Thoughts on the Market

With the US election as a backdrop, our Head of Corporate Credit Research Andrew Sheets tells three stories that help encapsulate the state of global credit markets.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, head of Corporate Credit Research at Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, today I'll go around the credit world in three short stories. It's Thursday, October 31st at 2pm in London.The US election next Tuesday continues to be a top issue on investor minds, and indeed is a top issue for us here at Thoughts on the Market, where it’s dominating your feed over this week. For credit, our positive view this year has been closely tied to the idea that the asset class likes moderation. For example, in data released yesterday the US economy grew a solid 2.8 per cent in the third quarter, while core inflation moderated to just 2.2 per cent, close to the Fed’s target. And Morgan Stanley’s forecasts for the rest of this year and next see that pattern continuing: Solid US Growth, falling inflation, driving steady further rate cuts from the Federal Reserve and all creating a better-than-expected backdrop for credit that should support tighter than average spreads. That idea that credit likes moderation is core to how we view the election. Outcomes that could drive larger changes in economic policy, domestic policy or foreign policy, are all larger risks. And outcomes that could drive more moderate outcomes across all of these factors are likely going to be better for credit, in our view. But you may also be tired of hearing about the election. And so for you, here is a quick tour of the credit world in three non-election stories. In Asia, Korea will be added to the FTSE World Government Bond Index, an important benchmark for global bond investors. This has significant implications across Korean assets, but for Credit, it may be most important for sparking more interest in Corporate Bonds denominated in local Korean Won.This is a larger market than investors may initially realize, totaling roughly $1 trillion US equivalent in size. And meanwhile, the exposure of foreign investors to this market is historically low. A large market with little global exposure is a potential opportunity. Moving to Europe, you could be forgiven for thinking the mood is pretty dour. Growth has been weaker than in the United States, while the US Election is raising questions around everything from disruptions to trans-Atlantic trade, to the future of NATO, to the war in Ukraine. But over the last month, flows into European credit have been extremely good. Per work by my colleagues, inflows into European credit have reached record levels over the last several months. The start of rate cuts leading investors to lock in still-attractive all-in yields in Europe is a big part of this story. Finally, in the US, we continue to see remarkable shifts in the ease with which investors can trade large volumes of corporate bonds. So-called portfolio trading, where investors buy or sell bonds as a group, continues to grow, with September seeing a new all-time high in activity. Year-to-date, through September, we estimate that roughly $760 billion – with a ‘b’ – has been traded this way. It’s never been easier to trade very large volumes of corporate bonds. The US election on November 5th will continue to dominate investor focus over the coming days. As it should. Credit has been an enormous beneficiary of the recent backdrop that’s seen solid growth, moderating inflation, and moderating policy rates. The vote will have an important bearing on whether that moderation continues, or if something new takes its place. But away from the election there are other important things happening. Korea’s Local Currency Corporate bond market is a large, underinvested market that may get more attention after index inclusion. European Credit is seeing record flows despite its macro uncertainties, an indicator of underlying investor demand. And in the US, the continued rise of portfolio trading is re-shaping market structure and improving the ability to trade ever larger volumes of corporate bonds. Thanks for listening. If you enjoy the show, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today. Oh, and Happy Halloween.

Our Global Head of Fixed Income and Thematic Research, Michael Zezas, outlines how investors should navigate the closing days of the presidential campaign -- including a vote-counting period that could extend past Election Day.----- Transcript -----Welcome to Thoughts on the Market. I’m Michael Zezas, Morgan Stanley’s Global Head of Fixed Income and Thematic Research. Today is going to be a little bit different. We’re exactly six days away from the US election. The race is neck-and-neck, and I want to sketch out what investors should expect in the next couple of weeks. It’s Wednesday, October 30, at 10 AM in New York.This is an historic election, and the outcome remains highly uncertain. What’s more, there’s a good chance we won’t know the winner on election night due to close vote counts. My colleagues and I have spent a lot of time on this show trying to give our listeners a sense of how the election might impact different economies around the word as well as markets, sectors, and specific industries. But today I want to take a step back and highlight a few things that investors should keep in mind right now. To sum up what we’ve covered so far: The key policies at stake are taxes, tariffs, and immigration. Congressional composition will be critical in determining the extent of tax cut extensions in either win outcome. Domestic, consumer-oriented sectors are most exposed to tax changes, while clean-tech is the most exposed to potential efforts at a repeal of the Inflation Reduction Act. Macro impacts vary depending on the scope of policies and their sequencing, but we see downside risks to growth in a Republican win outcome. As our listeners know, a candidate needs 270 Electoral College votes to win. Former President Trump’s most likely path to victory is through the Sun Belt – Arizona, North Carolina and Georgia; while Vice President Harris’ most likely path to victory is through the so-called Blue Wall – Michigan, Wisconsin and Pennsylvania. In terms of the Senate, polling and prediction markets have consistently implied higher likelihood of Republicans winning control. Democrats are defending more seats in states that Trump won in 2020, as well as more seats in states Biden won by a small margin. As far as the House of Representatives, Republicans need 11 of the 25 toss-up seats to maintain control of the House, and Democrats need 15. The generic ballot is the most reliable House indicator, in our view. It’s a political poll which asks not which candidate you plan to vote for to represent you in Congress, but rather which political party – Democrat, Republican or Independent – that you would support. The generic ballot historically correlates with the House winner, and it currently favors Democrats. All this leaves us with two key takeaways: First, don’t expect conclusive results on election night. Early vote data from key states reflects our view that vote-by-mail levels are lower than in 2020 but still elevated versus historical levels. And it may take days to get all the mail-in votes counted. Second, full election results may differ from early returns. Why is that? A candidate may have a deficit in election night vote counts but still come back to win the race once all ballots are counted. This depends on two key variables: The share of the electorate who vote by mail; and the skew among those ballots toward Democrats – a blue shift – or Republicans – a red shift. So again, we need to be patient and wait for the final results. And when that happens, we will start digging deep into the post-election outlook for the economy and markets. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen to podcasts and share Thoughts on the Market with a friend or colleague today.

Our U.S. Public Policy and Valuation, Accounting & Tax strategists assess the possible scenarios in the upcoming elections, and what they could mean for both taxpayers and the market.----- Transcript -----Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Morgan Stanley's US public policy strategist.Todd Castagno: And I'm Todd Costagno, Head of Global Valuation, Accounting, and Tax Research at Morgan Stanley.Ariana Salvatore: With less than a week to go until the US election, the race is still neck and neck. Today, we dig into a key issue voters care about: Taxes.Todd Castagno: It's Tuesday, October 29th at 10am in New York.So, Ariana. Taxes are an issue that impact both businesses and individuals. It's a key component of both candidates plans and proposals. How have they evolved over the campaign?Ariana Salvatore: I'd say in general we do tend to see a lot of overlap between Harris' proposals and the ones that the Democrats were campaigning on before she took over the mantle from President Biden in July. That being said, in some instances, her plans go beyond what was requested in the president's fiscal year [20]25 budget request.For example, that $6,000 credit for newborns and the $25,000 homebuyer tax credit. These are areas where we've seen her campaign go beyond the scope of what Biden was campaigning on while he was still in the race. Of course, it's important to remember that any of these proposals would have to pass muster in a Democrat controlled or a split Congress – meaning that there will be some tempering of these plans at the margin.Todd Castagno: So former President Trump campaigned in his first election on tax policy. He's campaigning on tax policy in his current campaign. What are his plans and views?Ariana Salvatore: We've been talking about the Republican sweep outcome as the most deficit expansionary from tax policy changes because Republicans understandably have more fealty to the 2017 Tax Cuts and Jobs Act.That law is set to expire by the end of next year. So, in a Trump win scenario plus Republican Congress, we think you can get most of that 2017 law extended. While in a Trump win scenario with divided government, it's probably a little bit narrower. In general, as I said, deficits skew larger in Republican win outcomes for that reason, with an asymmetry across the other election scenarios. That being said, we do still expect to see deficit expansion in 2026, regardless of who's in power, because these tax cuts will be extended one way or another.But Todd, you've done a lot of work in this area and there are some substantial impacts from a potential corporate rate increase to think through. Can you give us a little bit of detail on what that kind of increase would mean for stocks and bonds?Todd Castagno: Yeah. So, investors have been very focused on the rate and where it matters and where it does not matter. So, if you really think about it, most companies that are exposed to a rate increase or decrease are domestic oriented, consumer companies, retail companies, you know, hospital facilities, industrials; those are the most exposed to a rate increase.Multinationals this time around are less exposed. So, if we go back to 2017, we think about it; that was a different story. We had $2 trillion of trapped cash on the sidelines that did come back – buybacks, dividends, corporate hiring. You know, this time around, that's a different story. So there is exposure but it's mainly consumer-oriented companies.Ariana Salvatore: That makes sense. And you mentioned the 2017 almost as a blueprint for what we saw last time. You mentioned dividends and buybacks.Do you have any sense of how this time around could be different? What do we think companies would likely spend these tax cuts on?Todd Castagno: Well, there are tax cuts. I do think it's going to be different. I do think the $2 trillion does not exist. That's not going to happen. So, you're going to have fewer buybacks, fewer dividends. But you could see some changes in employment. You could see some changes in investment. Things like upfront expensing could help boost the economy, higher jobs, et cetera.One thing, Ariana. You know, tax cuts are expensive. I think that's what we've all contemplated for almost 10 years now. How are we going to pay for these in this new world?Ariana Salvatore: Well Republicans have proposed a few different pay forwards. But to your point, we're not in the same environment as 2017, and we don't expect to see the same ones that were part of the original Tax Cuts and Jobs Act negotiations this time around. Specifically, former President Trump has talked about not extending the SALT cap, which was a revenue raiser that capped the amount of deductions some individuals could take between state and federal taxes. That provision raised about $900 billion over 10 years.Republicans in general are mainly focused on peeling back some parts of the IRA – or the Inflation Reduction Act – a

As the U.S. presidential race continues to be neck and neck according to opinion polls, our Chief Fixed Income Strategist considers the possible market implications if some policies proposed during this campaign are implemented.----- Transcript -----Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley’s Chief Fixed Income Strategist. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about understanding market dynamics against the backdrop of U.S. elections. It's Monday, Oct 28th at 1 pm in New York.The outcome of the U.S. elections, now just over a week away, has been at the center of every discussion I have had in the last several days. There have been significant moves, not so much in the opinion polls – but in prediction markets. In the opinion polls, the presidential race remains tight and neck-to-neck in key swing states with poll numbers well within the margin of error. But some prediction markets have shifted meaningfully toward Republicans in the contests for both the presidency and control of Congress. Financial markets have also moved a lot. Stocks exposed to a Republican win outcome have risen a fair bit. To understand the potential policy changes that can have an impact on markets, I think it is crucial to understand the sequencing of those policy changes. Given the moves in the prediction markets, let us first frame a Trump win scenario. It seems reasonable to bucket the possible shifts into three categories – fiscal policy, immigration controls, and tariffs. Meaningful changes in fiscal policy require control of both houses of Congress; and even in a Republican sweep, scenario legislation would still be time-consuming and likely come last. We don’t really have many details on how changes to immigration policy would be implemented and so their timing remains very unclear. On the other hand, given broad presidential discretion on trade policy, Trump’s expressed intentions in his campaign messaging, and the precedent of his first term, tariff changes would likely come first.Our economists have looked at the potential impact of tariffs on the economy. They concluded that broad tariffs imply downside risks to growth through declines in consumption, investment spending, payrolls, and labor income, and upside risks to inflation. Their estimates suggest that imposing all the tariffs currently under discussion could result in a delayed drag of -1.4 per cent on real GDP growth and a more rapid boost of 0.9 per cent to inflation. How do we reconcile the equity market’s reaction to the increasing odds of a Trump win in some prediction markets with the idea that there will be a drag on GDP growth and boost to inflation that our economists assess? Two explanations. Markets could be counting on the prospect that all tariffs would not be imposed. Or at least would be sequenced over an extended period, with some coming much later than others. Also, markets could be putting greater emphasis on the revival of “animal spirits” driven by expectations of regulatory easing, which is hard to define or quantify.Let us look at other markets. In the bond markets, treasury yields have risen notably in the last month. Many investors see the Republican sweep outcome as most bearish for US Treasuries, based on the experience of the 2016 election. As Matt Hornbach, our global head of macro strategy has noted, there are meaningful differences between the Fed’s monetary policy today and the pre-election period in 2016, suggesting that any rise in Treasury yields would be more contained this time, even in a Republican sweep outcome. In 2016, markets were pricing in about 30 basis points of rate hikes over the next 12 months. Contrast that to the current market expectation of about 135 basis points in rate cuts over the next 12 months. Also, in the year after the 2016 election, expectations for the Fed Funds Rate rose nearly 125 basis points. A similar rise in expectations for Fed policy now would require market participants to expect the Fed to stop cutting immediately; and refrain from further cuts through 2025. This seems like a remote possibility – even under a Republican sweep elections scenario. Given the recent moves across markets and the expectations they are pricing in, markets may now be somewhat offside should Harris win, as they would have to reverse the course. Elections are a known unknown. Based on opinion polls, this race remains extremely tight, and multiple combinations of presidential and congressional outcomes are very much in play. We must also contend with the prospect that determining the outcome may take much longer this time.Thanks for listening. If you enjoy the podcast, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

After decades of offshoring, the pendulum for US manufacturing is swinging back toward domestic production. Our US Multi-Industry Analyst Chris Snyder looks at what’s behind this trend.----- Transcript -----Welcome to Thoughts on the Market. I’m Chris Snyder, Morgan Stanley’s US Multi-Industry Analyst. Today I’ll discuss the far-reaching implications of shifting industrial production back to the United States. It’s Friday, October 25th, at 10am in New York.Global manufacturing is undergoing a seismic shift, and the United States is at the epicenter of this transformation. After decades of offshoring and relying on international supply chains, the pendulum is swinging back toward domestic production. This movement – known as reshoring – is not just a fleeting trend but a strategic realignment of manufacturing capabilities that is indicative of the “multipolar” theme playing out globally.In fact, we believe the US is entering the early innings of re-Industrialization – a multi-decade opportunity that we size at $10 trillion and think has the potential to restore growth to the US industrial economy following more than 20 years of stagnation. The reshoring of manufacturing to the US is fueled by a combination of factors that are making domestic production both viable and lucrative. While the initial sparks were ignited by policy changes, including tariffs and trade agreements, the COVID-19 pandemic laid bare the risks of elongated supply chains and over-dependence on foreign manufacturing.Meanwhile, the diffusion of cutting-edge technologies, such as automation, artificial intelligence, and advanced robotics, has diminished the cost advantages of low-wage countries. The US -- with its robust tech sector and innovation ecosystem -- is uniquely positioned to leverage technology to revitalize its manufacturing base. Who are the direct beneficiaries? High-tech sectors, such as semiconductors, pharmaceuticals, and advanced manufacturing systems, are likely to be the biggest winners. Traditional industrial sectors, such as automotive and aerospace, are also seeing a resurgence. Finally, companies that invest in more sustainable manufacturing processes stand to gain from both policy-driven incentives and a growing market demand. All told, these businesses should see shorter supply chains, reduced legal and tariff costs, and a more resilient operational structure. As for the broader US economy? We think the implications are pretty profound. In altering the US industrial landscape, reshoring promises not only to boost GDP growth, but it could also stabilize and potentially reverse the trade deficits that have plagued the US economy for years.Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Morgan Stanley’s European Head of Research Product Paul Walsh speaks to Betsy Graseck, Global Head of Banks and Diversified Finance, and Bruce Hamilton, European Asset Managers Diversified Financials Analyst, about the implications of increasing life expectancy for the financial industry.----- Transcript -----Paul Walsh: Welcome to Thoughts on the Market. I'm Paul Walsh, Morgan Stanley's European Head of Research Product, and today we dig into a topic that really affects us all. Retirement.Life cycles are extending as people are living longer, healthier lives. Coupled with government pension funds that are increasingly under pressure, this means that consumers will need to build much more robust investment plans to substitute for salaries to carry them through a longer retirement. And to understand more about the changing financial needs and challenges of an aging population, I'm delighted to be joined by my colleagues, Betsy Graseck, Global Head of Banks and Diversified Finance, and Bruce Hamilton, our European Asset Managers Diversified Financials Analyst. It's Thursday, October the 24th at 3pm in London. Betsy Graseck: And it's 10 am in New York. Paul Walsh: Now Bruce, let's start with you. As people live longer, they will likely spend more time in retirement. Managing and ensuring retirement income over a longer duration could have a significant impact on asset management. What are the broad trends you're seeing in the industry right now?Bruce Hamilton: So, the asset management industry in large part has focused on the accumulation phase of investors journey. Whilst this remains critical as people build assets for retirement – and we see growing allocations from affluent investors to private markets as a trend which is likely to be reinforced by the aging theme – there's a significant need for decumulation products and solutions that can offer returns and income over a prolonged retirement.We see a lot of innovation as asset managers look to develop products to meet this need.Paul Walsh: So Betsy, people are living longer. How ready are consumers for retirement? Are most retirement plans or similar financial services ready to handle this challenge?Betsy Graseck: Some are ready. But given how rapidly the global population is aging, there is an increasing need to provide solutions to individuals. Just to put a number on it, the global population that is 65 years old or older in the year 2000 was only 7 per cent. This is set to hit 10 per cent next year in 2025 and 16 per cent in 2050. All groups need service and advice – with the affluent group needing the most increase in services especially if government pension funds come under more pressure. Paul Walsh: So, I think you set the scene really well there, Betsy, and I guess the obvious question is, how can wealth and financial planners best respond, do you think? Is it by creating new products? Or do we need a much deeper transformation?Betsy Graseck: We see individuals today having a wide range of retirement choices. What we feel they really need here is personalized, customized advice, delivering solutions that can address their unique needs. These span from affluent individuals needing salary replacement strategies to high-net-worth individuals looking for philanthropic and wealth transfer strategies. A focus on integrated, personalized advice, innovative products, and high-quality service that meets clients as they wish to connect effectively will be critical. Paul Walsh: It seems to me that it is – but is this a positive for the financial services sector? And if so, what do you think is the size of this revenue opportunity and over what time period do you think?Betsy Graseck: Well, the way we've looked at this is across the global asset manager and global wealth manager industry, as they will be the ones called upon to address these needs. And we do see a roughly 30 per cent uplift in global revenues by 2028, which equates to [$]400 billion in incremental revenues across the global industry.And that is driven by the expansion of individuals looking for advice, in particular from the affluent group, as well as an increase in fee-based products to address the income needs. Paul Walsh: And there's some big numbers that you've quoted there, Betsy. So let's dig into the financial subsector and industries. What are the biggest untapped opportunities there?Betsy Graseck: Well, the number one is the affluent customer base that we do see having the biggest need for advice, relative to advice seeking today. And as that group, reaches out and receives advice from wealth channels, that is one major driver here. The second driver is the increase in fee-based products to service the income replacement needs.Paul Walsh: And what are the biggest challenges do you think? Obviously, we've talked about the opportunity there, but the biggest challenges to financial services that you see along the way. Betsy Graseck: Well, the way I think about this is what is required t

