Thoughts on the Market

The profound demographic changes underway in countries around the world will require innovative, socially focused solutions in sectors including health care, finance and infrastructure.----- Transcript -----Stephen Byrd: Welcome to Thoughts on the Market. I'm Stephen Bryd, Morgan Stanley's Global Head of Sustainability Research. Mike Canfield: And I'm Mike Camfield, Head of EMEA Sustainability Research. Stephen Byrd: On this special episode of the podcast, we'll discuss the social factors within the environmental, social and governance framework, or ESG, as a source of compelling opportunities for investors. It's Tuesday, August 8th, at 10 a.m. in New York. Mike Canfield: And 3 p.m. in London. Stephen Byrd: At Morgan Stanley Research. We believe that investing in social impact is critical to addressing some of the most pressing challenges facing our world today, such as inequality, poverty, lack of access to health care and education, and the repercussions of climate change. Traditional methods like philanthropy and government aid are a piece of the puzzle, but alone they can't address with the breadth and scale of these issues. So, Mike, looking back over the last couple of decades, investors have sometimes struggled with the social component of ESG investing. Some of the main challenges have been around data availability, the potential for social washing and the capacity to influence systemic change. How are market views on social investing changing right now, and what's driving this shift? Mike Canfield: It has historically been quite easy for investors to dismiss social, it's too subjective, too hard to measure, overly qualitative, and perhaps not even material in moving share prices. Increasingly, we do find investors recognize the vast and intractable social problems we face, whether that's structural shifts in workforces with countries like Korea, Japan and large parts of Europe projecting working age population decline by double digit percentage in the next 15 to 20 years, significant growth in urbanization or growing middle class populations in countries around the world. Investors also increasingly understand the interconnectivity of stakeholders across society, be that supranational organizations or governments or the corporate world, or even citizens themselves. Concurrently, it's becoming clear that corporate purpose and culture are critical considerations for prospective and current employees, as well as end customers themselves who are prepared to vote with both their wallets and their feet. All that said, we do note the overall impact at EM has garnered in 18% kagger over the last five years to nearly $213 billion with the Global Impact Investing Network pointing out that over 60% of impact investors are targeting some of the UN's socially focused SDGs. Notably goal eight around decent growth, goal five, around gender equality, goal ten around reduced inequalities broadly and goal three good health and well-being. In terms of drivers, we're seeing the realization rapidly dawning amongst investors that the profound changes underway in society and the climate will drive the need for innovative, socially focused solutions in a number of sectors, from health care to finance to infrastructure, as well as significant challenges to resilience and adaptation for industries around the world. With huge shifts in demographics coming whether through urbanization or migration, aging populations in some countries or declining fertility rates, the investing landscape is set to change dramatically across sectors, with change manifesting in anything from shifting consumer preferences to education access and outcomes to greater need for assistive technologies, to substantial food production issues, to financial system access and inclusion, or even simply addressing rapidly increasing demand for basic services and clean energy. Stephen Byrd: Thanks, Mike. So what are some of the core themes in social investing? Mike Canfield: Yeah in our recent social skills notes, we did identify five truly global, fast growing and compelling investment themes you can focus on under the broad umbrella of what we would call social investing. Firstly, access to health care, which includes but obviously not limited to pharmaceuticals, vaccines, orthopedics, medical devices, elderly care, sanitation and hygiene, women's health and sexual health. Secondly, nutrition and fitness, which encompasses things like infant nutrition, healthy or healthier food and beverage options, alternative proteins, food safety and food packaging. Thirdly, social infrastructure, which includes mobility, digital and communication systems, connectivity, health care and education facilities, community and affordable housing and access to clean energy. Fourthly, education and reskilling, which includes everything from pre-K, K-12, higher education, corporate and lifelong learning. Our colleague Brenda recently wrote on th

The residential housing market continues to face limited inventory, low affordability and high mortgage rates, but the worst may have passed.----- Transcript -----Michelle Weaver: Welcome to Thoughts on the Market. I'm Michelle Weaver from the Morgan Stanley U.S. Equity Strategy Team. Jim Egan: And I'm Jim Egan, Co-Head of U.S. Securities Products Research. Michelle Weaver: On this special episode of the podcast, we'll discuss the state of the housing market. It's Monday, August 7th at 10 a.m. in New York. Michelle Weaver: We recently did a deep dive into the global housing market and found that cyclical housing headwinds are significant but approaching a peak globally. And there are a few important things to keep in mind when thinking about this housing cycle. First is that higher interest rates and high home prices have kept affordability low. Second, housing is undersupplied in most economies. And third, there is a big gap between new and existing mortgages. Jim, can you start by talking us through how the structure of U.S. mortgages are different from what's common in other parts of the world? Jim Egan: Absolutely. So the structure of various mortgage markets has important implications for the pass through of monetary policy changes. And average mortgage terms vary significantly across the globe, from roughly 70% adjustable rate in Australia on one end to nearly all 30 year fixed rate mortgages here in the United States. Though we would say the duration has generally lengthened post the great financial crisis for most economies. Longer duration mortgages lower the sensitivity of housing markets to the policy rate, both in terms of timing and cyclicality. But for the U.S., that 30 year fixed rate, fully amortizing mortgage that's freely repayable at any point in time with no penalty to the borrower, that's a unique feature for our mortgage market. And it's something that's made possible by the fact that roughly 2/3 of that $13 trillion mortgage market is guaranteed by the U.S. government. And that in turn contributes to the sizable and relatively liquid securitization market, which effectively democratizes the risk across a much broader range of investors than just the lenders themselves. Michelle Weaver: And how have high mortgage rates impacted home sales in the U.S.? If someone's looking to buy a home, are they able to even find listings? Jim Egan: I think that's an important question, and that's really contributed to our bifurcated housing narrative that we've discussed on this podcast in the past. Mortgage rates go up, affordability deteriorates, but not for current homeowners. They become very locked in at that lower rate and disincentivized to really list their home for sale, and that's why we've seen existing listings fall to 40 year lows. We say 40 year lows because that's just as far back as the data goes, this is the lowest we've seen that. If they're not listing their homes for sale, that means that they're also not buying homes on the follow, and that really brings sales volumes down. That's why in the cycle, existing home sales have fallen twice as fast as they did during the great financial crisis, despite the fact that home prices have remained incredibly protected at near those peaks. Now, let me turn it to you, Michelle. You cover U.S. equities and the housing market has many different links to the equity market. When someone buys a new home, they make a lot of associative purchases, like buying new furniture or making improvements around the house. How have home improvement companies fared? Michelle Weaver: Sure, so a lot of people made improvements to their houses during COVID to make staying indoors a little bit more comfortable. And post-COVID demand reversion has been a really important driver for the past few years. If you make home improvements one year, you're not going to need to make them again for, you know, several years. And so we think that the reversion of COVID driven overconsumption is largely complete now. Housing prices and housing turnover, these fundamental metrics governing the housing market are likely to resume being the core drivers for the home improvement space from here. Jim Egan: Now, banks also have a relationship with the housing market through mortgage lending. What've these higher mortgage rates meant for banks? Michelle Weaver: Interest rates are very high and consequently mortgage rates are also very high. And this has put a damper on demand for new mortgages at banks. There's also a large gap between existing mortgage rates and new mortgage rates, like we were discussing earlier. And in the U.S., homeowners refinanced and masked during COVID when mortgage rates were extremely, extremely low and locked in these rates. Now, less than 1% of American mortgages would be considered in the money to refinance or essentially make sense to refinance. So mortgage originations are expected to continue to stay very low.

