Thoughts on the Market

New data on both immigration and inflation defied predictions and may have shifted the Fed’s perspective. Our Chief U.S. Economist and Head of U.S. Rates Strategy share their updated outlooks.  ----- Transcript -----Ellen Zentner: Welcome to Thoughts on the Market. I'm Ellen Zentner, Morgan Stanley's Chief US Economist.Guneet Dhingra: And I'm Guneet Dhingra, Head of US Rates Strategy.Ellen Zentner: And today on the podcast, we'll be discussing some significant changes to our US economic outlook and US rates outlook for the rest of this year.It's Tuesday, April 23rd at 10am in New York.Guneet Dhingra: So, Ellen, last week you put out an updated view on your outlook -- with some substantial forecast changes. Can you give us the headlines on GDP, inflation and the Fed forecast path? And what has really changed versus your last update?Ellen Zentner: Sure Guneet. So, our last economic outlook update was in November last year. And since that time, really, the impetus for all of these changes came from immigration. So, we got new immigration data from the CBO, and just to give you a sense of the magnitude of upward revision, we thought we had an increase of 800,000 in 2023. It turns out it was 3.3 million. And so far, the flows of immigrants suggest that we're going to get about as many as last year, if not a little bit more. And so, what does that mean? Faster population growth, those are more mouths to feed. You've got a faster labor force growth. They can work. They are working. And data historically shows that their labor force participation rates are higher than native born Americans.So, you've got to take all this into account. And it means that you've got this big positive supply side shock. And so, when the labor market has been about balance now between demand and supply, as Chair Powell's been noting, you're now going to have supply outrun demand this year.And so, you basically got much more labor market slack. You've got -- and I'm going to steal Chair Powell's words here -- you've got a bigger economy, but not a tighter economy. So, it's faster GDP growth. We have taken out one Fed cut, and I know we're going to talk about that because inflation has surprised the upside recently. But you've got slower wage growth. More labor market slack. And so, we did not change our overall inflation numbers on the back of this better growth and better labor force growth.Guneet Dhingra: That's very helpful. That's a very interesting read in the economy, Ellen. Do you think the Fed is reading the supply side story the same way as you are? And said differently, is the Fed on the same page as you? And if not, when do you think they could be?Ellen Zentner: Yeah. So, you know, Chair Powell, if you go back to his speeches and the minutes from the Fed. They've been talking about immigration. I think we've known for a while that the numbers were bigger than previously thought. But how you interpret that into an outlook can be different. And it takes some time. It even took us some time -- about a month -- to finally digest all the numbers and figure out exactly what it meant for our outlook. So, here's the biggest, I think, change for them in terms of what it means. The break-even level for payrolls is just that much higher.Now what does break even mean? It means it's the pace of job gains you need to generate each month in order to just keep the unemployment rate steady. And six months ago, we all thought it was 100, 000, including the Chair. And now we think it's 265,000. That is eye popping. And it means that when you see these big labor market numbers -- 250, 000; 300,000. That's normal. And that's not a labor market that's too tight.And so, I think the easiest thing the Fed, has realized is that they don't need to worry about the labor market. There's a lot more slack there. There's going to be a lot more slack there this year. Wage growth has come down because of it. ECI, or Employment Cost Index, is going to come down for this year. The unemployment rate is going to be higher. They do still need to reflect that in their forecast. And that means that we could show, sort of, this flavor of bigger but not tighter economy when we get their forecast updates in June.Guneet Dhingra: I think the medium-term thesis is very compelling, Ellen, but how do you fit the three back-to-back upside surprises in CPI here? How does that fit with the labor supply story?Ellen Zentner: So, that is sort of disconnected from the bigger but not tighter economy, because we did have to take into account that inflation has surprised to the upside. I mean, these have been some real volatile prints in the last three months, and we're now tracking March core PCE at 0.25 per cent and we're going to get that number later this week. And so that's above the threshold that we think the Fed needs in order to gain confidence that that pace of deceleration we saw late last year, is n

Recent data indicates the economy may avoid either a soft or hard landing for now. Our Chief U.S. Equity Strategist explains why investors should seek out quality as the economy stays aloft.----- 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 impact of better economic growth and stickier inflation on stocks.It's Monday, April 22nd at 11:30am in New York. So let’s get after it.In our first note of the year, I cited three potential macro-outcomes for 2024 with similar probability of occurring.First, a soft landing with slowing, below potential GDP growth and falling inflation toward the Fed's target of 2 per cent. Second, a no landing scenario under which GDP growth re-accelerated with stickier inflation. And third, a hard landing, or recession. Of course, each scenario has very different implications for asset prices generally and equity leadership, specifically. Just a few months ago, the consensus view skewed heavily toward a soft landing. However, the macro data have started to support the no landing outcome with recent growth and inflation data exceeding most forecasters' expectations – including the Fed’s. Over the past year, consensus views have gone from hard landing in the first quarter of 2023 to soft landing in the second quarter, back to hard landing in the third quarter to soft landing in the fourth quarter, and now to no landing currently. This shift has not been lost on markets with assets that benefit from higher inflation doing well over the past few months. However, while cyclically sensitive stocks and sectors have started to outperform, quality remains a key attribute for the leaders. We think this combination of quality and cyclical factors makes sense in the context of what is still a later, rather than early cycle re acceleration in growth. If it was more the latter, we would not be observing such persistent under performance of low-quality cyclicals and small caps. Furthermore, we continue to believe much of the upside in economic growth over the past year has been the result of government spending, funded by growing budget deficits. This has led to a crowding out of many smaller and lower quality businesses – and the lowest small business sentiment since 2012. As with most fiscal stimulus packages, the plan is for the bridge of support to buy time until a more durable growth outcome arrives – driven by organic private income, and consumption and spending. Until this potential outcome is more solidified, the equity market should continue to trade with a quality bias. The largest risk for stocks more broadly is higher 10-year Treasury yields as investors begin to demand a larger term premium due to higher inflation and the growing supply of bonds to pay for the endless deficits. While leadership within the equity market continues to broaden toward cyclicals it still makes sense to stay up the quality curve. Our recent upgrade of large cap Energy fits the shifting narrative to the no landing outcome, and it remains one of the cheapest ways to get exposure to the reflation theme. Other reflation trades are more extended in our view. Our primary concern for equities at this point is that aggressive fiscal spending has led to better economic growth. But it keeps upward pressure on inflation and prevents the Fed from cutting interest rates that many economic participants desperately need at this point. In short, a no landing outcome may make the crowding out problem even worse for smaller businesses, many consumers and even regional banks. This is all in-line with our 2024 outlook that suggests the major equity indices are overvalued while the best opportunities are likely beneath the surface in underappreciated sectors like energy that are positively levered to stickier inflation and higher interest rates. Thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen to podcasts and share the podcast with a friend or colleague today.

Japan and India are currently set to lead growth in these markets, but a higher-for-longer rate environment in the U.S. could favor China, Hong Kong and others, according to our analyst.----- Transcript -----Daniel Blake: Welcome to Thoughts on the Market. I'm Daniel Blake from Morgan Stanley's Asia & Emerging Market Equity Strategy Team. Along with my colleagues bringing you a variety of perspectives, today I'll discuss whether U.S. macro resilience is too much of a good thing when it comes to its impact on Asia's equity markets.It's Friday 19th of April at 10am in Singapore.Our U.S. economics team has substantially lifted its forecast for 2024 and 2025 GDP growth following strong migration boosted activity and employment trends. Recent inflation readings have been bumpy, but our team still sees it moderating over the summer as core services and housing prices cool off. While the market has been focused on this silver lining of stronger global growth, the clouds are rolling in from expectations of a shallower and later easing of global monetary policy.Our team now believes that the first Fed rate cut won't come until July but does see two additional cuts coming in November and December. We've made similar adjustments in our outlook for Asia-ex-China's monetary policy easing cycle, seeing it coming later and shallower. Meanwhile, in Japan, our economists now expect two further hikes from the Bank of Japan -- in July this year, and again in January next year -- taking policy rates up to 0.5 per cent.But how does all this leave the Asia and EM equity outlook? In a word, mixed.We see this driving more divergence within Asia and EM, depending on how exposed each market is to stronger global growth, a stronger U.S. dollar or impacted by higher interest rates. On the positive side, Taiwan, Japan, Mexico, and South Korea have the most direct North American revenue exposure. And for Japan, the strong US dollar is also positive through the translation of foreign revenues back at this historically weak yen. However, in the short run, we do need to be mindful of any price momentum reversal as April is normally seasonally weak, and we do see dollar-yen approaching 155. So, any FX (foreign exchange) intervention could sharpen a price momentum reversal.Next up, we're paying close attention to India's equity market, where we have a secularly bullish view. India has remained resilient to date, consistent with our thesis that macro stability has become a key driver of the bull market. And this is in sharp contrast to prior cycles. For example, during the Taper tantrum of 2013, where India saw a sudden and sharp bear market as Fed expectations shifted.On the negative side then, we are seeing a breakdown in correlations of some markets with these higher Fed funds expectations, including in Indonesia and Brazil where policy space is being constrained, and in Australia where valuations were pushed up on hopes of an RBA easing cycle that won't come until next year in our view.So, this is indeed a mixed picture for Asia and EM, but we retain our core views that market leadership will continue coming from Japan and India through 2024. And so, what's the risk from here? The larger risk to Asia and EM markets, we think, comes from an even more inflationary and hawkish scenario where the Fed is forced to recommence rate hikes, ultimately bearing the risk of driving a hard landing to bring inflation back to target.In this scenario, we could see a pivot in leadership away from markets with high US revenue exposure, such as Taiwan and Japan, towards more domestically oriented and resilient late cycle markets, such as an emerging ASEAN partner, and potentially China and Hong Kong -- if additional stimulus is forthcoming there.Thanks for listening. If you enjoyed the show, please leave us a review wherever you listen to podcasts and share Thoughts on the Market with a friend or colleague today.

GenAI will likely drive the exponential growth of data centers. Listen as our Capital Goods Analyst shares key takeaways on the electrical equipment central to the data center market.----- Transcript -----Welcome to Thoughts on the Market. I’m Max Yates from the European Capital Goods team. Along with my colleagues bringing you a variety of perspectives, today I'll focus on the critical element of the AI revolution. It's Thursday, April 18, at 2pm in London. Over the last few weeks, several of my colleagues have come on to the show to talk about the exponential growth of data centers and just what it will take to power the GenAI revolution. Stephen Byrd, Morgan Stanley's Head of Global Sustainability, forecasts that in 2027 data center power consumption just from GenAI will equal 80 percent of the consumption from all data centers in 2022.This shows the sheer scale of necessary additions and upgrades. And it also makes clear that the AI push provides very significant opportunities for Electrical Equipment companies. It’s these businesses that are the picks and shovels of the AI revolution. These companies provide key solutions such as Data Center Infrastructure Management software, connected equipment, racks, switchgears, and last but not least, cooling. Keep in mind that in this breakneck AI race, ever-increasing efficiency is essential. So, imagine we’re inside an actual data center. What you’d see is a huge number of racks, the steel frameworks that house the servers, cables, and other equipment. The power needed to run GenAI then creates a lot of heat.Our recent work on the data center market suggests two key takeaways when it comes to the electrical equipment.First, there’s a significant imbalance in supply-demand. Data center vacancy rates and rental prices all point to an intensifying capacity shortage. This explains why the top 10 cloud providers have increased their capital expenditures this year by 26 per cent. Equipment shortages and lead times are still an issue in the industry and large electrical equipment suppliers have a clear competitive advantage at the moment, with their stronger supply chains and ability to actually deliver this equipment. The second thing we found from our work, there are well-known and less well-known ways to deal with increasing power density. Now why is power density rising? Because what we’re trying to do is cram more high-power chips into the same amount of space. There’s more power per rack, higher computing workload that all has to be accommodated into less floor space. This higher power density, however, requires more powerful cooling solutions. But there’s also smaller changes that can support airflow management that are less talked about in the industry. This is things like busways, to reduce cable density and promote airflow. Smart equipment provides information on power consumption. And another key element is rear-door cooling, which pushes airflow through the servers.The other theme that’s gaining traction in the industry to facilitate a faster ramp up is the idea of modular data centers. This helps equipment suppliers plan supply chains but also customers to quickly ramp up and meet the new data center demand with more standardized data center offerings. However, there’s not yet an industry standard to manage higher data center power and rack density for AI. There will be new builds. There will also be data center upgrades. However, there’s no consensus yet on exactly how the power equipment will be configured, and when the data centers will be upgraded. And in what style and what way.      This is clearly a dynamic space to watch, and we’ll be keeping you updated.Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us wherever you listen to your podcasts. It helps more people to find the show.

As global conflicts escalate, our Global Head of Fixed Income and Thematic Research unpacks the possible market outcomes as companies and governments seek to bolster security. ----- 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 current geopolitical tensions and their impact on markets.It's Wednesday, April 17th at 10:30 am in New York.Continued tensions in Middle East kept geopolitics in focus with clients this week. But markets seem to be shrugging off the recent escalation in the conflict, with relative stability in oil prices and equities. This implies some faith in the idea that the involved parties benefit from no further escalation – and will design responses to one another that won’t lead to a broader conflict with bigger consequences. But obviously, this tricky dynamic bears watching, which we’ll be doing. In the meantime, there’s a key market theme that’s underscored by these tensions. And that’s the idea of Security as a secular market theme.This is a topic we’ve been collaborating with many research teams on, including Ed Stanley, our thematics analyst in Europe, and defense sector research teams globally. The idea here boils down to this. Russia’s invasion of Ukraine, the US’ increased rivalry with China, questions about the future of NATO, and of course the Middle East conflict, all reminds us that we’re in a transition phase to a multipolar world where security is more tenuous. That requires a lot of spending by companies and governments to cope with this reality. In fact, we estimate that supply chains, food and health systems, IT, and more will require about $1.5 trillion of investment across the US and EU to protect against rising geopolitical risks. This means a lot more demand for global tech and industrials.And of course it means more demand for the defense sector. Regardless of whether US military aid plans continue to stall, there’s news of increased spending in China, Canada, and Europe. Our head defense analyst in Europe, Ross Law, and our head European Economist Jens Eisenschmidt have looked at this in recent weeks. They argue there’s scope for tens of billions of euros in extra spend annually in Europe, with a greater geopolitical shock putting that number into the hundreds of billions. It’s a key reason our equity research colleagues favor the US and EU defense sectors.Bottom line, geopolitical events continue to reflect the transition to a multipolar world. And as companies and governments seek security in this world, there will be market impacts. We’ll be tracking them here.Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts, or wherever you listen, and leave us a review. We’d love to hear from you.

Our Global Head of Sustainability Research and U.S. Utilities Analyst discuss the rapidly growing power needs of the GenAI enablers and how to meet them.----- Transcript -----Stephen Byrd: Welcome to Thoughts on the Market. I'm Stephen Byrd, Morgan Stanley's Global Head of Sustainability Research.David Arcaro: And I'm Dave Arcaro, Head of the US Power and Utilities team.Stephen Byrd: And on this episode of the podcast, we'll discuss just what it would take to power the Gen AI revolution.It's Tuesday, April 16th at 10am in New York.Last summer, scientists used GenAI to find a new antibiotic for a nasty superbug. It took the AI system all of an hour and a half to analyze about 7,000 chemical compounds; something that human scientists would have toiled over for months, if not years. It's clear that GenAI can open up breathtaking possibilities, but you have to stop and think. What kind of compute power is needed for all of this?A few weeks ago, our colleague Emmet Kelly, who covers European Telecom, discussed the exponential growth of European data centers on this podcast. And today, Dave and I want to continue the conversation about this critical moment of powering the GenAI revolution.So, Dave, what is your current assessment of the global power demand from data centers?David Arcaro: Yeah, Stephen, we're expecting rapid growth in the power demand coming from data centers across the world. We're currently estimating data centers consume about one and a half per cent of global electricity today. We're expecting that to grow to almost four percent in 2027. And in the US, data centers represent roughly three percent of total electricity consumption now, and we expect that to escalate to eight per cent of the total US by 2027.And there will be even more dramatic impacts at the local and regional level. The data center landscape tends to be highly concentrated, and the next wave of GenAI data centers is likely to be much larger than the previous generation.So, the impact on specific regions will be magnified. To give an example, in Georgia, the utility there has previously forecasted just half a percent of annual growth in electricity use but is now calling for nine per cent of annual growth in electricity consumption, and that's largely driven by data centers.It's a dynamic that we haven't seen in decades in the utility space.Stephen Byrd: You know, what I find interesting about what you just said, Dave, is -- it is impressive to see growth go from one and a half to four per cent, but it's really these local dynamics where what we're seeing is just much more concentrated, and that's where we start to see the real issues with the infrastructure growing quickly enough.So, it's becoming obvious that the existing power grid infrastructure is not meeting the growth and capacity needs of data centers. And that's something that you refer to as the tortoise and the hare. How big of a mismatch are we exactly talking about here, Dave?David Arcaro: It's definitely a big mismatch. To your point before, the US electricity growth across the country has been flattish over the last 10 years.So, this is a step change in expectations now, from the impact from Gen AI going forward. And we're looking at over 100 per cent annual growth in the power consumed by data centers now in the US over the next four years. And for comparison, the US utility industry is growing at about 8 per cent a year.These data centers that are coming are huge. They can be 10 to 50 times as big as the last generation of data centers in terms of their power consumption. And this means it takes time to connect to the electric grid and get power. 12 to 18 months in the best case, three to five years plus in other locations, often because they might need to wait for the electric utility grid to catch up, waiting for grid upgrades and assessments and new power plants to get built.Stephen Byrd: Well, I think those delays are going to be fairly problematic for the fast-moving GenAI sector. So essentially there's a lot of pressure on data center developers to secure a power source as quickly as possible. And in our note, we described the mathematics around that. The time value to get these data centers online is absolutely enormous. But you've just described the power grid infrastructure as a tortoise.So, are there any other alternatives? How about nuclear power plants in this context?David Arcaro: There's a lot of urgency, as you can tell from the data center companies, to get online as fast as possible. It's a fast-moving market, very competitive, they need the power, they need to run these GenAI models as soon as possible. And the utility industry is not used to responding to demand that's coming this quickly.It's a slower moving industry. There's policies and processes and regulation that all utilities have to get through. They're not prepared strategically to move as quickly as the data center industry is moving. So, data