Our Chief Europe Economist Jens Eisenschmidt and Europe Equity Strategist Regiane Yamanari discuss the strain of an aging population on the future of Europe’s economy and markets.----- Transcript -----Jens Eisenschmidt: Welcome to Thoughts on the Market. I'm Jens Eisenschmidt, Morgan Stanley's Chief Europe Economist.Regiane Yamanari: And I’m Regiane Yamanari from the European Equity Strategy Team.Jens Eisenschmidt: Today we are discussing one of the most urgent challenges Europe is facing right now, a declining working age population – and its implication for Europe's economy and potential solutions.It’s Wednesday, October 23rd, at 3 pm in Frankfurt.Regiane Yamanari: And 2 pm in London.So Jens, people are getting older around the world, living longer. Although the rate of change is different from country to country, can you tell us what's the situation in Europe right now?Jens Eisenschmidt: Yes, Europe faces a declining working age population, so much is sure. We have just put out a big report, where we come up with numbers around this issue. We think for the large four Euro area countries – Germany, France, Italy, and Spain – we see a decline in Euro area working population by 2040 by 6.4 per cent. People also get older, so that doesn't necessarily mean the overall population is declining by as much. It simply means that working age population, as a sort of most direct, relevant measure for the economy, is declining.Regiane Yamanari: Why does an aging population hamper economic growth?Jens Eisenschmidt: So, think about the economy producing, in a very stylized sense, with two factors. One is capital and the other one is labor. And typically, these two factors are connected. So, you can't really produce just with one factor. Typically, you need at least some labor to produce something or at least some machinery to produce something with labor.So we just; I mean, it's a very simple way of looking at the economy, but typically very powerful in explaining what's going on. So, if we take this approach and look at our economy through the lens of these two factors and we have one factor declining significantly, this will affect the amount the economy can produce.So, we are talking here about so-called potential growth or potential output. And we think the declining working age population will lead to a decline in potential output. For the Euro area economies I was just mentioning, we think it could be around 4 per cent over the period 2000, from now to 2040. And that amounts to on an annual basis around 25 basis points lower growth potential.Regiane Yamanari: Suppose policy makers want to boost Europe's working age population, which they do. What options do they have? Which European countries most benefit from these policies or options?Jens Eisenschmidt: Yeah, the oldest policy measure, or if you want the most discussed one, typically has been birth rates.Now, many of the policies being implemented here – and they have been implemented for decades already – have been found to be not really changing [the] situation in a profound way. So, birth rates have either stopped increasing again or actually continued dropping. So, policy makers’ attention probably for this reason has turned to other measures.Other measures we think of here mostly in the current debate is increasing net migration, so you're basically getting your working age population replenished to some extent from the outside. Changing participation pattern in your own domestic labor market – typically, it's framed around the question, how much or how high is the share of one cohort versus the other.For instance, males versus females. We have countries where there is a large gap between these two groups, just to name an example here. And you know, closing that gap could help you increasing or offset; some of the projected decline in working age population.Another measure that's often discussed is increasing, retirement age. So essentially working age population is defined by those age between 15 and 64. And of course, if you work for longer, so you increase retirement age, that will also help, to stem against some of the projected decline in working age population.Now, if you look around for the countries that we are discussing in the report, um, then there are different ways these policies affect these countries.So, for instance, in Italy, closing the gap between male and female labor force participation would offset a large part of the projected fall in its working age population because that gap is so large. In France, in terms of our numbers, the most effective measure would be increasing the retirement age. And again, in Germany and Spain, it would probably be migration policies that are most effective.Okay now let's consider the alternative, Regiane. Suppose nothing changes. There are fewer and fewer working age people in Europe. How would this affect companies earn

Our Medical Technology expert analyzes the medical potential and market opportunity in technology that allows direct communication between the human brain and an external device.----- Transcript -----Welcome to Thoughts on the Market. I’m Kallum Titchmarsh, from Morgan Stanley’s U.S. Medical Technology Team. On today’s episode – a dive into a topic that sounds like it’s straight out of science fiction. Brain Computer Interfaces, or BCIs.It’s Tuesday, October 22, at 10 AM in New York.The latest version of Tony Stark – better known as his alter ego Iron Man – is a good example of a brain computer interface. When the billionaire businessman-inventor is critically wounded, he builds an armor suit that gives him superhuman abilities. Flying through air. Clearing out obstacles with repulsor blasts. Shooting enemies with guided missiles. All controlled by his brain. This, of course, is the stuff of science fiction. Real world examples of brain computer interfaces – or BCIs – aren’t fantastical. But they are fascinating. Translating thoughts into actions like generating text on a screen or moving a robotic limb.BCIs have been in development for more than a century, but recent advances have brought them much closer to becoming a reality. We expect to see BCIs in commercial medical use in about five years, at which point they can help treat a wide range of health disorders, from motor neuron disease – such as ALS – to depression. The market opportunity for BCIs looks enormous – $400 billion of total addressable market – or TAM – in the US alone. This figure includes two types of BCIs: enabling BCIs, which facilitate behaviors like moving a cursor on a screen, and preventive BCIs, which can prevent adverse events like depressive states or epileptic seizures. We divide the BCI healthcare opportunity into two segments: early TAM and intermediate TAM. The early TAM includes individuals with critical upper limb impairment and select variants of neurological conditions like epilepsy and depression. These patients will likely be the first to receive a BCI. The intermediate TAM includes patients with moderate upper limb impairment and severe lower limb impairment. As BCI technology develops, these patients will eventually become eligible for treatment. There are at least 2.8 million patients in the US forming the early TAM and an additional 6.8 million within the intermediate TAM. Together, these groups represent the $400 billion of potential revenue I already mentioned based on a single implant procedure. The opportunity may be significantly larger when factoring for potential replacement cycles and recurring revenues from software upgrades. But while the estimated TAM is indeed vast, we think penetration will remain limited through the first 20 years of launch. By 2035, we expect just under $1.5 billion of revenue to be generated from BCI implant procedures, hitting north of a $500 million annual run rate in 2036, and reaching the $1 billion annual run rate by 2041. It’s exciting to think BCIs will begin their healthcare application in the coming years, but we anticipate a number of regulatory hurdles on the way to widespread adoption in healthcare and beyond. Will BCIs push into fields like neurogaming, warfare, and even biological optimization of humans? The potential is certainly there, and with it the burden of the safe and responsible use of this cutting-edge technology. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Our CIO and Chief U.S. Equity Strategist explains his preference for cyclical stocks amid a rise in global money supply and current US election dynamics.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief US Equity Strategist. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about our recent upgrade of quality cyclicals and how it will be affected by the US election and liquidity.It's Monday, Oct 21st at 11:30am in New York. So let’s get after it. We continue to have conviction in our recent cyclical shift and Financials upgrade. Indeed, cyclicals traded well last week as most economic data came in stronger than expected. It’s worth noting we recommend investors stay up the quality curve within the cyclical space, however. While Financials have been the best performing sector in the S&P 500 since our upgrade, institutional investors remain under-exposed to Financials based on our data suggesting the sector can run further. In addition to better economic data, there are other factors affecting pro-cyclical stocks. We are focused on two, in particular. The election and global liquidity. We believe a Trump win with a split Congress would provide a pro-cyclical bias with small caps keeping pace with large caps. The markets seem to agree, with the recent cyclicals outperformance led by financials. Meanwhile, consumer stocks negatively exposed to tariff risks under a Trump win have underperformed. Interestingly, there is some overlap between this recent leadership and the post Biden debate period in early July as well as the months surrounding the 2016 election. Finally, we've also witnessed higher interest rates and a stronger US Dollar more recently, which is something to watch closely as a possible headwind for liquidity post election and into 2025. While some argue a Trump win would be a headwind for growth and equity markets, due to tariff risks and slower immigration, we think there's an additional element from the 2016 experience that’s worth considering—rising animal spirits. More specifically, in 2016 Trump's pro-business approach led to the largest three-month positive impact on small business confidence in the past 40 years. It also translated into a spike in individual investor sentiment. It appears to me that markets may be trying to front-run a repeat of this outcome as Trump's win in 2016 came as a surprise to pundits and markets alike.This also means a Harris win could lead to some reversion in terms of overall equity market performance and leadership. Most notably, bonds could potentially rally with defensive and quality growth stocks doing better like earlier this year. Secondarily, even with a Trump win, certain areas of the market may be vulnerable to a ‘sell the news’ phenomena if the upside is already priced amid bullish positioning. On this front, we would also point out that the economic set-up today is very different than the 2016 period when the economy had much more slack and could absorb additional pro-cyclical policies like tax cuts or other forms of fiscal stimulus.Turning to liquidity, we note that global money supply in US dollars has surged at an 18 per cent annualized rate since the end of June. I believe this has also had a positive effect on equity prices, not to mention credit spreads, precious metals, cryptocurrencies and real estate. Bottom line, in the absence of a major swing in election probabilities or global liquidity between now and the election, equity markets are likely to trade with a bullish tilt both at the index level and from a style, sector, factor standpoint. Thanks for listening. If you enjoy the podcast, leave us a review wherever you listen, and share Thoughts on the Market with a friend or colleague today.

Our Head of Corporate Credit Research Andrew Sheets discusses why uncertainty around the election’s outcome could be detrimental for credit investors.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, today I'll discuss the US Election, and how it might matter for Credit. It's Friday, October 18th, at 4pm in London. Morgan Stanley’s positive view on credit this year has been anchored on a simplistic thesis. Credit is an asset class that hates extremes, as it faces losses if a company fails, but doesn’t earn extra if that company’s profits double or even triple. Credit, to an unusual degree, is an asset class that loves moderation. And here at Morgan Stanley, we’ve been forecasting … a lot of moderation. Moderate growth for the U.S. and Europe. Moderating inflation, that continues to fall into next year. And a moderation of central bank interest rates, rather than the type of sharp declines that you tend to see around recessions; as we think Fed funds will settle in a little bit below three-and-a-half per cent by the middle of next year. This moderate economy, coupled with moderate levels of corporate aggressiveness should be music to a credit investor’s ears, and support richer-than-average valuations, in our view. So how does the upcoming U.S. election on November 5th fit into this otherwise benign picture? Who runs a government matters, especially when it’s the government of the world’s largest and strongest economy. This election is also notable for the differences between the two candidates, who are presenting sharply contrasting visions of economic, domestic and foreign policy. Against this backdrop, we suggest credit investors try to keep a few things top of mind. First, and most broadly, the idea that “credit likes moderation” remains our north star. Outcomes that could drive larger changes of economic policy, or larger uncertainty in policy in general, are probably going to be a larger risk for credit.Second, of all the various policies under discussion, tariffs feel especially important as they can be largely implemented without congressional approval, and are thus far easier to see go into effect. Tariff proposals could create significant dispersion at the single-name level in credit, and pose significant risks for sectors like retail, which import a large share of their ultimate goods. For time-limited investors, tariffs are the policy area where we’d spend the most time – and where much of our Credit Research around the election has been focused. Third, it’s notable that as we head into this election, expected volatility, in equities or credit, is elevated even as the stock market sits near all time highs, and credit spreads are historically low. So this begs the question. Do these options markets know something that the rest of the market does not? We’re skeptical. Historically, when you’ve seen high volatility alongside all-time-highs in the market – and it’s not all that common – it’s tended to be a positive short-term indicator, rather than a negative one. And one way we could perhaps explain this is that it suggests that investors are still a little bit nervous, and not as positive as they otherwise could be. The U.S. election is close in time, uncertain in outcome, and has stakes for future policy. That high implied volatility we see at the moment, in our view, could reflect known unknowns, rather than some hidden factor. Tariff policy, being largely independent of congress and thus easier to implement, is probably the most relevant for single-name credit exposures. And most broadly, credit likes moderation, and should do best in outcomes that are more likely to achieve that.  Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Our expert panel explains whether the US election will impact energy policy, including how the Inflation Reduction Act’s possible fate and increased tariffs could transform the sector.----- Transcript -----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Global Head of Fixed Income and Thematic Research.David Arcaro: I'm Dave Arcaro, Morgan Stanley's US Power and Utilities Analyst.Andrew Percoco: And I'm Andrew Percoco, the North American Clean Tech Analyst here at Morgan Stanley.Michael Zezas: And today we're discussing another key election related topic that generates a lot of political and market debate: Energy policy.It's Thursday, October 17th at 10am in New York.The outcome of the 2024 election will likely determine the direction of U.S. climate policy for years to come. David, what are the key focus areas for investors as they evaluate the various election outcomes on the utilities and clean energy industries?David Arcaro: Yeah, Mike, investors are highly focused on the Inflation Reduction Act, the IRA, especially as it pertains to the election and the clean energy space. This was a law that was passed in 2022, and it really has supportive policies across the entire clean energy spectrum. It's got tax credits and incentives for solar, wind, offshore wind, green, hydrogen, nuclear, you name it. Battery storage. And some of those tax credits go all the way to 2032 and beyond in some cases.So, it's a very supportive policy when it comes to the clean energy industry and the growth outlook. So, the big question is what's going to happen to the Inflation Reduction Act – depending on which administration is in place following the election.Our core view is that the IRA stays in place; that the core wind, solar storage and nuclear tax credits all remain, regardless of the outcome of the election. And then separately, investors are focused on tariff policy as it pertains to clean energy. It is a global industry. A lot of the equipment and materials are imported around the world. And so, any changes to the tariff approach could have an impact on the space as well.Michael Zezas: Got it. And so how does the outlook for renewables change under different election outcomes?David Arcaro: Yeah, really, the outlook for renewables growth is not very different in our view, regardless of the outcome of the election.We think it's a strong growth outlook either way. And part of that is because we've got policies that we expect to stay in place that will be supportive regardless of the outcome, as I mentioned with the Inflation Reduction Act. And then we've also got demand. It's a very strong demand backdrop for the renewable space – and that's because in the electric industry, we're seeing an inflection in electricity usage across the US.It's been stagnant for years and years, but now with data center growth, with industrial production accelerating, and manufacturing and onshoring, we're seeing a big change in the growth outlook for electricity usage. And that means we need more power plants. We need more to be built, and renewables are going to be the predominant new resource for producing electricity in the US.Some of these companies like data centers, they want renewables to power their operations. And most utilities, electric companies that are building power plants, they're going to be using renewables more than anything else. There are impediments to building fossil plants, it's challenging to permit and there's supply chain delays and issues.So, we think there's a very strong growth outlook for renewables based on that demand and the policy support going forward, regardless of the outcome.Michael Zezas: And Andrew, how about corporate tax policy, including renewable energy tax credits?Andrew Percoco: I mean, as Dave mentioned, we think IRA repeal risk is very low, and I think the only scenario where IRA repeal is a relevant conversation is in a Republican sweep scenario. But even under this scenario, we would expect any repeal measures to be targeted in nature and not a wholesale repeal of the bill. So, the question then becomes, you know, what is safe and what's at risk of getting cut.So, to start off with what's safe; maybe three items that I'll highlight. One would be domestic manufacturing tax credits. There's been a lot of bipartisan support for the onshoring of manufacturing. So, the clean energy manufacturing tax credits within the IRA look like they are on solid footing, regardless of the election outcome.Now, why do domestic manufacturing tax credits have bipartisan support? One, there's a general view that we need to reduce our reliance on China for our energy infrastructure and, two, the job creation angle. The IRA has created over 150, 000 new jobs, and a lot of those jobs are in states where there is a large representation of Republican voters. So, the local pushback would be pretty severe if IRA was repealed in full.Number

Mortgage rates aren’t directly influenced by Federal Reserve policy. However, the Fed’s recent cut likely will have a domino effect on the US housing market, say our Co-Heads of Securitized Products Research Jay Bacow and James Egan.----- Transcript -----Jay Bacow: Welcome to Thoughts on the Market. I'm Jay Bacow, Co-Head of Securitized Products Research at Morgan Stanley.James Egan: And I'm Jim Egan, the other Co-Head of Securitized Products Research at Morgan Stanley. And on this episode of the podcast, we're going to discuss the impacts of a 50-basis point cut from the Fed on the US housing and mortgage markets.It's Wednesday, October 16th at 1 pm in New York.Now, Jay, the Fed cut 50 basis points at its last meeting. What are your views on the mortgage market in the aftermath of that cut?Jay Bacow: We think that is constructive for mortgages and we recommended a long mortgage basis versus rates. The healthy economy and a Fed that doesn't want to fall behind the curve should be good for risk assets in general. We think there's a likelihood of vol possibly falling and that is constructive for agency mortgages in particular.Now it's a positive narrative. But, the valuations matter, and we have to admit that the valuations are not that compelling with spreads on agency mortgages trading near the tights since the regional bank crisis. However, if you look further back, mortgages start to look attractive, particularly relative to other high quality fixed-income assets.For instance, agency mortgages are basically trading at the average spread they've traded at since the GFC. Corporate credit, on the other hand, is trading within a few basis points of the tights since the GFC. If risk assets are going to do well, and we're certainly seeing that in corporate credit and in the stock market, we think mortgages are particularly priced attractively relative to most of them.James Egan: Alright, so relative value for mortgages makes sense, but can you talk a little bit about the technicals here?Jay Bacow: The technicals are where we feel more confident. One of the reasons why mortgage spreads have been wide for the past two years – it's an environment where the Fed and the domestic banks, the two largest holders of mortgages, have been reducing their holdings.Now, we still expect the Fed to reduce their holdings of mortgages, but we think the bank demand is going to turn positive. That's due to not just clarity around the Basel III Endgame that should be coming soon, but more directly related to this conversation – as the Fed cuts rates that directly impacts the amount of yield that banks earn of the cash sitting at the Fed.Now, that is projected to continue to go down as the Fed cuts rates. What's not projected to continually go down very much is the yield on the securities that they can be buying in mortgages. So, the incentive for them to move out of cash and into securities, and those securities likely to be mortgages, is picking up as the Fed cuts rates. And it's not just the banks that are going to be more active. It's also overseas investors. As the Fed cuts rates and the Bank of Japan hikes, the FX (foreign exchange) hedging costs, which is basically a function of the interest rate differential between the two banks is likely to decrease, which means that overseas investors will be more active.A steeper curve is going to be positive for REIT demand. And then over time, as the Fed cuts rates and money market yields go down, those retail investors are likely to be incentivized to move out of money market funds into core funds with higher yields, which will be supportive of money manager demand – although that's likely a 2025 story.James Egan: All right, Jay, thank you for that. But one of the questions that you and I have received a lot since the Fed's cut is: Okay, the Fed cut 50 basis points. Why haven't mortgage rates come down by 50 basis points on the follow?Jay Bacow: Well, so, mortgage rates, obviously in the US, the vast majority of them are 30-year fixed rate mortgages. And so, if you have one, the Fed actions don't impact that. If you have an adjustable-rate mortgage, it will reset – but typically those resets happen every six months. Although you're probably getting asked about the prevailing mortgage rate; and the prevailing mortgage rate – because it's the 30-year fixed rate, it's not a function of Fed funds – but it's more of a function of the yields further out the curve. Although maybe Jim, you can do a better job explaining this.James Egan: So, when it comes to interest rates and mortgages, Jay, as you mentioned, we're going to be more focused on the five- and 10-year part of the curve than we are on Fed funds.To provide a little bit of an example there, from the fourth quarter of 2023 until the Wednesday morning that the Fed cut, 30-year mortgage rates had decreased by 180 basis points. The Fed had yet to cut a single basis point. But, just taking a step b

Our Chief Korea and Taiwan Economist discusses the reforms needed to overcome Korea’s urgent demographic crisis.----- Transcript -----Welcome to Thoughts on the Market. I’m Kathleen Oh, Morgan Stanley’s Chief Korea and Taiwan Economist. Today I’ll discuss what’s needed to overcome Korea’s aging population crisis.It’s Tuesday, Oct 15th, at 4 PM in Hong Kong. South Korea faces some of the world's most challenging demographics and will officially become a super-aged society next year – that’s more than 20 percent of the population 65 or older. The implications of this are so significant that the Korean government recently declared a national emergency, and we don’t think this is overstating the case. Korea’s low fertility rate is the primary culprit. In 2023 it plummeted to the lowest level globally and currently sits at 0.72. For reference, the total fertility rate of 2.1 children per woman is what’s necessary to maintain a stable population in general. By next year, Korea’s population will start declining and is projected to shrink by a third over the next 40 years as the working population halves. At this pace, the Bank of Korea forecasts that Korea’s potential growth could enter negative territory by 2040, down from 2 per cent in [20]24-25. So why does Korea have such a record-low fertility rate? In the short term, there are two key drivers: First, the declining number of marriages during the pandemic drove a rapid drop in births; having children out of wedlock is taboo in Korea. Once weddings resumed in 2022, Korea saw a slight but insufficient rebound in births. Second, housing prices have gone up 80 per cent in the past decade, which has discouraged young couples from having families. Families with first children feeling extra financial burdens to have [a] second child. Beyond the short term, structural factors have also played a role. After a compressed period of rapid economic growth, Koreans feel uncertain about the employment conditions and housing outlook. Tackling the low fertility rate has been on Korean policymakers’ agenda for the past 20 years. The government has invested more than $320 billion into solving the demographic challenge. And while these efforts have certainly raised awareness, they have yet to overcome the crisis. And why? Because Korea has not addressed the root causes of the problem -- income uncertainty, high childcare and education costs. It’s clear what’s needed here are structural reforms and Korea is clearly taking important steps towards overcoming the issue by tackling the fundamental problems now. Policymakers are working to reshape the pension system for the first time in 15 years. They are focusing on measures around improving work-life balance, reducing the gender wage gap, and increasing support for working parents. They are also considering lowering barriers to immigration, which could help alleviate talent shortages. They are also working on reducing the cost of private education. And finally, the government is also focused on improving the country’s capital market infrastructure. They are aiming to attract foreign investment, as well as to help households secure [a] source of asset accumulation, and lower borrowing costs for domestic players. Of course, it’s impossible to quickly reverse the downtrend and positive change will require multiple years - even decades. Korea’s government has set a medium-term goal of returning the fertility rate to 1.0 by 2030, which would delay working population decline by five years. And if the fertility rate reaches 2.1, that would delay the decline in the workforce by 20 years. Conversely, if Korea’s fertility rate remains at the current rate of 0.72, the population will halve by 2065 and the economy will start contracting in 2040, a worst-case scenario that the government is determined to avoid.Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

