Morgan Stanley: Weak Jobs Data May Force Aggressive Fed Rate Cuts

In a recent CNBC interview, Mike Wilson, Morgan Stanley’s chief investment officer, presented a nuanced view of the Federal Reserve’s upcoming policy decisions. His central thesis hinges on what he describes as the “lagged” and revised nature of key economic data, particularly employment figures. Wilson argues that the real-time data stream has not been weak enough to justify more aggressive rate cuts from the Fed’s perspective. However, he contends that once the central bank examines the revisions to previous months’ job numbers, a clearer—and significantly weaker—picture of the labor market cycle will emerge.

“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,” Wilson stated, acknowledging the challenge of real-time policymaking. His analysis suggests that the United States has already undergone a “significant labor cycle” and is now emerging from it. This transition, while positive for the broader economy, creates a policy conundrum: should the Fed cut rates based on revised historical data showing past weakness, even as current equity markets remain hot?

Wilson points to a critical piece of evidence supporting the economic recovery: corporate earnings. He highlights that earnings growth for the median company in the S&P 500 is now expanding at a rate close to 10%. “That’s the best growth we’ve seen in four years. There’s evidence,” he noted. This robust performance underscores underlying economic strength and validates the view that the labor cycle has turned.

Yet, this strength is not uniformly distributed. Wilson warns of a “bifurcated economy”—one where corporate profitability soars while certain segments of the private economy struggle. He explicitly names housing, consumer goods, and lower-end consumers as the “financial levered” parts of the economy in need of relief. “We need that,” Wilson emphasized, arguing that targeted rate cuts are necessary to support these sectors and promote a more balanced recovery beyond just buoyant stock markets.

According to Wilson’s analysis, the logical conclusion for the Federal Reserve, upon reviewing the weaker revised job data, will be to implement rate cuts. This action is framed as essential for aiding the working class and struggling industries. However, Wilson introduces a stark warning: this very strategy risks creating an “asset bubble.” He directly links potential Fed easing to the already strong earnings cycle, posing the critical question: “If we cut into that earnings cycle, do we get an inflated stock market?”

Morgan Stanley’s official view, as conveyed by Wilson, answers in the affirmative. “Our view is yes,” he stated, indicating the bank’s expectation that aggressive monetary easing could detach stock prices, particularly in the SPX, from underlying fundamentals. The trader’s commentary lays out a scenario where the Fed’s well-intentioned efforts to heal a bifurcated economy could inadvertently overheat financial markets, setting the stage for potential instability. This encapsulates the delicate tightrope the Fed must walk: stimulating vulnerable economic areas without fueling excessive speculation in assets.