Morgan Stanley Warns Weak Labor Market Could Force Additional Fed Rate Cuts, Spark New Stock Market Bubble

Morgan Stanley’s chief investment officer says weak job data may force the Federal Reserve into a more aggressive rate-cutting phase, boosting the stock market once again.

In a new interview on CNBC, Mike Wilson says once the Fed looks into the revisions of the previous months’ employment numbers, the central bank will lower rates despite an already-hot equities market.

“They’re going to realize that the data itself is very lagged. I’m not blaming the Fed, this is tricky. I mean, it’s hard. In real time, the data has not been weak enough to justify cutting more, but when they actually look at the revisions now, and that’s what we do…

It’s very clear that we had a significant labor cycle… and we’ve come out of it, which is very good. And by the way, the best confirmation of this is that the earnings growth now for the median company in the S&P is actually growing again close to 10%. That’s the best growth we’ve seen in four years. There’s evidence.”

Wilson says that the Fed will likely cut rates to bring relief to the working class and certain industries that have been struggling, but at the risk of creating an “asset bubble” – which is what Morgan Stanley is currently expecting, according to the trader.

“I think what they’ll notice is that if you want to recover in the private economy – which we all do, we don’t want to just have this bifurcated economy – they’ll realize that we do need rate cuts for the financial levered part of the economy whether it’s housing, consumer goods, the lower end consumer. We need that.

The risk in this strategy for the Fed to think about is ‘do we have an asset bubble then?’ If we cut into that earnings cycle, do we get an inflated stock market? Our view is yes.”

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