At present, the hottest issue in the US market is whether America's strong economic growth and inflationary figures are the short-term outbursts caused by massive stimulus or the beginning of medium-and long-term trends.

If this turns out to be the result of monetary and fiscal stimulus, global economic growth is likely to slow as it did in 2012, according to the Chetan Ahya team, chief economist of Morgan Stanley, when policy makers withdrew fiscal and monetary policy support, and the resulting weak growth and low inflation environment raised fears of prolonged stagnation.

The Chetan Ahya team calls for attention to an important inflation phenomenon: don't just focus on CPI and PPI, and most importantly:Whether the US core PCE will exceed the 2.5 per cent year-on-year growth threshold that the Fed is watching.

This is a serious problem that may begin in mid-2022.

The US core personal consumption expenditure (PCE) price index rose 1.8 per cent in March from a year earlier, the biggest increase since February 2020. Goldman Sachs Group, who expects it to be earlier than Morgan Stanley, believes the index will peak at 2.8 per cent in May and fall back to 2.25 per cent by the end of the year.

To discuss this problem, we must first ignore the cardinality effect and temporary factors. In Morgan Stanley's view, the continuously improving job market and the rise in total wage costs will push the inflation indicator higher.

This situation has begun to show. The employment cost index is particularly evident, with a year-on-year growth rate of 2.7% just 20 basis points below its pre-epidemic high. Wage costs will also increase with the rapid improvement in the labour market as a result of a rapid economic recovery.

Morgan Stanley believes that even if the overall unemployment rate rises sharply, total wage costs are likely to rise. Because this time unemployment is mainly concentrated in low-wage groups. As policy makers drive high economic growth to bring jobs back home, strong aggregate demand will drive unemployment lower in the middle and high end of the sector. The impact of the huge pressure of labor demand on wage costs will complement the impact of labor supply.

What does it mean for the market?

The Andrew Sheets team, Morgan Stanley's chief cross-asset strategist, believes that higher inflation and higher valuations complicate a strong growth environment.

With the market in the middle of the cycle, the Andrew Sheets team recommends that investors reduce their exposure to stocks and corporate bonds.

In terms of specific assets, the Andrew Sheets team is bullish on developed stock markets other than US stocks, especially in Europe. For US stocks, Morgan Stanley is tactically cautious about risks. However, they also believe that after the end of the short-term adjustment, the bull market in US stocks will recover, the market breadth will be better, and there will be a tendency to reflate.

Morgan Stanley's high forecast for the global economy and market consensus

Without the above inflation risks, Morgan Stanley's Chetan Ahya team believes that the following scenarios would occur in the global economy:

In this economic cycle, the US has played an extraordinary role in driving strong global growth. The Chetan Ahya team expects global GDP to exceed pre-epidemic levels from the third quarter of this year, growing by 6.5 per cent for the whole year and 4.8 per cent next year.This is 50 basis points higher than the market consensus of 2021-22.

They also believe that the current round of economic growth is the strongest rebound in the past five cycles. Us GDP exceeds pre-recession levels, a level never seen in the first two economic cycles.

So far, the sharp rebound in consumption and the initial rebound in capital spending have been the dominant factors in the US economic recovery. The continued recovery in personal income and the excessive stock of savings suggest that consumption growth will continue.

In the next phase, the Chetan Ahya team believes that a strong recovery in aggregate demand will drive a hot cycle of capital spending. By the end of 2022, global investment will rise to 121 per cent of pre-recession levels, with US investment reaching 116 per cent of pre-recession levels, a level that took 40 quarters in the previous cycle.

If low growth and low inflation are the characteristics of the macro economy after 2010, this time it will become an environment of high growth and high inflation, thus reducing the risk of long-term stagnation. In the US, this means that by the end of 2022, GDP will be 3 per cent higher than it was before the outbreak, while the underlying core PCE will exceed 2 per cent from March next year.

In the meantime, the Fed should keep monetary policy loose.

The Ellen Zentner team, chief US economist of Morgan Stanley, expects the Fed to start signalling a gradual tightening of asset purchases at its meeting in September, which was officially announced at its meeting in March and will begin in April.

As for raising interest rates, Morgan Stanley expects the Fed to wait until the third quarter of 2023 to act. Mainly considering that the Fed's inflation target is an annualized average of 2%, rather than hitting 2%. Therefore, it is necessary to let the bullet of inflation fly for a while, and the labour market should reach the maximum level of employment.