Moves by the Bank of Japan, the downgrade of the U.S. credit rating and new economic data may all have contributed to a spike in bond yields and fall in stock prices.----- Transcript -----Welcome to Thoughts in the Market. I'm Andrew Sheets, Fixed Income Strategist for 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, August 4th at 2 p.m. in London. After a placid July, August has opened with a bout of volatility. In one sense, this isn't unusual. July is historically one of the best months of the year for global equity performance, August and September are two of the worst. But the way markets have weakened has been more striking. Long term bond yields rose sharply this week, with the U.S. 30 year bond yield rising 27 basis points over the course of the last five days. Long term rates in the UK and Germany also rose sharply. Equity markets fell. Those facts are clear and indisputable. But why interest rates rose so much, and whether they're responsible for equity weakness? That, ladies and gentlemen of the jury, is a lot less clear. Indeed, there's more than one driver of last week's events. Maybe it's the Bank of Japan, which late last week raised the effective cap on Japanese government bond yields, which went on to rise sharply over the course of this week. Maybe it's the Fitch rating agency, which on Tuesday downgraded the credit rating of the United States by one notch to AA+. And maybe it's the US economic data, which has been quite strong, something that usually corresponds to higher rates. There's also the way that yields have risen. While long term U.S. interest rates rose sharply, shorter two year yields barely budged over the last week and in the UK and Germany, those two year yields actually fell. The large move higher in U.S. rates has also occurred while the market's actually lowered its assumption about long run inflation, another unusual occurrence. In reality, the drivers of these recent events might be all of the above. The initial rise in U.S. yields matched the move higher in Japanese rates, almost one for one. But we do think that move in Japanese rates is now mostly complete. The timing of Fitch's downgrade, which was somewhat unusual, given that there hasn't been any recent legislation to change fiscal policy and the fact that it happened at the start of August, a month that often sees less liquidity, might have given it an outsized impact. And the economic data has been good, suggesting that the U.S. economy for now is handling higher rates, a development that would generally support higher yields and a steeper curve. And in terms of the global equity reaction, some perspective is probably helpful. While last week saw higher yields and lower prices, since early April, both nominal yields, real yields and global stock prices have all risen together and by quite a bit. Now, it's possible that this relationship between stocks and bonds shifted some this week based on simply how much equity valuations have appreciated, as my colleague Mike Wilson, Morgan Stanley's Chief Equity Strategist, has noted recently. Higher yields make a focus on valuation more important and also make it more essential that good data, the best version of that higher yield story, continues to come through. In bonds, meanwhile, the recent rise in yields is boosting expected returns going forward. On Morgan Stanley's base case forecast, the U.S. ten year Treasury through the middle of 2024 will return over 10%. Thanks for listening. Subscribe to Thoughts of the Market on Apple Podcasts or wherever you listen, and leave us a review. We'd love to hear from you.

While rate hikes and work from home are depressing office real estate in the U.S., the market is vast globally, and there are clear differences across regions and asset types, ranging from occupancy to design to financing.----- Transcript -----Welcome to Thoughts on the Market. I'm Ron Kamdem, Head of Morgan Stanley's U.S. Real Estate Investment Trust and Commercial Real Estate Research. Today, I'll be talking about our outlook for the future of the global office real estate market. It's Thursday, August 3rd at 10 a.m. in New York. There is more than 6 billion square feet of office space across the globe with value of more than 4 trillion U.S. dollars. Within this vast market, there are clear differences across the regions, ranging from occupancy to design to financing. In the U.S., office real estate fundamentals this cycle appear worse than they were during the great financial crisis of 2008 in terms of occupancy, subleasing activity and office utilization. In fact, overall, U.S. office utilization seems to be stalling at 20 to 55% compared to other regional markets in the 60 to 80% range. This trend will likely remain in place as key U.S. tenants are looking to reduce office space by about 10% over the next three years. Work from home and hybrid arrangements are the biggest drivers, particularly with business services and technology focused firms on the West Coast. In addition, sharp rate hikes and regional bank weakness have driven up loan-to-value ratios in the U.S. versus global peers. Looking at other countries, Australia and Mexico may be having similar problems as far as work from home is concerned, but average loan-to-value ratios are much lower, which lenders typically consider a good sign. Mainland China is unique among our coverage markets for having declining rates. Hong Kong seems to be the most undervalued and closer to bottoming, and we prefer it over Singapore, Japan and Australia. In Latin America, we remain on the sidelines. Despite the increase in net absorption growth, the office real estate market is still showing a slow paced recovery from pandemic levels, especially in Mexico. All in all, global office markets remain 10 to 15% oversupplied. While higher vacancy is an issue impacting all countries, an important emerging theme across the various region as a bias towards newer and greener buildings. Our channel checks with tenants and landlords suggests that as employees, especially the younger cohorts, choose to work for organizations with strong climate change values, employers will seek to establish offices and more energy efficient buildings. Also, in an effort to encourage office attendance and in-person collaboration, occupiers are gravitating toward younger buildings with more attractive amenities. Overall, as we look across regions and countries, one common thread is what we call "bifurcation", that is a widening gap between the class-A prime assets and the rest of the commodity B&C space, which is happening at an accelerating pace. We believe it would take 5 to 13 years for the global office market to return to pre-COVID occupancy levels. However, the class A prime assets can recover in half the time as the rest of the market and newer, greener buildings in particular are likely to be most favored. Bottom line for the U.S looking at fundamentals is that New York and Boston on the East Coast are showing the most resilient trends. Downtown L.A., downtown San Francisco, downtown Seattle and even Chicago are showing the most headwinds, sunbelt markets are somewhere in between but have been lowing. 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.

The recent downgrade to Fitch's U.S. credit rating should have less of an impact on demand for bonds than the ongoing trajectory of inflation.----- Transcript -----Welcome to the Thoughts on the Market. I'm Michael Zezas, Global head of Fixed Income and Thematic Research for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the impact of the U.S. downgrade to bond markets. It's Wednesday, August 2nd at 11 a.m. in New York. Yesterday, one of the three main rating agencies, Fitch, downgraded the U.S's credit rating to AA+ from AAA. The U.S. now only has one AAA rating left. Fitch attributed the change to the US's growing debt burden and a, quote, "erosion of governance", unquote, specifically referring to debt ceiling standoffs over the past decade as a cause for concern. The tone of this language may understandably elicit concern from investors, but practically speaking, does it actually matter? In our view, in the short term, probably not. First off, the downgrade doesn't communicate anything investors didn't already know about the level and trajectory of U.S. debt and deficits. Second, it doesn't tell us anything forward looking about arguably the biggest factor influencing whether or not investors want to own bonds at their current prices, inflation. Third, a ratings downgrade doesn't appear to trigger any structural change in bond demand. Unpacking that last point a bit more, let's look at the main holders of U.S. Treasuries, the Fed, banks, overseas holders and households. The Fed is under no obligation to adjust Treasury holdings based on credit ratings. It's a similar situation for banks whose incentive to own treasuries is based on risk weightings determined by U.S. regulators, we view as very unlikely to adjust regulations to align with a ratings opinion they likely don't agree with. Overseas holders typically own treasuries because they have U.S. dollars from doing business with U.S. customers, and we don't see their desire to do business with U.S. companies and consumers changing because of a ratings opinion. As for households, it's possible that some mutual funds and separately managed accounts could want to sell treasuries if they're under a mandate to only own assets rated AAA, but we suspect this type of vulnerability is small and easily absorbable by the market. It's also possible there could be some selling of lower rated bonds, given some portfolios have to maintain an average credit rating, which could be lessened on this downgrade if they own treasuries. But those portfolios could just as easily restore an average credit rating by buying more treasuries versus selling lower rated bonds. Bottom line, we think investors should look beyond the downgrade and stay focused on the U.S. macro debates that have and continue to matter to markets this year, the trajectory of inflation and whether or not the Fed can control it without a recession resulting. Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague, or leave us a review on Apple Podcasts. It helps more people find the show.