Markets are suggesting that spirits consumption will return to historical growth levels post-pandemic, but our Head of European Consumer Staples Research disagrees.----- Transcript -----Welcome to Thoughts on the Market. I’m Sarah Simon, Head of the European Consumer Staples team. Along with my colleagues bringing you a variety of perspectives, today I'll talk about a surprising trend in the global spirits market.It's Monday, April 15, at 2pm in London. We all remember vividly the COVID-19 period when we spent much more on goods than services, particularly on goods that could be delivered to our homes. Not surprisingly, spirits consumption experienced a super-cycle during the pandemic. But as the world returned to normal, the demand for spirits has dropped off. The market believes that after a period of normalization, the US spirits market will return to mid-single-digit growth in line with history; but we think that’s too optimistic.Changes in demographics and consumer behavior make it much more likely that the US market will grow only modestly from here. There are several key challenges to the volume of US alcohol consumption in the coming years. Sobriety and moderation of alcohol intake are two rising trends. In addition, there’s the increased use of GLP-1 anti-obesity drugs, which appear to quell users' appetite for alcoholic beverages. And finally, there’s stiffer regulation, including the lowering of alcohol limits for driving.A slew of recent survey data points to consumer intention to reduce alcohol intake. A February 2023 IWSR survey reported that 50 per cent of US drinkers are moderating their consumption. Meanwhile, a January 2024 NCSolutions survey reported that 41 per cent of respondents are trying to drink less, an increase of 7 percentage points from the prior year. And importantly, this intention was most concentrated among younger drinkers, with 61 per cent of Gen Z planning to drink less in 2024, up from 40 per cent in the prior year's survey. Meanwhile, 49 per cent of Millennials had a similar intention, up 26 per cent year on year.Why is all this happening? And why now? Perhaps the increasingly vocal commentary by public bodies linking alcohol to cancer is really hitting home. Last November, the World Health Organization stated that "the higher the amount of alcohol consumed, the higher the risk of developing cancer" but also that "half of all alcohol-attributable cancers in the WHO European Region are caused by ‘light’ and ‘moderate’ alcohol consumption. A recent Gallup survey of Americans indicated that young adults are particularly concerned that moderate drinking is unhealthy, with 52 per cent holding this view, up from 34 per cent five years ago. Another explanation for the increased prevalence of non-drinking among the youngest group of drinkers may be demographic makeup: the proportion of non-White 18- to 34-year-olds has nearly doubled over the past two decades.And equally, the cost of alcohol, which saw steep price increases in the last couple of years, seems to be a reason for increased moderation. Spending on alcohol stepped up materially over the COVID-19 period when there were more limited opportunities for spending. With life returning to normal post pandemic, consumers have other – more attractive or more pressing – opportunities for expenditure.Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us wherever you listen to podcasts. It helps more people to find the show.

The math of ‘bond-equity correlation' is complicated. Our head of Corporate Credit Research breaks it down, along with the impact of bond rates on other asset classes.----- 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 be talking about why the same factors can have different outcomes for interest rates and credit spreads.It's Friday, April 12th at 2pm in London.  Most of 2024 remains to be written. But so far, the financial story has been a tale of two surprises. First, the US Economy continues to be much stronger and hotter than expected, with growth and job creation exceeding initial estimates. Then second, due in part to that strong economy, interest rates have risen materially, with the yield on the US 10-year government bond about half-a-percent higher since early January. More specifically, market attention over the last week has refocused on whether these higher interest rates are a problem for other markets. In math terms, this is the great debate around bond-equity or bond-spread correlation, the extent to which assets move with bond yields, and a really important variable when it comes to thinking about overall portfolio diversification. But this somewhat abstract mathematical idea of correlation can also be simplified. The factors that are driving yields higher might look very different for other asset classes, such as credit. That could argue for a different correlation. Let’s think about how.Consider first why yields have been rising. Economic data has been good, with strong job growth and rising Purchasing Manager Indices or PMIs, conditions that are usually tough for government bonds. Supply has been heavy, with the issuance of Treasuries up substantially relative to last year. The so-called carry on government bonds is bad as the yield on government bond yields is generally lower, much lower, than the yield on cash. And the time-of-year is unhelpful: since 1990, April has been the worst month of the year for government bonds.But take all those same things thought the eyes of a different asset class, such as credit, and they look – well – different. Good economic data should be good for credit; historically, low-but-rising PMIs, as we’ve been seeing recently, is the most credit-friendly regime. Corporate bond supply hasn’t risen nearly as much as the supply for government bonds. The carry for credit is positive, thanks to still-steep credit curves. And the time of year looks very different: over that same period since 1990, April has been the best month of the year for corporate credit – as well as broader stock markets.Government bonds are currently being buffeted by multiple headwinds. Hot economic data, heavy supply, poor yields relative to cash, and unhelpful seasonality. The good news? Well, Morgan Stanley’s interest rate strategists expect these headwinds to be temporary, and still forecast lower yields by year-end. But for other asset classes, including credit, it’s also important to note that that same data, supply, carry and seasonality debate – fundamentally look very different in other asset classes.We think that means that Credit spreads can stay at historically tight levels in April and beyond, even as government bond yields have risen.Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts, or wherever you listen, and leave us a review. We’d love to hear from you.

With global temperatures rising and an increasing urgency to speed progress on the energy transition, our Head of Sustainability Equity Research examines the key materials needed—and the risks of disruption from US-China trade tensions.----- Transcript -----Welcome to Thoughts on the Market. I’m Laura Sanchez, Head of Sustainability Equity Research in the Americas. Along with my colleagues bringing you a variety of perspectives, today I’ll discuss a highly topical issue: the impact of US-China trade tensions on the energy transition. It is Thursday, April 11, at 12 pm in New York.Last week, you may have heard my colleagues discuss the geopolitics at play around US-China trade tensions and the energy transition. Today I’m going to elaborate on that discussion, spearheaded by my team, with a deeper dive into the materials and minerals at risk and exactly what is at stake for several industries in the US.When we talk about clean technologies such as electric vehicles, energy storage and solar, it is important to note that minerals such as rare earths, graphite, and lithium — just to name a few — are crucial to their performance. At present, China is a dominant producer of many of those key minerals, whether at the mining level – which is the case with gallium, rare earths and natural graphite; at the refining level – the case for cobalt and lithium; or at the downstream level – that is, the final product, such as batteries and EVs.If trade tensions between the US and China rise, we believe China could implement new or incremental export bans on some of these minerals that are key for western nations’ energy transition as well as for their broad economic and national security.So, we have analyzed over 10 materials and found that the highest risks of disruption exist for rare earths and related equipment, as well as for graphite, gallium, and cobalt. Some minerals have already seen certain export bans but given the lack of diversification across the value chain, we actually see the potential for incremental restrictions.So, this led us to ask our research analysts: how should investors view rising trade tensions in the context of clean technologies’ penetration, specifically?While electric vehicles appear most at risk, we see the largest negative impacts for the clean technology sector as well as for large-scale renewable energy developers. This has to do with China dominating around 70 per cent of the battery supply chain and still having strong indirect ties in the solar supply chain. But there are important nuances to consider for renewable energy developers, such as their ability to pass the higher costs to customers, whether this higher cost could hurt the economics of projects and therefore demand, and the unequal impacts between large and small players – where large, tier 1 developers could actually gain share in the market as they have proven to navigate better through supply chain bottlenecks in the past.On the Autos side, slower EV adoption would naturally impact sentiment on EV-tilted stocks; but as our sector analyst highlights, this could also mean lighter losses near term, as well as market share preservation for the largest EV players in the market. US Metals & Mining stocks would likely see positive moves as further trade tensions incentivize onshoring of mining and increase demand for US-made equipment.Given strong bipartisan support in the US for a more hawkish approach to China, our policy experts believe that the US presidential election is unlikely to lead to easing trade restrictions. Nonetheless, in terms of the energy transition theme, a Republican win could create volatility for trade and corporate confidence, while a Democrat administration would be more sensitive to the balance between protectionism and achieving global climate goals.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 Global Chief Economist joins our Head of Fixed Income Research to review the most recent Consumer Price Index data, and they lay out potential outcomes in the upcoming U.S. elections that could impact the course of inflation’s trajectory.  ----- Transcript -----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Global Head of Fixed Income and Thematic Research.Seth Carpenter: And I'm Seth Carpenter, Global Chief Economist.Michael Zezas: And on this special episode of Thoughts on the Market, we'll be taking a look at how the 2024 elections could impact the outlook for inflation.It's Wednesday, April 10th at 4pm in New York.Seth, earlier this morning, the US Bureau of Labor Statistics released the Consumer Price Index (CPI) data for March, and it's probably an understatement to say it's been a much-anticipated report -- because it gives us some signal into both the pace of inflation and any potential fed rate cut path for 2024. I want to get into the longer-term picture around what the upcoming US election could mean for inflation. But first, I'd love your immediate take on this morning's data.Seth Carpenter: Absolutely, Mike. This morning's CPI data were absolutely critical. You are right. Much anticipated by markets. Everyone looking for a read through from those data to what it means for the Fed. I think there's no two ways about it. The market saw the stronger than expected inflation data as reducing the likelihood that the Fed would start cutting rates in June.June was our baseline for when the Fed would start cutting rates. And I think we are going to have to sharpen our pencils and ask just how much is this going to make the Fed want to wait? I think over time, however, we still see inflation drifting down over the course of this year and into next year, and so we still think the Fed will get a few rate hikes in.But you wanted to talk longer term, you wanted to talk about elections. And when I think about how elections could affect inflation, it's usually through fiscal policy. Through choices by the President and the Congress to raise taxes or lower taxes, and by choices by the Congress and the President to increase or decrease spending.So, when you think about this upcoming election, what are the main scenarios that you see for fiscal policy and an expansion, perhaps, of the deficit?Michael Zezas: Yeah, I think it's important to understand first that the type of election outcome that historically has catalyzed a deficit expansion is one where one party gets complete control of both the White House and both chambers of Congress.In 2025, what we think this would manifest in if the Democrats had won, is kind of a mix of tax extensions, as well as some spending items that they weren't able to complete during Biden's first term -- probably somewhat offset by some tax increases. On net, we think that would be incremental about $500 billion over 10 years, or maybe $40 [billion] to $50 billion in the first year.If Republicans are in a position of control, then we think you're looking at an extension of most of the expiring corporate tax cuts -- expire at the end of 2025 -- that is up to somewhere around a trillion dollars spread over 10 years, or maybe a hundred to $150 billion in the first year.Seth Carpenter: So, what I'm hearing you say is a wide range of possible outcomes, because you didn't even touch on what might happen if you've got a split government, so even smaller fiscal expansion.So, when I take that range from a truly modest expansion, if at all, with a split government, to a slight expansion from the Democrats, a slightly bigger one from a Republican sweep, I'm hearing numbers that clearly directionally should lead to some inflationary pressures -- but I'm not really sure they're big enough to really start to move the needle in terms of inflationary outcomes.And I guess the other part that we have to keep in mind is the election’s happening in November of this year. The new president, if there's a new president, the new Congress would take seats in the beginning of the year next year. And so, there's always a bit of a lag between when a new government takes control and when legislation gets passed; and then there's another lag between the legislation and the outcome on the economy.And by the time we get to call it the end of 2025 or the beginning of 2026, I think we really will have seen a lot of dissipation of the inflation that we have now. So, it doesn't really sound like, at least from those baseline scenarios that we're talking about a huge impetus for inflation. Would you think that's fair?Michael Zezas: I think that's fair. And then it sort of begs the question of, if not from fiscal policy, is there something we need to consider around monetary policy? And so around the Fed, Chair Powell's term ends in January of 2026 -- meaning potential for a new Fed chair, depending on the next US president.So, Seth,

Our Chief Fixed Income Strategist surveys the latest big swings in the oil market, which could lead to opportunities in equities and credit around the energy sector.----- 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, I'll be talking about the implications of recent strong moves in oil markets.It's Tuesday, April 9th at 3pm in New York.A lot is going on in the commodity markets, particularly in the oil market. Oil prices have made a powerful move. What is driving these moves? And how should investors think about this in the context of adjacent markets in equities and credit?Morgan Stanley's Global Commodity Strategist and Head of European Energy Research, Martijn Rats, raised crude oil price forecast for the third quarter to $94 per barrel. The rally in recent weeks is a result of positive fundamental news and rising geopolitical tensions.On the fundamental side, we've had better than expected demand from China and steeper than forecast fall in US production. Further, oil prices have also found support from growing potential for supply uncertainty in the Middle East. Martijn thinks that the last few dollars of rally in oil prices should be interpreted as a premium for rising geopolitical risks. The revision to the third quarter forecast should therefore be seen to reflect these growing geopolitical risks.Our US equity strategists, led by Mike Wilson, have recently upgraded the energy sector. The underlying rationale behind the upgrade is that the energy sector relative performance has really lagged crude oil prices; and unlike many other sectors within the US stock world, valuation in energy stocks is very compelling.Furthermore, the relative earnings revisions in energy stocks are beginning to inflect higher and the sector is actually exhibiting best breadth of any sector across the US equity spectrum. Higher oil prices are also important for credit markets. To quote Brian Gibbons, Morgan Stanley's Head of Energy Credit Research, for credit bonds of oil focused players, flat production levels and strong commodity prices should support free cash flow generation, which in turn should go to both shareholder returns and debt reduction.In summary, there is a lot going on in the energy markets. Oil prices have still some room to move higher in the short term. We find opportunities both in equity and credit markets to express our constructive view on oil prices.Thanks for listening. If you enjoyed the show, please leave us a review on Apple Podcasts or wherever you listen to this podcast. And share Thoughts on the Market with a friend or colleague today.

Our Global Chief Economist explains why the rapid hikes, pause and pivot of the current interest rate cycle are reminiscent of the 1990s.----- Transcript -----Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about the current interest rate cycle and the parallels we can draw from the 1990s.It's Monday, April 8th, at 10am in New York.Last year, we reiterated the view that the 1990s remain a useful cycle to consider for understanding the current cycle. Our European equity strategy colleagues shared our view, and they've used that episode to inform their ‘out of consensus, bullish initiation on European equities’ in January. No two cycles are identical, but as we move closer to a Fed cut, we reassess the key aspects of that comparison.We had previously argued that the current interest rate cycle and the mid 90s cycle differ from the intervening cycles because the goal now is to bring inflation down, rather than preventing it from rising. Of course, inflation was already falling when the 1994 cycle started, in part, because of the recession in 1991.This cycle -- because much of the inflation was driven by COVID-related shocks, like supply chains for consumer goods and shifts in housing for shelter inflation -- inflation started falling rapidly from its peak before the first hike could have possibly had any effect. In recent months, our economic growth forecasts have been regularly revised upward, even as we have largely hit our expected path for inflation.A labor supply shock appears to be a contributing factor that accounts for some of that forecast deviation, although fiscal policy likely contributed to the real side's strength as well. Supply shocks to the labor market are an interesting point of comparison for the two cycles. In the 1990s, labor force growth was still benefiting from this multi-decade rise in labor force participation among females. The aggregate labor force participation rate did not reach its peak until 2000.Now, as we've noted in several publications, the surge in immigration is providing a similar supply side boost, at least for a couple of years. But the key lesson for me for the policy cycle is that monetary policy is not on a pre-set, predetermined course merely rising, peaking and then falling. Cycles can be nuanced. In 1994, the Fed hiked the funds rate to 6 per cent, paused at that peak and then cut 75 basis points over 1995 and 1996. After that, the next policy move was actually a hike, not a cut.Currently, we think the Fed starts cutting rates in June; and for now, we expect that cutting to continue into next year. But as our US team has noted, the supply side revisions mean that the path for policy next year is just highly uncertain and subject to review. From 1994 to 1996, job gains trended down, much like they have over the past two years.That slowing was reflective of a broader slowing in the economy that prompted the Fed to stop hiking and partially reverse course. So, should we expect the same now, only a very partial reversal? Well, it's too soon to tell, and as we've argued, the faster labor supply growth expands both aggregate demand and aggregate supply -- so a somewhat tighter policy stance could be appropriate.In 1996, inflation stopped falling, and subsequently rose into 1997, and it was that development that supported the Fed's decision to maintain their somewhat restrictive policy. But we can't forget, afterward, inflation resumed its downward trajectory, with core PCE inflation eventually falling below 1.5 per cent, suggesting that that need to stop cutting and resume hiking, well, probably needs to be re-examined.So, no two cycles match, and the comparison may break down. To date, the rapid hikes, pause and pivot, along with a seeming soft landing, keeps that comparison alive. The labor supply shock parallel is notable, but it also points to what might be, just might be, another possible parallel.In the late 1990s, there was a rise in labor productivity, and we've written here many times about the potential contributions that AI might bring to labor productivity in coming years.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.