A slump in tech stocks may explain the market rotation – but it’s the earnings season that investors need to watch, says CIO and Chief US Equity Strategist Mike Wilson.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief US Equity Strategist. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about the recent rotation toward more cyclical parts of the equity market.It's Monday, Oct 14th at 11:30am in New York.So let’s get after it.Last Monday, we upgraded cyclicals relative to defensives after taking profits in our defensive  overweight two weeks prior. These calls come on the back of September's strong jobs report and our economists' expectation for the Fed to still cut interest rates into next year. The resilient labor report effectively reverses the softness we saw in labor markets over the summer which had re-introduced hard landing risks into the markets, driving big outperformance in bonds and defensive stocks. In short, it was a good time to lock in profits after an historically good run. Indeed, cyclical stocks have delivered better performance with these improved macro data.  Importantly, the rates market is confirming this move. Oftentimes, the rates market tends to hold  onto growth risks longer than the equity market. Thus, the recent move higher in yields following resilient data suggests the bond market pricing is shedding some of its growth concerns, and giving us more confidence in our cyclicals upgrade. Furthermore, our cyclical overweights at the sector level in Industrials, Financials and Energy are all exhibiting a positive correlation to rates. Conversely, defensives are exhibiting a negative correlation to yields. In other words, good macro data is still good for many large cap cyclical stocks, while it's bad for defensives. Thus, further stabilization in the economic surprise index should continue to  support quality cyclicals' relative performance even if it comes amid higher yields.Meanwhile, positioning in cyclicals remains light amongst our institutional client base. This is  particularly true for Financials. In our view, this creates opportunity in a sector that we upgraded to overweight last week. This upgrade was based on rebounding capital markets activity, a better loan growth environment in 2025, an acceleration in buybacks post Basel Endgame re-proposal, and attractive relative valuation. Finally, we also factored in the notion that several large cap bank stocks had de-risked in mid-September with lowered guidance ahead of earnings season. Initial results from earnings season last week indicate that large cap banks are clearing that lowered hurdle. On the other side of the coin, positioning in defensives and quality growth remains extended. This is consistent with our conversations with clients who generally remain positioned for a soft macro growth regime.Given the significant influence of the Magnificent 7 stocks on the overall direction of the S&P 500, investors remain focused on how this group of stocks will trade into year-end. It's notable this cohort has underperformed since the second quarter earnings season, and relative performance just took another leg lower.  The breadth among this group has been somewhat narrow with only one of the seven making new highs since the summer in both absolute and relative terms. In our view, this may be one of the reasons for the better performance in other areas of the market and is a potential driver of further broadening into cyclicals. Of course, if the market reverts back to these stocks, it’s a risk to our  cyclical upgrade.Earnings season will be an important factor in terms of these rotations. The fundamental reason for the underperformance of the Magnificent 7 could simply be the deceleration in earnings growth from the very strong pace last year. If this underperformance continues, it could provide further fuel for the quality cyclicals to continue to do better as we expect. Conversely, if earnings revisions show relative strength for the Mag 7, these stocks will likely outperform once again and market leadership may narrow—like it did during [the] second quarter and all of 2023.Thanks for listening. If you enjoy the podcast, leave us a review wherever you listen, and share Thoughts on the Market with a friend or colleague today.

Our Head of Corporate Credit Research and Global Chief Economist explain why they’re watching the consumer savings rate, tariffs and capital expenditures.----- Transcript -----Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley.Seth Carpenter: And I'm Seth Carpenter, Morgan Stanley's Global Chief Economist.Andrew Sheets: And today on this special episode of the podcast, we'll be discussing what could cause our optimistic view on the economy and credit to go wrong.Andrew Sheets: It’s Friday, Oct 11th at 4pm in London.Seth Carpenter: And as it turns out, I'm in London with Andrew.Andrew Sheets: So, Seth you and your global economics team have been pretty optimistic on the economy this year. And have been firmly in the soft-landing camp. And I think we’ve seen some oscillation in the market's view around the economy over the course of the year, but more recently, we've started to see some better data and increasing confidence in that view.So, this is actually maybe the perfect opportunity to talk about – well, what could go wrong? And so, what are some of the factors that worry you most that could derail the story?Seth Carpenter: We have been pretty constructive all along the whole hiking cycle. In fact, we've been calling for a soft- landing. And if anything, where we were wrong with our forecast so far is that things have turned out even better than we dare hoped. But it's worth remembering part of the soft-landing call for us, especially for the US is that coming out of COVID; the economy rebounded employment rebounded, but not proportionally. And so, for a long time, up until basically now, US firms had been operating shorthanded. And so, we were pretty optimistic that even if there was something that caused a slowdown, you were not going to see a wave of layoffs. And that's usually what contributes to a recession. A slowdown, then people get laid off, laid off people spend less, the economy slows down more, and it snowballs.So, I have to say, there is gotta be just a little bit more risk because businesses basically backfilled most of their vacancies. And so, if we do get a big slowdown for some reason, maybe there's more risk than there was, say, a year ago. So, what could that something be is a real question. I think the first one is just -- there's just uncertainty.And maybe, just maybe, the restraint that monetary policy has imparted -- takes a little bit longer than we realized. It's a little bit bigger than we realized, and things are slowing down. We just haven't seen the full force of it, and we just slowed down a lot more.Not a whole lot I can do about that. I feel pretty good. Spending data is good. The last jobs report was good. So, I see that as a risk that just hangs over my head, like the sword of Damocles, at all times.Andrew Sheets: And, Seth, another thing I want to talk to you about is this analysis of the economy that we do with the data that's available. And yet we recently got some pretty major revisions to the US economic picture that have changed, you know, kind of our basic understanding of what the savings rate was, you know, what some of these indicators are.How have those revisions changed what you think the picture is?Seth Carpenter: So those benchmark revisions were important. But I will say it's not as though it was just a wholesale change in what we thought we understood. Instead, the key change that happened is we had information on GDP -- gross domestic product -- which comes from a lot of spending data. There's another bit of data that's gross domestic income that in some idealized economic model version of the world, those two things are the same -- but they had been really different. And the measured income had been much lower than the measured gross domestic product, the spending data. And so, it looked like the saving rate was very, very low.But it also raised a bit of a red flag, because if the savings rate is, is really low, and all of a sudden households go back to saving the normal amount, that necessarily means they'd slow their spending a lot, and that's what causes a downturn.So, it didn't change our view, baseline view, about where the economy was, but it helped resolve a sniggling, intellectual tension in the back of the head, and it did take away at least one of the downside risks, i.e. that the savings rate was overdone, and consumers might have to pull back.But I have to say, Andrew, another thing that could go wrong, could come from policy decisions that we don't know the answer to just yet. Let you in on a little secret. Don't tell anybody I told you this; but later this year, in fact, next month, there's an election in the United States.Andrew Sheets: Oh my goodness.Seth Carpenter: One of the policies that we have tried to model is tariffs. Tariffs are a tax. And so, the normal way I think a lot of people think about what

Mike Canfield, Morgan Stanley’s Head of Europe Sustainability Research, discusses why ensuring safe and responsible artificial intelligence is essential to the AI revolution.----- Transcript -----Mike Canfield: Welcome to Thoughts on the Market. I'm Mike Canfield, Morgan Stanley's Europe, Middle East and Africa Head of Sustainability Research.Today I'll discuss a critical issue on a hot topic: How safe is AI?It's Thursday 10th of October at 2pm in London.AI is transforming the way that we live, work, and connect. It's really got the potential at every level and aspect of society, from personal decisions to global security. But as these systems become ever more integrated into our critical functions – whether that's healthcare, transportation, finance, or even defense – we do need to develop and deploy safe AI that keeps pace with the velocity of technological advances.Market leaders, academic think tanks, NGOs, industry bodies, intergovernmental organizations have all attempted to codify what safe or responsible AI should look like. But at the most fundamental level, the guidelines and standards we've seen so far share a number of clear similarities. Typically, they focus on fostering innovation in practical terms, as well as supporting economic prosperity – but also asserting the need for AI systems to respect fundamental human rights and values and to demonstrate trustworthiness.So where are we now in terms of regulations around the world?The EU's AI Act leads the way with its detailed risk-based approach. It really focuses on transparency as well as risks to people and fundamental rights. In the USA, while there's no comprehensive federal regulation or legislation, there are some federal laws that offer some sector specific guidance on AI applications. Things like the National Defense Authorization Act of 2019 and the National AI Initiative Act of 2020. Alongside those, President Biden's published an executive order on AI, promoting safety, responsible innovation, and supporting Americans and their rights, including things like privacy. In Asia Pacific, meanwhile, countries are working to establish their own guidelines on consumer protection, privacy, and transparency and accountability.In general, it’s very clear that policymakers and regulators increasingly expect AI systems developers to adopt what we'd call the socio-technical approach, focused on the interaction between people and technology. Having examined numerous existing regulations and foundational standards from around the world, we think a successful policymaking approach requires the combination of four core conceptual pillars.We've called them STEP. That's Safety, Transparency, and Ethics and Privacy. With these core considerations, AI can take a step – pun intended – in the right direction. Within safety, the focus is on reliability of systems, avoiding harm to people and society, and preventing misuse or subversion. Transparency includes a component of explainability and accountability; so, systems allowing for future feedback and audits of outcomes. Ethically, the avoidance of bias, preventing discrimination, inclusion, and the respect for the rule of law are key components. Then finally, privacy considerations include elements like data protection, safeguards during operation, and allowing users consent in data used for training.Of course, policymakers contend with a variety of challenges in developing AI regulations. Issues like bias, like discrimination, implementing guardrails without stifling innovation, the sheer speed at which AI is evolving, legal responsibility, and much more beyond. At its most basic, though, arguably the most critical challenge of regulating AI systems is that the logic behind outcomes is often unknown, even to the creators of AI models, because these systems are intrinsically designed to learn.Ultimately, ensuring safety and responsibility in the use of AI is an essential step before we can really tap into ways AI could positively impact society. Some of these exciting opportunities include things like improving education outcomes, smart electric grid management, enhanced medical diagnostics, precision agriculture, and biodiversity monitoring and protection efforts. AI clearly has enormous potential to accelerate drug development, to advance material science research, to boost manufacturing efficiency, improve weather forecasting, and even deliver better natural disaster predictions.In many ways, we need guardrails around AI to maximize its potential growth.Thanks for listening. If you enjoy the show, please do leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Our Global Head of Fixed Income and Thematic Research Michael Zezas and Chief Asia Economist Chetan Ahya discuss how the upcoming US elections might impact economic policies in Asia.----- Transcript -----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Global Head of Fixed Income and Thematic Research.Chetan Ahya: And I'm Chetan Ahya, Morgan Stanley's Chief Asia Economist.Michael Zezas: Today, we'll talk about what the US election means for Asia's economy.It's Wednesday, October 9th at 10am in New York.Chetan, we're less than a month now from the US election, and when I think about what it means for Asia, perhaps the most immediate and direct impact would be via tariffs.Now, our colleagues have already addressed some of this on the podcast, but I'm eager to hear your thoughts. And in the case of a Trump win and a significant tariff increase on China, how big of an impact do you think this policy would have on China's economy, and what particular areas of the economy might be most affected?Chetan Ahya: Well, Mike, I think firstly the tariff numbers being floated, i.e. that if it is 60 per cent, it would mean an increase in tariff of about 35 percentage points over an existing number, which is at 25 per cent. So, the amount of tariffs that we're talking about this time are larger than what we saw in 2018-19. And in terms of implications, of course, it will depend upon exactly what is the magnitude of tariff that is being imposed, but we definitely think there will be a significant downside to China's growth; and we expect an increase in deflationary pressures.Just to give you a bit of perspective of what happened in 2018-19, tariff resulted into China's growth slowing by a full percentage point from 6.9 per cent to 5.9 per cent; and at the same time, we saw that there was downward pressure on China's inflation dynamic. And the timing of tariffs this time does not seem to be great. China is going through an existing challenge of debt deflation loop. And we've seen that China's GDP deflator, which is a broader measure of prices, has been in deflation already for about seven quarters now. And so, in this context, tariffs will further add to its deflationary pressures and make that macro situation much more complicated.Michael Zezas: Got it. And so, how do you think China might respond if it becomes the target of higher tariffs?Chetan Ahya: So, we think China's policy makers could take up three sets of measures to mitigate the impact of tariffs.Number one, there will be, of course, depreciation in its exchange rate, which will be offsetting some part of the tariff increase effect. And so, for example, the weighted average tariff increase was about 18 percentage points during 2018-19, and the RMB depreciation was about 11 per cent. So, there was a significant offset of that tariff increase by currency depreciation.Number two, China could continue to take its effort to rewire trade flows and supply chain. So, for example, in 2018-19, we've seen a significant rewiring of exports from China to the US via Vietnam and Mexico, and we think this time that could be expanded to some more economies.And number three, China also resorted to focusing on new markets, i.e. some of the other emerging markets other than US. And at the same time, they focused on introducing new export products; like in the last cycle, they focused on solar panels, lithium batteries, EVs, and old generation chips. So, in effect, they will try to expand their market base from US into other emerging markets. And at the same time, they will be focusing on new products to ensure that their market share in global goods exports is maintained.So, Mike, we've been discussing the potential impact of a Trump win. But how would a Harris White House shape trade policy, vis-à-vis China and rest of Asia?Michael Zezas: Yeah, I think a Harris White House would represent a lot of continuity with the Biden White House's approach toward Asia and China, specifically when it comes to trade. That is to say, there's a lot of support for continued use and expansion of non-tariff barriers – things like export controls, and inbound and outbound investment restrictions. And there's less interest in using higher tariffs than what we already have as a tool.So, you can expect that. And I think you could also expect there to be kind of a broader reach out to develop economic relationships with Pan Asia as a means of enabling some of the transition that multinational companies would need to rewire their supply chains.But if we take as a given that that might be Harris's approach to trade policy, Chetan, what's your outlook for Asia if she wins in November?Chetan Ahya: Well, if Harris wins, that would eliminate the key risk to region's outlook in form of significant tariff implementation. And in this case, we expect status quo to our Asia forecast. And we would maintain our constructive outlook for the lar

The rhetoric around the US elections is heating up, and tariffs have become a central theme – to rally for or against. In Part II of our roundtable discussion, our chief economists break down national and global implications of this policy lever.----- Transcript -----Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist.On this special episode of the podcast, we're going to continue our third roundtable discussion with Morgan Stanley's economists from around the world as we enter the fourth quarter of 2024.It's Tuesday, October 8th at 10am in New York.Jens Eisenschmidt: And 3pm in London.Seth Carpenter: All right, so yesterday we covered topics about central banks, inflation, reflation, deflation, China's stimulus policies – a whole set of things. But today I really want to focus on the upcoming US elections and some of the possible implications around the world.As of this recording, the race between Vice President Harris and former President Trump is essentially in a dead heat and it has left policymakers and market participants with few clear signals about what policy is going to be going forward.One key policy lever is tariffs; and so Diego, I’m going to come to you. What has the US team said about tariffs and what it might mean for the economy?Diego Anzoategui: Yes, I think the three key policy levers to consider are tariffs, as you mentioned Seth, immigration policy, and fiscal policy. Tariffs, in particular, are basically a presidential authority, so the outcome of the election is going to be very important there.Fiscal policy will depend not only on the White House, but also on the Congress, which most polls suggest that it will be split between the two parties. So, we don't expect much there. And immigration policy is tricky because if you take a look at the data, immigration flows have been decreasing. And the key question here is whether the new policy is going to affect that already decreasing pathSeth Carpenter: For tariffs, I know that we've published -- that there's both a boost to inflation that can come, but also a hit to economic growth. And that boost to inflation likely comes first.The logic is tariffs are taxes, and so they should be seen as a tax on consumption spending -- but also, on domestic CapEx spending and domestic manufacturing because a lot of the imports that are under tariff are either capital goods or intermediate goods that go into manufacturing here in the US.Diego Anzoategui: Yeah, that's right. Of course, the details will matter a lot. So, suffice it to say, there's a lot of uncertainty.Seth Carpenter: Okay, that's fair. Chetan, let me come back to you on this. This topic is particularly important for China's economy since the Trump campaign has pledged tariffs of up to 60 per cent on China, and then 10 per cent globally -- something that our public policy team believes could be a driver of a broader decoupling.You've written a lot about tariffs, tariff structure, what it means for China, the deflationary path. Could you just elaborate a little bit for us?Chetan Ahya: Yeah, absolutely. I think the timing of this tariff, if they do come up in November or sometime in 2025, couldn't have been coming at a worse time for China. As we've been discussing, China has already been going through this challenge of deflation, and tariffs essentially will mean additional deflationary pressures on China.So that is one source of impact that we would be watching. The other would be what is the impact on global corporate confidence and China's corporate confidence. That can have additional negative impact in form of slowdown in investment. And one other thing to keep in mind is that in 2018-2019, China could respond, in terms of fiscal and monetary easing and offset some of the downside that came from tariffs. But in this cycle, considering the state of the property market, it would be very difficult for China to reflate that property market demand and offset the downside from tariff.So essentially, we think the tariffs, if they come in this time, could be far more challenging for China, particularly for deflation management.Seth Carpenter: Of course, tariffs are global and the Trump campaign has talked about not just tariffs on China. So, Jens, let me come to you. Maybe there are some implications here for Europe as well.During former President Trump's administration, there were targeted tariffs that, met challenges of the WTO and retaliatory tariffs on American exports to Europe. Looking back on what happened in 2018 and 2019, what do you think could be ahead in the event that former President Trump wins the election again?Jens Eisenschmidt: So, the episode in 2018 could be actually a template, even though it's probably limited in scopes because tariffs were much more limited that were applied back then. We've talked about around 1 per cent of total American-EU imports that back th

Morgan Stanley’s chief economists take stock of a resilient global economy that has weathered a recent period of market volatility, in Part I of our two-part roundtable.----- Transcript -----Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist. And on this special episode of the podcast, we'll hold our third roundtable discussion focusing on Morgan Stanley's global economic outlook as we enter the final quarter of 2024.I am joined today by our economics team from three regions.Chetan Ahya: I’m Chetan Ahya, Chief Asia Economist.Jens Eisenschmidt: I’m Jens Eisenschmidt, Chief Europe Economist.Diego Anzoategui: I’m Diego Anzoategui from the US Economics team.It's Monday, October 7th at 10 am in New York.Jens Eisenschmidt: And 3 pm in London.Seth Carpenter: I have to say, a lot has happened since the last time we held this roundtable. To say the very least, we've had volatility in financial markets. But on balance, I kind of have to say the global economy has more or less performed the way we expected.The US economy is cruising towards a soft landing. The labor market maybe is a touch softer than we expected, but consumer spending has remained resilient. In Asia, Japan's reflation story is largely intact, while China is still confronting that debt deflation cycle that we've talked about. And in Europe, the tepid growth we had envisioned -- well, it's continuing. Inflation is falling, but the ECB seems to be accelerating its rate cuts. So, let's get into the details.Diego, I'm going to start with you and the US. The Fed cut interest rates in September for the first time this cycle, and they cut by 50 basis points instead of the 25 basis points that some people -- including us -- were expecting. So, the big question for you is, where does the Fed go from here?Diego Anzoategui: So, we are looking for a string of 25 basis point cuts from the Fed as long as labor markets hold up. Inflation has come down notably and we expect a normalization of interest rates ahead. But, of course, we might be wrong again. Labor markets might cool too much, and in that case, one or two additional 50 basis point cuts might happen again.Seth Carpenter: So, either the Fed glides into the soft landing or they pick up the pace and they cut faster.So, Jens, let me turn to you and pivot to Europe. You recently changed your forecast for the ECB, and you're now looking for a rate cut in October. And that's following two cuts already that the ECB has done. So, what prompted your change? Is it like what Diego said about a softer outcome prompting a faster pace of cuts. What's likely to happen next for the ECB?Jens Eisenschmidt: That's right. We changed our ECB call. And to understand why we have to go back to September. So already at the September meeting the ECB president, Lagarde, made clear in the press conference that the bank was a little bit less concerned about structurally high services inflation that is forecast to be persistently high still for some time to come -- mainly because there was more conviction that wages would come down eventually.And so, they could really focus a little bit more, give a bit more attention to the growth side of things. Just as a reminder, the Fed has a dual mandate. So, it's growth and inflation. The ECB only has inflation. So basically, if the ECB wants to act on growth, it needs to be sure that inflation is under control. And then since September what happened is that literally every single indicator, leading indicator, for inflation was negative. We had lower oil prices, we had a stronger euro, and of course, also weaker activity in terms of the PMIs pointing to a cooling of the ongoing recovery.So, all of that led us to revise our inflation forecast, and that means that ECB will very likely already be a target mid next year. That should lead to an acceleration of the rate cut cycle. And then it's only a question, will it be already in October or in December? And here comes the September inflation print in, which was softer in particular on the core or on the services component than expected. And we think that has tilted the balance; or will tilt the balance in favor of an October rate cut.So, what we see now is October, December, January, March -- 25 basis points rate cuts by the ECB leading to a rate of 250. Then this being close to neutral, they will slow down again, quarterly rate cut pace. So, June, September, December, 25 basis points each -- leading to a final rate end of next year at 175.Seth Carpenter: Okay, got it. So, inflation has come down in most developed market economies. Central banks are starting to cut. For the Fed, there's an open question about how much strength the labor market still has and whether or not they need to do 50 basis points or 25.But I have to say, Chetan -- and I'm going to come to you because -- in Asia, we saw a lot of market turmoil in August, and that was partly

