There are more chances that the Federal Reserve will ditch its hawkish monetary policy as global US dollar liquidity is now in the “danger zone where bad stuff happens,” Morgan Stanley’s Mike Wilson said in a Monday note.
Just like the Bank of England had to intervene last week by purchasing long-dated bonds to stem skyrocketing gilt yields, the Fed will likely have to intervene similarly, whether that means a halt in rate hikes or full-out quantitative easing.
“The first question to ask is, when does the US dollar become a US problem? Nobody knows, but more price action of the kind we’ve been experiencing will eventually get the Fed to back off,” Wilson said.
However, investors should put only a little in stocks, he added. That’s because an earnings recession is looming, and a potential stock market crash from a sizable earnings slump would likely outweigh the potential upside from a Fed pivot.
According to Wilson, the earnings plunge will follow several macro risks that firms have been forced to navigate in recent months, including China’s COVID lockdowns, a soaring US dollar, higher interest rates, and weakness in Europe’s economy.