While the U.S. economy appears on track to avoid a recession, investors should still consider the implications of an upcoming wave of maturities in corporate credit.----- 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 will be talking about potential risk to the economy. It's Tuesday, August 1st at 10 a.m. in New York. Another FOMC meeting came and went. To nobody's surprise the Fed hiked the target Fed funds rate by 25 basis points. Beyond the hike, the July FOMC statement had nearly no changes. While data on inflation and jobs are moving in the right direction, the Fed remains far from its 2% inflation goal. That said, Fed Chair Powell stressed that the Fed is closer to its destination, that monetary policies is in restrictive territory and is likely to stay there for some time. Broadly, the outcome of the market was in line with our economists expectation that the federal funds rate has peaked, will remain unchanged for an extended period, and the first 25 basis point cut will be delivered in March 2024. Powell sounded more confident in a soft landing, citing the gradual adjustment in the labor market and noting that despite 525 basis point policy tightening, the unemployment rate remains at the same level it was pre-COVID. The fact that the Fed has been able to bring inflation down without a meaningful rise in unemployment, he described as quote unquote "blessing". He noted that the Fed staff are no longer forecasting a recession, given the resilience in the economy. This specter of soft landing, meaning a recession is not imminent, is something our economists have been calling for some time. This has now become more broadly accepted across market participants, albeit somewhat reluctantly. The obvious question, therefore, is what are the risks ahead and what are the paths for such risks to materialize? One such potential risk emanates from the rising wave of credit maturities from the corporate credit markets. While company balance sheets, by and large, are in a good shape now, given how far interest rates have risen and how quickly they have done so, as that debt begins to mature and needs to be refinanced, it will happen at sharply higher rates. From now through the end of 2024, almost a trillion of corporate debt will mature. Sim ply by holding rates constant, that refinancing will represent a tightening of financial conditions. Fortunately, a high proportion of the debt comes from investment grade borrowers and does not appear to be particularly challenging. However, below investment grade debt has a tougher path ahead for refinancing. As we continue through 2024 and get into 2025, more and more high yield bonds and leveraged loans will need to be refinanced. All else equal, the default rates in high yield bonds and leveraged loans currently  hovering around 2.5% may double to over 5% in the next 12 months. The forecasts of our economists point to a further slowdown in the economy from here, as the rest of the standard lags of policy are felt. We continue to think that such a slowing could necessitate a re-examination of the lower end of the credit spectrum. The ongoing challenges in the regional banking sector only add to this problem. In our view, in the list of risks to the U.S. economy, the rising wave of maturities in the corporate debt markets is notable. Thanks for listening. If you enjoyed the show, please leave us a review on Apple Podcasts, and share Thoughts on the Market with a friend or colleague today.

With uncertainty around the effects of new central bank policy, investors should be on the lookout for sales growth, cost cutting and sectors that might be turning a corner on performance.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, July 31st, 11 a.m. in New York. So let's get after it. This past week was an extremely busy one for global central banks, with the Fed and European Central Bank raising interest rates again by 25 basis points, while leaving the door open to either more hikes or pausing indefinitely. They remain data dependent. However, the biggest change may have come from the Bank of Japan. More specifically, the Bank of Japan decided to get the ball rolling on ending its long standing policy of yield curve control, a policy under which it maintains a cap on interest rates across the curve. This is an important pivot in our view, as it signals the Bank of Japan's willingness to join the fight against inflation. In short, it's incrementally hawkish for global bond markets. For U.S. equity investors, the main focus has been on the Fed getting closer to the end of its tightening campaign. The key question from investors is whether that means the Fed has orchestrated a soft landing or if a recession is unavoidable. While many investors remain skeptical of the soft landing outcome, equity markets have traded so well this year that these same investors have been swayed into thinking a soft landing is now the highest probability outcome. We believe equity markets are in a classic policy driven late cycle rally. Furthermore, the excitement over a Fed pause has been supported by very strong fiscal impulse and a still supportive global liquidity backdrop, even with central banks tightening. The latest example of a similar late cycle period occurred in 2019. Back then, a robust rally in equities was driven almost exclusively by valuations rather than earnings, like this year. Both then and now, Mega- cap growth stocks were the best performers as equity market internals processed a path to easier monetary policy and lower interest rates. The 2019 analogy suggests more index level upside from here, however, we would note that the Fed was already cutting interest rates for a good portion of 2019, leaving ten year Treasury yields 200 basis points lower than they are today. Nevertheless, equity valuations are 5% higher now than in 2019. The other scenario is that we are in a new cyclical upturn and growth is about to reaccelerate sharply for both the economy and earnings. While we're open minded to this new view materializing next year, we'd like to see a broader swath of business cycle indicators inflect, higher, breadth improve and short term interest rates come down before adjusting our stance in this regard. In other words, the current progression of these factors does not yet look like prior new cyclical upturns. Meanwhile, earnings season has been a fade the news so far, with the average stock down about 1% post results. This is worse than the past eight quarters where stocks are flat to up. While hardly a disaster, we think companies will have to start delivering better sales growth to outperform from here. On that score, even the large cap growth stocks have been mostly cost cutting stories to date. Another interesting observation over the past month is that the worst performing sectors are starting to exhibit the best breadth of performance, namely energy, utilities and health care. Industrials is the only leading sector with improving breath. Given the uncertainty there remains about the economic outcome in central bank policy, investors should look to the laggards with good breadth for relative performance catch up. Our top picks are healthcare, utilities and energy. 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.