Following the US Federal Reserve’s September rate cut, labor data may have more impact on markets than further cuts. Andrew Sheets, Head of Corporate Credit Research, explains why.----- Transcript -----Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, head of Corporate Credit Research at Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, today I'll discuss why what the Fed does next might not matter all that much. It’s Friday, October 4th, at 2 pm in London. Over recent months the Federal Reserve has been at the center of the global market debate. After keeping policy rates unchanged at the end of July, a decision the markets initially cheered, a string of weak data in early August drove concerns that Fed policy was behind schedule. The Fed then responded with a larger-than-expected half-percent interest rate cut in September. And so, given these swings, a common question for investors is, understandably: What will the Fed do next? But what if the Fed’s next move doesn’t matter all that much? Monetary policy is both powerful and weak. Powerful, because interest rates impact so many decisions across the economy, from buying a home, to financing equipment, to acquiring a competitor. And it’s also weak, because how interest rates impact these decisions can have a long and variable lag. It can be six to twelve months before the full impact of an interest rate cut is felt in the economy. And so that half percentage point cut by the Fed last month might not be fully felt in the US economy until June of 2025. That lag is one reason why the Fed’s next move may matter less. The second reason is what we think the market is worried about. We think a lot of the market’s volatility over the last two months has been driven by concerns that the US economy, particularly the labor market, is weakening right now. If interest rates are too high and the labor market is weakening, then cutting more rapidly in the coming months might not make a difference. Because of that lag, the help from lower rates simply wouldn’t arrive in time.Meanwhile, there’s also a view that interest rates might need to fall quite a long ways to have the sort of impact that would be needed if the economy is really slowing down rapidly: by the Fed’s own Summary of Economic Projections (SEP), the policy rate that neither helps or hinders the economy could still be about 2 per cent lower than the current rate – even after that half a percentage point cut in September. Interest rates are well above what could be neutral. In short, if the data weaken materially over the coming months, more Fed cuts may not necessarily help in time. And if the data remain solid, Fed policy will have lots of time to adjust. It’s the data, not the Fed’s next action, that are most important at the moment. We also see support for this idea in history. It’s notable that some of the most aggressive US interest rate-cutting cycles – 2001, 2008, February of 2020 – overlapped with weak equity and credit markets. And it was smaller rate cutting cycles – in 1995-96, 1998 or 2019 – that overlapped with much better markets. And that makes sense; if one assumes that it’s the data rather than exactly how much the Fed is cutting rates that matter most to the market. All of this especially feels topical today. Today’s better than expected report on the US jobs market should support the case that Fed policy is on schedule, and larger adjustments aren’t needed. It’s good news. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Our Chief China Economist Robin Xing and Chief China Equity Strategist Laura Wang discuss how markets have responded to rate cuts and commitments to government spending, and what they could mean over the long term.----- Transcript -----Laura Wang: Welcome to Thoughts on the Market. I'm Laura Wang, Morgan Stanley's Chief China Equity Strategist. Robin Xing: And I'm Robin Xing, Morgan Stanley's Chief China Economist.Laura Wang: All eyes have been on China this past week, and today we'll discuss why recent news from China's policymakers have commanded the attention of global markets.It's Thursday, October the 3rd, at 4pm in Hong Kong.So, Robin, China has been wrestling with the triple macro challenge of debt deflation and demographics -- what we call the three Ds -- for some time now. Last week, China's central bank, PBOC, announced a stimulus package that exceeded market expectations. And then later in the week, top China Communist Party officials, known as the Politburo, focused their monthly meeting on economics, which is not their usual practice.This meeting was a positive surprise to both us and the market. Let's start with the PBOCs easing package. For listeners who haven't been following China's economy closely, what's our current view on China's economy and can you walk us through the policy measures that the central bank introduced?Robin Xing: China's economy has been struggling lately and that's pushed the Beijing to pivot approach. Over the last 18 months, they have tried smaller, reactive measures. But now, they are doing something much bigger. On September 24, the People's Bank of China, PBOC, made a bold move, cutting interest rates and introducing new tools to support the stock market.Now, these cuts might sound small, just 20 basis points, but they are pretty rare in China. They also cut the reserve requirement ratio, which is a fancy way of saying banks can lend more money by 50 basis points. And for the first time, the central bank gave forward guidance, signaling even more cuts could come by year end.On top of that, the PBOC launched two big programs, a 500 billion yuan fund to help investors buy stocks, and a 300 billion yuan program to help companies buy back their own shares. These moves gave a much-needed boost to both the markets and consumer confidence.Laura Wang: And how about the Politburo meeting that came on the heels of the PBOC announcement? What exactly did it focus on?Robin Xing: The Politburo meeting was a rather critical moment. Normally, they don't even talk about the economy in September. But this year was different. It really signaled how urgent things have become.They made it clear they are ready to spend more. The government is pledging to increase public spending because other parts of the economy, like corporates and consumers, are holding back. There is also a big focus on the housing market, which has been in decline since 2021. They are promising to stop that slide, and it's the strongest commitment we have seen so far.Laura Wang: So, given everything we've seen from the PBOC and the Politburo, do you think this is a ‘whatever it takes moment’ to address the macro challenges facing China's economy?Robin Xing: Not quite, but it's close. We are seeing the start of what's going to be a bumpy recovery. The deflation problem, where prices are falling and people are not spending, is complicated.Beijing seems open to trying different approaches, but fixing the deeper issues -- like the struggling housing market and the local government debt -- it’s going to take a lot. In fact, we think China might need to spend about 1-1.5 trillion dollars over the next two years to really turn things around.Right now, the measures they have announced are smaller than that. That's because these are new policies. And they still need to build consensus and work out the details. So, while this isn't a ‘whatever it takes moment’ yet the mindset has definitely shifted in that direction.Laura Wang: In this case, what are the next steps you are monitoring for China's policymaker and how long will the various measures take to implement?Robin Xing: We expect to see a supplementary budget of 1-2 trillion yuan announced at the upcoming NPC Standing Committee meeting in late October. This budget should focus on boosting consumer spending, increasing social welfare, and helping local governments managing their debt. We will likely see more monetary easing too.As well as tweaks to the Housing Inventory Buy Back program. These steps should help the economy grow slightly faster, possibly hitting a 5 per cent quarter on quarter growth over the next two quarters, compared to the 3 per cent we have seen recently.Looking ahead, we will get more clues at the December Central Economic Work Conference. That's when we might see the first signs of plans to use central government funds to tackle housing and local government debt issues. The full details could come

Thousands of U.S. dockworkers have gone on strike along the East Coast and Gulf Coast. Our Global Head of Fixed Income and Thematic Research Michael Zezas joins U.S. economist Diego Anzoategui to discuss the potential consequences of a drawn-out work stoppage.----- Transcript -----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income and Thematic Research for Morgan Stanley.Diego Anzoategui: And I'm Diego Anzoategui from the US Economics team.Michael Zezas: And today, we'll be talking about the implications of this week's US dockworker strike on the US economy.It's Wednesday, October 2nd, at 11am in New York.Diego, as most of our listeners likely know, yesterday roughly 45,000 US dockworkers went on strike for the first time in perhaps decades at 36 US ports from Maine to Texas. And so, I wanted to get your initial read on the situation because we're obviously getting a lot of questions from clients concerned about what this could mean for growth and inflation.Diego Anzoategui: Yeah, of course, there's a lot of uncertainty about this situation because we don't know how long the strike is going to last. But the strike can in principle hit economic growth and boost inflation -- but only if it is long lasting, right. Local producers and retailers, they typically have inventories of final and intermediate goods, so the disruption needs to be long enough so that those inventories go down to critical levels in order to see a meaningful macroeconomic impact.But if the strike is long enough, we might see an important impact on economic activity and inflation. If we look at trade flows data, roughly 30 per cent of all goods imports and exports are handled by the East and Gulf ports.Michael Zezas: So then let's drill down on that a bit. If the strike continues long enough and inventories decline, what are the shocks to economic growth that you're considering?Diego Anzoategui: Yeah, I would think that there are two main channels through which the strike might hit economic activity. The first one is a hit to local production because of disruptions in the supply of capital goods and intermediate goods used for domestic production. We not only use the ports to bring final goods, but also intermediate and capital goods like machinery, basic metals, plastic, to name a few.And the second channel is directly through exports. The East Coast and Gulf ports channel 84 per cent of exports by water. Industries producing energy, chemicals, machinery, cars, might be affected by these bottlenecks.Michael Zezas: Right, so fewer potential imports of goods, and fewer potential productive capacity as a consequence. Does that have an impact on inflation from your perspective?Diego Anzoategui: Yes, it can have an impact on inflation. Again, assuming that the strike is long lasting, right? I would expect acceleration in goods prices, in particular key inputs coming from the Eastern Gulf ports. And these are cars, electronics, clothes, furniture and apparel. All these categories roughly represent 13 per cent of the core PCE basket, the price index.Also, you know, a meaningful share of food and beverages imports come through water. So, I would also expect an impact there in those prices. And in terms of what prices might react faster, I think the main candidate is food and beverages -- and especially perishable food that typically have lower inventory to sales ratios.And if we start seeing an increase in those prices, I think that would be a good early signal that the disruptions are starting to bite.Michael Zezas: That makes sense. And last question, what about the impact to the US workforce? What would be the impact, if any, on payroll data and unemployment data, reflecting workforce impact -- the types of data that investors really pay close attention to.Diego Anzoategui: Yeah. So, we will likely see an impact on nonfarm payrolls, NFP, and the unemployment rate if the strike is long lasting. But even if there are not important disruptions, the strike itself can mechanically affect October's nonfarm payrolls print. They want to be released in November. Remember that strikers don't get paid, and they are not on the payroll; so they are not be[ing] counted by the establishment survey.But a necessary condition to see this downward bias in the NFP reading is that the strike needs to continue next week, that is the second week of October, right. But know that The Fed tends to look through these short run fluctuations in NFP due to strikes -- because any drag we see in the October sprint will likely be followed by payback in November if the strike is short lived.Michael Zezas: Got it. That makes a lot of sense. Diego, thanks for making the time to talk with us as this unfolds. Let's hope for a quick resolution here.Diego Anzoategui: Thanks, Michael. Great speaking with you.Michael Zezas: And thanks for listening. If you enjoy Thoughts on the Market, please be sure to rate and review us on the Apple Podc

Our US public policy and global economics experts discuss how an escalation of US tariffs could have major domestic and international economic implications.----- Transcript -----Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Morgan Stanley's US Public Policy Strategist. Arunima Sinha: And I’m Arunima Sinha, from the Global Economics team. Ariana Salvatore: Today we're talking tariffs, a major policy issue at stake in the US presidential election. We'll dig into the domestic and international implications of these proposed policies. It's Tuesday, October 1st at 10am in New York. In a little over four weeks, Americans will be going to the polls. And as we've noted on this podcast, it's still a close race between the two presidential candidates. Former president Donald Trump's main pitch to voters has to do with the economy. And tariffs and tax cuts are central to many of his campaign speeches. Arunima Sinha: You're right, Ariana. In fact, I would say that tariffs have been the key theme he keeps on coming back to. You've recently written a note about why we should take the Republicans proposed policies on tariffs seriously. What's your broad outlook in a Trump win scenario? Ariana Salvatore: Well, first and foremost, I think it's important to note that the President has quite a bit of discretion when it comes to trade policy. That's why we recommend that investors should take seriously a number of these proposals. Many of the authorities are already in place and could be easily leveraged if Trump were to win in November and follow through on those campaign promises. He did it with China in 2018 to 2019, leveraging Section 301 Authority, and many of that could be done easily if he were to win again.Arunima Sinha: And could you just walk us through some of the specifics of Trump's tariff proposals? What are the options at the President's disposal? Ariana Salvatore: Sure. So, he's floated a number of tariff proposals -- whether it be 10 per cent tariffs across the board on all of our imports, 60 per cent specifically on China or targeted tariffs on certain goods coming from partners like Mexico, for example. Targeted tariffs are likely the easiest place to start, especially if we see an incrementalist approach like we saw during the first Trump term over the course of 2018 to 2019. Arunima Sinha: And how quickly would these tariffs be implemented if Trump were to win? Ariana Salvatore: The answer to that really depends on the type of authorities being leveraged here. There are a few different procedures associated with each of the tariffs that I mentioned just now. For example, if the president is using Section 301 authorities, that usually requires a period of investigation by the USTR -- or the US Trade Representative --before the formal recommendation for tariffs.However, given that many of these authorities are already in place, to the extent that the former president wants to levy tariffs on China, for example, it can be done pretty seamlessly. Conversely, if you were to ask his cabinet to initiate a new tariff investigation, depending on the authority used, that could take anywhere from weeks to months. Section 232 investigations have a maximum timeline of 270 days. There's also a chance that he uses something called IEEPA, the International Emergency Economic Powers Act, to justify quicker tariff imposition, though the legality of that authority hasn't been fully tested yet. Back in 2019, when Trump said he would use IEEPA to impose 5 per cent tariffs on all Mexican imports, he called off those plans before the tariffs actually came into effect. Arunima Sinha: And could you give us a little more specific[s] about which countries would be impacted in this potential next round of tariffs -- and to what extent? Ariana Salvatore: Yeah, in our analysis, which you'll get into in a moment, we focus on the potential for a 10 per cent across the board tariff that I mentioned, in conjunction with the 60 per cent tariff on Chinese goods. Obviously, when you map that to who our largest trading partners are, it's clear that Mexico and China would be impacted most directly, followed by Canada and the EU.Specifically on the EU, we have those section 232 steel and aluminum tariffs coming up for review in early 2025, and the US-MCA or the agreement that replaced NAFTA is set for review later in 2026. So, we see plenty of trade catalysts on the horizon. We also see an underappreciated risk of tariffs on Mexico using precedent from Trump's first term, especially if immigration continues to be such a politically salient issue for voters. Given all of this, it seems that tariffs will create a lot of friction in global trade. What's your outlook, Arunima? Arunima Sinha: Well, Arianna, we do expect a hit to growth, and a near term rise in inflation in the US. In the EU, our economists also expect a negative impact on growth. And in other economies, there are several considerations. How would tariffs

Our CIO and Chief US Equity Strategist Mike Wilson takes a closer look at the potential ramifications of the sharp central bank policy shifts in the U.S., Japan and China.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief US Equity Strategist. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about what to expect from the sharp pivot in global monetary and fiscal policy.  It's Monday, Sept 30th at 11:30am in New York. So let’s get after it. Over the past few months, Fed policy has taken on a more dovish turn. To be fair, bond markets have been telling the Fed that they are too tight and in many respects this pivot was simply the Fed getting more in line with market pricing. However, in addition to the 50 basis point cut from the Fed, budget deficits are providing heavy support; with August’s deficit nearly $90b higher than expected. Meanwhile, financial conditions continue to loosen and are now at some of the most stimulative levels seen over the past 25 years. Other central banks are also cutting interest rates and even the Bank of Japan, which recently raised rates for the first time in years, has backed off that stance – and indicated they are in no hurry to raise rates again. Finally, this past week the People’s Bank of China announced new programs specifically targeting equity and housing prices. After a muted response from markets and commentators, the Chinese government then followed up with an aggressive fiscal policy stimulus. Why now?  Like the US, China is highly indebted but it has entered full blown deflation with both credit and equity markets trading terribly for the past several years. There is an old adage that markets stop panicking when policy makers start panicking. On that score, it makes perfect sense why China equity and credit markets have responded the most favorably to the changes made last week. European equity markets were also stronger than the US given European economies and companies have greater exposure to China demand. On the other hand, Japan and India traded poorly which also makes sense in my view since they were the two largest beneficiaries of investor outflows from China over the past several years. Such trends are likely to continue in the near term.  For US equity investors, the real question is whether China’s pivot on policy will have a material impact on US growth. We think it’s fairly limited to areas like Industrial spending and Materials pricing and it’s unlikely to have any impact on US consumers or corporate investment demand. In fact, if commodities rally due to greater China demand, it may hurt US consumer spending. As usual, oil prices will be the most important commodity to watch in this regard. The good news is that oil prices were down last week due to an unrelated move by Saudi Arabia to no longer cap production in its efforts to get oil prices back to its $100 target. If prices reverse higher again and move toward $80/bbl due to either China stimulus or the escalation of tensions in the Middle East, it would be viewed as a net negative in my view for US equities.  As discussed last week the most important variables for the direction of US equities is the upcoming labor market data and third quarter earnings season. Weaker than expected data is likely to be viewed negatively by stocks at this point and good news will be taken positively. In other words, investors should not be hoping for worse news so the Fed can cut more aggressively. At this point, steady 25 basis point cuts for the next several quarters in the context of growth holding up is the best outcome for stocks broadly. Meanwhile individual stocks will likely trade as much on idiosyncratic earnings and company news rather than macro data in the absence of either a hard landing or a large growth acceleration; both of which look unlikely in the near term. In such a scenario, we think large cap quality growth is likely to perform the best while there could be some pockets of cyclical strength in companies that can benefit from greater China demand. The best areas for cyclical outperformance in that regard remain in the Industrial and materials sectors.  Thanks for listening. If you enjoy the podcast, leave us a review wherever you listen, and share Thoughts on the Market with a friend or colleague today. 