Oil demand has been higher than expected so far in 2024. Our Global Commodities Strategist explains what could drive oil to $95 per barrel by summer.----- Transcript -----Welcome to Thoughts on the Market. I’m Martijn Rats, Morgan Stanley’s Global Commodities Strategist. Along with my colleagues bringing you a variety of perspectives, today I’ll discuss recent developments in the oil market. It is Friday, April the 5th at 4 PM in London. At the start of the year, the outlook for the oil market looked somewhat unexciting. With the recovery from COVID largely behind us, growth in oil demand was slowing down. At the same time, supply from countries outside of OPEC (Organization for Petroleum Exporting Countries) had been growing strongly and we expected that this would continue in 2024. In fact, at the start of the year it looked likely that growth in non-OPEC supply would meet, or even exceed, all growth in global demand. When that occurs, room in the oil market for OPEC oil is static at best, which in turn means OPEC needs to keep restraining production to keep the balance in the market. Even if it does that, it results in a decline in market share and a build-up of spare capacity. History has often warned against such periods.Still, by early February, the oil market started to look tighter than initially expected. Demand started to surprise positively – partly in jet fuel, as aviation was stronger than expected; partly in bunker fuel as the Suez Canal issues meant that ships needed to take longer routes; and partly in oil as petrochemical feedstock, as the global expansion of steam cracker capacity continues. At the same time, production in several non-OPEC countries had a weak start of the year, particularly in the United States where exceptionally cold weather in the middle of January caused widespread freeze offs at oil wells, putting stronger demand and weaker supply together, and the inventory builds that we expected in the early part of the year did not materialise. By mid-February, we could argue that the oil market looked balanced this year, rather than modestly oversupplied; and by early March, we were able to forecast that oil market fundamentals were strong enough to drive Brent crude oil to $90 a barrel over the summer.Since then, Brent has honed in on that $90 mark quicker than expected. Over the last week or so, the oil market has shown a powerful rally that has the hallmarks of simply tightening fundamentals but also with some geopolitical risk premium creeping back into the price. For now, our base-case forecast for the summer is still for Brent to trade around $90 per barrel as that is where we currently see fundamental support. However, the oil market typically enjoys a powerful seasonal demand tailwind over the summer. And that still lies ahead. And, geopolitical risk is still elevated, for which oil can be a useful diversifier. With those factors, our $95 bull case can also come into play.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.

Experts from our research team discuss how tensions with China could limit US access to essential technologies and minerals.----- Transcript -----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income and Thematic Research.Ariana Salvatore: And I'm Ariana Salvatore from the US Public Policy Research Team.Michael Zezas: And on this episode of the podcast, we'll discuss how tensions in the US-China economic relationship could impact US attempts to transition to clean energy.It's Thursday, April 4th at 10am in New York.Ariana, in past episodes, I've talked about governments around the world really pushing for a transition to clean energy, putting resources into moving away from fossil fuels and moving towards more environmentally friendly alternatives. But this transition won't be easy. And I wanted to discuss with you one challenge in the US that perhaps isn't fully appreciated. This is the tension between US climate goals and the goal of reducing economic links with China. So, let's start there.What's our outlook for tensions in the near term?Ariana Salvatore: So, first off, to your point, the world needs over two times the current annual supply of several key minerals to meet global climate pledges by 2030. However, China is a dominant player in upstream, midstream, and downstream activities related to many of the required minerals.So, obviously, as you mentioned, trade tensions play a major role in the US ability to acquire those materials. We think friction between the US and China has been relatively controlled in recent years; but we also think there are a couple factors that could possibly change that on the horizon.First, China's over-invested in excess manufacturing capacity at a time when domestic demand is weak, driving the release of extra supply to the rest of the world at very low prices. That, of course, impacts the ability of non-Chinese players to compete. And second, obviously a large focus of ours is the US election cycle, which in general tends to bring out the hawk in both Democrats and Republicans alike when it comes to China policy.Michael Zezas: Right. So, all of that is to say there's a real possibility that these tensions could escalate again. What might that look like from a policy perspective?Ariana Salvatore: Well, as we established before, both parties are clearly interested in policies that would build barriers protecting technologies critical to US economic and national security. These could manifest through things like additional tariffs, as well as incremental non-tariff barriers, or restrictions on Chinese goods via export controls.Now, importantly, this could in turn cause China to act, as it has done in the recent past, by implementing export bans on minerals or related technology -- key to advancing President Biden's climate agenda, and over which China has a global dominant position.Specifically on the mineral front. China dominates 98 per cent of global production of gallium, more than 90 per cent of the global refined natural graphite market, and more than 80 per cent of the global refined markets of both rare earths and lithium. So, we've noted that those minerals are at the highest risk of disruption from potential escalation intentions.But Michael, from a market's perspective, are there any sectors that stand out as potential beneficiaries from this dynamic?Michael Zezas: So, our research colleagues have flagged that traditional US autos would see mostly positive implications from this outcome as EV penetration would likely stagnate further in the event of higher trade tensions. Similarly, US metals and mining stocks would likely benefit on the back of increased support from the government for US production, as well as increased demand for locally sourced materials.On the flip side, Ariana, any clear risks that our analysts are watching for?Ariana Salvatore: Yeah, so a clear impact here would be in the clean tech sector, which faces the greatest risk of supply chain disruption in an environment with increasing trade barriers in the alternative energy space. And that's mainly a function of the severe dependencies that exist on China for battery hardware. Our analysts also flagged US large scale renewable energy developers for potential downside impacts in this scenario -- again, specifically due to their exposure to battery and solar panel supply chains, most of which stems from China domiciled industries.Michael Zezas: Makes sense and clearly another reason we’ll have to keep tracking the US-China dynamic for investors. Ariana, thanks for taking the time to talk.Ariana Salvatore: Great speaking with you Mike.Michael Zezas: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen to the show and share the podcast with a friend or colleague today.

Consumers are increasingly sensitive about where their personal data is being processed and stored. The head of our European Telecom team explains the complexity around data sovereignty and why investors should care about the issue.----- Transcript -----Welcome to Thoughts on the Market. I’m Emmet Kelly, Head of Morgan Stanley’s European Telecom team. Today I’ll be talking about data sovereignty. It’s Wednesday, April 3rd, at 5pm in London.It’s never been easier to manage your life with just a click of a button or tap on the screen. You can take a photo, upload it to social media, and share it with friends and family. You can pay your bills online – from utilities and groceries to that personal splurge. You can even renew your library card or driver’s license or access your emails from years and years ago.But where is all this data stored? Our recent work shows that consumers are increasingly sensitive about this issue. Among European consumers, for example, more than 80 percent think it’s either very or somewhat important to know where their data is stored. And two-thirds of European consumers would like their data to be stored in their country of residence. A further 20 percent would be willing to pay more to store data locally, especially consumers in Spain and Germany. These results suggest that in the future, processing and storage of European data is more likely to be near shored rather than be based abroad.A few weeks ago, I came on this podcast to talk about our expectation that European data centers will grow five-fold over the next decade. Our research showed that key drivers would include increased cloudification, artificial intelligence and data sovereignty. We believe the most under-appreciated driver of this exponential growth is the question of where data is stored and processed. This is data sovereignty; and it’s a concern for European consumers.Data sovereignty means having legal control and jurisdiction over the storage and processing of data. It also means that data is subject to the laws of the country where that data was gathered and processed. More than 100 countries have data sovereignty laws in place, and laws governing the transfer of data between countries will only proliferate from here. In Europe, for example, we estimate that less than 50 per cent of cloud data is stored locally, within the European continent. The remainder is stored either in the US – notably in Virginia, which is the key data center hub in the United States; or, to a lesser extent, in lower-cost locations within Emerging Markets or in Asia.Complicating the issue of data sovereignty further are the so-called “extraterritorial laws” or "extra-territorial jurisdiction." These dictate the legal ability of a government to exercise authority beyond its normal geographic boundaries. From a data perspective, even if data is stored and/or processed in Europe, it may also be subject to extraterritorial laws. Essentially, foreign, non-European governments could still gain access to European data.This is something to keep in mind as we put data sovereignty in the context of the transition to a multipolar world – a major theme which Morgan Stanley Research has been mapping out since 2019. The rewiring of the global economy is well under way and data security is a key imperative for policy makers against the backdrop of accelerating tech diffusion and also geopolitical tensions. Our baseline de-risking scenario for the rewiring of global trade extends to data security and implies a robust case for the near shoring of European data and data center growth.With so little of the European data pie stored or processed in Europe, the potential upside from near-shoring is considerable. Bottom line, we think investors should pay close attention to the issue of data sovereignty, especially as it plays out in Europe over the coming decade.  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.

We discuss how the upcoming US elections could affect trade and tax policy, and which scenarios are most favorable to retailers and brands. ----- Transcript -----Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore from Morgan Stanley's US Public Policy Research Team.Alex Straton: And I'm Alex Straton, head of the North America Softlines Retail and Brands team.Ariana Salvatore: On this episode of the podcast, we'll discuss some key policy issues that may play into the U.S. presidential election and their potential impact on businesses and consumers.It's Tuesday, April 2nd, at 10 am in New York.Election season is fully underway here in the U.S. and as in past election cycles, trade policy and tax reform are once again a big concern.With that in mind, I wanted to discuss the potential implications on the retail space with my colleague Alex. So, let's start there. In general, Alex, how are retail stocks impacted leading up to the U.S. presidential elections?Alex Straton: So, look, this kind of surprised us when we had looked into some of this data. But if you look at the last six elections or so, on a full year basis, trading activity can be super volatile in my coverage; and it depends on what's at stake.But what we do broadly observe is back half underperformance to a bigger magnitude than is typical in a normal year. So, there is pressure on these stocks, in a way that you don't see in non-election years. Makes sense, right? Kind of a makes sense hypothesis that we confirmed. But I think the more interesting nugget about Softlines, Retail and Brand stocks leading into elections is that the higher frequency data can actually look worse than what actually comes to fruition in the top line or the sales numbers.So, by that I mean, you'll see surveys out of our economics team or out of, you know, big economics forums that say, ‘Oh, sentiment is getting worse.’ And then we'll see things like traffic is getting worse, these higher frequency indicators; and they actually end up almost exacerbating the impact than what we actually see when we get the true revenue results later on.So, my point being -- beware, as you see this degradation in the data; that doesn't necessarily mean that these businesses fundamentals are going to deteriorate to the same degree. In fact, it shows you that -- yes, maybe they're a little bit worse, but not to that extent.Alex Straton: So, Ariana, let's look at the policy side. More specifically, let's talk about some potential changes in tax policy that's been a hot topic for companies I cover. So, what's on the horizon, top down?Ariana Salvatore: Yeah, so, lots of changes to think about the horizon here.Just for some quick context, back in 2017, Republicans under former President Trump passed the Tax Cuts and Jobs Act, and that included a whole host of corporate and individual tax cuts. The way that law was structured was set to start rolling off around 2022, and most, if not all, of the bill is set to expire by the end of 2025.So that means that regardless of the election outcome, the next Congress will have to focus on tax policy, either by extending those cuts, or allowing some or all of them to roll off. So, in general, we think a Democratic sweep scenario would make it more likely that you would see the corporate rate, perhaps tick up a few points; while in a Republican sweep, we think you probably would maintain that 21 per cent corporate rate; and perhaps extend some of the other expiring corporate provisions.So, Alex, how do you expect these potential changes in the corporate tax side to impact the retailers and the brands that you cover?Alex Straton: Yeah. So, high level, I think about it on a sub-sector basis. And so, the headline you should hear is that my brand or wholesale coverage, which has more international revenue experience exposure, is better off than my retail coverage, which has more domestic or North America exposure.And it all just comes back to having more or less foreign exposure. The more North America exposure you have, the more subject you are to a change in tax rate. The more foreign exposure you have, the less subject you are to a change in tax rate. So that's the high-level way to think about it.We did run some analyses across our coverage, and if we do see the US corporate tax rate, let's say, lowered to 15 per cent hypothetically, we'll call that the Trump outcome, if you will. We calculate about a 5 per cent average benefit to 2025 earnings across our coverage. Now on the other hand, if we see something like a corporate tax rate that goes to 25 per cent, Biden outcome -- let's just label it that. We calculate 3 per cent average downside to the 2025 EPS estimates in our coverage.So that's how we sized it. It's not a huge swing, right? And the only reason why there's what I would call more of a benefit than a downside impact of that analysis is because of where the current tax rate sits and the r

Our Global Chief Economist surveys recent US and Australian census data to explain immigration’s impact on labor supply and demand, as well as the implications for monetary policy. ----- Transcript -----Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist, along with my colleagues bringing you a variety of perspectives. And today, I'll be talking about immigration, economic growth, and the implications for monetary policy.It's Monday, April 1st, at 10am in New York.Global migration is emerging as an important macro trend. Some migration patterns change during and after COVID, and such changes can have first order effects on the population and labor force of an economy.That fact has meant that several central banks have discussed immigration in the context of their economic outlook; and we focus here on the Fed and the Reserve Bank of Australia, the RBA.In the US, recent population estimates from the CBO and the census suggests that immigration has been and is still driving faster growth in the population and labor supply, helping to explain some of last year's upside surprise in non-farm payrolls. In Australia, the issue is even longer standing, and accelerated migration in recent years has provided important support to consumption and inflation.From a macro perspective, immigration can boost both aggregate demand and aggregate supply. More specifically, more immigration can lead to stronger consumption spending, a larger labor force, and may drive investment spending.The permanence of the immigration, like some immigrants are temporary students or just visiting workers, the skill level of the migrants and the speed of labor force integration are consequential -- in determining whether supply side or demand side effects dominate. Demand side effects tend to be more inflationary and supply side effects more disinflationary.In Australia, the acceleration in immigration has played an important driver in population growth and aggregate demand. In the decade before COVID, net migration added about a percentage point to the population growth annually. In 2022 and 2023, the growth rate accelerated beyond two percent. The pace of growth and migration and the type of migration have supported consumption spending and made housing demand outpace housing supply.Our Australia economists note that net migration will likely remain a tailwind for spending in 2024 -- but with significant uncertainty about the magnitude. In stark contrast, recent evidence in the US suggests that the surge in immigration has had a relatively stronger impact on aggregate supply. Growth in 2023 surprised to the upside, even relative to our rosier than consensus outlook.Academic research on US states suggests that over the period from 1970 to 2006, immigration tended to increase capital about one for one with increases in labor -- because the capital labor ratio in states receiving more immigrants remained relatively constant. That is, the inflow of immigrants stimulated an increase in investment.Of course, the sector of the economy that attracts the immigrants matters a lot. Immigrants joining sectors with lesser capital intensiveness may show less of this capital boosting effect.So, what are the implications for monetary policy? Decidedly, mixed. In the short run, more demand from any of the above sources will tend to be inflationary, and that suggests a higher policy rate is needed. But, as any supply boosting effects manifest, easier policy is called for to allow the economy to grow into that higher potential. So, a little bit here, a little bit there. Over the long run, though, only a persistently faster growth rate in immigration, as opposed to a one-off surge, would be able to raise the equilibrium rate, the so-called R star, on a permanent basis.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 a colleague today.

A landmark settlement with the National Association of Realtors will change the way brokers are paid commissions. How would this affect people looking to buy or sell homes? Our co-heads of Securitized Products Research discuss.----- Transcript -----James 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 Securitized Products Research.James Egan: And on this episode of the podcast, we'll be discussing some proposed changes to the US housing market. It's Thursday, March 28th, at 1pm in New York.Jay Bacow: Jim, two weeks ago, the National Association of Realtors (NAR) settled a case that could fundamentally change how commissions are paid to brokers. Acknowledging that there's a few months until this is all going to get approved, it looks like sellers are no longer going to have to compensate buyers’ agents. Which means that the closing cost that sellers have to pay is going to come down from the current 5 to 6 per cent to brokers to something more in the context of 3.5 to 4 percent -- based on estimates from many economists. What does this mean for the housing market?James Egan: So, this is certainly a settlement worth paying attention to.There are a lot of moving pieces here, but some of our first thoughts. Look, if we're lowering the ultimate transaction costs when it comes to selling homes, we do think that -- all else equal and probably a little bit more into the future -- it's going to lead to a higher volume of transactions. Or a higher level of turnover in the housing market.Now sellers no longer having to compensate buyers’ agents. That becoming something that buyers will need to do -- that could, at least from a perception perspective, increase the cost for buyers at a place, where we're already at one of our least affordable points in several decades. So, when we think about an increased level of transaction volumes; if that means, especially in the near term, or especially where we are right now, a little bit of an increase in for-sale inventory, combined with some of the affordability issues -- maybe it weighs a little bit on home prices. But our bottom line here is we think from a home price perspective, largely unchanged here. From a transaction volume perspective, all else equal, you could see a little bit of a pickup.Jay Bacow: All right. But Jim, haven't you been calling for some of the story already with increased housing activity, causing home prices to end 2024 slightly below 2023. Does this then change the narrative at all?James Egan: No, I don't think this changes the narrative. If we go back into that call just a little bit, our call for the marginal decrease in year over year home price growth was driven by growth in for-sale inventory this year. We're seeing that steady growth in existing listings over the past couple of months.Now, the most recent housing start print was also positive from this perspective. Single unit housing starts were up for the eighth month in a row and have now increased 11 per cent from their local lows, which were in June of 2023. I think it's also worth pointing out over that same time frame, five plus unit starts, multi-unit housing, they're down in almost every single one of those months -- all but one of them. And they're down 19 per cent from that same month, June of 2023. But that's probably something for another podcast.Jay Bacow Alright. Well, I think there's two more things we should include in this podcast. First, this settlement isn't the only factor that could increase housing activity. Recently, around the State of the Union [address], President Biden announced a number of plans that could also contribute.Now, some of them require congressional approval, including a $10,000 middle-income first-time homebuyer tax credit. And then a separate $10,000 tax credit to middle class families that would sell their home below the median income in the county to help account for some of these lock-in effects that you mentioned.Jay Bacow: However, he also announced a pilot program that would eliminate total insurance fees for some low-risk refinance transactions. And that one doesn't require congressional approval; it's getting put in place as we speak, and that would save homeowners about $750 in closing costs on a refinance.James Egan: Interesting. So, if I'm hearing you correctly, the ones that would require congressional approval, they're more on the -- what we would call housing activity side: sales, purchase volumes. Whereas the one that didn't was on the refinance side. Now, presumably there's not much refinance activity going on right now.Jay Bacow: That's a correct presumption. Right now, we estimate that only about 3 per cent of homeowners have a critical incentive to refinance 25 basis points versus a prevailing mortgage rate. So, this is going to matter a lot more if we rally i