Chief Cross-Asset Strategist Andrew Sheets explains why it’s increasingly more favorable to be a lender than an asset owner.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for 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, July 28th at 2 p.m. in London. Markets have been stronger than we expected. Some of the story is straight forward, some of it is not. Indeed across asset classes, the capital structure increasingly looks upside down. Our investment strategy has been based on the assumption that strong developed market growth was set to slow sharply as post-COVID stimulus waned and policy tightened at the fastest pace in 40 years. Sharp slowing, from an elevated base, has often rewarded more defensive investment positioning. But our assumption about this growth backdrop has simply been wrong. Growth has been good, with the U.S. printing yet another set of better than expected economic data this week. 20 years from now, an investor looking back on the first half of 2023 might find nothing particularly out of place. The economic data was good and surprisingly so, stocks, especially more cyclical ones, outperform bonds. Yet that straightforward story has happened alongside something more unusual. Across markets, we can observe a capital structure, that is how much investors are expected to earn as the owner of an asset, a company, an office building and so on, relative to being the lender to the asset. The lender should get a lower return since they're taking less risk, and over the last decade, very low borrowing rates have meant that that very much is the case. But it's been shifting. To varying degrees, the capital structure now looks almost upside down, with high yields on debt relative to more junior exposure, or the yield on the underlying asset. And we see this in several areas. In U.S. corporates, higher equity valuations have meant that the forward earnings yield for the Russell 1000, at about 4.8%, is now below the yield on US investment grade corporate debt at about 5.5%, and the difference between these two is only been more extreme in about 2% of observations over the last 20 years. In real estate, yields on debt have risen much faster than capitalization rates, that is the yield on the underlying real estate asset, and that's happened across both commercial and residential segments. And across leveraged loans and collateralized loan obligations, or CLO's, the so-called CLO ARB, which is the difference between the yield on the CLO loan collateral and the weighted cost of its liabilities, are unusually low. And we've also seen this in the loan market.For much of the last decade, the economics of borrowing to buy assets has been attractive. As the examples I've mentioned try to show, these economics are changing. Across scenarios where growth stays solid or especially if it slows, we think being the lender to an asset rather than its owner, is now often the better risk/reward. 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 higher quality and lower costs, China’s electric vehicles could lead a shift in the global auto industry.----- Transcript -----Adam Jonas: Welcome to Thoughts on the Market. I'm Adam Jonas, Head of Morgan Stanley's Global Autos and Share Mobility Team. Tim Hsaio: And Tim Hsaio Greater China Auto Analyst. Adam Jonas: And on this special episode of Thoughts on the Market, we're going to discuss how China Electric vehicles are reshaping the global auto market. It's Thursday, July 27th at 8 a.m. in New York. Tim Hsaio: And 8 p.m in Hong Kong. Adam Jonas: For decades, global autos have been dominated by established, developed market brands with little focus on electric vehicles or EVs, particularly for the mass market. As things stand today, affordable EVs are few and far between, and this undersupply presents a major global challenge. At Morgan Stanley Equity Research, we think the auto industry will undergo a major reshuffling in the next decade as affordable EVs from emerging markets capture significant global market share. Tim, you believe China made EVs will be at the center of this upcoming shakeup of the global auto industry, are we at an inflection point and how did we get here? Tim Hsaio: Thanks, Adam. Yeah, we are definitely at a very critical inflection point at the moment. Firstly, since last year, as you may notice that China has outsized Germany car export and soon surpassed Japan in the first half of this year as the world's largest auto exporter. So now we believe China made EVs infiltrating the West, challenging their global peers, backed by not just cheaper prices but the improving variety and quality. And separately, we believe that affordability remains the key mitigating factors to global EV adoption, as Rastan brands have been slow to advance their EV strategy for their mass market. A lack of affordable models actually challenged global adoption, but we believe that that creates a great opportunity to EV from China where a lot of affordable EVs will soon fill in the vacuum and effectively meet the need for cheaper EV. So we believe that we are definitely at an inflection point. Adam Jonas: So Tim, it's safe to say that the expansionary strategy of China EVs is not just a fad, but real solid trend here? Tim Hsaio: Totally agree. We think it's going to be a long lasting trend because you think about what's happened over the past ten years. China has been a major growth engine to curb auto demands, contributing more than 300% of a sales increment. And now we believe China will transport itself into the key supply driver to the world, they initially by exporting cheaper EV and over time shifting course to transplant and foreign production just similar to Japan and Korea autos back to 1970 to 1990. And we believe China EVs are making inroads into more than 40 countries globally. Just a few years ago, the products made by China were poorly designed, but today they surpass rival foreign models on affordability, quality and even detector event user experience. So Adam, essentially, we are trying to forecast the future of EVs in China and the rest of the world, and this topic sits right at the heart of all three big things Morgan Stanley Research is exploring this year, the multipolar world, decarbonization and technology diffusion. So if we take a step back to look at the broader picture of what happens to supply chain, what potential scenarios for an auto industry realignment do you foresee? And which regions other than China stand to benefit or be negatively impacted? Adam Jonas: So, Tim, look, I think there's certainly room to diversify and rebalance at the margin away from China, which has such a dominant position in electric vehicles today, and it was their strategy to fulfill that. But you also got to make room for them. Okay. And there's precedent here because, you know, we saw with the Japanese auto manufacturers in the 1970s and 1980s, a lot of people doubted them and they became dominant in foreign markets. Then you had the Korean auto companies in the 1990s and 2000s. So, again, China's lead is going to be long lasting, but room for on-shoring and near-shoring, friend shoring. And we would look to regions like ASEAN, Vietnam, Thailand, Indonesia, Malaysia, also the Middle East, such as Morocco, which has an FTA agreement with the U.S. and Saudi, parts of Scandinavia and Central Europe, and of course our trade partners in North America, Mexico and Canada. So, we’ re witnessing an historic re-industrialization of some parts of the world that where we thought we lost some of our heavy industry. Tim Hsaio: So in a context of a multipolar trends, we are discussing Adam, how do you think a global original equipment manufacturers or OEM or the car makers and the policymakers will react to China's growing importance in the auto industry? Adam Jonas: So I think the challenge is how do you re-architect supply chains and still have skin in the

Investors are questioning what new policy changes the 2024 election might bring, how the changes could affect markets and when they should start paying attention.----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed-Income and Thematic Research for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about what investors need to know about the 2024 U.S. election. It's Wednesday, July 26th at 11 a.m. in New York. As the press starts to focus more and more on the 2024 election, so have our clients leading many questions to come our way about who we think will be the next president and what we think they might do that could influence markets. As listeners of this podcast are surely aware, here at Morgan Stanley Research, we obviously care a great deal about elections and their consequences for markets. So then you might be surprised to know that our response so far to 2024 election questions has been, 'Nothing to see here, at least not yet'. There's two reasons behind this thinking. First, there's no data out there that can tell us much about what the election outcome will be. Polls are, in our view, better predictive tools and they've recently gotten credit for, but polls taken today about presidential candidates over a year away from the election have no track record of predicting anything. The same is true for polls about who the challenging party's nominee will be. And modern U.S. electoral history is full of examples where party nomination frontrunners have either faded or won the nomination, so there's no pattern to rely on there. In short, if you're interested in knowing who will win the election, there's not much to do but watch and wait. Second, the policy consequences of the election that might matter to markets could evolve greatly over the next 12 months in unpredictable ways. For example, in 2019, the 2020 election seemed set to be all about health care policy, and investors were intensely focused on the potential impact to the pharma sector. But when the pandemic hit, the election's importance to the market became more macro, it was all about the potential for more fiscal stimulus, shifting the election from an equity sector story to one that mattered to the overall stock index and bond yields. In 2007, the 2008 election seemed poised to be all about foreign policy, but then the financial crisis hit and markets again cared about how the outcome would affect potential fiscal stimulus and bank regulation. We could go on, but the point is this, history tells us this election will matter greatly to markets, but it's way too early to reliably know how it will matter. Now, rest assured, while we're suggesting investors don't have to pay close attention to the US election yet, we are paying attention and putting plenty of time into assessing the various plausible impacts the election could have. In particular around tax policy, tech regulation, defense spending, and refreshing our framework for how fiscal policy in the U.S. reacts to political conditions and party control in Congress. Of course, we'll flag for you when we think it's a productive time to join us in this early preparation, so that when the election and its consequences come more into focus, you'll be front footed. Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague or leave us a review on Apple Podcasts. It helps more people find the show.