Credit likes moderation, and the Fed’s rate cut indicates its belief that the economy is heading for a soft landing. Our Chief Fixed Income Strategist warns that markets still need to keep an eye on incoming data.----- Transcript -----Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley’s Chief Fixed Income Strategist. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about the implications of the Fed’s 50 basis points interest rate cut for corporate credit markets. It's Friday, Sep 27th at 10 am in New York. For credit markets, understanding why the Fed is cutting is actually very critical. Unlike typical rate cutting cycles, these cuts are coming when the economic growth is still decelerating but not falling off the cliff. Typically, rate cuts have come in when the economy is already in a recession or approaching recession. Neither is the case this time. So the US expanded by 3 per cent in the second quarter; and the third quarter, it is tracking well over 2 per cent. So, these cuts do not aim to stimulate the economy but really to acknowledge that there’s been significant progress on inflation, and move the policy towards a much more normalized policy stance. In some way, this really reflects the Fed’s confidence in the inflation path. So that means, not cutting now would mean restraining the economy further through high real interest rates. So, this cut really reflects a growing faith by the Fed in achieving a soft landing. Also, the size of the cut, the 50 basis point cut as opposed to 25 basis points, shows the Fed’s willingness to go big in response to weaker data, especially in labor markets. So since the beginning of the year, we have been pretty constructive on spread products across the board, particularly corporate credit and securitized credit, even though valuations have been tightening. Our stance is based on the idea that credit fundamentals will stay reasonably healthy even if economic growth decelerates, as long as it doesn’t fall off the cliff. Further, we also believe that credit fundamentals will improve with rate cuts because stress in this cycle has mainly come from higher interest expenses weighing on both corporations and households. This is in stark contrast to other recent periods of stress in credit markets – such as 2008/09 when we had the financial crisis, 2015/16 we had the challenges in the energy sector and then 2020, of course, we faced COVID. So the best point of illustrating this would be through leveraged loans, which are floating-rate instruments. As the Fed started tightening in 2022, we saw increasing pressures on interest coverage ratios for leveraged loan borrowers. That led to a pick-up in downgrades and defaults in loans. As rate hikes ended, we started seeing stabilization of these coverage ratios, and the pace of downgrades and defaults slowed. And now, with rate cutting ahead of us and the dot plot implying 150 basis points more of cuts for the rest of this year and the next year to come, the pressure on interest coverage ratios are going to be easing, especially if the economy stays in soft landing mode. This suggests that while spreads are today tight, the fundamentals could even improve with rate cuts – that means the spreads could remain around these levels, or even tighten a bit further. After all, if you remember the mid-1990s, which was the the last time that the Fed achieved a soft landing, investment grade corporate credit spreads were about 30 basis points tighter relative to where we are today. That 'if' is a big if. If we are wrong on the soft landing thesis, our conviction about the spread products being valuable will prove to have been misplaced. Really the challenge with any landing is that we can’t be certain of the prospect until we actually land. Till then, we are really looking at incoming data and hypothesizing: are we heading into a soft or hard landing? So this means incoming data pose two-sided risks to the path ahead for credit spreads. If incoming data are weak – particularly employment data are weak – it is likely that faith in this soft landing construct will dim and spreads could widen. But if they are robust, we can see spreads tightening even further from the current tight levels. Thanks for listening. If you enjoy the podcast, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Our US Consumer Economist Sarah Wolfe lays out the impact of the Federal Reserve’s rate cut on labor market and consumers, including which goods could see a rise in spending over the next year.----- Transcript -----Welcome to Thoughts on the Market. I’m Sarah Wolfe, from the Morgan Stanley US Economics Team. Today, a look at what the Fed cut means for US consumers. It’s Thursday, September 26, at 2 PM in Slovenia. Earlier this week, you heard Mike Wilson and Seth Carpenter talk about the Fed cut and its impact on markets and central banks around the world. But what does it actually mean for US consumers and their wallets? Will it make it easier to pay off credit card debt and secure mortgages? We explore these questions in this episode. Looking back to last week, the FOMC cut rates by a larger chunk than many anticipated as risks from inflation have come down significantly while labor market risks have risen. Now, with inflation wrangled in, it’s time to start reducing the restrictiveness of policy to prevent a rise in the unemployment rate and a slump in economic growth. In fact, my colleague Mike Wilson believes the US labor data will be the most important factor driving US equities for the next three to six months. Despite potential risks, the current state of the U.S. labor market is still solid and that’s where the Fed wants it to stay. The health of the labor market, in my opinion, is best reflected in the health of consumer spending. If we look at this quarter, we’re tracking over 3 per cent growth in real consumption, which is a strong run rate for consumption by all measures. And if we look at how the whole year has been tracking, we’ve only seen a very modest slowdown in real consumer spending from 2.7 per cent last year to 2.5 per cent today. For a bit of perspective, if we go back to 2018 and 2019, when rates were much lower than they are today, and we had a tight labor market, consumption was running closer to 2 to 2.3 per cent. So we can definitively say, consumption is pretty solid today. What is most notable, however, is the slowdown in nominal consumption which takes into account unit growth and pricing. This has slowed much more notably this year from 5.6 per cent last year to 4.9 per cent today. It’s reflected by the significant progress we’ve seen in inflation this year across goods and services, despite solid unit growth – as reflected by stronger real consumer spending. Our US Economics team has been stressing that the fundamentals that drive consumption – which are labor income, wealth, and credit – would be cooler this year but still support healthy spending. When it comes to consumption, in my opinion, I think what matters most is labor income. A slowdown in job growth has stoked fears of slower consumer spending, but if you look at aggregate labor income growth and household wealth, across both equities and real estate, those factors remain solid. So, then we ask ourselves, what has driven more of the slowdown in consumer spending this past year?And with that, let’s go back to interest rates. Rates have been high, and credit conditions have been tight – undeniably restraining consumer spending. Elevated interest rates have pushed banks to pull back on lending and have curbed household demand for credit. As a result, if you look at consumer loan growth from banks, it’s fallen from about 12 per cent in 2022 to 7 per cent last year, and just 3 per cent in the first half of this year. Tight credit is dampening consumption. When interest rates are high, people buy less -- especially on credit. And this is a key principle of monetary policy and it's used to lower inflation. But it can have adverse effects. The brunt of the pain has been borne by the lowest-income households which rely heavily on revolving credit for basic spending needs and more easily max out on their credit limits and fall delinquent. As such, as the Fed begins to lower interest rates, the rates charged on consumer loan products have started to moderate. And with a lag, we expect credit conditions to ease up as well, allowing households across the income distribution to begin to access more credit. We should first see a rebound in durable goods spending – like home furnishing, electronics, appliances, and autos. And then that should all be further supported by more activity in the housing market.  While interest rates are on their way down, they are still relatively elevated, which means the rebound in consumption will take time. The good news, however, is that we do think we are moving through the bottom for durable goods consumption – with pricing for goods likely to stabilize next year and unit growth to pick back up.Thank you for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

With the US presidential race being as closely contested as it is, Michael Zezas explains why patience may be a virtue for investors following Election Day. ----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Global Head of Fixed Income and Thematic Research. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about why investors should prepare to wait to get clarity on the US election result. It's Wednesday, September 25th at 10:30am in New York. As we all know, markets dislike uncertainty; and one of the biggest potential catalysts between now and the end of the year is the results of the US presidential election. So it’s important for investors to know that the timing of knowing the outcome may not be what you expect. On most U.S. presidential election days, the outcome is known within hours of polls closing in the evening. That’s because while all votes may not yet have been counted, enough have to make a reasonable projection about the winner. But that’s not what happened in 2020. Vote counts were tight across many states. A condition that was compounded by the slowness of counting mail in ballots, which was a style of voting more widely adopted during the pandemic. As a result, news networks didn’t make a formal outcome projection until about four days after election day.Rather than a reversion to the norm of quickly knowing the result for the 2024 election, we expect an outcome similar to 2020. It could be days before we reliably know a result.The same dynamics as 2020 are in play. Polls show a very close race. And while more voters are likely to show up in person this year, voting by mail is still expected to represent a substantial chunk of ballots cast this cycle. That’s because many states' rules automatically send mail-in ballots to those who voted by that method in the last election. And some recent news out of Georgia underscores the potential for a slower result. The state just adopted a rule requiring all its votes to be hand-counted.Now, this may not matter if either candidate has enough votes without Georgia to win the electoral college. But if Georgia is the deciding or tipping point state then a longer wait becomes possible. Per the 538 election forecast model, there’s about an 11 per cent chance that Georgia plays this role.So, bottom line, investors may have to be patient this November. It could take days, or weeks, to reliably project an election outcome, and therefore start seeing its market effects.Thanks for listening. If you enjoy the podcast, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

From stock price fluctuations to concerns about deflation, the reactions to the Fed rate cut have been varied. But we still need to keep an eye on labor data, says Mike Wilson, our CIO and Chief US Equity Strategist.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief US Equity Strategist. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about the Fed’s 50 basis point rate cut last week, and the impact on markets.It's Tuesday, Sept 24th at 11:30am in New York.So let’s get after it. As discussed last week, I thought that the best short-term case for equities was that the Fed could deliver a 50 basis point cut without prompting growth concerns. Chair Powell was able to thread the needle in this respect, and equities ultimately responded favorably. However, I also believe the labor data will be the most important factor in terms of how equities trade over the next three to six months. On that score, the next round of data will be forthcoming at the end of next week. In my view, that data will need to surprise on the upside to keep equity valuations at their currently elevated level. More specifically, the unemployment rate will need to decline and the payrolls above 140,000 with no negative revisions to prior months.  Meanwhile, I am also watching several other variables closely to determine the trajectory of growth. Earnings revision breadth, the best proxy for company guidance, continues to trend sideways for the overall S&P 500 and negatively for the Russell 2000 small cap index. Due to seasonal patterns, this variable is likely to face negative headwinds over the next month.Second, the ISM Purchasing Managers Index has yet to reaccelerate after almost two years of languishing. And finally, the Conference Board Leading Economic Indicator and Employment Trends remain in downward trends; this is typical of a later cycle environment.Bottom line, the Fed's larger than expected rate cut can buy more time for high quality stocks to remain expensive and even help lower quality cyclical stocks to find some support. The labor and other data now need to improve in order to justify these conditions though, through year end.It's also important to point out that the August budget deficit came in nearly $90 billion above forecasts, bringing the year-to-date deficit above $1.8 trillion. We think this fiscal policy has been positive for growth but has resulted in a crowding out within the private economy and financial markets. This is another reason why a recession is the worst-case scenario even though some argue a recession is better than high price levels or inflation for 80-90 per cent of Americans. A recession will undoubtedly bring debt deflation concerns to light, and once those begin, they are hard to reverse. The Fed understands this dynamic better than anyone as first illustrated in Ben Bernanke's famous speech in 2002 entitled “Deflation, Making Sure It Doesn’t Happen Here.” In that speech, he highlighted the tools the Fed could use to avoid deflation including coordinated monetary and fiscal policy.We note that gold continues to outperform most stocks including the high-quality S&P 500. Specifically, gold has rallied from just $300 at the time of Bernanke’s speech in 2002 to $2600 today. The purchasing power of US dollars has fallen much more than what conventional measures of inflation would suggest.As a result, gold, high-quality real estate, stocks and other inflation hedges have done very well. In fact, the newest fiat currency hedge, crypto, has done the best over the past decade. Meanwhile, lower quality cyclical assets like commodities, small cap stocks and commercial real estate have done poorly in both absolute and relative terms; and are losing serious value when adjusted for purchasing power.The bottom line, we expect this to continue in the short term until something happens to change investors' view about the sustainability of these policies. In order to reverse these trends, either organic growth in the private economy needs to reaccelerate and we’ll see a rotation back to the lower quality cyclical assets; or recession arrives, and we finish the cycle and reset all asset prices to levels from which a true broadening out can occur.Thanks for listening. If you enjoy the podcast, leave us a review wherever you listen, and share Thoughts on the Market with a friend or colleague today.

Our Global Chief Economist, Seth Carpenter, explains why, despite last week’s big Fed move, there’s still plenty of uncertainty in global markets and questions about how other central banks will respond. ----- Transcript -----Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist.Today, I'll be talking about the Fed meeting, where they cut rates for the first time in this cycle, and what it means for the economy around the world.It's Monday, September 23rd at 10am in New York.The Fed cut rates by 50 basis points; but we did not see a huge shift in its reaction function. Rather, the 50 basis points was to show a commitment to not falling behind the curve -- to use Chair Powell's words. From here, the most likely path, from my perspective, is a string of 25 basis point cuts. Powell has again demonstrated that the Fed can move gradually, or quickly, depending on perceptions of risk.But for now, judging from Powell, or other policy makers comments, the Fed still sees the economy as healthy in the labor market; as solid. But another payroll print of 100, 000 or softening in consumer spending, well, that would tip the balance. So, the market debate will continue to focus on the pace of rate cuts and the ultimate landing zone.Our baseline is a touch more front loaded than the dot plot would imply; with us expecting the funds rate to reach just below 3.5 per cent in the middle of next year, rather than the end of next year. The Fed's projections have declines in the target rate into 2026 and beyond, but I have to say the dispersion in the dots that they put up shows just how much consensus is yet to be built within the committee. And, as a result, the phrase data dependency, well, that's not a term that we want to drop from the lexicon anytime soon.The magnitudes of the changes differ, but a comparison that we have made often here is to the 1990s, and that cutting cycle eventually it paused as the economy stabilized and continued to grow. So, there are lots of options for where we go next.Globally, central banks will be adapting and reacting both to global financial conditions like this Fed rate cut, as well as their domestic outlook. Among emerging market economies, Brazil and Indonesia make for useful case studies. With an eye on defending its policy credibility and on market expectations, the central bank in Brazil hiked rates to 10-and-three-quarters per cent this week after a cutting cycle and then a long pause. A weaker currency is the external push, but strong domestic growth is the internal consideration and both of those imply some inflation risks.The Bank of Indonesia cut rates after a strong appreciation in the currency, which lowered the risk from inflations, and it really enabled them to change their footing.Now, for DM central banks, the 50 basis point cut really doesn't materially shift our expectations for what's going to happen. If we are right, and ultimately we get a string of 25 basis point cuts, there's little reason for other developed market central banks to really adjust what they're doing. In Europe, we're waiting for inflation data to confirm the slowdown after the softening of wages that we've seen. So, we have high conviction that there's a cut in September, and we expect another cut in December.Now, more cutting by the Fed might lead to a stronger Euro, which would reinforce that inflation trend, but I don't think it would be enough to really change the path and prompt more aggressive cutting from the ECB. After skipping a rate move in September, given all the question marks they still see about inflation in the UK, we think the Bank of England restarts their cuts in November.The split decision at this most recent meeting shows that the MPC is not making frequent adjustments to its plan based on small tweaks to the incoming data. And finally, for the Bank of Japan, we expect them to stay on hold until January. The meeting for the Bank of Japan was primarily about communication, and indeed, Governor Ueda's comments did not prompt the type of reaction that we saw at the July meeting. So, if we're right, and the Fed's path is mostly, like we think it will be, these other developed market central banks don't have to make big changes.So, the Fed didn't really fully recalibrate its outlook. Instead, what it did was signal a willingness, but just a willingness, to make large shifts; with no clear indication that the fundamental strategy has changed.The market implications seem like they could be clear. With the Fed easing, amid economic conditions that remain resilient, that should be positive for risk assets. But the Fed is also trying to prevent complacency, and I have to say, uncertainty is plentiful. If for no other reason, we've got an election coming up, and that makes forecasting what happens in 2025 very difficult.Thanks for listening. And if you enjoy this show, please leave us a review wherever you listen to podcasts a

Our Chief Latin American Equity Strategist explains how potential changes in Mexico’s regulatory approach could have implications for the country’s equity markets.----- Transcript -----Welcome to Thoughts on the Market. I’m Nikolaj Lippmann, Morgan Stanley’s Chief Latin American Equity Strategist. Today I’ll talk about Mexico’s recent judicial reform and its potential impact on equities market.It’s Friday, September 20, at 10am in Mexico City.Mexico has made significant changes to its judicial system. After winning two-thirds majority in both houses – enough to allow for constitutional changes – Mexico policymakers have embarked on a robust reform agenda. Their first stop is a comprehensive reform of the judicial branch, which aims at replacing roughly 2,000 senior judges including the entire Supreme Court. New judges will no longer be appointed but will now be elected by popular vote. This is practically unprecedented in a global context, and while the executive branch might still try to filter future candidates, this new system will likely create a real risk to checks and balances on the judicial branch as well as to expertise and procedure. Additional reforms, including the elimination of independent regulatory bodies, would likely compound these risks. The judicial reform could have a material impact on Mexican equities. So much so, that we think Mexico goes from being an investor favorite to a ‘show me’ story where investors are less likely to give the market the benefit of the doubt. This is likely to result in a derailing or lower set of multiples being paid by investors in Mexican equities or higher risk premium required to invest. Essentially, the judicial reforms could add fiscal, labor and concession/regulatory risk for Mexican companies, even though Mexico has deep manufacturing ecosystems, and has been well-positioned from the transition to [a] multipolar world. Just to give you a sense. Mexico has already sailed past China in terms of manufacturing exports to the United States, and are now approaching the levels of the entire European Union in terms of manufacturing export to the US. These new reforms will raise significant investor concerns, so much so that we’ve downgraded Mexican equities to underweight, a second downgrade since June. Mexican equities have sold off roughly 20 per cent in the past three months, in dollar terms. And we think the judicial reform may contribute to further decline. All in, we see significantly greater potential for negative outcomes than positive outcomes going forward.Looking ahead, we see three key challenges for Mexico: First, the new judicial structure would raise concerns about the independence of the judicial branch. Second, the United States-Mexico-Canada Agreement, the USMCA, is up for review in 2026, and Mexico's judicial reform could mean a much deeper revision. Mexico has committed to maintaining independent regulatory bodies for a number of areas, such as telecom, electricity, in competition. The judicial reform could complicate this commitment. Electricity is a key challenge for Mexico, and it requires immediate investments. Our nearshoring investment thesis stands, but the electricity-related challenges are becoming more pronounced, and they won’t be helped by investor concerns around the judicial reform. So all in, some businesses will be at greater risk from these developments. We expect technology, digitalization, real estate companies to be at the least level of risk, or the lowest level of risk. Domestic concessions could be at more risk. We will continue to bring you relevant updates as Mexico reforms unfold. Thank you for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us wherever you listen. It helps more people find the show.

Investors came away from Morgan Stanley’s recent Industrials Conference with a more optimistic outlook than they expected, based on perspectives including freight transportation’s momentum and AI’s impact on the growth of data centers.----- Transcript -----Michelle Weaver: Welcome to Thoughts on the Market. I'm Michelle Weaver, Morgan Stanley Research's U.S. Thematic Strategist.Ravi Shanker: I'm Ravi Shanker, Morgan Stanley's Freight Transportation and Airlines Analyst.Chris Snyder: And I'm Chris Snyder, the U.S. Industrial Analyst.Michelle Weaver: Today, we'll talk about key themes for Morgan Stanley's recently concluded industrials conference in Laguna Beach.It's Thursday, September 19th at 10am in New York.Last week, we were all out in Laguna Beach at the industrials conference. There were about 500 different industrials investors, along with 156 corporates, which gave us a pretty comprehensive read on what's going on in the industrial sector.Investor sentiment around industrials was pretty poor heading into the conference, and the overall tone of management, though, seemed better than feared in presentations.Chris, your coverage includes companies with exposure to a wide range of end markets. What did you learn about the cycle from your discussions with company management?Chris Snyder: Yeah, I think you categorized it well: consistent, largely unchanged, but better than feared. Morgan Stanley did a poll ahead of the conference. And only 5 percent of investors thought that the conference would be bullish for industrial risk sentiment. Coming out of the conference, 60 percent of industrial investors are bullish on risk sentiment into the end of the year. So, I think it kind of shows that sentiment was in a very bad place and ‘better than feared’ is the right way to categorize it.We've generally been surprised at the lack of optimism around the industrial cycle in the market. The industrial economy has been in contraction for almost two years now, and it seems like we're on the verge of a rate cut cycle, which has historically been a tailwind for the cycle.You know, in our coverage, business is driven by a combination of investments and then production of goods; and the companies we’re seeing real bifurcation on that. On the investment side -- and that's things like data center, new manufacturing facilities with all the US reshoring momentum -- that business remains strong. And on the production side of the house, that business remains soft. And that's generally in line with our call. We prefer CapEx exposure, particularly those that are tied into energy efficiency.Michelle Weaver: Great. That's really positive to hear that the investment side is still doing well. Ravi, your freight coverage is very macro as well -- in that the freight companies move all the stuff that other companies are making. How does demand from shippers look? And what are freight companies saying about the cycle?Ravi Shanker: Yeah, from a freight transportation perspective, I guess, no news was good news out in Laguna; largely because we have already started to see an improvement in the freight cycle, at the end of 1Q going into 2Q. And I think the market was just waiting to see if that would sustain through 3Q. The data has been supportive so far, and the good news was most of the trucking companies did validate the fact that we have seen a continuation of seasonality from 2Q into 3Q.And looking forward, they're also anticipating a fairly decent peak season, probably the most robust peak season we have had in two or three years. And I use the word robust on a relative basis because it's not going to be the greatest peak season ever. But certainly, better than we've had the last couple of years. But that momentum should continue into 2025.So, nobody really was high fiving out there. But certainly, noted the fact that we are seeing a continued improvement in the cycle; and that momentum should continue into next year.Michelle Weaver: One of Morgan Stanley Research's three key themes for the year is technology, diffusion and AI; and this theme came up repeatedly throughout the conference.Chris, some of your companies have significant exposure to data centers, which have seen a huge boost in demand from AI. What does the growth opportunity look like for Multi's names with exposure to data centers?Chris Snyder: Yeah, data center is a growth opportunity for my industrials’ coverage. And they primarily are driven by the investment side. How much data centers are we building? And they sell a lot of the equipment that goes into the data centers. And what we're seeing now is that there's a huge focus on energy efficiency within the data center. You know, obviously it helps improve their cost profile, but also as there's growing concerns around load growth and electricity allotment.And what that's doing is it's driving demand towards the high end of the spectrum, which is where our big public c