Consumer credit scores have ticked higher in the last two years – but so have the rate of delinquencies and defaults. Our Global Head of Fixed Income discusses “credit score migration” with the firm's Asset-Backed Security Strategist.----- Transcript -----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income and Thematic Research for Morgan Stanley.Heather Berger: And I'm Heather Berger, Asset-Backed Security Strategist.Michael Zezas: And today, we'll be talking about the trend of migrating US consumer credit scores and the potential effect on equities and fixed income. It's Wednesday, March 27th at 10am in New York.Heather, I really wanted to talk to you today because we've all seen some recent news reports about delinquencies and defaults in consumer credit ticking higher over the last two years. That means more people missing payments on their car loans and credit cards, suggesting the consumer is increasingly in a stressed position. But at the same time, that seems to be at odds with what's been an upward trend in consumers’ credit scores, which on its face should suggest the consumer is in a healthier position.So, it all begs the question: what's really going on here with the consumer, and what does it mean for markets? Now, you and your colleagues have been doing some really fascinating work showing that in order to get to the truth here, we have to understand that there's a measurement problem. There’s quirks in the data that, when you understand them, mean you have a more accurate picture of the health of the consumer. And that, in turn, can clarify some opportunities in the fixed income and equity markets.So, this measurement problem seems to center around the idea of credit score migration. Can you start by explaining what exactly is credit score migration?Heather Berger: Sure. So, credit scores are used as a way to estimate expected default risk on consumer loans. And these scores are really the most standardized and widespread way of evaluating consumer credit quality. Scores are meant to be relative metrics at any point in time. So, a 700 score today is meant to indicate less default risk than a 600 score today, but a 700 score today isn't necessarily the same as a 700 score a few years ago.Credit scores have been increasing throughout the past decade; most extremely from 2020 to 2021, largely due to COVID related factors such as stimulus checks. The average credit score is up 10 points in the past four years, and this trend has broadly been referred to as credit score migration.Michael Zezas: So, just so we can have a concrete example, can you talk about how this has affected one particular consumer credit category?Heather Berger: Well, as you mentioned earlier, delinquencies and defaults have been rising across consumer loan types, whether it's autos, credit cards, or personal loans. The macro backdrop has definitely contributed to this, as inflation has weighed on consumers real disposable income, but we do think that score migration has had an impact as well, considering the large changes over the past few years.Looking at auto loans, for example, with the same credit scores from 2022 versus loans from 2018, we see that delinquency rates on the 2022 loans are up to 60 per cent higher than on the 2018 loans. We estimate that 30 to 50 per cent of this increase can be due to effects of credit score migration.Michael Zezas: And is there anything we can assume here about the actual health of the US consumer? Do we see delinquencies improving or getting worse?Heather Berger: I think one of the main takeaways here is that since score migration impacts performance metrics, we shouldn't necessarily extrapolate delinquency data to broader consumer health. Despite the high delinquency rates, our economists do expect consumers to remain afloat.They're forecasting a modest slowdown in consumer spending this year as we move off a hot labor market and continue to face elevated interest rates.Michael Zezas: So, let's shift to the market impacts here. Maybe you could tell us what your colleagues in equity research saw as the impact on the banks and consumer finance sectors. And in your area of expertise, what are the impacts for asset-backed securities?Heather Berger: We think that across both of these spaces, taking into account changes in credit scores will be important to use in models moving forward; and this can help us to more accurately assess the risks of consumer loans and to predict performance. Movements in credit scores have actually been muted in the past year, which is a big change from the large increases we saw a few years ago.So, score migration should now have a smaller impact on consumer performance and delinquency rates. This means that performance will be driven by macro factors and lending standards. As inflation comes down and with lending standards tight, we view this as a positive for asset

As investors look for clues on market durability, our Chief U.S. Equity Strategist highlights which sectors could show more widely distributed gains in the near term.----- 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 an opportunity for energy stocks to keep working in the near term.It's Tuesday, March 26th at 9:30 am in New York. So let’s get after it.Over the past five months, global stocks are up about 25 percent while many other asset prices were up double digits or more. What’s driving this appreciation? Many factors are at work. But for stock indices, it’s been mostly about easier financial conditions and higher valuations rather than improving fundamentals. Granted, higher asset prices often beget even higher prices – as investors feel compelled to participate. From our perspective, it’s hard to justify the higher index level valuations based on fundamentals alone, given that 2024 and 2025 earnings forecasts have barely budged over this time period.  We rolled out our “Boom-Bust” thesis in 2020 based on the shift to fiscally dominant policy in response to the pandemic. At that point, our positive view on stocks was based on the boom in earnings that we expected over the 2020-2021 period as the economy roared back from pandemic lows. Our outlook anticipated both accelerating top line growth and massive operating leverage as companies could reduce headcount and other costs while people were locked down at home. The result was the fastest earnings growth in 30 years and record high margins and profitability. In other words, the boom in stocks was justified by the earnings boom that followed. Stock valuations were also supported by arguably the most generous monetary policy in history. The Fed continued Quantitative Easing throughout 2021, a year when S&P earnings grew 48 percent to an all-time high.Today, stock valuations have reached similarly high levels achieved back in 2020 and [20]21 – in anticipation of improving growth after the earnings deterioration most companies saw last year. While the recent easing of financial conditions may foreshadow such an acceleration in earnings, bottom-up expectations for 2024 and [20]25 S&P 500 earnings remain flat post the Fed’s fourth quarter dovish shift. Meanwhile, small cap earnings estimates are down 10 percent and 7 percent for 2024 and [20]25, respectively since October. We think one reason for the muted earnings revisions since last fall, particularly in small caps, is the continued policy mix of heavy fiscal stimulus and tight front-end interest rates. We see this crowding out many companies and consumers.  The question for investors at this stage is whether the market can finally broaden out in a more sustainable fashion. As we noted last week, we are starting to see breadth improve for several sectors. Looking forward, we believe a durable broadening comes down to whether other stocks and sectors can deliver on earnings growth. One sector showing strong breadth is Industrials, a classic late-cycle winner and a beneficiary of the major fiscal outlays for things like the Inflation Reduction and CHIPS Act, as well as the AI-driven data center buildout. A new sector displaying strong breadth is Energy, the best performer month-to-date but still lagging considerably since the October rally began. Taking the Fed’s recent messaging that they are less concerned about inflation or loosening financial conditions, commodity-oriented cyclicals and Energy in particular could be due for a catch-up. The sector’s relative performance versus the S&P 500 has lagged crude oil prices, and valuation still looks compelling. Relative earnings revisions appear to be inflecting as well. Some listeners may be surprised that Energy has contributed more to the change in S&P 500 earnings since the pandemic than any other sector. Yet it remains one of the cheapest and most under-owned areas of the market.  Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts or wherever you listen and leave us a review. We’d love to hear from you. 

Morgan Stanley’s Chief Fixed Income Strategist explains why private credit markets have expanded rapidly in recent years, and how they may fare if public credit makes an expected comeback.----- 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, I'll be talking about the implications of the rapid growth in private credit for the broader credit markets.  It’s Monday, March 25th at 12 noon in New York.The evolution of private credit is reshaping the landscape of leveraged finance. Investors of all stripes and all around the world are taking notice. The rapid expansion of private credit in the last few years has come against a much different backdrop in the public credit markets – a contraction in the high yield bond market and lackluster growth in the broadly syndicated loan market. What the emergence of private credit means for the public credit and the broader credit markets is a topic of active debate.Just to be clear, let me define what we mean by private credit. Private credit is debt extended to corporate borrowers on a bilateral basis or involving very small number of lenders, typically non-banks. Lenders originate and negotiate terms directly with borrowers without the syndication process that is the norm in public markets for both bonds and loans. These private credit loans are typically not publicly rated; they’re not typically traded in secondary markets; tend to have stronger lender protections and offer a spread premium to public markets.Given the higher overall borrowing costs as well the need to provide stronger covenant protection to lenders, what motivates borrowers to tap private credit versus public credit? Three key factors explain the recent rapid growth in private credit and show how private credit both competes and complements the public credit markets.First, small and medium-sized companies that used to rely on banks had to find alternative sources of credit as banks curtailed lending in response to regulatory capital pressures. A majority of these borrowers have very limited access to syndicated bond and loan markets, given their modest size of borrowings.Second, because of the small number of lenders per deal – frequently just one – private credit offers both speed and certainty of execution along with flexibility of term. The last two years of monetary policy tightening has meant that there was a lot of uncertainty around how high policy rates would go and how long they will stay elevated – which has led investors to pull back. The speed and certainty of private credit ended up taking market share from public markets against this background, given this uncertainty in the public markets.Third, the pressure on interest coverage ratios from higher rates resulted in a substantial pick-up in rating agency downgrades into the B- and CCC rating categories. At these distressed ratings levels, public markets are not very active, and private credit became the only viable source of financing.Where do we go from here? With confidence growing that policy tightening is behind us and the next Fed move will be a cut, the conditions that contributed to deal execution uncertainty are certainly fading. Public markets, both broadly syndicated loan and high yield bond markets, are showing signs of strong revival. The competitive advantage of execution certainty that private credit lenders were offering has become somewhat less material. Further, given the amount of capital raised for private credit that is waiting to be deployed – the so-called dry powder – the spread premium in private credit may also need to come down to be competitive with the public markets.So private credit is both a competitor and a complement to the public markets. Its competitive attractiveness will ebb and flow, but we expect its complementary benefit as an avenue for credit where public markets are challenged to remain as well as grow.Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts or wherever you get this podcast – and share Thoughts on the Market with a friend or colleague today.

Our Head of Corporate Credit notes that while recent central bank meetings offered few surprises, there was still plenty to be gleaned that could affect credit valuations.  ----- 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 be talking about this week’s central bank meetings, and why as expected outcomes can still mean new information for credit investors.It's Friday, March 22nd at 2pm in London.When a good friend was interviewing at Morgan Stanley, many years ago, he was asked a version of the ‘Monty Hall Problem.’ Imagine that you’re on a game show with a prize behind one of three doors. You make your guess of door 1, 2 or 3. And then the host opens one of the doors you didn’t pick, showing that it’s empty. Should you change your original guess?While it’s a bit of a paradox, you should. Your original odds of finding the prize were 1-in-3. But by showing you a door with a wrong answer, the odds have improved. The host gave you new information. And that’s what came to mind this week, after important meetings from the Federal Reserve and Bank of Japan. Both banks acted in-line with our economists’ expectations. But those meetings and what came after still provided some valuable new information. Information that, in our view, was helpful to credit.On Tuesday, the Bank of Japan raised interest rates for the first time since 2016, ended Yield Curve Control, and ended its purchases of equities. All of these measures had been previously used to help boost too-low inflation. But they have also resulted in a significant weakening of Japan’s currency, the Yen. And that, in turn, had made it attractive for Japanese investors to invest in overseas bonds in other currencies – which were gaining value as the Yen weakened.So, one risk heading into this week was that these big changes in the Bank of Japan would reverse these other trends. It would strengthen the currency and make buying corporate bonds from the US or Europe less attractive to Japanese investors. But this meeting has now come and gone, and the Yen saw little movement. That is helpful, new information. Before Tuesday, it was impossible to know how the currency would react.Then on Wednesday, the Fed confirmed its expectation from December that it was planning to cut interest rates three times this year. On the surface, that was another ‘as expected’ outcome. But it still contained new information. The Fed’s forecast suggested more confidence that stronger 2024 growth wouldn’t lead to higher inflation. And that endorsed the idea that the productive capacity of the US economy is improving. Solid growth and lower inflation co-existing, thanks to better productivity, will be closer to a 1990s style outcome. And that was a pretty good scenario for credit.This week’s central bank meetings have come and gone without big surprises. But sometimes ‘as expected’ can still deliver new information. We continue to expect credit valuations to hold at richer-than-average levels, and like US leveraged loans, as a high yielding market well-suited for a mid-90s scenario.Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts, or wherever you listen, and leave us a review. We’d love to hear from you. 

The perspective from our recent European Financials Conference looked positive for UK markets, loan demand and M&A activity. Our European heads of Diversified Financials and Banks Research discuss.----- Transcript -----Bruce Hamilton: Welcome to thoughts on the Market. I'm Bruce Hamilton, head of European Diversified Financials Research.Alvaro Serrano: And I'm Alvaro Serrano, head of European Banks Research.Bruce Hamilton: And on this episode of the podcast, we'll discuss some of the key takeaways from Morgan Stanley's just concluded 20th European Financials Conference. It's Thursday, March 21st at 3 pm in London.Alvaro, we were both at the European Financials Conference in London. More than 100 companies attended the event. 95 percent of the attendees were from CE level management. There was a lot to take in.Investor sentiment heading into the conference seemed noticeably more upbeat than last year's, thanks in part to stronger-for-longer net interest income (NII), an M&A cycle that is heating up, attractive capital returns, and increasing activity in private markets.Now you were the conference chair, Alvaro. And you have a unique overview of this event. What's, in your view, the single most important takeaway?Alvaro Serrano: Thanks, Bruce. Look, I think for me that if I had to summarize in two words is ‘risk on.’ I think the tone of the conference has been positive almost across the board. The lower rate outlook has increased market confidence. And corporates were pointing that out. They've seen stronger activity, so far this year, in many product lines. They've called out loan demand being stronger. They've called out debt capital market activity being stronger. They've announced M&A -- we know is up strongly and asset management inflows are up strong as well. So yes, a strong start to the year - confidence is back, and I would summarize it as risk on.Bruce Hamilton: Got it. And in terms of the other key themes and debates that emerged from company presentations at the conference.Alvaro Serrano: Yeah, look, I think the main themes following up from what I was saying earlier are: First of all, I would say leadership change. Within the sector, we've been calling for leadership change in our outlook. And I think what we heard at the conference supports this. So, given market activities coming back, I think a lot of investors were more keen to look for more resilient revenue models; maybe less peripheral banks, less NII retail-centric banks. And looking for more fee growth that could benefit from that market recovery.The second point I would point out is UK. There’s definitely a change in sentiment around the UK in the polling questions. It came out as a preferred region, and I think what's behind that preference is that we're seeing an inflection point in NII.And I think the third and final theme for me is investment banking and wealth recovery. Look, wealth may not recover already in Q1. But as this confidence builds up, we definitely expect inflows to pick up in the second half, both in quantity and margin.Bruce Hamilton: So, based on your own work and what you heard at the conference, what's your overall view on the financial sector and what drives that from here?Alvaro Serrano: We continue positive the sector. Look, the valuation is depressed. The multiples, the PE multiples on six times. Historically, it's been much closer to double-digit. We think, recovering PMIs should help re-rate that multiple. And while we do wait for those PMIs to recover, you're being paid 11 per cent yield between dividends and buybacks.I think the confidence build up that we're seeing in the tone of the conference suggests an early indicator of those PMIs recovering, if you ask me. And then in the panels, we've had plenty of discussions around asset quality. Obviously, commercial real estate exposure is a big theme. But we think it's a manageable problem. It's less than 5 per cent of the loan books, within that office is less than a third. And within that US office spaces is a fraction. So overall, we think it's a manageable problem and our highest single conviction in the sectors that the yields are sustainable and resilient.So, with a strong valuation underpin, we continue, positive of the sector.Bruce, why don't I turn it over to you? Given your focus on private markets, exchanges, and asset management sub-sectors within diversified financials, can you talk us through private markets and deal activity space?Bruce Hamilton: Yeah, our fireside chats with panels, and with private market management teams, saw more optimistic commentary on capital markets activity. And similarly fundraising improvements are expected to be closely linked to cash flows from exit activity flowing back to institutional clients, who can then reallocate to new funds.So there's a little delay. But overall, the direction of travel clearly feels positive and pointed to a reacce

Our Global Head of Fixed Income and Thematic Research outlines the potential impact the upcoming U.S. elections could have on increasing treasury yields, US-China policy and Japan’s current trajectory.----- 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 overseas investors' view on the US election. It's Wednesday, Mar 20th at 10:30 am in New York. I was in Japan last week. And as has been the case with other clients outside the US, the upcoming American elections were a key concern. To that end, we’re sharing the three most frequently asked questions, as well as our answers, about the impact of the U.S. election on markets coming from clients outside the US.First, clients are curious what the election could mean for what’s recently been a very rosy outlook for Japan. The central bank is taking steps toward normalizing monetary policy which, combined with corporate reforms, is driving renewed investment. And it doesn’t hurt that multinationals are finding it more challenging to do new business in China due to U.S. policy restrictions. In our view, regardless of the election outcome, these positive secular trends will continue. While its true that Republicans are voicing greater interest in tariffs on US friend and foe alike, in our view there are other geographies more likely to bear the impact of stricter trade policy from the US – such as Europe, Mexico, and China; areas where there’s clearer overlap between US trade interests and the geopolitical preferences of the Republican party.Second, clients wanted to know what the election would mean for US-China policy. The first thing to understand is that both parties are interested in policies that build barriers protecting technologies critical to US economic and national security. For Democrats, this has meant a focus on extending non-tariff barriers such as export and investment restrictions; many of which end up affecting the trade relationship between the US and China, and over time have resulted in US direct investment tilting away from China and toward the rest of the world.  Republicans support these policies too. But key party leaders, including former President and current candidate Trump, also want to use tariffs as a tool to negotiate better trade agreements; and, potentially as a fall back, to harmonize tariff levels between countries. So, the election is unlikely to yield an outcome that eases trade tension between the US and China. But an outcome where Republicans win could create more volatility for global trade flows and corporate confidence, creating more economic uncertainty in the near term. Third and finally, clients wanted to know if there were any election outcomes that would reliably change the trajectory of US growth, inflation, and accordingly the trajectory for treasury yields. In particular there was interest in outcomes that could cause yields to move higher. Our take here is that there’s been no solidly reliable outcome that points in that direction -- at least not yet. While it's likely that a potential Trump presidency would favor tax cuts and tariffs, it’s not clear that either of these definitively lead to inflation. Cutting taxes for companies with healthy balance sheets doesn’t necessarily yield more investment. Tariffs increase the cost of the thing being tariffed, but that could lead to prices of other goods in the economy suffering from weaker demand. Relatedly, the idea that a more dovish Fed could enable inflation is not a foregone conclusion because – as we’ve discussed on prior episodes – the President's ability to influence monetary policy is more limited than you might think.Still, because of the pileup of these factors, it wouldn’t be surprising to see rates rise at some point this year on election risk perceptions. But it's not clear this would be a sustained move, and so it's not causing us yet to recommend clients’ position for it. For clients looking for more reliable market moves from the election, we’re still focused on key sectoral impacts: sectors like industrials and telecom which could benefit from tax cuts in a Republican win scenario; and sectors like clean tech which benefit in a Democratic win scenario, on greater certainty for the spend of energy transition money in the IRA.  Of course, as markets change and price in different outcomes, interesting macro markets opportunities will emerge -- and we’ll be here to tell you all about it.Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts, or wherever you listen, and leave us a review. We’d love to hear from you.