Rapidly declining inflation poses a challenge to revenue growth and earnings. So what should investors look out for to identify the winners from here?----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues bringing a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Tuesday, July 25th at 10 a.m. in New York. So let's get after it. As discussed in last week's podcast, this year's equity market has been all about expanding valuations. The primary drivers of this multiple expansion have been falling inflation and cost cutting rather than accelerating top line growth. Last October, we based our tactically bullish call on the view that inflation was peaking, along with back end interest rates and the US dollar. While the 30% move in equity multiples on the back of this theme has gone much further and persisted longer than we anticipated, we don't feel the urge to turn bullish now. Missing the upside this year was unfortunate, however, compounding with another bad call can lead to permanent loss. While falling inflation supports the expectations for a Fed pivot on monetary policy, it also poses a risk to nominal revenue growth and earnings. To remind listeners of a key component to our earnings thesis, we believe inflation is now falling even faster than the consensus expects, especially the inflation experienced by companies. With price being the main factor keeping sales growth above zero for many companies this year, it would be a material headwind if that pricing were to roll over. This is precisely what we think is starting to happen for many businesses, especially in the goods portion of the economy. Last year's earnings disappointment in communication services, consumer discretionary and technology were significant, but largely a function of over-investment and elevated cost structures rather than disappointing sales. In fact, our operational efficiency thesis that worked so well last year was adopted by many of these companies in the fourth quarter, and they've been rewarded for it. From here, though, we think sales estimates will likely have to rise for these stocks to continue to power higher, and this will be the key theme to watch when they report. Last week was not a good start in that regard, as several large cap winners disappointed on earnings and these stocks sold off 10%. The same thing can be said for the rest of the market, too. If we're right about pricing fading amid falling inflation, then sales will likely disappoint from here. We think it's also worth keeping in mind that the economic data is not always reflective of what companies see in their businesses from a pricing standpoint. Recall in 2020 and 21, the companies were extracting far more than CPI-type pricing as demand surged higher from the fiscal stimulus, just as supply was constrained. This was the inflation driven boom we pointed to at the time, a thesis we are now simply using in reverse. Bottom line, investors may need to focus more on top line growth acceleration to identify the winners from here. This will be harder to find if our thesis on inflation is correct and cost cutting and better than feared earnings results would no longer get it done, at least in the growth sectors. On the other side of the ledger, we have value stocks where expectations are quite low. Last week, financial stocks outperformed on earnings results that were far from impressive, but not as bad as feared. That trade is likely behind us, but with China now offering some additional fiscal stimulus in the near term, energy and materials stocks may be poised for a catch up move using that same philosophy. In short, growth stocks require top line acceleration at this point to continue their run, while value stocks can do better if things just don't deteriorate further. 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.

India’s smartphone market could triple in size over the next decade, putting it behind only the U.S. and China.----- Transcript -----Welcome to Thoughts on the Market. I'm Erik Woodring, Morgan Stanley's U.S. Hardware Analyst. Along with my colleagues bringing you a variety of perspectives, today, I'll discuss our outlook for the India smartphone market. It's Monday, July 24th at 10 a.m. in New York. We're making a bold call for India's smartphone market. We believe it will triple in size over the next decade to $90 billion and account for 15% of global smartphone shipments by 2032, up from just 6% today. That implies that India alone will drive 100% of global smartphone shipment growth over the next decade. India has the largest worldwide population, but smartphone penetration is significantly lower versus the rest of the world. For the last two decades, investors have been intrigued by the vast growth potential of the India smartphone market. But so far, investor expectations have not played out, as smartphone penetration in India has failed to surpass 40% versus the global average of 60%. And growth in the India smartphone market has been overwhelmingly driven by low end devices, with razor thin margins for original equipment manufacturers or OEMs. In fact, the smartphone TAM or total addressable market is just 25% the size of China, despite a similarly sized population. But we think the next decade will be different - it will be India's decade. Besides forecasting annual GDP growth of 6.5% for the next decade, our India Strategy and Economics colleagues believe that over the next decade, domestic consumption in India will more than double - driven by a number of important factors, including widespread economic reforms. These efforts are expected to bring meaningful demographic change, with income per capita expected to double, and the number of high income households expected to quintuple over the next decade. Alongside nearly 100% electrification of the country and a government led effort to prioritize digital transformation, we expect strong demand for technology goods to emerge over the next decade. We see these factors as setting the stage for robust smartphone growth in India. A recent AlphaWise smartphone survey of Indian consumers confirmed these trends, with three in four survey respondents acknowledging they are likely to purchase a new smartphone in the next 12 months, in line with other leading emerging markets. In fact, some respondents acknowledged they are more likely to own a smartphone over other household items such as a PC, car or refrigerator. Furthermore, Indian consumers are willing to pay up to 20% more for their next smartphone to gain access to premium technologies such as 5G compatibility, longer battery life, better camera quality and more storage capacity. While it's still early days, we believe these survey results illustrate the growing importance of the smartphone in India and the rising potential for the Indian smartphone market. When we take a step back, the two most important factors underpinning our $90 billion India smartphone TAM are growing smartphone penetration and positive mix shift, meaning customers are shifting their purchases to higher end devices. We estimate that in a decade, Indian smartphone penetration will reach 60%, the global average today. Furthermore, we estimate that over the next decade, 80% of India's smartphone market growth will come from smartphones priced in excess of $250, which have only accounted for about 10% of smartphone growth in India over the last five years. Combined, we believe these factors will drive a 11% annual smartphone market growth in India over the next decade, allowing India to become the third largest smartphone market in the world at $90 billion, trailing just China and the United States. 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.