While the electoral impact of last week’s US presidential debate is unclear, our Global Head of Fixed Income and Thematic Research offers two guiding principles to navigate the markets during the election cycle.----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Global Head of Fixed Income and Thematic Research. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about takeaways from the US presidential campaign debate. It's Wednesday, September 18th at 10:30am in New York. Last week, Vice President Harris and Former President Trump met in Philadelphia for debate. Investor interest was high, and understandably so. As our Chief Economist Seth Carpenter has previously highlighted in his research, visibility remains low when it comes to the outlook for the US in 2025. That’s because the election could put the country on policy paths that take economic growth in different directions. And of course, the last presidential debate in June led to President Biden’s withdrawal, changing the race dramatically. So, any election-related event that could provide new information about the probability of different outcomes and the resulting policies is worth watching. But, as investors well know from tracking data releases, earnings, Fedspeak, and more, potential catalysts often remain just that – potential. For the moment, we’re putting last week’s debate in that category. Take its impact on outcome probabilities. It could move polls, but perhaps not enough for investors to view one candidate as the clear favorite. For weeks, the polls have been signaling an extremely tight race, with only a small pool of undecided voters. While debates in past campaigns have modestly strengthened a candidate’s standing in the polls, in this race any lead would likely remain within the margin of error. On policy, again we don’t think the debate taught us anything new. Candidates typically use these widely watched events to influence voters’ perceptions. The details of policies and their impact tend to take a back seat to assertions of principles and critiques of their opponents. This is what we saw last week. So if the debate provided little new information about the impact of the election on markets, what guidance can we offer? Here again we repeat two of our guiding principles for this election cycle. First, between now and Election Day, expect the economic cycle to drive markets. The high level of uncertainty and the lack of precedent for market behavior in the run-up to past elections suggest sticking to the cross-asset playbook in our mid-year outlook. In general, we prefer bonds to equities. While our economists continue to expect the US to avoid a recession, growth is slowing. That bodes better for bonds, where yields may track lower as the Fed eases, as opposed to equities, where earnings may be challenged as growth slows. Second, lean into market moves that election outcomes could accelerate. For several months, Matt Hornbach and our interest rate strategy team have been calling for a steeper yield curve, driven by lower yields in shorter-maturity bonds. They have been guided by our economists’ steadfast view that the Fed would start cutting rates this year as inflation eases. We doubt that policies in Democratic win scenarios would change this trend, and a Republican win could accelerate it in the near term, as higher tariffs would imply pressure on growth and possibly further Fed dovishness. Pricing that path could steepen the yield curve further. And of course, there’s still several weeks before the election to get smart on the economic and market impacts of a range of election outcomes. We’ll keep you updated here. Thanks for listening. If you enjoy the podcast, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Our US Public Policy Strategist explains the potential impact of the upcoming presidential election on the healthcare sector, including whether the outcome is likely to drive a major policy shift.----- Transcript -----Welcome to Thoughts on the Market. I’m Ariana Salvatore, Morgan Stanley’s US Public Policy Strategist. Along with my colleagues bringing you a variety of perspectives, today I’ll focus on what the US election means for healthcare. It’s Tuesday, September 17th at 10am in New York. Around elections what we tend to see is voters rank healthcare pretty high among their priority list. And for that reason it’s not surprising that it generates significant debate as well as investor concern – about everything from drug pricing to potential sweeping reforms. We think that the 2024 election is unlikely to transform the US healthcare system. But there are still policies to watch that could change depending on the outcome. We outlined these in a recent note led by our equity research colleagues Erin Wright and Terence Flynn. To start, we think bipartisan policies should continue uninterrupted, regardless of the election outcome. Certain regulations requiring drug price and procedural transparency, for example, which affect hospitals and health plans, are unlikely to change if there is a shift of power next year. We’ve seen some regulations from the Trump era kept in place by the Biden administration; and similarly during the former president’s term there were attempts at bipartisan legislation to modify the Pharmacy Benefit Management model. There are some healthcare policies that could be changed through the tax code, including the extension of the COVID-era ACA subsidies. In President Biden’s fiscal year [20]25 budget request, he called for an extension of those enhanced subsidies; and Vice President Kamala Harris has proposed a similar measure. As we’ve said before on this podcast, we think tax policy will feature heavily in the next Congress as lawmakers contend with the expiring Tax Cuts and Jobs Act. So many of these policies could come into the fold in negotiations. Aside from these smaller potential policy changes, we think material differences to the healthcare system as we know it right now are a lower probability outcome. That’s because the creation of a new system - like Medicare for All or a Public Option - would require unified Democratic control of Congress, as well as party unanimity on these topics. Right now we see a dispersion among Democrats in terms of their views on this topic, and the presence of other more motivating issues for voters; mean[ing] that an overhaul of the current system is probably less likely. Similarly, in a Republican sweep scenario, we don't expect a successful repeal of the Affordable Care Act as was attempted in Trump’s first administration. The makeup of Congress certainly is important, but there are some actions that the President can leverage unilaterally to affect policy here. For example, former President Trump issued several executive orders addressing transparency and the PBM model. If we look at some key industries within Healthcare, our equity colleagues think Managed Care is well positioned heading into this relatively more benign election cycle. Businesses and investors are focusing on candidates' approaches to the Medicare Advantage program and the ACA Exchange, which has subsidies set to expire at the end of 2025. Relative to prior elections, Biopharma should see a lower level of uncertainty from a policy perspective given that the Inflation Reduction Act, or the IRA, in 2022 included meaningful drug pricing provisions. We also think a full-scale repeal of the IRA is unlikely, even in a Republican sweep scenario. So, expect some policy continuity there. Within Biotech, the path to rate cuts is likely a more significant driver of near-term Small and Mid-Cap sentiment rather than the 2024 election cycle. Our colleagues think that investors should keep an eye on two election-related factors that could possibly impact Biotech including potential changes to the IRA that may impact the sector and changes at the FTC, or the Federal Trade Commission, that could make the M&A environment more challenging. As always, we will continue to keep you abreast of new developments as the election gets closer. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen to podcasts and share Thoughts on the Market with a friend or colleague today.

With the Federal Reserve poised to make its long-awaited rate cut this week, our CIO and Chief US Equity Strategist tells us why investors have pivoted their concerns from high inflation to slowing growth. ----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief US Equity Strategist. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about what to expect as the Fed likely begins its long-awaited rate cutting cycle this week.  It's Monday, Sept 16th at 10:30am in New York.So let’s get after it.After nearly 12 months of great anticipation, the Fed is very likely to start its rate  cutting cycle this week. The old adage that it is often easier to travel than arrive may apply as markets appear to have priced an aggressive Fed cutting cycle into the  middle of next year while assuming a soft-landing outcome for the economy.More specifically, the two-year US Treasury yield is now 180 basis points below the Fed Funds Rate which is in line with the widest spread in 40 years, a level associated with a hard landing. This is the bond market's way of messaging to the Fed that they are late in getting started with rate cuts. This doesn't mean the Fed can't get ahead of it, but they may need to move faster to keep investors' hopes alive.As a result, the odds of a 50 basis point cut have increased over the past week but it’s still well below a certainty. This is unusual going into an FOMC meeting and is setting markets up for a greater surprise either way. How the markets react to what the Fed does this week will have an even greater influence on investor sentiment than usual, in my view. Ideally, rates should rise at both the front and back end if the bond market likes the Fed’s actions because it signals they aren’t as far behind in trying to orchestrate a soft landing. Conversely, a fall in rates will be a vote of lower confidence. On the other side of the ledger, we have the equity market which appears to be highly convicted that the Fed has already secured the soft landing, at least at the index level. Today, the S&P 500 trades at 21x forward earnings, which also assumes a healthy path of 10 percent earnings growth in 2024 and 15 percent growth in 2025.  Under the surface, the market has skewed much more defensively as it worries more about growth and less about high inflation. I have commented extensively in this podcast about this shift that started in April and why we have been persistently recommending defensive quality for months. With the significant outperformance of defensive sectors since April, the internals of the equity market may not be betting on a soft landing and reacceleration in growth as the S&P 500 index suggests.Keep in mind that the S&P 500 is a defensive, high-quality index of stocks and so it typically  holds up better than most stocks as growth slows in a late cycle environment like  today. These growth concerns will likely persist unless the data turn around, irrespective of what the Fed does this week.In the 11 Fed rate cutting cycles since 1973, eight were associated with recessions while only three were not. The performance over the following year was very mixed with half negative and half positive with a very wide but equal skew. Specifically, the average performance over the 12 months following the start of a Fed rate cutting cycle is 3.5 percent – or about half of the longer-term average returns. The best 12-month returns were 33 percent, while the worst was a negative 31 percent.  Bottom line, it’s generally a toss-up at the index level. The analysis around style and sectors is clearer. Value tends to outperform growth into the first cut and underperform growth thereafter. Defensives tend to outperform cyclicals both before and after the cut. Large caps also tend to outperform small caps both before and after the first rate cut. These last two factor dynamics are supportive of our defensive and large cap bias as Fed cuts often come in a later cycle environment. It’s also why we are sticking with it. Thanks for listening. If you enjoy the podcast, leave us a review wherever you listen, and share Thoughts on the Market with a friend or colleague today.

After sending global markets in a brief tailspin in early August, the Bank of Japan is once again the center of attention. Our Global Chief Economist and Chief Asia Economist discuss the central bank’s next steps to help ease volatility and inflation.----- Transcript -----Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist.Chetan Ahya: And I'm Chetan Ahya, Chief Asia Economist.Seth Carpenter: And on today's episode, Chetan and I are going to be discussing the Bank of Japan and the role it has been playing in recent market turmoil.It's Friday, September 13th at 12.30pm in New York.Chetan Ahya: And it's 5.30pm in London.Seth Carpenter: Financial markets have been going back and forth for the past month or so, and a lot of what's been driving the market movements have been evolving expectations of what's going on at central banks. And right at the center of it has been the Bank of Japan, especially going back to their meeting at the very end of July.So, Chetan, maybe you can just level set us about where things stand with the Bank of Japan right now? And how they've been communicating with markets?Chetan Ahya: Well, I think what happened, Seth, is that Bank of Japan (BoJ) saw that there was a significant progress in inflation and wage growth dynamic. And with that they went out and told the markets that they wanted to start now increasing rate hikes. And at the same time, the end was weakening.And to ensure that they kind of convey to the markets that they want to be now taking rates higher, the governor of the central bank came out and indicated that they are far away from neutral.Now while that was having the desired effect of bringing the yen down, i.e. appreciated. But at the same time, it caused a significant volatility in the equity markets and make it more challenging for the BoJ.Seth Carpenter: Okay, so I get that. But I would say the market knew for a long time that the Bank of Japan would be hiking. We've had that in our forecast for a while. So, do you think that Governor Ueda really meant to be quite so aggressive? That meeting and his comments subsequently really were part of the contribution to all of this market turmoil that we saw in August. So, do you think he meant to be so aggressive?Chetan Ahya: Well, not really. I think that's the reason why what we saw is that a few days later, when the deputy governor Uchida was supposed to speak, he tried to walk back that hawkishness of the governor. And what was very interesting is that the deputy governor came out and indicated that they do care for financial conditions. And if the financial conditions move a lot, it will have an impact on growth and inflation; and therefore, conduct of monetary policy.In that sense, they conveyed the endogeneity of financial conditions and their reaction function. So, I think since that point of time, the markets have had a little bit of reprieve that BoJ will not take up successive rate hikes, ignoring what happens to the financial conditions.Seth Carpenter: But this does feel a little bit like some back and forth, and we've seen in the market that the yen is getting a little bit whipsawed; so the Bank of Japan wants to hike, and markets react strongly. And then the Bank of Japan comes out and says, ‘No, no, no, we're not going to hike that much,’ and markets relax a little bit. But maybe that relaxation allows them to hike more.It kind of reminds me, I have to say, of the 2014 to 2015 period when the Federal Reserve was getting ready to raise interest rates for the first time off of the zero lower bound after the financial crisis. And, you know, markets reacted strongly -- when then chair Yellen started talking about hiking and because of the tightening of financial conditions, the Fed backed down.But then because markets relaxed, the Fed started talking about hiking again. Do you think that's an apt comparison for what's going on now?Chetan Ahya: Absolutely, Seth. I think it is exactly something similar that is going on with Bank of Japan.Seth Carpenter: So, I guess the question then becomes, what happens next? We know with the Fed, they eventually did hike rates at the end of 2015. What do you think we're in line for with the Bank of Japan, and is it likely to be a bumpy ride in the future like it has been over the past couple months?Chetan Ahya: Well, so I think as far as the market’s volatility is concerned, we do think that the fact that the BoJ has come out and indicated that their reaction function is such that they do care about financial conditions. Hopefully we should not see the same kind of volatility that we saw at the start of the month of August.But as far as the next steps are concerned, we do see BoJ taking up one more rate hike in January 2025. And there is a risk that they might take up that rate hike in December.But the reason why we think that they will be able to take up one

Our Head of Corporate Credit Research looks at the Fed’s approach to rate cuts, seasonal trends and the US election to explain why the next month represents a crucial window for credit’s future. ----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, head of Corporate Credit Research at Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, today I'll discuss why the next month is a critical window for credit.It's Thursday, September 12th at 9am in New York. We’ve liked corporate credit as an asset class this year and think the outlook over the next 6-12 months remains promising. At a high level, credit likes moderation, and that continues to be exactly what Morgan Stanley’s economists are forecasting; with moderate growth, moderate inflation, and moderating policy in the US and Europe. Meanwhile, at the ground level, corporate balance sheets are in good shape, and demand for fixed income remains strong, dynamics that we think are unlikely to shift quickly. But this good credit story is now facing a critical window. As we’ve discussed recently on this program, the Fed has taken a risk with monetary policy, continuing to keep interest rates elevated despite increasing indications that they should be lower. U.S. inflation has been coming down rapidly, to the point where the market now thinks the rate of inflation over the next two years will be below what the Fed is targeting. The labor market is slowing, and government bond markets are now assuming that the Fed will have to make much more significant adjustments to policy. And so, this becomes a race. If the economic data can hold up for the next few months, while the Fed does make those first gradual rate cuts, it will help reassure markets that monetary policy is reasonable and in-line with the underlying economy. But if the data weakens more now, the market is vulnerable. Monetary policy works with a lag, meaning rate cuts are not going to help anytime soon. And so, it becomes easier for the market to worry that growth is slowing too much, and that the cavalry of rate cuts will be too late to arrive. The second immediate challenge is so-called seasonality. Over almost a century, September has seen significantly weaker performance relative to any other month. Seasonality always has an element of mysticism to it, but in terms of specific reasons why markets tend to struggle around this time of year, we’d point to two factors. First, after a summer lull, you tend to see a lot of issuance, including corporate bonds issuance. And for Equities, September often sees more negative earnings revisions, as companies aim to bring full-year estimates in line with reality. Lots of supply and weaker earnings revisions are often a tough combination. A final element of this critical window is the approaching US election. This appears to be an extremely close race between candidates with very different policy priorities. If investors get more nervous that monetary policy is mis-calibrated, or seasonality is unhelpful, the approaching election provides yet another reason for investors to hold back. All of this is why we think the next month is a critical window for credit, and why we’d exercise a little bit more caution than we have so far this year. But we also think any weakness is going to be temporary. By early November, the US election will be over, and we think growth will be holding up, inflation will keep coming down, and interest rate cuts will be well underway. And while September is historically a bad month for stocks and credit, late-October onward is a different and much better story. Any near-term softness could still give way to a stronger finish to the year. Thanks for listening. If you enjoy the show, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Office buildings continue to struggle in the post-pandemic era, but our Chief Fixed Income Strategist notes that other properties have turned a corner. ----- Transcript -----Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley’s Chief Fixed Income Strategist. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about how the challenges facing the US commercial real estate markets have evolved and talk about where they are headed next.It's Wednesday, Sep 11th at 10 am in New York.Over the last year and half, the challenges of commercial real estate, or CRE in short, have been periodically in the spotlight. The last time we discussed this issue here was in the first quarter of this year. That was in the aftermath of loan losses announced by a regional bank that primarily focused on rent-stabilized multifamily and CRE lending in the New York metropolitan area. At the same time, lenders and investors in Japan, Germany and Canada also reported sizable credit losses and write-down related to US commercial real estate.At that time, we had said that CRE issues should be scrutinized through the lenses of lenders and property types; and that saw meaningful challenges in both – in particular, regional banks as lenders and office as a property type.Rolling the calendar forward, where do things stand now?Focusing on the lenders first, there is some good news. While regional bank challenges from their CRE exposures have not gone away, they are not getting any worse. That means incremental reserves for CRE losses have been below what we had feared. Our economists’ expectations of Fed’s rate cuts on the back of their soft-landing thesis, gives us the conviction that lower rates should be an incremental benefit from a credit quality perspective for banks because it alleviates pressure on debt service coverage ratios for borrowers. Lower rates also give banks more room to work with their borrowers for longer by providing extensions. For banks, this means while CRE net charge-offs could rise in the near term, they are likely to stabilize in 2025.In other words, even though the fundamental deterioration in terms of the level of delinquencies and losses may be ahead, the rate of change seems to have clearly turned. In that sense, as long as the rate cuts that we anticipate materialize, the worst of the CRE issues for regional banks may now be behind us.From the lens of property types, it is important not to paint all property types with the same brushstroke of negativity. Office lots remain the pain point. Looking at the payoff rates in CMBS pools gives us a granular look at the performance across different property types.Overall, 76 per cent of the CRE loans that matured over the past 12 months paid off, which is a pretty healthy rate. However, in office loans, the payoff rate was just 43 per cent. Other property types were clearly much better. For example, 100 per cent of industrial property loans, 96 per cent of multi-family loans, 89 per cent of hotel loans that matured in the last 12 months paid off. The payoff rates in retail property loans were a bit lower but still pretty healthy at 76 per cent, in clear contrast to office properties. Delinquency rates across property types also show a similar trend with office loans driving the lion’s share of the overall increase in delinquencies.In short, the secular headwinds facing the office market have not dissipated. Office property valuations, leasing arrangements and financing structures must adjust to the post-pandemic realities of office work. While this shift has begun, more is needed. So, there is really no quick resolution for these challenges which we think are likely to persist. This is especially true in central business district offices that require significant capex for upgrades or repurposing for use as residential housing.Overall, we stick to our contention that commercial real estate risks present a persistent challenge but are unlikely to become systemic for the economy. Thanks for listening. If you enjoy the podcast, please leave us a review wherever you listen to this and share Thoughts on the Market with a friend or colleague today.