Our Chief Asia and Emerging Market Equity Strategist reviews an up-and-down first quarter for markets across the region, and gives an update on which sectors investors should be eyeing. ----- Transcript -----Welcome to the Thoughts on the Market. I’m Jonathan Garner, Morgan Stanley’s Chief Asia and Emerging Market Equity Strategist. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about our key investment views in Asia. It's Tuesday, Mar 19th at 9 am in Singapore.It's been quite a first quarter in Asian equities with a wide degree of dispersion in market returns. At one end of the spectrum Japan’s Nikkei index is up 16 percent. At the other end, despite a recent rally, the Hang Seng index in Hong Kong is down 2 percent for the year. Meanwhile, the AI thematic has helped Taiwan into second place regionally, with a 10 percent gain; but Korea has risen by a lot less.Our highest conviction views remains that we’re in the midst of multi-year secular bull markets in Japan and India, whilst at the same time China is in a secular bear market. So, let’s lay out the building blocks of those theses.Firstly, Japan’s Return on Equity Journey. We think that markets – like stocks – reward improvement in profitability or ROE. The drivers of the ROE improvement are numerous but include domestic reflation, a weaker Yen, a productive capex cycle and improved capital management by Japan’s leading firms. And these together have led to improving net income margins in two-thirds of industries versus a decade ago. We forecast robust EPS growth of around 9 percent in 2024, with similar growth in 2025. Now that’s assuming our foreign exchange strategists’ USD/JPY forecast of 140 for the fourth quarter of this year is accurate. This week the BOJ – the Bank of Japan – is considering whether to exit its Negative Interest Rate Policy and abolish or flex yield curve control. If it does so, that will be a sign – along with recent strong wage gains – that Japan has definitively exited deflation.Secondly, India’s Decade. Multipolar world trends are supporting foreign direct investment (FDI) flows and portfolio flows to India, whilst positive demographics from a rapidly growing working age population are also supporting the equity market. India is holding national elections in May, and we will be watching the policy framework thereafter. But our base case is little change; success that India has achieved in macro-stability is underpinning a strong capex and profits outlook.Finally, China’s Deflationary Challenge. China continues to battle what we’ve termed its 3D challenge of Debt (now standing at 300 per cent of GDP), Demographics and Deflation. And profitability has fallen steadily in recent years – so going in the opposite direction from Japan; approximately halving since the middle of the last decade, whilst earnings have missed for nine straight quarters. We think more forceful countercyclical measures are needed to boost demand in China given incipient balance sheet recession due to headwinds from property and local government austerity.Finally, to summarize some of our sector and style views. We still like Korea and Taiwan’s semiconductors, into an expected 2024 recovery in traditional product areas such as smart phone, as well as the new theme of AI related demand. We are positive on Financials in India, Indonesia and Singapore; Industrials in India and Mexico; and Consumer Discretionary in India. On the quant and style side, we’re neutral on value versus growth as we expect the path to lower yields to be bumpy – as inflation risk remains. And we have recently recommended investors to reduce momentum exposure for risk management purposes given the strong outperformance year to date.Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts or wherever you listen – and leave us a review. We’d love to hear from you.

Our CIO and Chief Equity Strategist discusses the continued uncertainty in the markets, and how investors are now looking at earnings growth and improving valuations.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about the risk of higher interest rates and equity valuations. It's Monday, March 18th at 11:30 am in New York. So let’s get after it.Long term interest rates peaked in October of last year and coincided with the lows in equities. The rally began with the Treasury's guidance for less coupon issuance than expected. This surprise occurred at a time when many bond managers were short duration. When combined with the Fed’s fourth quarter policy shift, there was a major squeeze in bonds. As a result, 30-year Treasury bonds returned 19 per cent over the October-December 2023 period, beating the 14 per cent return in the S&P 500. Nearly all of the equity return over this period was attributable to higher valuations tied to the fall in interest rates.Fast forward to this year, and the story has been much different. Bond yields have risen considerably as investors took profits on longer term bonds, and the Fed walked back several of the cuts that had been priced in for this year. The flip side is that the growth data has been weaker in aggregate which argues for lower rates. Call it a tug of war between weaker growth and higher inflation than expected.There is also the question of supply which continues to grow with the expanded budget deficit. From an equity standpoint, the rise in interest rates this year has not had the typically negative effect on valuations.  In other words, equity investors appear to have moved past the Fed, inflation and rates – and are now squarely focused on earnings growth that the consensus expects to considerably improve.  As noted in prior podcasts, the consensus earnings per share (EPS) growth estimates for this year are high, and above our expectations – in the context of sticky cost structures and falling pricing power as fiscal spend crowds out both labor and capital for the average company. In our view, this crowding out is one reason why fundamentals and performance have remained relatively muted outside of the large cap, quality winners. We have been expecting a broadening out in leadership to other large cap/quality stocks away from tech and communication services; and recently that has started to happen. Strong breadth and improving fundamentals support our relative preference for Industrials within broader cyclicals.Other areas of relative strength more recently include Energy, Materials and Utilities. Some of this is tied to the excitement over Artificial Intelligence and the impact that will have on power consumption. The end result is lower valuations for the index overall as investors rotate from the expensive winners in technology to laggards that are cheaper and may do better in an environment with higher commodity prices.  Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts or wherever you listen --and leave us a review. We’d love to hear from you. 

Our Head of Corporate Credit Research explains why leveraged loans would benefit if bumpy inflation data leads the Federal Reserve to delay interest rate cuts.----- 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 be talking about the ramifications of the fed rate cuts, and what it could mean for credit – and what would benefit if rates stay higher for longer. It's Friday, March 15th at 2pm in London.The big story in markets this week was inflation. U.S. Consumer Price inflation continues to moderate on a year-over-year basis, but the recent path has been bumpier than expected. And as U.S. Economic growth in the first quarter continues to track above initial expectations, there’s growing debate around whether the U.S. economy is still too strong to justify the Federal Reserve lowering rates.Morgan Stanley’s economic base case is that these inflation readings will remain bumpy – but will trend lower over the course of the year. And if we couple that with our expectations that job growth will moderate, we think this still supports the idea that the Federal Reserve will start to lower interest rates starting in June.Yet the bumpiness of this recent data does raise questions. What if the Federal Reserve lowers rates later? Or what if they lower rates less than we expect?For credit, we think the biggest beneficiary of this scenario would be leveraged loans. For background, these represent lending to below-investment grade borrowers, similar to the universe for high yield bonds. But loans are floating rate; their yields to investors rise and fall with central bank policy rates.Coming into 2024, there were a number of concerns around the levered loan market. Worries around growth had led markets at the start of the year to imply significant rate cuts from the Fed. And that’s a double whammy, so to speak, for loans; as loans are both economically sensitive to that weaker growth scenario and would see their yields to investors decline faster if there are more rate cuts. Meanwhile, an important previous buyer of loans, so-called Collateralized Loan Obligations, or CLOs, had been relatively dormant.Yet today many of those factors are all looking better. Estimates for US 2024 GDP growth have been creeping up. CLO activity has been restarting. And some of this recent growth and inflation data means that markets are now expecting far fewer rate cuts – which means that the yield on loans would also remain higher for longer. And that’s all happening at a time when the spread on loans is relatively elevated, relative to similar fixed rate high yield bonds.A question of whether or not U.S. inflation will be sticky remains a key debate. While we think inflation resumes its improvement, we like leveraged loans as a high yielding, floating rate instrument that has a number of key advantages – if rates stay higher, for longer, than we expect.Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts, or wherever you listen, and leave us a review. We’d love to hear from you. 

Morgan Stanley’s chief economists have their quarterly roundtable discussion, focusing on the state of inflation across global regions, the possible effect of the US election on the economy and more.----- Transcript -----Seth Carpenter: Welcome to Thoughts On the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist. On this episode, on this special episode of the podcast, we'll hold our second roundtable discussion covering Morgan Stanley's global economic outlook as we look into the second quarter of 2024.It's Thursday, March the 14th at 10 am in New York.Jens Eisenschmidt: And it's 2 pm in London.Chetan Ahya: And 10pm in Hong Kong.Seth Carpenter: Excellent. So, things around the world have changed significantly since our roundtable last quarter. US growth is notably stronger with few signs of a substantial slowdown. Inflation is falling, but giving some hints that things could stay -- maybe -- hotter for longer.In Europe, things are evolving mostly as anticipated, but energy prices are much lower, and some data suggest hope for a recovery. Meanwhile, in China, debt deflation risks are becoming a reality. And the last policy communication shows no sign of reflation. And finally, Japan continues to confirm the shift in equilibrium, and we are expecting the policy rate change imminently.So, let's dig into these developments. I am joined by the leaders of the economics team in key regions. Ellen Zentner is our Chief US Economist, and she's here with me in New York. Chetan Ahya is our Chief Asia Economist, and Jens Eisenschmidt is our Chief Europe Economist.Ellen, I'm going to start with you and the US. Have the stronger data fundamentally changed your view on the US economy or the Fed?Ellen Zentner: So, coming off of 2023, growth was just stronger than expected. And so, carrying that into 2024, we have revised upward our GDP forecast from 1.6 per cent Q4 over Q4 to 1.8 per cent. So already we've got stronger growth this year. We have not changed our inflation forecast though; because this could be another year of stronger data coming from supply side normalization, and in particular the labor market -- where it's come amid higher productivity and decelerating inflation. So, I think we're in store for another year like that. And I would say if I add risks, it would be risk to the upside on growth.Seth Carpenter: Okay, that makes sense. But if there's risk to the upside on growth -- surely there's some risk that the extra strength in growth, or even some of the slightly stronger inflation that we've seen, that all of that could persist; and the Fed could delay their first cut beyond the June meeting, which is what you've got penciled in for the first cut. So how do you think about the risks to the timing for the Fed?Ellen Zentner: So, I think you've got a strong backdrop for growth. You've got relatively easy financial conditions. And Fed policymakers have noted that that could pose upside risks to the economy and to inflation. And so, they're very carefully parsing every data point that comes in. Chair Powell said they need a bit more confidence on inflation coming down. And so that means that the year over year rate on core PCE -- their preferred measure of inflation -- needs to continue to take down.I think that the risk is more how long they stay on hold -- than if the next move is a hike, which investors have been very focused on. Do we get to that point? And so certainly if we don't see the next couple of months and further improvement, then I think it just does lead for a longer hold time for the Fed.Seth Carpenter: All right. A risk of a longer hold time. Chetan, how do you think about that risk?Chetan Ahya: That risk is important to consider. We recently published on the idea that Asian central banks will have to wait for the Fed. Even though inflation across Asia is settling back into target ranges, central banks appear to be concerned that real rate differentials versus US are negative and still widening, keeping Asian currencies relatively weak.This backdrop means that central banks are still concerned about future upside to inflation and that it may not durably stay within the target. Finally, growth momentum in Asia excluding China has been holding up despite the move in higher real rates -- allowing central banks more room to be patient before cutting rates.Seth Carpenter: I got it. Okay, so Jens, what about for the ECB? Does the same consideration apply if the Fed were to delay its cutting cycle?Jens Eisenschmidt: I'm glad you're asking that question, Seth, because that's sort of the single most asked question by our clients. And the answer is, well, yes and no. In our baseline, first of all, to stress this, the ECB cuts before the Fed, if only by a week. So, we think the ECB will go on June 6th to be precise. And what we have heard, last Thursday from the ECB meeting exactly confirms that point. The ECB is set to go in J

Our Freight Transportation & Airlines Analyst unboxes the latest trends around parcel transit times and systems in the U.S. and their impact on the future of e-commerce supply chains.----- Transcript -----Welcome to Thoughts on the Market. I’m Ravi Shanker, Morgan Stanley’s Freight Transportation analyst. Along with my colleagues bringing you a variety of perspectives, today I’ll discuss what’s happening in the eCommerce parcel delivery space. It’s Wednesday, March 13, at 10 AM in New York.Most people love the convenience of online shopping. You click, you pay. Next thing you know, your doorbell rings. Turns out, we’ve become so used to this kind of instant gratification that many customers now abandon an online cart – if the delivery process takes too long. eCommerce parcel delivery companies are taking notice of consumers' growing impatience and are putting a lot of effort into making parcel transit shorter, faster and tighter. A couple of factors drive this trend. First, we have the retailers’ desire to store inventory at more locations; closer to the end-consumer versus the centralized, nationalized distribution centers of the old model. Second, connecting those inventory locations quickly, easily and cheaply by truck rather than long-haul transportation modes like air or rail. As a result, companies can offer consumers one-day or same-day delivery in a highly cost-effective manner.This means a shift from long-distance transit via air towards ground transportation – be it express or non-express ground. Such a transition could be a drag on margins at major parcel companies. These players are fully aware of the risk; and they’re making their own structural changes and downsizing their air business. However, even as big parcel companies are trying to keep up with the times and evolving consumer pressures, the transition from long-haul air to short-haul truck makes parcel delivery a less complex operation to run – and that may attract more competitors over time.Another factor at play is the continued popularity of curbside pickup, also known as Click And Collect or even delivery from the store – these are options that became ubiquitous during the pandemic. Even post-pandemic, major retailers have been attempting to move inventory closer to customers and lowering the cost to ship to homes by treating their physical brick and mortar stores as last-mile fulfillment options.As inventories have been getting leaner over the last few quarters, Click & Collect, Ship from Store, and other similar services have seen their popularity rise. Indeed, several retailers have expanded their physical footprint to accommodate these options. Or they have leveraged their current stores to offer more of these capabilities.We think this could have a significant impact on eCommerce supply chains for incumbent parcel companies. In the current long-distance eCommerce supply chain model, the long-haul middle-mile portion accounts for the bulk of the profitability for a parcel carrier. By substituting that middle-mile parcel move with regular inventory channel fill, parcel companies could be effectively excluded from the process, in our view. Given their entrenched long-haul networks, it could be difficult for the parcel companies to be consistently profitable doing last-mile deliveries alone. Instead, this last mile delivery market could go to delivery companies, regional delivery providers, or even in-house delivery solutions.This is a rapidly evolving landscape, and we’ll continue to keep you updated on major new developments.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 roundtable of experts recaps highlights from the 2024 Morgan Stanley Technology, Media & Telecom Conference, including AI innovation, trends in live entertainment and the need for operational efficiency. ----- Transcript -----Michelle Weaver: Welcome to Thoughts on the Market. I'm Michelle Weaver, Morgan Stanley Research's US thematic strategist. I'm joined by Ben Swinburne, who leads coverage of the media and entertainment, advertising, and cable and satellite industries, and Kieran Kenny, who covers internet. Along with my colleagues, bringing you a variety of perspectives, today we'll discuss some key themes from Morgan Stanley's recently concluded Technology, Media, and Telecom Conference in San Francisco.It's Tuesday, March 12th, at 10am in New York.Ben, Kieran, we have to lead off on AI. It was a tech conference. As we've written about in the past, most companies want to either be AI enablers or AI adopters. And we believe that 2024 will be the year of the adopters. We scraped transcripts of the presentations at the conference and found that AI was mentioned 155 times.There was a particular focus on Generative AI or Gen AI. And one of the means of adopting AI that was repeatedly mentioned was using chatbots for customer service. And chatbots can easily handle commonly asked questions without needing a customer service person to speak live. Kieran, can we start by talking about some of the most interesting ways companies and internet are adopting AI?Kieran Kenny: So, there's a wide range of use cases so far. What we're seeing more recently is growing adoption for, to your point, AI assistance for customer support types of use cases. We're also seeing increased adoption from advertisers; for generative AI, for image and text creation for advertisements. And in the video game space, we're also seeing demand for generative AI based content creation tools -- to give you a sense of some of the use cases. The most common use case, though, is adoption of generative AI coding assistant tools, which we're seeing that pretty pervasively across the internet space.Michelle Weaver: Great. And I know you've done a bunch of work around AI. What are some of the areas you think we'll see the quickest AI driven efficiency gains?Kieran Kenny: I think most likely you'll see the efficiency gains come first in the code assistant use cases. That when we go through and scan company disclosures for efficiency gains related to generative AI and look through some of the empirical studies -- code assistant tools tend to show the most consistent productivity gains in the 20 to 50 per cent range. And because R&D expenses are such a large percent of revenue for internet. It's on average 25 percent. There's a really strong incentive for companies to adopt those tools to drive productivity amongst their software engineers. So, we think that's the area you're likely going to see the benefits first.Michelle Weaver: Great. Thanks, Kieran. Ben, what do you think some of the most interesting ways companies in your coverage are leveraging AI?Benjamin Swinburne: I would echo some of the points that Kieran made, particularly around content creation and dealing with customers.You know, in the content creation area, we're seeing AI leveraged in creative services. So, creating content for marketing purposes is an area we're seeing the ad agencies look for opportunities. In the audio industry, we've seen AI used to more efficiently and more effectively translate podcasts and audio books to different languages, which can be then distributed around the world.One leading streaming audio company has an AI DJ that they used to drive recommendations for listeners. And on the customer front, we're seeing a lot of companies in the cable industry, basically distribute AI tools into their call centers and into their network diagnostics -- so they can predict where network failures may happen before they happen. Or help call center agents better help customers with issues more effectively using, you know, AI and big data.Michelle Weaver: Great. Super interesting. I'm sure that's just the tip of the iceberg, too, in terms of what we'll see with AI adoption. Ben, I also noticed that there was a lot of discussion from media companies around live events and whether that's high demand for concert tickets, streaming services offering live events, or demand for theme parks. Can you tell us a little bit about consumer experiences in the media space?Benjamin Swinburne: Yeah, absolutely. I mean, we believe that there are secular drivers of consumer spending towards experiences, for a variety of reasons. And we're seeing that happen; show up in the results and outlook for a number of companies in our coverage. We had some really positive commentary from a number of companies in the theme park space around current trends, which are pacing better than expected from the conference. We've seen leading streaming

