Morgan Stanley: Bond Market Is Doing the Fed's Tightening for It, a Moderate CPI Could Give Stocks Room to Breathe

Odaily News: As global bond yields continue to climb, Morgan Stanley believes the bond market is preemptively accomplishing part of the tightening the Federal Reserve would otherwise need to achieve through its policy rate, which could in turn create conditions that ease pressure on the stock market.

Mike Wilson, Morgan Stanley's chief U.S. equity strategist, said the 10-year U.S. Treasury yield has risen about 120 basis points since February, marking a clear tightening of financial conditions. If this market-driven tightening is sufficient to slow the economy, the Fed may not need to further raise its policy rate to rein in demand in the future.

Wilson believes investors currently need to watch two key indicators: the performance of financial stocks and bond market volatility. If the September CPI comes in moderate and pressure in the bond market eases, the Fed may gain more room to observe, and the stock market could also see a broader foundation for gains.