With the generational shift in the US housing market underway, our analysts discuss the impact this trend will have on residential real estate investing.----- Transcript -----Ron Kamdem: Welcome to Thoughts on the Market. I'm Ron Kamdem, head of Commercial Real Estate Research and the US Real Estate Investment Trust team within Morgan Stanley Research.Lauren Hochfelder: And I'm Lauren Hochfelder, Co-Chief Executive Officer of Morgan Stanley Real Estate Investing, the global private real estate investment arm of the firm.Ron Kamdem: And on this special episode of Thoughts on the Market, we’ll discuss the tangible impact of shifting demographics on the residential real estate investing space.It's Tuesday, September 10th at 10 am in New York.So, Lauren, for several years now, we've been hearing about millennials overtaking the baby boomers. As a reminder, millennials are people between the age of 28 and 43. So someone like me. And there’s about 72 million millennials right now. Baby boomers are around 59 to 78; and there's about 69 million at the moment. This demographic shift will have a profound impact on all sectors of the economy, including residential housing. So, let's lay the foundation first. What are the current needs of baby boomers and millennials when it comes to their homes?Lauren Hochfelder: Yeah, this is such an interesting moment, Ron, because as you say, their needs are shifting. Over the last 15 years, what have millennials wanted? They have wanted multifamily. They have wanted rental apartment units. And by the way, they've wanted, generally speaking, small ones in cities.Ron Kamdem: Yup.Boomers? They have been disproportionately residing in single family homes that they own, and that they've owned for a long time. But here we are, as millennials reach peak household formation years and boomers approach their 80-year-old mark. There's a real shift.We have millennials growing up and growing out, and boomers growing older. And that means millennials need more space; boomers need more services. Housing with increased care options. And that really leads to three things.One, pockets of oversupply of multifamily. Developers develop to the rearview mirror; and we have way too much of what they wanted yesterday and too little of what they wanted to what they want tomorrow. The second is increased demand for single family rental in more suburban locations to meet the needs of those millennials. And the third is increased demand for senior housing for the boomers.Ron Kamdem: Excellent. So, when we look at the next five to ten years, let's consider each of these generations. Demand for senior housing is increasing significantly. Where are we in this process, and what's your expectation for the next decade?Lauren Hochfelder: Look, we think this is the golden age for senior housing. The demand wave is upon us, supply is way down. And by the way, labor costs, which have been a real headwind, are finally abating. New construction of senior housing has basically fallen off a cliff. It is down 75 per cent from its peak; if you look at the first quarter of this year, it's basically at GFC levels. And third, the senior wealth effect. Not only do seniors need this product, they can afford it.They have been in those homes, they've owned those homes for a very long time, and over that period, home prices have appreciated. So, seniors are in a position where they can really afford to move into these senior living facilities.Ron Kamdem: And what about millennials? As they get older, how are their housing needs evolving?Lauren Hochfelder: I'd say three things. It's they need more space. So single family rental versus multifamily. The second is migratory shifts, right? It's no longer -- I have to live in San Francisco or New York. You're seeing real growth in the southeast and Texas. And the third is this preference to rent. Now, a lot of that's affordability driven.Ron Kamdem: Right.Lauren Hochfelder: But I think there's also mobility. There's just general preference. I mean, this is a generation that doesn't own a landline, right? So, they want to rent. They don't want to buy.Ron Kamdem: So, given these trends as an actual real estate investor, how do you view the supply and demand dynamics within residential investing? And where do you see the biggest opportunities?Lauren Hochfelder: Look, I think housing in general is attractive to invest in. There's simply too little of it. But you really can't paint a broad brush. You need to invest in the type of housing with the best outlook. And you and I can sit here and debate what's going to happen with interest rates. But what is not debatable is that these two large age groups are going to drive demand disproportionately.And so rather than speculating on interest rates, let's calculate the number of people in these generations. And so that means that we want to invest in single family. We want to invest in

Following weaker-than-expected August jobs data, our CIO and Chief U.S Equity Strategist lays out how the Federal Reserve can ease concerns about a possible hard landing.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief US Equity Strategist. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about the labor market’s impact on equity markets.It's Monday, Sept 9th at 11:30am in New York. So let’s get after it.Last week, I wrote a detailed note discussing the importance of the labor data for equity markets. Importantly, I pointed out that since the materially weaker than expected July labor report, the S&P 500 has bounced more than other "macro" markets like rates, currencies and commodities. In the absence of a reacceleration in the labor data, we concluded the S&P 500 was trading out of sync with the fundamentals. Over the past week, we received several labor market data points, which were weaker than expected. First, the Job Openings data for July was softer than expected coming in at 7.7mm versus the consensus expectation of 8.1mm. In addition, June's initial result was revised lower by 274k. This essentially supported the view that the weak payrolls data in July may, in fact, not be related to weather or other temporary issues. Second, the job openings rate fell to 4.6%, which is very close to the 4.5% level Fed Governor Waller has cited as a threshold below which the unemployment rate could rise much faster. Third, the Fed's Beige Book came out last week. It indicated that activity remains sluggish with 9 of the 12 Federal Reserve districts reporting flat or declining activity in August, though commentary on labor markets was more neutral, rather than negative. These data sync nicely with the Conference Board’s Employment Trends Index, which I find to be a very objective aggregate measure of the labor market's direction. This morning, we received the latest release for August Conference Board labor market trends and the trend remains down, but not necessarily recessionary. Of course, the main event last week was Friday's monthly jobs and unemployment reports, where the payroll survey number came in below consensus at 142k. In addition, last month's result was revised lower from 114k to 89k. Meanwhile, the unemployment rate fell by only a couple of basis points leaving investors unconvinced that July’s labor weakness was overstated. Given much of these labor and other growth data have continued to skew to the downside, the macro markets (like rates, currencies, and Commodities) have been trading with more concern about potential hard landing risks. Perhaps nowhere is this more obvious than with 2-year US Treasuries. As of Friday, the spread between the 2-year Treasury yields and the Fed Funds Rate matched the widest levels in the past 40 years. This pricing suggests the bond market believes the Fed is behind the curve from an easing standpoint. On Friday, the equity market started to get in sync with this view and questioned whether a 25bp cut in September would be an adequate policy response to the labor data. In the context of an equity market that is still quite rich and based on well above average earnings growth assumptions, the correction on Friday seems quite appropriate. In my view, until the bond market starts to believe the Fed is no longer behind the curve, labor data reverses course and improves materially or additional policy stimulus is introduced, it will be difficult for equity markets to trade with a more risk on tone. This means valuations are likely to remain challenged for the overall index, while the leadership remains more defensive and in line with our sector and stock recommendations. We see two ways in which the Fed can get ahead of the curve—either faster cutting than expected which is unlikely in the absence of recessionary data; or the labor data starts to improve in a convincing manner and 2-year yields rise. Given the Fed is in the blackout period until next week’s FOMC meeting, and there are not any major labor data reports due for almost a month, volatility will likely remain elevated and valuations under pressure overall. This all brings our previously discussed fair value range for the S&P 500 of 5000-5400 back into view.Thanks for listening. If you enjoy the podcast, leave us a review wherever you listen, and share Thoughts on the Market with a friend or colleague today.

Our Head of Corporate Credit Research, Andrew Sheets, expects a sticky but shallow cycle for defaults on loans, with solid quality overall in high-grade credit.----- Transcript -----Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, head of Corporate Credit Research at Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, today I'll discuss some longer-term thoughts on the credit market and the economic cycle.It's Friday, September 6th at 2pm in London.Concerns around US growth have risen, an issue that will probably persist even after today’s US Payrolls report came roughly inline with expectations. At Morgan Stanley, we continue to expect moderate slowing in growth, not a slump. By the middle of next year, our economists see growth slowing to a still respectable 2% growth rate, and a total of seven rate cuts.While growth is set to slow, we think corporate balance sheet metrics are unusually good in the face of this slowing. Indeed, the credit quality of the US investment grade and BB credit markets, which represent the vast majority of corporate credit outstanding, have actually improved since the Fed started hiking rates.Now, looking ahead, there's understandable concern that these currently good credit metrics won't be sustainable as companies will have to refinance the very cheap borrowing that they received immediately after COVID, with the more expensive costs of today's currently higher yields. But we actually think balance sheets will be reasonably robust in light of this reset, and so their ultimate rate sensitivity could be relatively low.One reason is that a wave of refinancing means companies have already tackled a significant portion of their upcoming debt, reducing the so-called rollover or refinancing risk. Interest coverage for floating rate borrowers has stabilized and should actually improve as the Fed starts to lower rates.The debt service costs for higher rated companies will increase as cheaper debt matures and has to be replaced with more expensive borrowing; but we stressed this is a pretty slow process given the long-term nature of a lot of this borrowing. And so, overall, we think the headwinds from higher debt costs are going to be manageable, with the problems largely confined to a smaller cohort of the lowest quality issuers.We think all of that will drive a so-called sticky but shallow default cycle, with defaults driven by higher borrowing costs at select issuers rather than a single problem sector or particularly poor corporate earnings. And there are also some important offsets. Morgan Stanley's forecast suggests that the Fed will be cutting rates, which will reduce overall borrowing costs over the medium term. And another notable theme over the last two years is that more defaults have been becoming so-called restructurings rather than bankruptcies. These restructurings are more likely to leave a company operating -- just under new ownership -- and create less negative feedback into the real economy.Now, against all this, we're mindful that credit spreads are tight, i.e. lower than average. But importantly, we don't think this reflects some sort of euphoria from either the lenders or the borrowers.All-in borrowing costs for corporates remain high, and that's made corporates less likely to be aggressive or increase their leverage. Indeed, since COVID, the overall high yield bond and loan markets have actually shrunk. Leverage buyout activity has been muted and corporate leverage has gone sideways.These are not the types of things you see when corporates are being particularly aggressive and credit unfriendly. Credit markets love moderation and that's very much what Morgan Stanley's economic forecasts over the medium term expect. Spreads may be tight. But we think they're currently supported by strong fundamentals, modest supply, and improving technicals.Today's roughly inline payroll number won’t resolve the uncertainty around growth, but longer term, we think the picture remains encouraging.Thanks for listening. If you enjoy the show, please leave us a review wherever you listen, and share Thoughts on the Market with a friend or colleague today.

Our US Public Policy and Global Commodities strategists discuss how the outcome of the election could affect energy markets in the US and around the world.----- Transcript -----Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Morgan Stanley's US public policy strategist.Martijn Rats: And I'm Martijn Rats, Global Commodity Strategist.Ariana Salvatore: Today we'll be talking about a topic that's coming into sharper focus this fall. How will the US presidential election shape energy policy and global energy markets?It's Thursday, September 5th at 10am in New York.Martijn Rats: And 3pm in London.Ariana Salvatore: As we enter the final leg of the US presidential campaign, Harris and Trump are getting ready to go head-to-head on a number of key topics. Healthcare, housing, the state of the economy, foreign policy; and also high on the agenda -- energy policy.So, Martijn, let's set the stage here. Prices at the gas pump in the US have been falling over recent weeks, which is atypical in the summer. What's happening in energy markets right now? And what's your expectation for the rest of the year?Martijn Rats: Yeah, it's a relevant question. Oil prices have been quite volatile recently. I would say that objectively, if you look at the market for crude oil, the crude oil market is tight right now. We can see that in inventories, for example, they are buying large drawing, which tell[s] you, the demand is outstripping supply.But there are two things to say about the tightness in the crude oil market. First of all, we're not quite seeing that tightness merit in the markets for refined products. So, get the market for gasoline, the market for diesel, et cetera. At the moment, the global refining system is running quite hard.But they're also producing a lot of refined product. A lot of gasoline, a lot of diesel. They're pushing that to their customers. Demand is absorbing that, but not quite in a convincing manner. And you can see that in refining margins. They have been steadily trending down all summer.The second thing to say about the tightness and crude is that it's largely driven by a set of factors that will likely to be somewhat temporary. Seasonally demand is at its strongest -- that helps. The OPEC deal is still in place. And as far as we can see in high frequency data, OPEC is still constraining production.And then thirdly, production has been growing in a number of non-OPEC countries. But that absent flows and the last couple of months have seen somewhat of a flat spot in non-OPEC supply growth.Now, those factors have created the tightness that we're seeing currently in the third quarter. But if you start to think about the oil market rolling into the fourth quarter and eventually 2025, a lot of these things going to reverse. The seasonal demand tailwinds that we are currently enjoying; they turn into seasonal demand headwinds in four q[uarter]and one q[uarter] -- seasonally weaker quarters of the year. Non-OPEC production will likely resume its upward trajectory based on the modeling of projects that we've done. That seems likely. And then OPEC has also said that they will start growing production again with the start of the fourth quarter.Now, when you put that all together, the market is in deficit now. It will return to a broadly balanced state in the fourth quarter, but then into a surplus in 2025. Prices look a little into the future. They discount the future a little bitNow, as the US election approaches, investors are increasingly concerned how a Trump versus Harris win would affect energy policy and markets going forward. Ariana, how much and what kind of authority does the US president actually have in terms of energy policy? Can you run us through that?Ariana Salvatore: Presidential authorities with respect to energy policy are actually relatively limited. But they can be impactful at the margin over time. What we tend to see actually is that production and investment levels are reasonably insulated from federal politics.Only about 25 per cent of oil and 10 per cent of natural gas is produced on federal land and waters in the US. You also have this timing factor. So, a lot of these changes are really only incremental; and while they can affect levels at the margin, there's a lag between when that policy is announced and when it could actually flow through in terms of actual changes to supply levels. For example, when we think of things like permitting reform, deregulation and environmental review periods and leasing of federal lands, these are all policy options that do not have immediate impacts; and many times will span across different presidential administrations.So, you might expect that if a new president comes into office, he or she could reverse many of the executive actions taken by his or her predecessor with respect to this policy area.Martijn Rats: And what have Trump and Harris each said so far about energy policy?Ariana Salvatore: So, I would say this topic h

Despite a flurry of election news, little may have changed for investors weighing the possible outcomes. Our Head of Fixed Income and Thematic Research, Michael Zezas, explains why this is the case as we move closer to Election Day.----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Global Head of Fixed Income and Thematic Research. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about recent developments in the US election.It's Wednesday, September 4th at 10:30am in New York. While news headlines might make it seem a lot has changed in recent weeks around the US election, in our view not much has changed at all. And that’s important for investors to understand as they navigate markets between now and Election Day on November 5th. Let me explain. In recent weeks, we've had the Democratic convention, fresh polls, and a third party candidate withdraw from the race and endorse former President Trump. But all appear to reflect only marginal impacts on the probabilities of different electoral outcomes. Take the withdrawal of independent candidate Robert F Kennedy Junior, which does not appear to be a game changer. Historical precedent is that third party candidates rarely have a path to even winning one state's electoral votes. Further, in polls voters tend to overstate their willingness to support third parties ahead of election day. And it's also not clear that Kennedy withdrawing clearly benefits Democrats or Republicans.  Kennedy originally ran for President as a Democrat, and so was thought to be pulling from likely Democratic voters. However, polls suggest his supporter’s next most likely choice was nearly split between Trump and Harris.  So while it’s possible that Kennedy’s decision to endorse Trump upon dropping out could be meaningful, given how close the race is, we’re unlikely to be able to observe that potentially marginal but meaningful effect until after the election has passed. And such effects could easily be offset by small shifts favoring Democrats, who are showing some polling resiliency in states where just a couple months ago the election was not assumed by experts to be close.  For example, Cook Political Report, a site providing non-partisan election analysis, shifted its assessment of the Presidential election outcome in North Carolina from “lean Republican” to a “toss-up.” Similarly, in recent weeks the site has shifted states like Arizona, Nevada, and Georgia into that same category from “lean Republican.” These shifts are mirrored in several other polls released last week showing a close race in the battleground states. So, for all the changes and developments in the last week, we think we’re left with a Presidential race that’s difficult to view as anything other than a tossup. To borrow a term from the world of sport – it’s a game of inches. Small improvements for either side can be decisive, but as observers we may not be able to see them ahead of time.  And so that brings us back to our guidance for investors navigating the run up to the election. Let the democratic process unfold and don’t make any major portfolio shifts until more is known about the outcome. That means the economic cycle will drive markets more than the election cycle in the next couple months. In our view, that favors bonds over stocks. Lower inflation enables easier monetary policy and lower interest rates, good for bond prices; but growth concerns should weigh on equities.  Thanks for listening. If you enjoy the podcast, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

While venture capital is taking a more cautionary approach with crypto startups, the buzz around GenAI is only increasing.----- Transcript -----Welcome to Thoughts on the Market. I’m Ed Stanley, Morgan Stanley’s Head of Thematic Research in Europe. Along with my colleagues bringing you a variety of perspectives, today I’ll discuss what private markets can tell us about the viability and investability of disruptive technologies. It’s Tuesday, the 3rd of September, at 2pm in London. For the past three years we have been tracking venture capital funding to help stay one step ahead of emerging technologies and the companies that are aiming to disrupt incumbent public leaders. Private growth equity markets are -- by their very definition – long-duration, and therefore highly susceptible to interest rate cycles. The easy-money bubble of 2021 and [20]22 saw venture funding reach nearly $1.2trillion dollars – more than the previous decade of funding combined. However, what goes up often comes down; and since their peak, venture growth equity capital deployment has fallen by over 60 percent, as interest rates have ratcheted ever higher beyond 5 percent. So as interest rates fall back towards 3.5 percent, which our economists expect to happen over the coming 12 months, we expect M&A and IPO exit bottlenecks to ease. And so too the capital deployment and fundraising environment to improve. However, the current funding market and its recovery over the coming months and years looks more imbalanced, in our view, than at any point since the Internet era. Having seen tens- and hundreds of billions of dollars poured into CleanTech and health innovations and battery start-ups when capital was free; that has all but turned to a trickle now. On the other end of the spectrum, AI start-ups are now receiving nearly half of all venture capital funding in 2024 year-to-date. Nowhere is that shift in investment priorities more pronounced than in the divergence between AI and crypto startups. Over the last decade, $79billion has been spent by venture capitalists trying to find the killer app in crypto – from NFTs to gaming; decentralized finance. As little as three years ago, start-ups building blockchain applications could depend on a near 1-for-1 correlation of funding for their projects with crypto prices. Now though, despite leading crypto prices only around 10 percent below their 2021 peak, funding for blockchain start-ups has fallen by 75 percent. Blockchain has a product-market-fit and a repeat-user problem. GenerativeAI, on the other hand, does not. Both consumer and enterprise adoption levels are high and rising. Generative AI has leap-frogged crypto in all user metrics we track and in a fraction of the time. And capital providers are responding accordingly. Investors have pivoted en-masse towards funding AI start-ups – and we see no reason why that would stop. The same effect is also happening in physical assets and in the publicly traded space. Our colleague Stephen Byrd, for example, has been advocating for some time that it makes increasing financial sense for crypto miners to repurpose their infrastructure into AI training facilities. Many of the publicly listed crypto miners are doing similar maths and coming to the same outcome. For now though, just as questions are being asked of the listed companies, and what the return on invested capital is for all this AI infrastructure spend; so too in private markets, one must ask the difficult question of whether this unprecedented concentration around finding and funding AI killer apps will be money well spent or simply a replay of recent crypto euphoria. It is still not clear where most value is likely to accrue to – across the 3000 odd GenerativeAI start-ups vying for funding. But history tells us the application layer should be the winner. For now though, from our work, we see three likely power-law candidates. The first is breakthroughs in semiconductors and data centre efficiency technologies. The second is in funding foundational model builders. And the third, specifically in that application layer, we think the greatest chance is in the healthcare application space. Thanks for listening. If you enjoy the show, please leave us a review and share Thoughts on the Market with a friend or colleague today.*****Digital assets, sometimes known as cryptocurrency, are a digital representation of a value that function as a medium of exchange, a unit of account, or a store of value, but generally do not have legal tender status. Digital assets have no intrinsic value and there is no investment underlying digital assets. The value of digital assets is derived by market forces of supply and demand, and is therefore more volatile than traditional currencies’ value. Investing in digital assets is risky, and transacting in digital assets carries various risks, including but not limited to fraud, theft, market volatility, market

Original Release Date August 8, 2024: Our Head of Europe Sustainability Research discusses how rising longevity is revolutionizing our fundamental approach from reactive to proactive treatment.----- Transcript -----Welcome to Thoughts on the Market. I’m Mike Canfield, Morgan Stanley’s European Head of Sustainability Research. Along with my colleagues, we’re bringing you a variety of perspectives; and today we’re focusing on a topic that affects everyone – how much does poor health cost us? And how are ageing populations and longer life expectancy driving a fundamental shift in healthcare? It’s Thursday, August the 8th, at 4pm in London.   As populations age across the developed world, health systems need to help people live both longer and healthier. The current system is typically built around to focus on acute conditions and it’s more reactive; so it introduces clinical care or drugs to respond to a condition after it’s already arisen, rather than keeping people healthy in the first instance. So increasingly, with the burden of chronic disease becoming by far the greatest health and economic challenge we face, we need to change the structure of the healthcare system. Essentially, the key question is how much is poor health amongst the ageing population really costing society? To get a true sense of that, we need to keep in mind that workers over 50 already earn one out of every three dollars across the G20 regions. By 2035, they're projected to generate nearly 40 per cent of all household income. So with that in mind, preventable conditions amongst those people aged 50-64 at the moment, are already costing G20 economies over $1 trillion annually in productivity loss. And there’s one more key number: 19 per cent. That's how much age-diverse workforces can raise GDP per capita over the next thirty years, according to estimates from the Organization for Economic Co-operation and Development, or OECD. So clearly, keeping workers healthier for longer underpins a more productive, more efficient, and a profitable global economy. So it’s clear that [if] the current healthcare system were to shift from sick from care to prevention, the global gains would be substantial.The BioPharma sector is already contributing some targeted novel treatments in areas like smart chemotherapy and in CRISPR – which is a technology that allows for selective DNA modification. While we can credit BioPharma and MedTech for really powerful innovations in diagnostics, in AI deployment for areas like data science and material science, and in sophisticated telemedicine – all these breakthroughs together give a more personalized, targeted health system; which is a big step in the right direction, but honestly they alone can’t solve this much broader longevity challenge we face. Focus on health and prevention, ultimately, could address those underlying causes of ill-health, so that problems don’t arise even in the first instance. Governments around the world are obviously realizing the value of preventive care over sick care. And as a strategy, disease prevention fundamentally aims to promote wellness across the board, whether that’s in things like mental state, nutrition or even in things like sleep and stress. While it might be easy to kind of conflate that with wellness trends – things like green smoothies or meditation – the underlying benefits of boosting health at the cellular level have much broader and deeper implications. Things like Type 2 diabetes and heart disease, supporting better health across populations can significantly reduce the incidence of a wide range of chronic conditions. It can lower the burden on health systems overall, and actually increase healthy lifespan at the end of the day. BioPharma advances are significant, but addressing longevity will require a much broader alignment across a myriad of elements; everything really from the food system to sanitation to training healthcare professionals. And of course, all of that will require consistent policy support. Regulators and policymakers are paying very close attention to their ageing population – and so are we. We’ll continue to bring you updates on this topic, which is so important to all of us.Thanks for listening. If you enjoy the show, please do leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