Matt Cost of the firm’s U.S. Internet team shares his key takeaways from the 2024 Morgan Stanley Technology, Media & Telecom Conference, including the online ad market’s rebound and the future of property tech.  ----- Transcript -----Welcome to Thoughts on the Market. I’m Matt Cost, from the Morgan Stanley US Internet team.Along with my colleagues bringing you a variety of perspectives, today I’ll talk about some key trends that emerged in conversations with internet companies at Morgan Stanley’s 2024 Technology Media and Telecom Conference in San Francisco.It’s Monday, Mar 11th at 8am in New York.So, we had a busy four days at the conference last week. It was our biggest gathering yet for what’s really the marquee TMT event of the year. And we brought together companies and investors from all over the world for keynotes and meetings and a lot of moments in between to connect with industry insiders about the latest trends in their space.I want to start with talking about AI. It was a big topic for almost every company we saw. But I’d say that for me, the video game companies stood out the most. Some C-suite executives that we spoke to talked about how their companies could become up to 30 per cent more efficient, as they leverage new AI tools to build and operate their games. But they also talked about the need to reinvest those efficiencies to make sure their products are the biggest, the best, and the most competitive they can be.This is against a video game market backdrop that remains more mixed though we did hear about some green shoots in mobile games; since there are a number of newly launched games there that are getting good traction – which is actually something we haven’t seen in a few years at this point. On the M&A front, after a wave of game industry consolidation we’ve seen over the past few years, we did hear companies acknowledge that scale matters more than ever – if you want to compete in this space.When it comes to the advertising companies, it’s clear that we’ve seen a marked improvement in the health of the online ad markets since October and November of [20]23, but there are still pockets of strength and weakness, particularly for smaller players where competition is the most intense.We’re also seeing a major focus on privacy, which has been a long-term trend in the space. But in the near term, the industry does expect browser cookies to go away later this year. And investors are trying to decide who that might hurt – and in some cases who it might potentially help. And when it comes to AI in the ad space, we’ve heard a mostly positive story about the potential for more personalized and better targeted ads in the future.Finally on the property tech side. Despite the fact that the residential real estate market is still pretty subdued in the US, many players in the space feel that two years into higher mortgage rates, they have leaner business models that set them up well to benefit when the market does come back. We also heard greater confidence from companies that they don’t expect to see major disruption from the ongoing legal disputes around real estate broker commissions. But that does remain one of the uncertainties in the space that investors are the most focused on into 2024 and beyond.For more on the Morgan Stanley TMT conference, check out the episode tomorrow, where my colleagues will dive deeper into thematic takeaways from this year's event.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 Head of Corporate Credit Research cites near-term and long-term factors indicating that investors should expect a major boost in merger and acquisition activity.----- 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, I'll be talking about trends across the global investment landscape, and how we put those ideas together.It's Friday, March 8th at 2:00pm in London.Usually, company activity follows the broader trends in markets. But last year, it diverged. 2023 was generally a strong year for economic growth and the stock market. But Mergers and Acquisition activity was anemic. By our count, global M&A activity in 2023, adjusted for the size of the economy, was the lowest in 30 years. We think that’s going to change. There are both near-term and longer-term reasons why we think the buying and selling of companies can pick up. We think we’re going to see the return of M&A.Near term, we think corporate confidence, which is essential to any large transaction, is improving. While stocks and the economy were ultimately strong last year, a lot of 2023 was still dominated by fears of rising yields, elevated inflation and persistent expectations of recession. Recall that as recently as October of 2023, the median stock in the S&P 500 was actually down about 5 per cent for the year.All of those factors that were hitting corporate confidence, today are looking better. And with Morgan Stanley’s expectation for 2024, and economic soft landing, we think that improvement will continue. But don’t just take our word for it. The companies that traffic directly in M&A were notably more upbeat about their pipelines when they reported earnings in January.Incidentally, this is also the message that we get from Morgan Stanley’s industry experts. We recently polled Morgan Stanley Equity Analysts across 150 industry groups around the world. Half of them saw M&A activity increasing in their industry over the next 12 months. Only 6 per cent expected it to decline.But there’s also a longer run story here.We think we can argue that depressed corporate activity has actually been a multi-year story. If we think about what factors historically explained M&A activity, such as stock market performance, overall valuations, volatility, Central Bank policy, and so on – the activity that we’ve seen over the last three years has undershot what these variables would usually expect by somewhere between $4-11 trillion. We think that speaks to a multi-year hit to corporate confidence and increased uncertainty from COVID and its aftermath; as that confidence returns, some of this gap might be made up.And there are other longer-term drivers. We believe Private Equity firms have been sitting on their holdings for an unusually long period of time, putting more pressure on them to do deals and return money to investors. Europe is just starting to emerge from an even longer-drought of activity, while reforms in Japan are encouraging more corporate action. We are positive on both European and Japanese equity markets. And other multi-year secular trends – from rising demand in AI capabilities, to clean energy transition, to innovation in life sciences – should also structurally support more M&A over the next cycle.Mergers and Acquisition activity has been unusually low. We think that’s changing, and investors should expect much more of this activity going forward.Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts, or wherever you listen, and leave us a review. We’d love to hear from you.

Morgan Stanley’s Europe Telecom Analyst outlines three factors pointing to a boom, the obstacles to overcome and the associated industries most likely to benefit.---- Transcript -----Welcome to Thoughts on the Market. I'm Emmet Kelly, head of Morgan Stanley's European Telecom team. Today, I'll be talking about the rise of data centers in Europe.The subject of data centers has, until now, largely been confined to the U.S. However, we believe that this is all about to change; and we also think the market significantly underestimates the size and scope of this potential growth in Europe.Why do we believe that the European data center market is set for such strong growth? Well, we've identified three reasons.The first reason is cloud computing. The primary driver of data center demand today is cloud and digitalization.Cloud represents the lion's share of data center growth in Europe on our numbers. Roughly 60 percent of growth by 2035. The second driver is AI. What's interesting is training AI models needs to be done within a single data center, and that's driving demand for large data center campuses across the globe.The third driver is data sovereignty. Data sovereignty is becoming increasingly important to both companies and also to consumers. Essentially, consumers want their data to be stored at home, and they want this to be subject to local law. A common parallel I've received is: would you want your bank account to be stored in a different country? The answer is probably no. And therefore, we believe that data will be increasingly near-shored across EuropeSo what's limiting European data center growth today? There are a number of hurdles in place and these bottlenecks include energy, capital, planning permission, and also regulationSo how do we get around that? Well, having chatted with my colleagues in the utilities and renewables teams, it's been quite clear that Europe needs to invest a lot of money in renewable energy, up to 35 billion euros over the next decade in Europe. This will bring a lot of onshore wind, offshore wind, solar and hydro energy to the market.In terms of the big data center markets in Europe, we've identified five big data center markets, commonly referred to as FLAP-D.Now this acronym does not roll off the tongue, but it does stand for Frankfurt, London, Amsterdam, Paris, and Dublin. Today, there are constraints in three of those markets, in Ireland, in Frankfurt and also in Amsterdam. We therefore believe that London and Paris should see outsized growth in data centers over the next decade or so.We also believe we'll see the emergence of new secondary data center markets.So, who stands to benefit from the explosive growth of European data centers? Among the key beneficiaries, we would highlight the picks and shovels. I'm talking about electric engineering, construction. I'm talking capital goods. We've also got the hyperscalers, the large providers of cloud computing and storage services. And then there is the co-locators as well. Beyond this, it's also worth looking at private capital and private equity companies as being positively exposed too.Thanks for listening. If you do enjoy the show, please leave us a review on Apple Podcasts and share thoughts on the market with a friend or colleague today.

Our Global Head of Fixed Income shares some startling data on decarbonization, the widespread use of AI and longevity.  ----- 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 key secular themes impacting markets.It's Wednesday, Mar 6th at 10:30 am in New York.We kicked off 2024 by highlighting the three secular themes we think will make the difference between being ahead of or behind the curve in markets – longevity, AI tech diffusion, and decarbonization. How’s it going so far? We’ve got some initial insights and opportunities at the sector level worth sharing, and here they are through the lens of three big numbers.The first number is €5 trillion – that’s how much our global economics and European utilities teams estimate will be spent in Europe by 2030 on efforts to decarbonize the energy system. These attempts will boost both growth and inflation, though by how much remains unclear. A more concrete investment takeaway is to focus on the sectors that will be on the receiving end of decarbonization spending: utilities and grid operators.The second set of numbers are US$140 billion and US$77 billion – these are our colleagues' total addressable market projections for smart-chemo, over the next 15 years, and obesity treatments, by 2030. In terms of our longevity theme, we see companies increasingly investing in and achieving breakthroughs that can extend life. While the theme will have myriad macro impacts that we’re still exploring, the tangible takeaway here is that there are clear beneficiaries in pharma to pursue.The last number we’re focusing on is US$500 billion. That’s the opportunity associated with a fivefold increase in the size of the European data center market out to 2035. That should be driven by the need to ramp up to deal with key tech trends, like Generative AI.So, while those numbers drive some pretty clear equity sector takeaways, the macro market implications are somewhat more complicated. For example, on longevity, a common client question is whether health breakthroughs will have a beneficial impact for bond investors by shrinking fiscal deficits. Among US investors, for example, one theory is that breakthroughs in preventative care will reduce Medicare and Medicaid spending. But even if that proved true, we still have to consider potential offsetting effects, such as whether new healthcare costs will arise. After all, if people are living longer, more active lives, they might need more of other types of healthcare, like orthopedic treatments. Simply put, the macro market impacts are complicated, but critical to understand. We remain on the case. In the meantime, there’s clearer opportunities from our big themes in utilities, pharma, and other key sectors.Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts, or wherever you listen, and leave us a review. We’d love to hear from you.

With tax season underway, our U.S. economist explains what the average refund will look like and how people are likely to spend it.----- Transcript -----Welcome to Thoughts on the Market. I’m Sarah Wolfe, from the Morgan Stanley US Economics Team. Along with my colleagues bringing you a variety of perspectives, today I’ll talk about the US federal tax refunds season. It’s March 5, at 10 AM in New York. The IRS began accepting tax returns for the 2023 tax year on January 29, 2024. This is about a week later than when they started accepting tax returns in 2023. As a result, the number of refunds and the total amount of refunds issued by the end of February is about 12 per cent below where they were at the same time last year. However, if we look at the average refund amount that households are getting in the third and fourth week of the tax refund season, they are about in line with the prior year. As such, we expect that total refunds will ramp up to an average amount similar to last year; so that’s about $3100 per person. While data show that refunds can fluctuate notably on a weekly and daily basis, total tax refunds through the end of February ran about in line compared to the same period over the past five years. Let’s remember though that they’re not going to be as high as 2022 when refunds were much larger due to COVID-related stimulus programs. So, we can compare it to the past five years apart from 2022.February through April remains the period where most tax refunds are received and spent, with the greatest impact on consumer spending in March. Our own AlphaWise survey of household intentions around the refunds reveals that households typically spend about a third of their refunds on everyday purchases – such as grocery, gas, apparel. Another third goes toward paying off debt, and the remaining third into savings. Last year, higher inflation pushed more households to use their refunds on everyday purchases. This year, it is likely that everyday purchases will remain a top priority, but we do think that more refunds will go in towards paying off debt than last year. There’s a couple of reasons why we think this. First, there was an expiration of the student loan moratorium at the end of 2023. This is affecting millions of student loan borrowers and putting more pressure on their debt service obligations. And then we’re also seeing rising credit card and consumer loan delinquencies, which reveal pressure to pay down debt. If we look at spending intentions by income group, upper income households are more likely to save any tax refund they may get or spend it on home improvement and vacations. So, a bit more on the discretionary side.When we think about tax liabilities instead of refunds, anomalous factors make this year’s tax season a poor comparison to last year – because last year several states got an extended deadline due to natural disasters. A delayed Tax Day largely impacts filers who have a tax liability or a complicated financial situation and prefer to file later. This has larger implications for the fiscal deficit since delayed tax remittances caused a larger deficit in the third quarter of 2023, and then it narrowed in the fourth quarter when remittances came in. But in terms of refunds and consumer spending, filers who expect refunds tend to file early and on time. An extension of the deadline has very little impact on this group of consumers.All in all, based on early data, we think that total tax refunds this year will be similar to last year, though higher than pre-COVID years due to inflation. Barring factors that can lead to a significant shift of the filing deadline, we should see a more normal timeline for tax remittances, but it is still important to track closely how the tax season evolves.Thank you for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

The U.S. stock market is rising to new highs, but investors should still try to minimize risk in their portfolios. Our analysts list a few key strategies to navigate this dynamic.----- Transcript -----Stephan Kessler: Welcome to Thoughts on the Market. I'm Stefan Kessler, Morgan Stanley's Global Head of Quantitative Investment Strategies Research, QIS Research in short.Aris Tentes: And I am Aris Tentes, also from the QIS research team.Stephan Kessler: Along with our colleagues bringing you a variety of perspectives, today we'll discuss different strategies to hedge equity portfolios.It's Monday, the 4th of March at 10am in London.The US equity market has been climbing to record levels, and it seems that long only investors -- and especially investors with long time horizons -- are inclined to keep their positions. But even in the current market environment, it still makes sense to take some risk off the table. With this in mind, we took a closer look at some of the potential hedging strategies for high conviction calls with a quantitative lens. Long only portfolios of high conviction names of opportunities for excess returns, or alpha; but also of exposures to broad market risk, or beta, embedded in these names.While investors are keen to access the idiosyncratic excess return in individual stocks, they often overlook the systematic market and risk factors that come with owning stocks. Rather than treating these risks as uncontrolled noise, it makes sense to think about hedging such risks.Aris, let me pass over to you for some popular approaches to hedging such risk exposures.Aris Tentes: Yes, thank you, Stefan.Today, investors can use a range of approaches to remove systematic risk exposures. The first one, and maybe the most established approach, is to hedge out broad market risks by shorting equity index futures. Now, this has the benefit of being a low-cost implementation due to the high liquidity of a futures contract.Second, a more refined approach, is to hedge risks by focusing on specific characteristics of these stocks, or so-called factors, such as market capitalization, growth, or value. Now this strategy is a way to hedge a specific risk driver without affecting the other characteristics of the portfolio. However, a downside of both approaches is that the hedges might interfere with the long alpha names, some of which might end up being effectively shorted.Stephan Kessler: Okay, so, so these are two interesting approaches. Now you mentioned that there is a potential challenge in which shorting out specific parts of the portfolio and removing risks, we effectively end up shorting individual equities. Can you tell us some approaches which can be used to overcome this issue?Aris Tentes: Oh, yes. Actually, we suggest an approach based on quantitative tools, which may be the most refined way of overcoming the issues with the other approaches I talked about. Now, this one can hedge risk without interfering with the long alpha positions. And another benefit is that it provides the flexibility of customization.Stephan Kessler: Aris, maybe it's worth actually mentioning why better hedges are important.Aris Tentes: So actually, better hedges can make the portfolio more resilient to factor and sector rotations. With optimized hedges, a one percentile style or sector rotation shock leads to only minor losses of no more than a tenth of a percentage point. As a result, risk adjusted returns increase noticeably.Stephan Kessler: That makes sense. Overall, hedging with factor portfolios gives the most balanced results for diversified, high conviction portfolios. One exception would be portfolios with a small number of names, where the universe remaining for the optimized hedge portfolio is broad enough to construct a robust hedge. This can lead to returns that are stronger than for the other approaches.However, if the portfolio has many names, the task becomes harder and the factor hedging approach becomes the most attractive way to hedge. Having discussed the benefits of factor hedging, I think we also should talk about the implementation side. Shorting outright futures to remove market beta is rather straightforward. However, it leaves many other sectors and factor risks uncontrolled. To remove such risks, pure factor portfolios are readily available in the marketplace.Investors can buy or sell those pure factor portfolios to remove or target factor and sector risk exposures as they deem adequate. Pure factor portfolios are constructed in a way that investment in them does not affect other factor orsector exposures. Hence, we refer to them as “pure.” Running a tailored hedge rather than using factor hedging building blocks can be beneficial in some situations -- but comes, of course, at a substantially increased complexity.Those are some key considerations we have around performance enhancement through thoughtful hedging approaches.Aris, thank you so much for helpin

Our head of Corporate Credit Research explains why the Purchasing Manager’s Index is a key indicator for investors to get a read on the economic 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, I'll be talking about trends across the global investment landscape, and how we put those ideas together.It's Friday, March 1st at 2pm in London.A perennial problem investors face is the tendency of markets to lead the economic data. We’re always on the lookout for indicators that can be more useful, and especially more useful at identifying turning points. And so today, I want to give special attention to one of our favorite economic indicators for doing this: the Purchasing Manager Indices, or PMIs. And how they help with the challenge that economic data can sometimes give us.PMIs works by surveying individuals working in the manufacturing and services sector – and asking them how they’re viewing current conditions across a variety of metrics: how much are they producing? How many orders are they seeing? Are prices going up or down? These sorts of surveys have been around for a while: the Institute of Supply Management has been running the most famous version of the manufacturing PMI since 1948.But these PMIs have some intriguing properties that are especially helpful for investors looking to get an edge on the economic outlook.First, the nature of manufacturing makes the sector cyclical and more sensitive to subtle turns of the economy. If we’re looking for something at the leading edge of the broader economic outlook, manufacturing PMI may just be that thing. And that’s a property that we think still applies -- even as manufacturing over time has become a much smaller part of the overall economic pie. Second, the nature of the PMI survey and how it’s conducted – which asks questions whether conditions are improving or deteriorating – helps address that all important rate of change. In other words, PMIs can help give us insight into the overall strength of manufacturing activity, whether that activity is improving or deteriorating, and whether that improvement or deterioration is accelerating. For anyone getting flashbacks to calculus, yes, it potentially can show us both a first and a second derivative.Why should investors care so much about PMIs?For markets, historically, Manufacturing PMIs tend to be most supportive for credit when they have been recently weak but starting to improve. Our explanation for this is that recent weakness often means there is still some economic uncertainty out there; and investors aren’t as positive as they otherwise could be. And then improving means the conditions likely are headed to a better place. In both the US and Europe, currently, Manufacturings are in this “recently weak, but improving” regime – an otherwise supported backdrop for credit.If you’re wondering why I’m mentioning PMI now – the latest readings of PMI were released today; they tend to be released on the 1st of each month. In the Eurozone, they suggest activity remains weak-but-improving, and they were a little bit better than expected. In the US, recent data was weaker than expected, although still showing a trend of improvement since last summer.PMIs are one of many data points investors may be considering. But in Credit, where turning points are especially important, it’s one of our favorites. Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts, or wherever you listen, and leave us a review. We’d love to hear from you. 