With positive GDP growth and increasing revenues, Japan equities are becoming a preferred market globally. ----- Transcript -----Chetan Ahya: Welcome to Thoughts on the Market. I'm Chetan Ahya, Morgan Stanley's Chief Asia Economist. Daniel Blake: And I'm Daniel Blake, Asia and Emerging Markets Equity Strategist. Chetan Ahya:  Over the last two days in this special three part series on Japan, we discussed a constructive outlook for Japan's economy and the various structural reforms it's undergoing. Today in this final episode focused on Japan, we'll talk about the key investment implications of these macro trends. It's Friday, July 21st at 9 a.m. in Hong Kong and Singapore. Chetan Ahya: Dan, you've been highlighting Japanese equities as our most preferred asset within the region and globally. Your bullish view is based on three powerful drivers of outperformance coming together, namely macro, micro and multipolar world. Starting with the macro, our economists expect an uplift in nominal GDP growth trend, how does this benefit Japanese equities? Daniel Blake: So we see this being another era for the Japanese market, having first exited deflation in 2013 with the initial Abenomics program, but now moving into positive nominal GDP growth from 2023 onwards. It's hugely important for companies who have been hemmed in with an inability to lift prices and hence they have been unable or unwilling to lift base wages or dividend levels. So this new pricing flexibility in top line growth supports the equity market in five key ways. First, we're going to see faster revenue growth. Second, we think this will mean wider operating profit margins given fixed cost leverage will now be working in favor of the bottom line. Third, financial sector earnings have been repressed by ongoing Bank of Japan policy, but a gradual process of normalization should help release the earnings power of Japanese financials. Fourth, domestic portfolios are highly risk averse and focused on cash and deposits. We think there will be some ongoing shift towards higher return assets, including equities. And finally, we think valuations for the equity market can continue to trend higher on convergence with global norms. Chetan Ahya: And on micro front, we've been discussing about the improvement in corporate governance for almost a decade now. What's changed this year? Daniel Blake: Yes, the environment has been changing for the better part of a decade, really since the introduction of the corporate governance and stewardship codes back in 2015 and 16. We are seeing progressive improvement with record levels of investor activism and engagement, and we're seeing signs that management teams are taking up the challenge of improving profitability with record buybacks and record levels of dividend payout ratios. That said, the progress has been patchy at times and coming into this year, 50% of equity market constituents were still trading below book value. So what's changed this year is in this backdrop of improving corporate governance we've had new calls from the Tokyo Stock Exchange for companies trading below book value to explore ways to meet their cost of capital and lift valuations. We think that additional support that will come through as companies look to engage with investors and unlock value will help to boost Japan's sustainable return on equity to 11 to 12%, that compares with Japan's 15 year average of just 4% before the Abenomics program took hold. And it would bring it up more consistent with global averages. Chetan Ahya: Dan, one of the big themes Morgan Stanley research is exploring deeply this year is the transition from a globalized or multipolar world. How does this emergence of multipolar world impact Japan and its equity markets in particular? Daniel Blake: Thanks, Chetan. And as we're thinking about a multipolar world transition, we think there are two scenarios for global supply chains and interdependencies. One is a de-risking process, which is our base case, where supply chains are strengthened, diversified, and we see ongoing policy support for investment into emerging industries. The second scenario, which we hope to avoid, is one of decoupling. But if we focus on the de-risking scenario, we think Japanese companies will benefit from that trend for two reasons. One, we have a high allocation in the Japanese market of companies skewed towards industrial automation, semiconductor manufacturing equipment, precision instruments, specialty chemicals, all of the inputs for supply chain diversification that are crucially in demand in this de-risking process. And the second reason is investor portfolios are also being diversified, and Japan's deep capital markets have been in a good position to absorb this shift. Chetan Ahya: So taking it together, where does this leave your view on Japan equities and what are the risks to your call? Daniel Blake: So overall, we see Japanese

As Japan anticipates shifts in structural policy and GDP growth, these are the industries within the market that are poised to benefit. Chief Asia Economist Chetan Ahya, Chief Japan Economist Takeshi Yamaguchi, and Japan Senior Advisor Robert Feldman discuss.----- Transcript -----Chetan Ahya: Welcome to Thoughts on the Market. I'm Chetan Ahya, Morgan Stanley's Chief Asia Economist. Takeshi Yamaguchi: I'm Takeshi Yamaguchi, Chief Japan Economist. Robert Feldman: And I'm Robert Feldman, Japan Senior Advisor. Chetan Ahya: Yesterday I discussed broad economic contours of Morgan Stanley's constructive view on Japan. Today, in the second installment of our special three part episode on Japan, we will dig deeper into the implications of the shift in Japan's nominal GDP path, the outlook for BOJ policy, as well as the outlook for structural reforms. It's Thursday, July 20th at 9 a.m. in Hong Kong. Robert Feldman: And 10 a.m. in Tokyo. Chetan Ahya: Yamaguchi-San, let's start here. The change in inflation dynamics that I covered on yesterday's episode could mean a momentous shift in Japan's nominal GDP path. Maybe you could start here with you walking us through some of the key implications of this shift. Takeshi Yamaguchi: Yes, Japan's nominal GDP has been in a flat range for many years, since 1990's after the collapse of the asset bubble. But now it's finally getting out of the range, and we expect this trend of positive nominal GDP growth to continue over the medium term. I think there are mainly three implications from economists' viewpoints. First, we expect compensation of employees, that's the amount taken by workers, and corporate earnings to grow at the same time. Before it was like a zero sum game with almost no nominal GDP growth, but now we expect a bigger economic pie which should benefit both workers and companies. Japan's wage trend is already improving after strong spring wage negotiations this year. Second, we think that the revival of positive nominal GDP growth will improve Japan's fiscal sustainability. We are already seeing a big increase in tax revenue with strong nominal GDP growth. Meanwhile, we expect the average interest costs or interest burden to increase only gradually due to monetary policy and also because average maturity of Japanese government bonds exceeds nine years. And finally, we think the outlook of higher nominal GDP growth strength should have some positive impact on asset prices, including equity prices. This is not the only reason behind the recent equity market moves, but the likely shift in the nominal GDP growth trend is playing some role here in our view. Chetan Ahya: Another question I want to ask is around the Bank of Japan's yield curve control program. You're expecting the BOJ to adjust its policy around yield curve control program at the upcoming policy in end July, which would be the second shift in monetary policy stance last December. Do you see further shifts in monetary policy and would it disrupt the virtuous cycle we are forecasting? Takeshi Yamaguchi: At that July monetary policy meeting we don't expect the BOJ to get rid of YCC, the yield curve control framework, but we expect the BOJ to change the conduct of YCC by allowing more fluctuations of ten year JGB yields, potentially to plus/minus 1%, around 0%. And that said, we think the BOJ governor Ueda directly emphasized that the 2% inflation target is still not achieved in a sustainable manner. So we expect the BOJ to maintain the current short term policy rate of -0.1% after the YCC adjustment. In the third quarter next year we expect the BOJ to exit negative interest rate policy after observing another round of solid spring wage negotiations. But even so, Japan's real interest rates would remain extremely low for some time. So we think the virtuous cycle we've been highlighting will likely remain intact.  Chetan Ahya: Thank you, Yamaguchi-San. Robbie, let me turn it over to you. Japan has been feeling increasing pressure from demographics and other factors at home and geopolitics abroad. And so in response it's developing a new grand strategy and undergoing a number of structural reforms. You believe these reforms could lead to higher growth, walk us through why you feel so positive. Robert Feldman: Thanks, Chetan. Structural reforms are being triggered by both market forces and policy. The market forces are technology change, labor shortage, geopolitical pressures, higher interest rates, pricing power from the end of deflation and supply chain derisking. The policy forces are corporate governance changes, immigration law changes, startup policies, monetary policy and climate and sustainability policy. There are lots of market forces and lots of policy forces behind these changes. Chetan Ahya: In what industries do you expect to see the biggest changes? Robert Feldman: There are five industries where I think there will be major changes. And