As the US Federal Reserve mulls a forthcoming interest rate cut, our Head of Corporate Credit Research and Global Chief Economist discuss how it is balancing inflationary risks with risks to growth.----- Transcript -----Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley.Seth Carpenter: And I'm Seth Carpenter, Morgan Stanley’s Global Chief Economist.Andrew Sheets: And today on the podcast, we'll be discussing the Federal Reserve, whether its policy is behind the curve and what's next.It's Thursday, August 29th at 2pm in London.Seth Carpenter: And it's 9am in New York.Andrew Sheets: Seth, it's always great to talk to you. But that's especially true right now. The Federal Reserve has been front and center in the markets debate over the last month; and I think investors have honestly really gone back and forth about whether interest rates are in line or out of line with the economy. And I was hoping to cover a few big questions about Fed policy that have been coming up with our clients and how you think the Fed thinks about them.And I think this timing is also great because the Federal Reserve has recently had a major policy conference in Jackson Hole, Wyoming where you often see the Fed talking about some of its longer-term views and we can get your latest takeaways from that.Seth Carpenter: Yeah, that sounds great, Andrew. Clearly these are some of the key topics in markets right now.Andrew Sheets: Perfect. So, let's dive right into it. I think one of the debates investors have been having -- one of the uncertainties -- is that the Fed has been describing the risk to their outlook as balanced between the risk to growth and risk to inflation. And yet, I think for investors, the view over the last month or two is these risks aren't balanced; that inflation seems well under control and is coming down rapidly. And yet growth looks kind of weak and might be more of a risk going forward.So why do you think the Fed has had this framing? And do you think this framing is still correct in the aftermath of Jackson Hole?Seth Carpenter: My personal view is that what we got out of Jackson hole was not a watershed moment. It was not a change in view. It was an evolution, a continuation in how the Fed's been thinking about things. But let me unpack a few things here.First, markets tend to look at recent data and try to look forward, try to look around the corner, try to extrapolate what's going on. You know as well as I do that just a couple weeks ago, everyone in markets was wondering are we already in recession or not -- and now that view has come back. The Fed, in contrast, tends to be a bit more inertial in their thinking. Their thoughts evolve more slowly, they wait to collect more data before they have a view. So, part of the difference in mindset between the Fed and markets is that difference in frequency with which updates are made.I'd say the other point that's critical here is the starting point. So, the two risks: risks to inflation, risks to growth. We remember the inflation data we're getting in Q1. That surprised us, surprised the market, and it surprised the Fed to the upside. And the question really did have to come into the Fed's mind -- have we hit a patch where inflation is just stubbornly sticky to the upside, and it's going to take a lot more cost to bring that inflation down. So those risks were clearly much bigger in the Fed’s mind than what was going on with growth.Because coming out of last year and for the first half of this year, not only would the Fed have said that the US economy is doing just fine; they would have said growth is actually too fast to be consistent with the long run, potential growth of the US economy. Or reaching their 2 per cent inflation target on a sustained basis. So, as we got through this year, inflation data got better and better and better, and that risk diminished.Now, as you pointed out, the risk on growth started to rise a little bit. We went from clearly growing too fast by some metrics to now some questions -- are we softened so much that we're now in the sweet spot? Or is there a risk that we're slowing too much and going into recession?But that's the sense in which there's balance. We went from far higher risks on inflation. Those have come down to, you know, much more nuanced risks on inflation and some rising risk from a really strong starting point on growth.Andrew Sheets: So, Seth, that kind of leads to my second question that we've been getting from investors, which is, you know, some form of the following. Even if these risks between inflation and growth are balanced, isn't Fed policy very restrictive? The Fed funds rate is still relatively high, relative to where the Fed thinks the rate will average over the long run. How do you think the Fed thinks about the restrictiveness of current policy? And how does that relate to what you expect going fo

While mortgage rates have come down, our Co-heads of Securitized Products Research say the US housing market still must solve its supply problem.----- Transcript -----Jim Egan: Welcome to Thoughts on the Market. I'm Jim Egan, co-head of Securitized Products Research at Morgan Stanley.Jay Bacow: And I’m Jay Bacow, the other co-head of Securitize Products Research.Jim Egan: Along with my colleagues bringing you a variety of perspectives, today Jay and I are here to talk about the US housing and mortgage markets.It's Wednesday, August 28th, at 10 am in New York.Now, Jay, mortgage rates declined pretty sharply in the beginning of August. And if I take a little bit of a step back here; while rates have been volatile, to say the least, we're about 50 basis points lower than we were at the beginning of July, 80 basis points lower than the 2024 peak in April, and 135 basis points below cycle peaks back in October of 2023.Big picture. Declining mortgage rates -- what does that mean for mortgages?Jay Bacow: It means that more people are going to have the ability to refinance given the rally in mortgage rates that you described. But we have to be careful when we think about how many more people. We track the percentage of homeowners that have at least 25 basis points of incentive to refinance after accounting for things like low level pricing adjustments. That number is still less than 10 percent of the outstanding homeowners. So broadly speaking, most people are not going to refinance.Now, however, because of the rally that we've seen from the highs, if we look at the percentage of borrowers that took out a mortgage between six and 24 months ago -- which is really where the peak refinance activity happens -- over 30 percent of those borrowers have incentive to refinance.So recent homeowners, if you took your mortgage out not that long ago, you should take a look. You might have an opportunity to refinance. But, for most of the universe of homeowners in America that have much lower mortgage rates, they're not going to be refinancing.Jim Egan: Okay, what about convexity hedging? That's a term that tends to get thrown around a lot in periods of quick and sizable rate moves. What is convexity hedging and should we be concerned?Jay Bacow: Sure. So, because the homeowner in America has the option to refinance their mortgage whenever they want, the investor that owns that security is effectively short that option to the homeowner. And so, as rates rally, the homeowner is more likely to refinance. And what that means is that the duration -- the average life of that mortgage is outstanding -- is going to shorten up. And so, what that means is that if the investor wants to have the same amount of duration, as rates rally, they're going to need to add duration -- which isn't necessarily a good thing because they're going to be buying duration at lower yields and higher prices. And often when rates rally a lot, you will get the explanation that this is happening because of mortgage convexity hedging.Now, convexity hedging will happen more into a rally. But because so much of the universe has mortgages that were taken out in 2020 and 2021, we think realistically the real convexity risks are likely 150 basis points or so lower in rates.But Jim, we have had this rally in rates. We do have lower mortgage rates than we saw over the summer. What does that mean for affordability?Jim Egan: So, affordability is improving. Let's put numbers around what we're talking about. Mortgage rates are at approximately 6.5 percent today at the peak in the fourth quarter of last year, they were closer to 8 percent.Now, over the past few years, we've gotten to use the word unprecedented in the housing market, what feels like an unprecedented number of times. Well, the improvement in affordability that we'd experience if mortgage rates were to hold at these current levels has only happened a handful of times over the past 35 to 40 years. This part of it is by no means unprecedented.Jay Bacow: Alright, now we talked about mortgage rates coming down and that means more refi[nance] activity. But what does the improvement in mortgage rates do to purchase activity?Jim Egan: So that's a question that's coming up a lot in our investor discussions recently. And to begin to answer that question, we looked at those past handful of episodes. In the past, existing home sales almost always climb in the subsequent year and the subsequent two years following an improvement in affordability at the scale that we're witnessing right now.Jay Bacow: So, there's precedent for this unprecedented experienceJim Egan: There is. But there are also a number of differences between our current predicament and these historical examples that I'd say warrant examination. The first is inventory. We simply have never had so few homes for sale as we do right now. Especially when we're looking at those other periods of affordabi

Our CIO and Chief US Equity Strategist explains why there’s pressure for the August jobs report to come in strong -- and what may happen to the market if it doesn’t. ----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief US Equity Strategist. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about the importance of economic data on asset prices in the near term.It's Tuesday, Aug 27th at 11:30am in New York.So let’s get after it. The stock rally off the August 5th lows has coincided with some better-than-expected economic data led by jobless claims and the ISM services purchasing manager survey. This price action supports the idea that risk assets should continue to trade with the high frequency growth data in the near term. Should the growth data continue to improve, the market can stay above the fair value range we had previously identified of 5,000-5,400 on the S&P 500. In my view, the true test for the market though will be the August jobs report on September 6th. A stronger than expected payroll number and lower unemployment rate will provide confidence to the market that growth risks have subsided for now. Another weak report that leads to a further rise in the unemployment rate would likely lead to growth concerns quickly resurfacing and another correction like last month. On a concerning note, last week we got a larger than expected negative revision to the payroll data for the 12 months ended in March of this year. These revisions put even more pressure on the jobs report to come in stronger. Meanwhile, the Bloomberg Economic Surprise Index has yet to reverse its downturn that began in April and cyclical stocks versus defensive ones remain in a downtrend. We think this supports the idea that until there is more evidence that growth is actually improving, it makes sense to favor defensive sectors in one's portfolio. Finally, while inflation data came in softer last week, we don't view that as a clear positive for lower quality cyclical stocks as it means pricing power is falling. However, the good news on inflation did effectively confirm the Fed is going to begin cutting interest rates in September. At this point, the only debate is how much?Over the last year, market expectations around the Fed's rate path have been volatile. At the beginning of the year, there were seven 25 basis points cuts priced into the curve for 2024 which were then almost completely priced out of the market by April. Currently, we have close to four cuts priced into the curve for the rest of this year followed by another five in 2025. There has been quite a bit of movement in bond market pricing this month as to whether it will be a 25 or 50 basis points cut when the Fed begins. More recently, the rates market has sided with a 25 basis points cut post the better-than-expected growth and inflation data points last week.As we learned a couple of weeks ago, a 50 basis points cut may not be viewed favorably by the equity market if it comes alongside labor market weakness. Under such a scenario, cuts may no longer be viewed as insurance, but necessary to stave off hard landing risks. As a result, a series of 25 basis points cuts from here may be the sweet spot for equity multiples if it comes alongside stable growth.The challenge is that at 21x earnings and consensus already expecting 10 percent earnings growth this year and 15 percent growth next year, a soft-landing outcome with very healthy earnings growth is priced. Furthermore, longer term rates have already been coming down since April in anticipation of this cutting cycle. Yet economic surprises have fallen and interest rate sensitive cyclical equities have underperformed. In my view this calls into question if rate cuts will change anything fundamentally.The other side of the coin is that defensive equities remain in an uptrend on a relative basis, a dynamic that has coincided with normalization in the equity risk premium. In our view, we continue to see more opportunities under the surface of the market. As such, we continue to favor quality and defensive equities until we get more evidence that growth is clearly reaccelerating in a way that earnings forecasts can once again rise and surpass the lofty expectations already priced into valuations.Thanks for listening. If you enjoy the podcast, leave us a review wherever you listen, and share Thoughts on the Market with a friend or colleague today.

Our US Thematic Strategist discusses surging confidence as the political landscape evolves, back-to-school spending starts strong and travel providers enjoy post-COVID demand. ----- Transcript -----Michelle Weaver: Welcome to Thoughts on the Market. I'm Michelle Weaver, Morgan Stanley's US thematic strategist. Along with my colleagues bringing you a variety of perspectives, today I'll give you an update on how recent market volatility and the upcoming US election are affecting the US consumer.It's Monday, August 26th at 10am in New York.A few weeks ago, we saw really sharp volatility. It was partially sparked by the unwind of the yen carry trade. But there are also renewed fears about a growth slowdown for the US or a possible US recession. Our economists do not think we are going into a recession though, and they have reaffirmed their longstanding view of a soft landing for the economy as a base case. And they think there's a slowdown, but not a slump.From the more company side, this earning season showed that the US consumer is softening incrementally; but they're not falling off a cliff. Spending is slowing this year, but it's on the heels of what was really high spending over the last couple of years.We did see some softness during second quarter results around the consumer. Consumer confidence is still intact, and our most recent survey in July showed a pretty strong improvement in sentiment. We think that this is partially a function of the political environment. We ran the survey from July 25th to 29th, shortly after President Joe Biden dropped out of the race and endorsed Vice President Kamala Harris. And we saw the biggest improvement in sentiment was for those who consider themselves middle of the road politically.Their net sentiment toward the economy improved from negative -23 percent to -1 percent. Net expectations are also really positive for those who identify as liberal. Net sentiment for very liberal respondents is +34 percent, while it's +20 percent for more somewhat liberal ones. Expectations for conservatives are still negative though, but they have improved since the prior wave of our survey.So, we do think that some of this increase in excitement and increase in confidence has been around the renewed political environment, renewed interest in the race.As we get close to the end of summer, we note two other key trends. Back to school shopping and travel. So, for back-to-school shopping, we're seeing pretty positive results from our survey. Consumers are reporting they're planning to spend more this back-to-school season versus last year. We saw an increase of 35 percent in spending intentions. And then when we think about the different back to school categories people are spending on, apparel saw the biggest net increase in spending plans versus last year. But we also saw an increase for school supplies and electronics. So, all things very important as the kids go back to school or people go off to college.Travel's been one part of the market that's held up super well post pandemic. People were very excited to get out there and go on vacations. And we saw, frankly, an unexpected positive level of demand for the past few years, and we didn't see that faster catch up in demand that a lot of people were expecting post pandemic. I know myself; I've been very excited to travel the last few summers. But this earning season we're starting to see more of a mixed bag within the travel space.Hotels across the board flag softening demand for leisure stays, but business travel has held up well. We saw a different story among the airlines though; several management teams were really emphasizing continued strong demands for air travel. And our survey is supportive of these comments and show that travel intentions remain stable and strong, and plans to follow through on travel that involve a flight also remain robust.The next three months leading up to the US election will certainly be interesting though, and we'll continue to bring you updates.Thank you for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Although markets have recovered over the last few weeks after a sudden drop, our Head of Corporate Credit Research warns that investors are still skeptical about the growth outlook.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, today we’ll discuss the big round trip for markets and why we’re not out of the woods.It's Friday, August 23rd at 2pm in London.The last few weeks have been a rollercoaster. July ended on a high with markets rallying as the Federal Reserve kept interest rates unchanged. Things turned almost immediately thereafter as weak data releases fanned fears that maybe the Fed was being just a little too nonchalant on the economy, making its patience withholding rates high look like a vice, rather than a virtue. A late summer period where many investors were out probably amplified the moves that followed. And so at the morning lows on August 5th, the S&P 500 had fallen more than 8 percent in just 3 trading days, and expected volatility had jumped to one of its highest readings in a decade. But since those volatile lows, markets have come back. Really come back. Stock prices, credit spreads, and those levels of expected volatility are all now more or less where they ended July. It was an almost complete round-trip. We have a colleague who got back from a two-week vacation on Monday. The prices on their screen had barely changed. The reason for that snapback was the data. Just as weak data in the aftermath of the Fed’s meeting drove fears of a policy mistake, better data in the days since have improved confidence. This has been especially true for data related to the US consumer, as both retail sales and the number of new jobless claims have been better than expected. This round-trip in markets has been welcome, especially for those, like ourselves, who are optimistic on credit, and see it well-positioned for the economic soft-landing that Morgan Stanley expects. But it is also a reminder that we’re not out of the woods. The last few weeks couldn’t be clearer about the importance of growth for the market outlook. This is a crucial moment for the economy, where U.S. growth is slowing, the Fed’s rates are still highly restrictive, and any help from cutting those rates may not be felt for several quarters. At Morgan Stanley we think that growth won’t slow too much, and so this will ultimately be fine for the credit market. But incoming data will remain important, and recent events show that the market’s confidence can be quickly shaken. Even with the sharp snapback, for example, cyclical stocks, which tend to be more economically sensitive, have badly lagged more defensive shares – a sign that healthy skepticism around growth from investors still remains. The quick recovery is welcome, but we’re not out of the woods, and investors should continue to hope for solid data. Good is good. Thanks for listening. If you enjoy the show, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

The Bank of Japan jolted global markets after its recent decision to raise interest rates. Our experts break down the effects the move could have on the country’s economy, currency and stock market.----- Transcript -----Chetan Ahya: Welcome to Thoughts on the Market. I'm Chetan Ahya, Morgan Stanley's Chief Asia Economist.Daniel Blake: And I'm Daniel Blake, from the Asia Pacific and Emerging Market Equity Strategy Team.Chetan Ahya: On this episode of the podcast, we will cover a topic that has been a big concern for global investors: Japan's rate hike and its effect on markets.It's Thursday, August 22nd at 6pm in Hong Kong.On July 31st, Japan's central bank made a bold move. For only the second time in 17 years, it raised interest rates. It lifted its benchmark rates to around 0.25 percent from its previous range of 0 to 0.1 percent. And at the press conference, BOJ Governor Ueda struck a more hawkish tone on the BOJ rate path than markets anticipated. Compounded with investors concern about US growth, this move jolted global equity markets and bond markets. The Japan equity market entered the quickest bear market in history. It lost 20 percent over three days.Well, a lot has happened since early August. So, I'm here with Daniel to give you an update.Daniel Blake: Chetan, before I can give you an update on what the market implications are of all this, let's make sense of what the macro-outlook is for Japan and what the Bank of Japan is really looking to achieve.I know that following that July monetary policy meeting, we heard from Deputy Governor Uchida san, who said that the bank would not raise its policy rates while financial and capital markets remain unstable.What is your view on the Bank of Japan policy outlook and the key macro-outlook for Japan more broadly?Chetan Ahya: Well, firstly, I think the governor's comments in the July policy meeting were more hawkish than expected and after the market's volatility, deputy governor did come out and explain the BOJ's thought process more clearly. The most important point explained there was that they will not hike policy rates in an environment where markets are volatile -- and that has given the comfort to market that BOJ will not be taking up successive rate hikes in an early manner.But ultimately when you're thinking about the outlook of BOJ's policy path, it will be determined by what happens to underlying wage growth and inflation trend. And on that front, wage growth has been accelerating. And we also think that inflation will be remaining at a moderate level and that will keep BOJ on the rate hike path, but those rate hikes will be taken up in a measured manner.In our base case, we are expecting the BOJ to hike by 25 basis points in January policy meeting next year, with a risk that they could possibly hike early in December of this year.Daniel Blake: And after an extended period of weakness, the Japanese yen appreciated sharply after the remarks. What drove this and what are the macro repercussions for the broader outlook?Chetan Ahya: We think that the US growth scare from the weaker July nonfarm payroll data, alongside a hawkish BOJ Governor Ueda's comments, led markets to begin pricing in more policy rate convergence between the US and Japan. This resulted in unwinding of the yen carry trade and a rapid appreciation of yen against the dollar.For now, our strategists believe that the near-term risk of further yen carry trade unwinding has lessened. We will closely watch the incoming US growth and labor market data for signs of the US slowdown and its impact on the yen. In the base case, our US Economics team continues to see a soft landing in the US and for the Fed to cut rates by three times this year from September, reaching a terminal of 3.625 by June 2025.Based on our US and BOJ rate path, our macro strategists see USD/JPY at 146 by year end. As it stands, our Japan inflation forecast already incorporates these yen forecasts, but if yen does appreciate beyond these levels on a sustainable basis, this would impart some further downside to our inflation forecast.Daniel Blake: And there's another key event to consider. Prime Minister Kishida san announced on August 14th that he will not seek re-election as President of The Liberal Democratic Party (LDP) in late September, and hence will have a new leader of Japan. Will this development have any impact on economic policy or the markets in your view?Chetan Ahya: The number of potential candidates means it's too early to tell. We think a major reversal in macro policies will be unlikely, though the timing of elections will likely have a bearing on BOJ.For example, after the September party leadership election, the new premier could then call for an early election in October; and in this scenario, we think likelihood of a BOJ move at its September and October policy meeting would be further diminished.So, Daniel, keeping in mind the macro backdrop that we jus