Morgan Stanley: “If Central Banks Push Back, Asset Prices Face A Severe Challenge”

As increasingly more analysts and Fed-watchers have suggested in recent months, the one catalyst that could send the market into a tailspin is for the Fed to get what it has so long wanted: a sudden spike in inflation. From Albert Edwards (who looks at record U. S. vacation plans as an ominous sign of rising wages), to Eric Peters (who warned that pent up inflation could unleash a “nightmare scenario” for the next Fed chair), to Aleksandar Kocic (who yesterday explained why the market is vulnerable to bear steepening of the curve with the Fed “massively negatively convex to inflation risk”), on Sunday Morgan Stanley’s chief cross-asset strategist, Andrew Sheets joins the warning and observes that at a time when things are finally starting to look up for the global economy, “this puts central banks in a challenging position. Inflation remains below target. But current policy means some of the easiest financial conditions ever observed, just as growth is picking back up, regulation is backing down and memories of the last crisis fade.”
As a result, Sheets believes that “current policy rates and financial conditions look unsustainably easy relative to the strength of global growth.” Which means that the response is once again in the hands of Central banks, who hold the key to determining when to push back. “If they do, asset prices face a severe challenge” Morgan Stanley warns, but maybe not yet: “until they do, we should be willing to accept that prices can persist above ‘fair value’.”
Andrew Sheets’ full note is below:

This post was published at Zero Hedge on Nov 12, 2017.