The first of our three-part series on the Japanese economy dives into the three key factors that have triggered a recent surge in interest from investors.----- 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, I'm kicking off a special three part episode on our outlook for Japan. Today I'll be discussing our view on the Japanese economy. It's Wednesday, July 19th at 9am in Hong Kong. As you may have seen, Japan's economy and financial markets have attracted outsized investor interest this year. We at Morgan Stanley Research have had a constructive view on the macro and markets outlook for some time, based on three pillars: A decisive shift away from deflation, structural macro reforms coupled with the improved corporate governance on the macro front and return on equity for the corporate sector. Let's start with the macro outlook. From my vantage point, the single most important factor that defines the Japan narrative is inflation. Between 1993 and 2012, the Japan economy was trapped in deflation, with headline inflation hovering around 0%. The pursuit of Abenomics from 2013 onwards brought about a transition from deflation to low-flation and inflation managed to move a tad bit higher to an average of 0.5% from 2013 to 2019. In this cycle, we are seeing yet another shift in which Japan is decisively exiting deflation. Indeed, we see Japan transitioning into moderate inflation territory, where inflation averages 1 to 1.5% over the medium term. How is this inflation outcome achieved? Since the early 1990's, Japan has experienced monetary easing and fiscal easing, but the two have never really come together in a coordinated fashion, and in fact at times have neutralized each other. This started to change in 2013, when fiscal easing was combined with quantitative and qualitative monetary easing, which we think was critical to initial exit from deflation. In this cycle, we finally saw wage growth rising to a multi-year high, which in our view is the final key ingredient that will sustain inflation in the range of 1 to 1 and a half percent. Moreover, we don't expect a premature withdrawal of accommodative macro policies. Against this backdrop, we believe inflation expectation will be re-anchored to a higher level than before. Why is the liftoff of inflation so important? Well, moderate inflation is what makes the economic machine work. If consumers expect deflation or low-flation, they will be incentivized to put off their spending plans. For the corporate sector, the resulting high level of real interest rates will not catalyze new investment. This whole situation changes when moderate inflation takes hold and inflation expectations shift. Animal spirits come back to life, and that is at the heart of why we are bullish on Japan. In the next episode, we are going to continue this conversation with our two leading minds on Japan, our Chief Japan Economist Takashi Yamaguchi, and Japan Senior Advisor Robert Feldman. The three of us will dive into the implications of the shift in Japan's nominal GDP path, the outlook for BOJ's policy, as well as the outlook for structural reforms. And to wrap up the series, I'll speak with our Equity Strategist Daniel Blake about our market outlook and what investors should focus on. Thanks for listening. If you enjoyed the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or a colleague today.

With the moratorium on federal student loans ending soon, discretionary spending is likely to go down and delinquency is likely to rise as consumers face the end of a three-year reprieve.----- Transcript -----Welcome to Thoughts on the Market. I'm Sarah Wolfe from the U.S. Economics Team. Along with my colleagues, bringing you a variety of perspectives, today I'll be talking about the implications from the upcoming student loan restart. It's Tuesday, July 18th at 10 a.m. in New York. The more than three year long moratorium on federal student loans is ending soon, expected to resume on October 1st, impacting nearly 27 million borrowers who have federal student loans in forbearance, totaling a trillion dollars or $41,000 per borrower on average. We believe this will translate into a hit to disposable income and a moderate pullback in discretionary spending in the fourth quarter of this year and partially into the first quarter of 2024. Altogether, we estimate it could shave about ten basis points off of total year real PCE growth or seven basis points off GDP growth. But we think that this is likely an upper estimate for a few reasons. First of all, there's a 12 month grace period that will allow households to take the next year to start making payments without falling delinquent—so not everybody is going to start making payments in October—consumers can tap into their savings and there could be debt reprioritization. There's going to be varying impact across different demographics. We find that those aged 25 to 34 are most likely to hold student debt, But borrowers age 35 and older hold the largest debt balance in dollar terms and as a share of disposable income. We also find, based on geography, that southern states, including Mississippi, Alabama, Georgia and South Carolina, have the highest average student loan balance as a share of per capita disposable income while states in the Northeast, like Massachusetts, Connecticut, New Jersey and New Hampshire have the lowest. It's worth mentioning that this is more of a result of disposable income being lower in southern states than debt balances being higher. So how will this impact credit? My colleagues from the Morgan Stanley U.S. consumer finance team expect the combination of student loan payments starting in October with the absence of loan forgiveness to lead to potential delinquencies as consumers divert cash flow, servicing other forms of debt like credit card and autos, towards their student loans. This could accelerate delinquency rates which are now above 2019 levels and increasing at the fastest clip in 15 years. One thing we're keeping an eye on are the new Biden administration initiatives that could provide some relief for low and middle income consumers. For example, as I mentioned, a 12-month ramp up grace period for borrowers means they won't be penalized or moved into delinquency if they fail to pay over the next year, though interest does still accrue. Also, a new save income driven repayment option should fully go into effect as of July 2024, lowering payments owed by undergraduate borrowers if they adopt this new income driven repayment plan. Overall, we believe the student loan repayment restart will be a hit to spending and borrowing that will spill over into U.S. hard lines, so these are appliances and sports equipment, broad lines, which are companies that deal in high volume at the cheaper end of a product line, and food retail industries, though at varying degrees. Retailers with customer demographics skewed towards younger and lower income consumers that sell into more discretionary categories appear to be the most at risk. Furthermore, our soft lines retail—that is clothing—and brands team think companies with outsized exposure to luxury and men's apparel, denim and swim could see the biggest slump in demand from student loan repayment, whereas those with sports apparel and footwear exposure may be the most insulated. That said, the bottom line is that no retailer is free from exposure to all three key student loan holder demographics, which skew younger, less affluent and more urban. 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.

While falling inflation is good news for many, equity investors may see volatility in earnings growth as pricing power fades.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, July 17th at 11 a.m. in New York. So let's get after it. Last week was all about the downward surprise to the June inflation data. More specifically, both the consumer and producer price indices came in well below expectations and suggests the Fed is on its way to winning its hard fought battle to beat inflation back down to 2%. Both stocks and bonds celebrated the news as a likelihood for a soft landing and the economy increased. Our view is not so sanguine on stocks as the steeper fall in inflation supports our view for a much weaker than expected earnings growth. Three years ago, at the trough of the pandemic recession, we were a lonely voice on the idea that inflation would surge higher due to excessive fiscal and monetary support. Furthermore, we suggested it would lead to a surge in earnings growth as companies discovered an ability to raise prices at will while the government subsidized labor costs. As we move to 2021, this over-earning broadens out as consumers spent their excess savings on everything from sporting goods to travel and leisure activities. By last summer, this boom in spending was so strong the Fed was forced to raise interest rates at a pace not seen in 40 years. With a lag in monetary policy close to 12 months, it should be no surprise that we are now seeing the headwinds on growth and inflation today. Because markets are forward looking, they understand this dynamic perhaps better than the average investor. In fact, it is the primary reason we decided to get tactically bullish on U.S. stocks last October. At that time, we suggested long term interest rates in the U.S. dollar would top in anticipation of the Fed's aggressive policy having its desired effect on inflation and growth. That began to play out in the fourth quarter as price earnings multiples expanded from 15.3x in October to 18x in early December. We decided to take the money and run at that point, thinking the market had already fully discounted the peak in inflation interest rates in the US dollar. Over the next six months, 18x did provide a ceiling on valuations. However, over the last six weeks, valuations have risen another 10% as the inflation data confirmed what we already knew. Meanwhile, artificial intelligence has given investors something to get excited about, but at unattractive valuations in our view. As noted earlier, we think inflation is now likely to surprise in the downside. A move to disinflation is positive for stocks because valuations typically rise under those circumstances. However, that has already happened. Now we expect disinflation to shift to deflation in many parts of the economy, in other words,prices began to fall. Most are not forecasting such a decline because it seems hard to fathom after what they witnessed in the real economy. However, it's just the mirror image of what happened in 2020 and 21 when supply was short of demand. At that time, inflation surprised companies and investors to the upside and led to much better earnings growth than forecasted. Now pricing power is fading due to demand falling short of supply, and this is likely to surprise many companies and investors to the downside. More importantly, it's not expected by the consensus anymore or is it in stock valuations at this point. We are already seeing pricing come down in many areas like consumer goods and commodities. Housing and cars are also seeing price degradation, especially in electric vehicles where supplies now overwhelming demand. In the latest consumer price index released last week, we even saw deflation in both airlines and hotel prices, two areas where demand is still robust. The bottom line, while falling inflation last week was great news for the Fed and its war on higher prices, equity investors should be careful what they wish for, as this is a slippery slope for earnings growth and hence stock valuations which are now quite extended. Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcast app. It helps more people to find the show.

