Inflation Relief Ahead?

Summary

Andrew Sheets presents Morgan Stanley's differentiated view that US inflation will ease in the second half of 2025, despite recent hot prints and strong economic activity. This outlook underpins their forecast for lower bond yields and higher stock prices over the next 12 months. He also highlights risks such as oil supply disruptions and near-term central bank tightening.

• US labor market remains resilient with low unemployment and steady jobless claims.
• Current CPI and PCE inflation measures remain well above the Fed's 2% target.
• Hot-cycle signals include surging M&A, AI data-center spending, and price-insensitive consumer demand.
• Morgan Stanley's forecast calls for inflation to moderate as housing and tariff-related costs ease.
• This benign inflation view drives a 12-month call for lower Treasury yields and higher equities.
• Key risks: Strait of Hormuz oil flow disruption, Fed removing easing bias, ECB and BoJ rate hikes.