Brace For The Inflationary Storm: Morgan Stanley Warns El Niño Will Unleash Another "Price Shock"

As Morgan Stanley writes in a report (available to pro subs) that is a must-read not only for weather-watchers but also traders (especially those who read our April note El Nino Watch Initiated As Ag-Industry In Crosshairs), developing countries around the world are facing another "inflation shock" as they grapple with floods and heatwaves fueled by the weather phenomenon known as El Niño. The shift to a warming phase from the cooler La Nina has sparked trouble for emerging market economies, which tend to be the most exposed to large swings in energy and food prices and production and usually have limited fiscal buffers to shield from an inflationary storm. 

According to Morgan Stanley's Rajeev Sibal, a moderately strong El Niño has a 90% chance of impacting weather patterns and "would be a significant headwind for EM economies, with high inflation and fiscal pressures two key risks."

Below we excerpt some highlights from the report, starting with the bank's schematic of how El Nino changes weather patterns across the Pacific and its downstream worldwide impacts.