Morgan Stanley: Fed’s rhetoric “misses the forest for the trees,” sees only US inflation, ignores global deflation.

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On October 13, Morgan Stanley’s global macro strategist Matthew Hornbach and his team issued a major report, “Ignoring Global Disinflation,” delivering a clear and sharp warning to the market.

Morgan Stanley believes that the global trend of declining inflation is evident, and investor concerns about U.S. inflation may be excessive. Before the impact of tariffs becomes apparent, they suggest hedging the downside risk of U.S. inflation by buying U.S. Treasuries and shorting the U.S. dollar.

At a time when Federal Reserve officials and many investors remain worried about persistently high U.S. inflation, this report offers a sober global perspective for those “held hostage” by hawkish Fed rhetoric and domestic U.S. data, highlighting a major disconnect in the macro landscape.

Ignoring the Global Disinflation Trend

The report pointedly notes that investors' reliance on central bank commentary has reached a thirty-year high, causing them to overlook broader cyclical trends and become followers of individual central bankers’ opinions. Excessive focus on U.S. inflation is a classic case of “missing the forest for the trees.” When we shift our gaze from the “tree” of the U.S. and look at the global “forest,” the picture is entirely different.

Morgan Stanley underscores this overlooked reality with data:

As of September, the global CPI annual average inflation rate stood at 3.3%, having fallen to the lower end of its pre-pandemic steady-state range and well below 4.5% from a year ago. Since peaking at 10.3% in October 2022, the global CPI annual rate has declined 80% of the time over the past 35 months—evidence of a strong downward trend.

The report further analyzes that the main driver of this round of global disinflation is emerging markets and developing economies (EMDE), where both core and headline inflation have fallen to multi-decade lows. Contrary to years of market assumptions, an increasingly multipolar world has so far not led to higher or more persistent CPI inflation.

Tariffs: Catalyst for Inflation or Killer of Profits?

Of course, tariffs are an obvious risk. But Morgan Stanley believes the reality is more nuanced. Companies may choose to absorb the costs by sacrificing profit margins, rather than passing them directly to consumers, which could actually increase the downside risk for the labor market and CPI inflation. Alternatively, companies may offset costs by improving productivity, which also reins in inflation.

The report’s conclusion is clear and forceful: investors should “think globally, act locally” and hedge against downside risks to U.S. inflation. Specific recommendations include buying U.S. Treasuries (especially 5-year bonds) and shorting the U.S. dollar. When facing the headwinds of global disinflation, making decisions based only on U.S. inflation data is like “viewing a leopard through a tube”—seeing only part of the picture.

Risk Warning and DisclaimerThe market carries risk, and investments should be made cautiously. This article does not constitute personal investment advice, nor does it consider the specific investment objectives, financial situation, or needs of any individual user. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investments made based on this are at your own risk. ```