Our Global Macro Strategist explains the complex nature of recent U.S. economic reports, and which figures should matter most to investors.----- Transcript -----Welcome to Thoughts on the Market. I’m Matthew Hornbach, Morgan Stanley’s Global Head of Macro Strategy. Along with my colleagues bringing you a variety of perspectives, today I'll talk about what investors should take away from recent economic data. It's Thursday, February 29, at 4pm in New York.There’s been a string of confusing US inflation reports recently, and macro markets have reacted with vigor to the significant upside surprises in the data. Before these inflation reports, our economists thought that January Personal Consumption Expenditures inflation, or PCE inflation, would come at 0.23 per cent for the month. On the back of the Consumer Price Index inflation report for January, our economists increased their PCE inflation forecast to 0.29 per cent month-over-month. Then after the Producers’ Price Index, or PPI inflation report, they revised that forecast even higher – to 0.43 per cent month-over-month. Today, core PCE inflation actually printed at 0.42 per cent - very close to our economists’ revised forecast.That means the economy produced nearly twice as much inflation in January as our economists thought it would originally. The January CPI and PPI inflation reports seem to suggest that while inflation is off the record peaks it had reached, the path down is not going to be smooth and easy. Now, the question is: How much weight should investors put on this data? The answer depends on how much weight Federal Open Market Committee participants place on it. After all, the way in which FOMC participants reacted to activity data in the third quarter of 2023 – which was to hold rates steady despite encouraging inflation data – sent US Treasury yields sharply higher.Sometimes data is irrational. So we would take the recent inflation data with a grain of salt. Let me give you an example of the divergence in recent data that’s just that – an outlying number that investors should treat with some skepticism. The Bureau of Labor Statistics, or BLS, calculates two measures of rent for the CPI index: Owner’s equivalent rent, or OER, and rents for primary residences. Both measures use very similar underlying rent data. But the BLS weights different aspects of that rent data differently for OER than for rents.OER increased by 0.56 per cent month-over-month in January, while primary residence rents increased 0.36 per cent month-over-month. This is extremely rare. If the BLS were to release the inflation data every day of the year, this type of discrepancy would occur only twice in a lifetime – or every 43 years.The confusing nature of recent economic data suggests to us that investors should interpret the data as the Fed would. Our economists don't think that recent data changed the views of FOMC participants and they still expect a first rate cut at the June FOMC meeting. All in all, we suggest that investors move to a neutral stance on the US treasury market while the irrationality of the data passes by.Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people to find the show.

As the deadline to fund the government rapidly approaches, Michael Zezas explains what economic effect a possible shutdown could have and whether investors should be concerned. ----- 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 the market impacts of a potential US government shutdown.It's Wednesday, February 28th at 2pm in New York.Here we go again. The big effort in Washington D.C. this week is about avoiding a government shutdown. The deadline to pass funding bills to avoid this outcome is this weekend. And while many investors tell us they’re fatigued thinking about this issue, others still see the headlines and understandably have concerns about what this could mean for financial markets. Here’s our quick take on it, specifically why investors need not view this as a markets’ catalyst. At least not yet.In the short term, a shutdown is not a major economic catalyst. Our economists have previously estimated that a shutdown shaves only about .05 percentage points off GDP growth per week, and the current shutdown risk would only affect a part of the government. So, it's difficult to say that this shutdown would mean a heck of a lot for the US growth trajectory or perhaps put the Fed on a more dovish path – boosting performance of bonds relative to stocks. A longer-term shutdown could have that kind of impact as the effects of less government money being spent and government employees missing paychecks can compound over time. But shutdowns beyond a few days are uncommon.Another important distinction for investors is that a government shutdown is not the same as failing to raise the debt ceiling. So, it doesn’t create risk of missed payments on Treasuries. On the latter, the government is legally constrained as to raising money to pay its bills. But in the case of a shutdown, the government can still issue bonds to raise money and repay debt, it just has limited authority to spend money on typical government services. So then should investors just simply shrug and move on with their business if the government shuts down? Well, it's not quite that simple. The frequency of shutdown risks in recent years underscores the challenge of political polarization in the U.S. That theme continues to drive some important takeaways for investors, particularly when it comes to the upcoming US election. In short, unless one party takes control of both Congress and the White House, there’s little domestic policy change on the horizon that directly impacts investors. But one party taking control can put some meaningful policies into play. For example, a Republican sweep increases the chances of repealing the inflation reduction act – a challenge to the clean tech sector. It also increases the chances of extending tax cuts, which could benefit small caps and domestic-focused sectors. And it also increases the chances of foreign policies that might interfere with current trends in global trade through the levying of tariffs and rethinking geopolitical alliances. That in turn creates incentive for on and near-shoring…an incremental cost challenge to multinationals.So, we’ll keep watching and keep you in the loop if our thinking changes.  Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts, or wherever you listen, and leave us a review. We’d love to hear from you.

As grocery and dining costs continue to increase, our analysts break down how this has affected consumers and when food prices may stabilize.----- Transcript -----Sarah Wolfe: Welcome to Thoughts on the Market. I'm Sarah Wolfe from the US economics team.Simeon Gutman: And I'm Simeon Gutman; Hardlines, Broadlines, and Food Retail Analyst.Sarah Wolfe: Today on the podcast, we'll discuss what's happening with food prices and how that's affecting the US consumer. It's Tuesday, February 27th at 10am in New York.It was almost exactly a year ago when I came on this podcast to talk about why eggs cost so much at the start of 2023. Here we are. It's a year later and food in the US still costs more. The overall inflation basket and personal consumption expenditures inflation was 2.6 per cent year over year in December; but dining out prices are still up 5.2 per cent. I'd like to admit that grocery prices are a little bit better. They're just a tad over 1 per cent. So we've seen a little bit more disinflation there. But overall food is still up and it's still expensive.Simeon, can you give us a little bit more color on what's actually going on here?Simeon Gutman: Yeah, so food prices measured by the CPI, as you mentioned, up about a per cent. The good news, Sarah, is that your eggs are actually deflating by about 30 per cent at the moment; so maybe you can buy a couple more eggs. But in general, we're following this descent that we started -- about almost two years ago where food prices were up double digits. A year ago, we were up mid single digits. And now we're down to this one per cent level. Looks like they're gonna hold. But so prices are coming in; but not necessarily deflating, but dis-inflating.Sarah Wolfe: Can you help me understand that a little bit better? You mentioned that some commodity prices are coming down, like food prices. So why is overall inflation for food still rising? And dining out, grocery stores, both of them are still seeing price increases.Simeon Gutman: Well, commodity prices, which is the most visible input to a lot of food items -- that's coming down in a lot of cases, and I'll mention some that haven't. But there's many other components into food pricing, besides the pure commodity. That's labor; you have freight; you have transportation. Those costs -- there's still some inflation running through the system -- and those costs make up a decent chunk of the total product costs. And that's why we're still seeing prices higher year over year on average for the entire group of products.Sarah Wolfe: How are grocery sales actually performing though? Are we seeing demand destruction from the higher pricing? Or has unit growth actually been holding up well?Simeon Gutman: First of all, total grocery sales are just slightly negative. We saw a little ray of hope in January, positive for the month; but likely driven by some stocking up ahead of weather events that happened in the country. So we were barely positive. It looked like we were getting out of the negative territory; but the first few weeks of February, we're back into the negative territory. Negative one, negative two per cent.Units are negative. Negative three to four per cent. If we look at CPI as sort of a proxy for the product categories that are doing better than others: dairy and fruit units, those are up mid to high single digits. And as I mentioned, we're seeing egg prices down significantly. We're also seeing a lot of deflation with fish and seafood as well as meat.So, and if you use that as a way to think about the various product categories that consumers are demanding, but overall industry sales are flat to slightly negative; and we think this negative cadence continues going forward.Sarah, let me turn it to you. You monitor the U. S. consumer closely. How big a bite of the US wallet is food right now? Groceries, eating out at restaurants, etc., and how does that compare to prior periods?Sarah Wolfe: Let's start high level with essential spending, which I consider to be groceries, energy and shelter. That typically averages about 40 per cent of household disposable income pre-COVID. And now if you add on all the price increases we've seen across all three categories, it's an additional 5 per cent of disposable income today.And this matters a lot when you're a lower income household and already over 90 per cent of your disposable income was going towards these essential categories pre-COVID. If I look at grocery prices alone, they're up 20 per cent on average since the start of the pandemic. And prior to COVID on a per household basis, they were spending $4,600 a year on groceries. And now that's $5,700 a year. More than a thousand dollars more each year on groceries.The last time we saw such extreme food inflation was the 1980s. Granted, I have to mention that we've also seen a really notable rise in disposable income too. So if you look at grocery spending as a share of disposable income, it's only marginally higher than i

Our Chief U.S. Equity Strategist reviews how the unusual mix of loose fiscal policy and tight monetary policy has benefited a small number of companies – and why investors should still look beyond the top five stocks.----- 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 investment implications of the unusual policy mix we face.It's Monday, February 26th at 12pm in New York. So let’s get after it.Four years ago, I wrote a note entitled, The Other 1 Percenters, in which I discussed the ever-growing divide between the haves and have-nots. This divide was not limited to consumers but also included corporates as well. Fast forward to today, and it appears this gap has only gotten wider.Real GDP growth is similar to back then, while nominal GDP growth is about 100 basis points higher due to inflation. Nevertheless, the earnings headwinds are just as strong despite higher nominal GDP – as many companies find it harder to pass along higher costs without damaging volumes. As a result, market performance is historically narrow. With the top five stocks accounting for a much higher percentage of the S&P 500 market cap than they did back in early 2020. In short, the equity market understands that this economy is not that great for the average company or consumer but is working very well for the top 1 per cent.  In my view, the narrowness is also due to a very unusual mix of loose fiscal and tight monetary policy. Since the pandemic, the fiscal support for the economy has run very hot. Despite the fact we are operating in an extremely tight labor market, significant fiscal spending has continued.In many ways, this hefty government spending may be working against the Fed. And could explain why the economy has been slow to respond to generationally aggressive interest rate hikes. Most importantly, the government’s heavy hand appears to be crowding out the private economy and making it difficult for many companies and individuals. Hence the very narrow performance in stocks and the challenges facing the average consumer.  The other policy variable at work is the massive liquidity being provided by various funding facilities – like the reverse repo to pay for these deficits. Since the end of 2022, the reverse repo has fallen by over $2 trillion. It’s another reason that financial conditions have loosened to levels not seen since the federal funds rate was closer to 1 per cent. This funding mechanism is part of the policy mix that may be making it challenging for the Fed’s rate hikes to do their intended work on the labor market and inflation. It may also help explain why the Fed continues to walk back market expectations about the timing of the first cut and perhaps the number of cuts that are likely to continue this year.  Higher interest rates are having a dampening effect on interest-rate-sensitive businesses like housing and autos as well as low to middle income consumers. This is exacerbating the 1 percenter phenomena and helps explain why the market’s performance remains so stratified. For many businesses and consumers, rates remain too high. However, the recent hotter than expected inflation reports suggest the Fed may not be able to deliver the necessary rate cuts for the markets to broaden out – at least until the government curtails its deficits and stops crowding out the private economy. Parenthetically, the funding of fiscal deficits may be called into question by the bond market when the reverse repo runs out later this year. Bottom line: despite investors' desire for the equity market to broaden out, we continue to recommend investors focus on high-quality growth and operational efficiency factors when looking for stocks outside of the top five which appear to be fully priced. Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts, or wherever you listen, and leave us a review. We’d love to hear from you. 

The valuations of stocks and corporate bonds, which have been driven largely by macroeconomic factors since 2020, are finally starting to reflect companies’ underlying performance. Our Head of Corporate Credit Research explains what that means for active 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 be talking about trends across the global investment landscape – and how we put those ideas together.It's Friday, February 23rd at 2pm in London.In theory, investing in corporate securities like stocks or corporate bonds should be about, well, the performance of those companies. But since the outbreak of COVID in 2020, financial markets have often felt driven by other, higher powers. The last several years have seen a number of big picture questions in focus: How fast could the economy recover? How much quantitative easing or quantitative tightening would we see? Would high inflation eventually moderate? And, more recently, when would central banks stop hiking rates, and start to cut.All of these are important, big picture questions. But you can see where a self-styled investor may feel a little frustrated. None of those debates, really, concerns the underlying performance of a company, and the factors that might distinguish a good operator from a bad one.If you’ve shared this frustration, we have some good news. While these big-picture debates may still dominate the headlines, underlying performance is starting to tell a different story. We’re seeing an unusual amount of dispersion between individual equities and credits. It is becoming a market of many.We see this in so-called pairwise correlation, or the average correlation between any two stocks in an equity index. Globally, that’s been unusually low relative to the last 15 years. Notably options markets are implying that this remains the case. We see this in credit, where solid overall performance has occurred along-side significant dispersion by sector, maturity, and individual issuer, especially in telecom, media and technology.We see this within equities, where my colleague Mike Wilson, Morgan Stanley’s CIO and Chief US Equity Strategist, notes that the S&P 500 and global stocks more broadly have decoupled from Federal Reserve rate expectations.And we see this in performance. More dispersion between stocks and credit would, in theory, create a better environment for Active Managers, who attempt to pick those winners and losers. And that’s what we’ve seen. Per my colleagues in Morgan Stanley Investment Management, January 2024 was the best month for active management since 2007.The post-COVID period has often felt dominated by large, macro debates. But more recently, things have been changing. Individual securities are diverging from one another, and moving with unusual independence. That creates its own challenges, of course. But it also suggests a market where picking the right names can be rewarded. And we think that will be music to many investors' ears.Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts, or wherever you listen, and leave us a review. We’d love to hear from you.

As traditional financial institutions tightened their lending standards last year, private credit stepped in to fill some of the gaps. But with rates now falling, public lenders are poised to compete again on the terrain that private credit has transformed.----- Transcript -----Vishy Tirupattur: 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 we’ll have a conversation with Joyce Jiang, our US leveraged finance strategist, on the topic of private credit.It's Thursday, February 22nd at noon in New York.Joyce, thank you for joining. Private credit is all over the news. Let’s first understand – what is private credit. Can you define it for us?Joyce Jiang: There isn't a consensus on the definition of private credit. But broadly speaking, private credit is a form of lending extended by non-bank lenders. It's negotiated privately on a bilateral basis or with a small number of lenders, bypassing the syndication process which is standard with public credit.This is a rather broad definition and various types of debt can fall under this umbrella term; such as infrastructure, real estate, or asset-backed financing. But what's most relevant to leveraged finance – is direct lending loans to corporate borrowers.Private credit lenders typically hold deals until maturity, and these loans aren't traded in the secondary market. So, funding costs in private credit tend to be higher as investors need to be compensated for the illiquidity risk. For example, between 2017 and now, the average spread premium of direct lending loans is 250 basis points higher compared to single B public loans.Vishy Tirupattur: That’s very helpful Joyce. The size of the private credit market has indeed attracted significant attention due to its rapid growth. You often see estimates in the media of [the] size being around $1.5 to $1.7 trillion. Some market participants expect the market to reach $2.7 trillion by 2027. Joyce, is this how we should think about the market? Especially in the context of public corporate credit market?Joyce Jiang: I've seen these numbers as well. But to be clear, they reflect assets under management of global private debt funds. So not directly comparable to the market size of high yield bonds or broadly syndicated loans.In our estimate, the total outstanding amount of US direct lending loans is in the range of $630-710 billion. So, we see the direct lending space as roughly half the size of the high yield bonds or broadly syndicated loan markets in the US.Vishy Tirupattur: Understood. Can you provide some color on the nature of private credit borrowers and their credit quality in the private credit space?Joyce Jiang: Traditionally, private credit targets small and medium-sized companies that do not have access to the public credit market. Their EBITDA is typically one-tenth the size of the companies with broadly syndicated loans. However, this is not representative of every direct lending fund because some funds may focus on upper middle-market companies, while others target smaller entities.Based on the data that’s available to us, total leverage and EBITDA coverage in private credit are comparable to a single B to CCC profile in the public space. Additionally, factors such as smaller size, less diversified business profiles, and limited funding access may also weigh on credit quality.Given this lower quality skew and smaller size, there have been concerns around how these companies can navigate the 500 basis point of rate hikes. However, based on available data, two years into the hiking cycle, coverage has deteriorated – mainly due to the floating-rate heavy nature of these capital structures. But on the bright side, leverage generally remained stable. Similar to what we’ve seen in public credit.Now let me turn it around to you, Vishy. What about defaults in private credit and how do they compare to public credit markets?Vishy Tirupattur: So when it comes to defaults, unlike in the public markets, data that cover the entire private credit market is not really there. We have to depend on the experience of sample portfolios from a variety of sources. These data tend to vary a lot, given the differences in defining what a default is and how to calculate default rates, and so on. So, all of this is a little bit tricky. We should also keep in mind that the data we do have on private credit is over the last few years only. So, we should be careful about generalizing too much.That said, based on available data we can say that the private credit defaults have remained broadly in the same range as the public credit. In other words, not substantially higher default rates in the private credit markets compared to the public credit defaults.A few things we should keep in mind as we consider this relatively benign default picture. What contributes to this?First, priv

Central banks in the U.S. and Europe are looking to cut rates this year, but the path to those cuts differs greatly. Our Global Chief Economist explains this stark dichotomy.----- Transcript -----Welcome to Thoughts on the Market. I’m Seth Carpenter, Morgan Stanley’s Global Chief Economist. Along with my colleagues bringing you a variety of perspectives, today I’ll be talking about the challenges for monetary policy on both sides of the Atlantic.It’s Wednesday, Feb 21st at 10am in New York.The Fed, the Bank of England, and the ECB all hiked rates to fight inflation, and now we are looking for each of them to cut rates this year. For our call for a June Fed rate cut, both growth and inflation matter. But our call for a May and June start on the east side of the Atlantic depends only on inflation. “Data dependent” here has two different meanings.At the January Fed meeting, Chair Powell said continued disinflation like in prior months was needed to cut. But he also emphasized that disinflation needs to be sustainably on track; not simply touching 2 per cent. Until Thursday’s retail sales data, the market narrative began to flirt with a possible re-acceleration of the US economy, spoiling that latter condition of inflation going sustainably to target. January inflation data showed strength in services in particular, and payrolls showed a tight labor market that might pick up steam.The retail sales data pushed in the opposite direction, and we think that the slower growth will prevail over time. And for now, market pricing is more or less consistent with our call for 100 basis points of cuts this year, starting in June.Now the Fed’s situation is in stark contrast to that of the Bank of England. Last week’s UK data showed a technical recession in the second half of 2023. And while the UK economy is not collapsing, a strongly surging economy is not a risk either. But until the last print, inflation in the UK had been stubbornly sticky. The January print came in line with our UK economist’s call, but below consensus. But still, one swallow does not mean spring, and the recent inflation data do not guarantee our call for a May rate cut will happen. Rather, broader evidence that inflation will fall notably is needed; and for that reason, the risks to our call are clearly skewed to a later cut.For the ECB, the inflation focus is the same. And on Thursday, President Lagarde warned against cutting rates too soon – a particularly telling comment in light of the weak growth in the Euro area. Recent data releases suggest that not only did Germany’s GDP decline by three-tenths of a per cent in Q4 of 2023; the second largest economy, France, also experienced stagnation in the second half of the year. And with this weakness expected to persist – well, we forecast a weak half per cent growth this year and about only 1 per cent growth in 2025.So, why is this dichotomy so stark? The simple answer is the weak state of the economy in the UK and in Europe. More fundamentally, the drivers of inflation started with a jump in food and energy prices, and then surging consumer goods prices as disrupted supply chains met consumer spending shifting toward goods. That inflation has since abated but services inflation tends to be more tied to the real side of the economy. And for the US in particular, housing inflation is driven by the state of the labor market over time.The Bank of England and the ECB are waiting for services inflation to respond to the already weak economy, and there is little risk of a reacceleration of inflation if that happens. In contrast, the Fed cannot have conviction that inflation won’t reaccelerate because of the continued resilience on the real side of the economy. The retail sales data will help, but the pattern needs to continue.Thanks for listening. If you enjoy the show, please leave us a review on Apple podcasts, and share Thoughts on the Market with a friend or colleague today.

Our Head of Thematic Research in Europe previews the possible next phase of the AI revolution, and what investors should be monitoring as the technology gains adoption.----- Transcript -----Welcome to Thoughts on the Market. I’m Edward Stanley, Morgan Stanley’s Head of Thematic Research in Europe. Along with my colleagues bringing you a variety of perspectives, today I’ll discuss the latest developments around AI Adopters. It’s Tuesday, February the 20th, at 2pm in London.The current technology shift driven by AI is progressing faster than any tech shift that came before it. I came on the show at the beginning of the year to present our thesis – while 2023 was the “Year of the Enablers,” those first line hardware and software companies; 2024 is going to be the “Year of the Adopters,” companies leveraging the Enablers’ hardware and software to better use and monetize their own data for this generative AI world.And the market is still sort of treating this as a “show me” story. Enablers are still driving returns. Around half of the S&P’s performance this year can be attributed to three Enabler stocks. Yet, be it Consumer or – more importantly – Enterprise adoption, monthly data we’re tracking suggests AI adoption is continuing at a rapid pace.So let me paint a picture of what we’re actually seeing so far this year.There has been a widening array of consumer-facing chatbots. Some better for general purpose questions; some better at dealing with maths or travel itineraries; others specialized for creating images or videos for influencers or content creators. But those proving to be the stickiest, or more importantly leading to major behavioral day-to-day changes, are coding assistants, where the productivity upside is now a well-documented greater than 50 per cent efficiency gain.From a more enterprise perspective, open-source models are interesting to track. And we do, almost daily, to see what’s going on. The people and companies downloading these models are likely to be using them as a starting point – for fine-tuning their own models.Within that, text models which form the backbone of most chatbots you will have interacted with, now account for less than 50 per cent of all models openly available for download. What’s gaining popularity in its place is multi-modal models. This is: models capable of ingesting and outputting a combination of text, image, audio or video.Their applications can range from disruption within the music industry, personalized beauty advice, applications in autonomous driving, or machine vision in healthcare. The list goes on and on. The speed of AI diffusion into non-tech sectors is really bewildering.Despite all these data points, suggesting consumer and enterprise adoption is progressing at a rapid clip, Adopter stocks continue to underperform those picks-and-shovels Enablers I mentioned. The Adopters have re-rated modestly in the first month and a half of the year – but not the whole group. Of course, this is a rapidly changing landscape. And many companies have yet to report their outlook for the year ahead. We’ll continue to keep you informed of the newest developments as the years progress.Thanks for listening. If you enjoy the show, please leave a review on Apple Podcasts and share Thoughts on the Market with a friend or a colleague today.

Our Fixed Income Strategist outlines commercial real estate’s post-pandemic challenges, which could make regional bank lenders vulnerable. ----- Transcript -----Welcome to Thoughts on the Market, I’m Vishy Tirupattur, Morgan Stanley’s Chief Fixed Income Strategist. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the challenges of the commercial real estate markets. It's Friday, Feb 16th at 3 pm in New York.Commercial real estate – CRE in short – is back in the spotlight in the aftermath of the loan losses and dividend cuts announced by New York Community Bancorp. Lenders and investors in Japan, Germany, and Canada have also reported sizable credit losses or write-downs related to US commercial real estate. The challenges in CRE have been on a slow burn for several quarters. In our view, the CRE issues should be scrutinized through the lenses of both lenders and property types. We see meaningful challenges in both of them.From the lenders’ perspective, we now estimate that about a trillion and a half of commercial real estate debt matures by the end of 2025 and needs to be refinanced; about half of this sits on bank balance sheets.The regulatory landscape for regional banks is changing dramatically. While the timeline for implementing these changes is not finalized, the proposed changes could raise the cost of regional bank liabilities and limit their ability to deploy capital; thereby pressuring margins and profitability. This suggests that the largest commercial real estate lender – the regional banking sector – might be the most vulnerable.Office as a property type is confronting a secular challenge. The pandemic brought meaningful changes to workplace practice. Hybrid work has now evolved into the norm, with most workers coming into the office only a few days a week, even as other outdoor activities such as air travel or dining out have returned to their pre-Covid patterns. This means that property valuations, leasing arrangements, and financing structures must adjust to the post-pandemic realities of office work. This shift has already begun and there is more to come.It goes without saying, therefore, that regional banks with office predominant in their CRE exposures will face even more challenges.Where do we go from here? Property valuations will take time to adjust to shifts in demand, and repurposing office properties for other uses is far from straightforward. Upgrading older buildings turns out to be expensive, especially in the context of energy efficiency improvements that both tenants and authorities now demand. The bottom line is that the CRE challenges should persist, and a quick resolution is very unlikely.Is it systemic? We get this question a lot. Whether or not CRE challenge escalates to a broader system-wide stress depends really on one’s definition of what systemic risk is. In our view, this risk is unlikely to be systemic along the lines of the global financial crisis of 2008. That said, strong linkages between the regional banks and CRE may impair these banks’ ability to lend to households and small businesses. This, in turn, could lead to lower credit formation, with the potential to weigh on economic growth over the longer term.Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

Michael Zezas, Global Head of Fixed Income and Thematic Research, gives his take on how the U.S. election may influence European policy on national security, with implications for the defense and cybersecurity sectors.----- 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 the impact of the US election on global security and markets. It's Thursday, February 15th at 3pm in New York.Last week I was in London, spending time with clients who – understandably – are starting to plan for the potential impacts of the US election. A common question was how much could change around current partnerships between the US and Europe on national security and trade ties, in the event that Republicans win the White House. The concern is fed by a raft of media attention to the statements of Republican candidate, Former President Trump, that are skeptical of some of the multinational institutions that the US is involved in – such as the North Atlantic Treaty Organization, or NATO. Investors are naturally concerned about whether a new Trump administration could meaningfully change the US-Europe relationship. In short, the answer is yes. But there’s some important context to keep in mind before jumping to major investment conclusions.For example, Congress passed a law last year requiring a two-thirds vote to affirm any exit from NATO, which we think is too high a hurdle to clear given the bipartisan consensus favoring NATO membership. So, a chaotic outcome for global security caused by the dissolution of NATO isn’t likely, in our view.That said, an outcome where Europe and other US allies increasingly feel as if they have to chart their own course on defense is plausible even if the US doesn’t leave NATO. A combination of President Trump’s rhetoric on NATO, a possible shift in the US’s approach to the Russia-Ukraine conflict, and the very real threat of levying tariffs could influence European policymakers to move in a more self-reliant direction. While it's not the chaotic shift that might have been caused by a dissolution of NATO, it still adds up over time to a more multipolar world. For investors, such an outcome could create more regular volatility across markets. But we could also see markets reflect this higher geopolitical uncertainty with outperformance of sectors most impacted by the need to spend on all types of security – that includes traditional suppliers of military equipment as well companies providing cyber security. Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts, or wherever you listen, and leave us a review. We’d love to hear from you.

Key developments in China and the U.S. will impact global trade and the growth outlook for Asia in 2024.----- Transcript -----Welcome to Thoughts on the Market. I’m Chetan Ahya, Morgan Stanley’s Chief Asia Economist. Along with my colleagues bringing you a variety of perspectives, today I’ll discuss the risk of re-emerging trade tensions and how this might impact the growth outlook for Asia. It’s Thursday, Feb 15, at 9 AM in Hong Kong.Trade tensions took a back seat during the pandemic when supply-chain disruptions led to a mismatch in the supply-demand of goods and created inflationary pressures around the world. However, these inflationary pressures are now receding and, in addition, there are two developments that we think may cause trade tensions to emerge once again.First is China’s over-investment and excess capacity. China continues to expand manufacturing capacity at a time when domestic demand is weakening and its producers are continuing to push excess supply to the rest of the world.China’s role as a large end-market and sizeable competitor means it holds significant influence over pricing power in other parts of the world. This is especially the case in sectors where China’s exports represent significant market share.For instance, China is already a formidable competitor in traditional, lower value-added segments like household appliances, furniture, and clothing. But it has also emerged as a leading competitor in new strategic sectors where it is competing head-on with the Developed Market economies. Take sectors related to energy transition.China has already begun cutting prices for key manufactured goods, such as cars, solar cells, lithium batteries and older-generation semiconductors over the last two quarters.The second development is the upcoming US presidential election. The media is reporting that if reelected, former President Trump would consider trade policy options, such as imposing additional tariffs on imports from China, or taking 10 per cent across-the-board tariffs on imports from around the world, including China.Drawing on our previous work and experience from 2018, we believe the adverse impact on corporate confidence and capital expenditure will be more damaging than the direct effects of tariffs. The uncertainty around trade policy may reduce the incentive for the corporate sector to invest. Moreover, this time around, the starting point of growth is weaker than was the case in 2018, suggesting that there are fewer buffers to absorb the effects of this potential downside.Will supply chain diversification efforts help provide an offset? To some extent yes, in a scenario where the US imposes tariffs on just China. The acceleration of friend-shoring would help; but ultimately the lower demand from China would still be a net negative. However, in the event that the US imposes symmetric tariffs on all imports from all economies, the effects would likely be worse.Bottom line, if trade tensions do re-emerge, we think it will detract from Asia’s growth outlook.Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or a colleague today.

Our expert panel discusses how the Red Sea situation is affecting the global economy and equity markets, as well as key sectors and the shipping industry.----- Transcript -----Jens Eisenschmidt: Welcome to Thoughts on the Market. I am Jens Eisenschmidt, Morgan Stanley's Chief Europe Economist.Marina Zavolock: And I'm Marina Zavolock, Chief European Equity Strategist.Cedar Ekblom: And I'm Cedar Ekblom, Shipping and Logistics Analyst.Jens Eisenschmidt: And on this special episode of the podcast, we will discuss the ongoing Red Sea disruptions and the various markets and economic dislocations caused by it. It's Tuesday, February 13th, 6pm in Frankfurt.Marina Zavolock: And 5pm in London.Marina Zavolock: 12 per cent of global trade and 30 per cent of container trade passes through the Suez Canal in Egypt, which connects the Mediterranean Sea and the Red Sea. Safety concerns stemming from the recent attacks on commercial ships in the Red Sea have driven the majority of container liners to divert trade around the Cape of Good Hope, pushing up container freight rates more than 200 per cent versus December of last year on the Asia to Europe route.Last week, our colleague Michael Zezas touched briefly on the situation in the Red Sea. Now we'd like to dig deeper and examine this from three key lenses. The European economy, the impact on equity markets and industries, as well as on global container shipping in particular.Marina Zavolock: So Cedar, let's start with you. You’ve had a high conviction call since freight rates peaked in the middle of January – that container shipping rates overshot and were likely to decline. We've started to see the decline. How do you see this developing from here?Cedar Ekblom: Thanks, Marina. Well, if we take a step back and we think about how far container rates have come from the peak, we're about 15 per cent lower than where we were in the middle of January. But we're still nearly 200 per cent ahead of where we were on the 1st of December before the disruption started.Cedar Ekblom: The reason why we're so convicted that freight rates are heading lower from here really comes down to the supply demand backdrop in container shipping. We have an outlook of significant excess supply playing out in [20]24 and extending into [20]25. During the COVID boom, container companies enjoyed very high freight rates and generated a lot of cash as a result. And they've put that cash to use in ordering new ships. All of this supply is starting to hit the market. So ultimately, we have a situation of too much supply relative to container demand.Another thing that we've noticed is that ships are speeding up. We have great data on this. And since boats have been diverted around the Cape of Good Hope, we've seen an increase in sailing speeds, which ultimately blunts the supply impact from those ships being diverted.And then finally, if we look at the amount of containers actually moving through the Suez Canal, this is down nearly 80 per cent year over year.Sure, we're not at zero yet, and there is ultimately [a] downside to no ships moving through the canal. But we think we are pretty close to the point of maximum supply side tension. That gives us conviction that freight rates are going lower from here.Jens Eisenschmidt: Thank you, Cedar, for this clear overview of the outlook for the container shippers. Marina, let's widen our lens and talk about the broader impact of the Red Sea situation. What are the ripple effects to other sectors and industries and are they in any way comparable to supply chain disruptions we saw as a result of the COVID pandemic?Marina Zavolock: So what we've done in equity strategy is we've worked with over 10 different sector analyst teams where we've seen the most prominent impacts from the situation in the Red Sea. We've worked as well with our commodity strategy team. And what we were interested in is finding the dislocations in stock moves related to the Red Sea disruptions in light of Cedar's high conviction and differentiated view.And what we found is that if you take the stocks that are pricing in the most earnings upside, and you look at them on a ratio basis versus the stocks that have priced in the most earnings downside. That performance along with container freight rates peaked sometime in January and has been declining. But there's more to go in light of Cedar's view in that decline.We believe that these moves will continue to fade and the bottom group, the European retailers that are most exposed. They have fully priced in the bear case of Red Sea disruptions continuing and also that the freight rate levels more importantly stay at these recent peaks. So we believe that ratio will continue to fade on both sides.The second point is you have some sectors, like European Airlines, where there's also been an impact. Air freight yields have risen by 25 per cent in

Despite a likely softening of the labor market, U.S. consumer spending should remain healthy for 2024.----- Transcript -----Welcome to Thoughts on the Market. I’m Sarah Wolfe from the US Economics Team. Along with my colleagues bringing you a variety of perspectives; today I’ll give you an update on the US consumer. It’s Monday, February 12, at 10 AM in New York.Lately, there's been a lot of mixed data on the health of the US consumer. We saw a very strong holiday spending in November and December; very strong jobs  reports in recent months. But we’re forecasting somewhat softer data in January for retail sales. And we know that delinquencies have been rising for households.When we look towards the rest of 2024, we're still expecting a healthy US consumer based on three key factors. The first is the labor market. Obviously, the labor market has been holding up very well and we’ve actually been seeing a reacceleration in payrolls in the last few months. What this means is that real disposable income has been stronger, and it’s going to remain solid in our forecast horizon. We do overall expect some cooling in disposable income though, as the labor market softens. Overall, this is the most important thing though for consumer spending. If people have jobs, they spend money.The second is interest rates. This has actually been one of the key calls for why we did not expect the US consumer to be in a recession two and half years ago, when the Fed started raising interest rates. There’s a substantial amount of fixed rate debt, and as a result less sensitivity to debt service obligations. We estimate that 90 per cent of household debt is locked in at a fixed rate. So over the last couple of years, as the Fed has been raising interest rates, we’ve seen just that: less sensitivity to higher interest rates. Right now, debt service costs are still below their 2019 levels. We’re expecting to see a little upward pressure here over the course of this year – as rates are higher for longer, as housing activity picks up a bit; but we expect there will be a cap on it.The last thing is what’s happening on the wealth side. We’ve seen a 50 percent accumulation in real estate wealth since the start of the pandemic. And we’re expecting to see very little deterioration in housing wealth this year. So people are still feeling pretty good; still have a lot of home equity in their homes. So overall, good for consumer spending. Good for household sentiment.So to sum it up, this year, we’re seeing a slowing in the US consumer, but still relatively strong. And the fundamentals are still looking good.Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.