With inflation slowly moving lower, government bonds are looking increasingly more attractive and may be primed for a comeback later this year.----- Transcript -----Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist. Along with my colleagues bringing you a variety of perspectives, today, I'll be talking about the case for government bonds. It's Friday, July 14th at 11 a.m. in New York. With the U.S. labor market remaining resilient, the prospects for bond markets would depend critically on the outlook for inflation. Our economists expect core inflation to continue to move lower, slowly but surely, shifting consumption patterns in which spending on services slows while goods consumption continues to contract, will weigh on core inflation.Recent data have been supportive of this expectation. The June employment report we got last Friday, showed a slowing in the services sector earnings growth. Overall, average hourly earnings moved sideways and still are higher than the historical averages. But the average hourly earnings for the services sector decelerated again in June. Though two months do not establish a firm trend, the deceleration in service's average hourly earnings since April is good news for the inflation outlook. The Consumer Price Index and the producer price index  data that we got this week also reflect this ongoing deceleration in inflation. On a year-over-year basis, headline inflation came down to 3% while core inflation came in at 4.8%, down from 5.3% in May. Core Producer Price Index also came in below consensus and is now running at 2.6% year-over-year, down from 2.8%. This moderation in economic activity and inflation goes beyond what many Fed officials would consider their model expectations. Such a deceleration, even if associated with a soft landing, could see them adjusting their current hawkish stances. Of course, in the best environment for government bonds, central banks are actively easing monetary policy, an environment our economists see taking shape at the end of the first quarter of next year. As such, expected returns for government bonds this year, while admirable, may be closer to average calendar year return than the returns typically delivered during the recessionary periods. At the same time, we think government bonds could perform even better than average, considering the risks that markets are not pricing in. The possibility that central bank hikes to date may weigh on economic activity into year end, and that inflation is likely to fall meaningfully into year end with sticky components becoming less sticky, increases the attractiveness of government bonds in our view. Hence, while they have been battered and bruised, government bonds look primed for a comeback in 2023. 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. 

As airlines scramble to decrease their carbon footprint by 80% before 2050, can sustainable aviation fuel lead the charge?----- Transcript -----Welcome to Thoughts on the Market. I'm Ravi Shanker, Morgan Stanley's freight transportation and airlines analyst. Along with my colleagues bringing you a variety of perspectives, today I'll discuss the path to decarbonization in aviation. It's Thursday, July 13th at 2 p.m. in New York. The global aviation industry emits roughly 1 billion tons of CO2 per year - comparable to the emissions of Japan, the world's third largest economy, and aviation emissions are estimated to double or even triple between 2019 and 2050 in a business-as-usual scenario. In order to reach net-zero emissions by 2050 and align with the goals of the Paris Agreement, the global aviation industry needs to reduce its CO2 absolute footprint by 13% by 2030, and 80% by 2050. We think the industry has three solutions for doing so. One, change its fleet mix towards more fuel efficient aircraft. Two, scale other modes of propulsion such as electric/hybrid engines and hydrogen. And three, change their jet fuel mix towards more sustainable aviation fuel. Based on currently available technologies, we see the third option, sustainable aviation fuel or SAF, as the most realistic pathway for the airlines industry to meet its 2030 decarbonization goals. SAF is a biofuel used to power aircraft that has similar properties to conventional jet fuel, and can be dropped into today's aircraft and infrastructure. SAF is derived from non-fossil sources called feedstock, such as corn grain, oilseeds, algae, oils, fats and greases, forestry residues, and municipal solid waste streams. There are currently various certified SAF production procedures, all of which make fuel that performs at levels operationally equivalent to jet A1 fuel. Replacing conventional jet fuel with SAF can mitigate CO2 materially. The challenge, however, is that SAF accounts for less than 1% of the fuel used in global aviation, and for the aviation industry to meet its decarbonization targets SAF supply needs to scale materially. The key constraints around wide adoption of SAF are cost, feedstock availability, impacts to nature and biodiversity, and, finally, the capital required to produce SAF at scale. That said, support for SAF has improved materially over the last two years. In 2021, President Biden's climate agenda outlined a goal of producing 3 billion gallons of SAF per year by 2030, roughly 10x the current global SAF production. And in 2022, the Inflation Reduction Act extended and bolstered incentives for SAF. Since then, new capacity has been announced and multiple airlines have committed to using more SAF through long term offtake agreements. Meanwhile, more than ten global airlines target to replace at least 10% of their jet fuel demand with SAF by 2030. In addition, several U.S. state jurisdictions are adopting clean fuel standards or are exploring similar programs. The EU, UK and Japan have also put in place various incentives and targets since 2021. While these developments are highly encouraging, more widespread support and long term certainty are needed to scale SAF production to the levels required to meet the 2030 targets. Is this achievable? We will continue to monitor developments and bring you updates as we make progress along the path to decarbonizing aviation. 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.

With a potential government shutdown looming in the fall, investors may want to keep an eye on the U.S. Treasury market to insulate themselves from risk.----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income and Thematic Research  for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the potential market impacts of a government shutdown. It's Wednesday, July 12th at 10 a.m. in New York. Press reports warning of a potential government shutdown this fall have understandably led to some questions from clients this week. They're asking what, if any, market impact should they expect if the U.S. fails to appropriate spending for the next fiscal year starting October 1st. The concern, of course, is that markets may react negatively perceiving economic risk if the government without funding ceases certain operations. But some historical perspective is helpful here and leads us to categorize this as a risk worth monitoring but not panicking about. First, while government shutdowns create a very real strain for parts of the economy, like government employees and contractors doing business with the government, our economists have pointed out that in the past, the aggregate impacts to the overall economy have tended to be modest and fleeting. A key reason why is that the norm has been that after shutdowns, the government typically appropriates back pay and resumes prior expected payments to vendors. So spending is simply deferred and made up in the future rather than completely foregone. Not surprisingly, then, market impacts have tended to be inconsistent and fleeting. True, there have been episodes when stocks sold off heading into and during shutdowns and then rally back when shutdowns ended, but it's difficult to desegregate the shutdown as a market driver from other prevailing economic conditions and market valuations. Said more simply, if equity and or credit markets were pricing higher economic optimism, a shutdown could be a temporary headwind for markets. But such a dynamic is far from something that we would base strategic investment guidance on. Despite all this, if you're still looking for a market that might be more insulated from the risk of a shutdown, then given current conditions, we'd look toward the U.S. Treasury market. While it might seem counterintuitive to own government bonds in a government shutdown, remember it was the debt ceiling issue that carried default risk, not a shutdown. In the shutdown, the U.S. Treasury has money and authority to pay bondholders, just not authority to pay certain other government operations. Further, we already think Treasuries are poised to have a strong second half of 2023 as yields could start to decline on softening economic data and an expectation that the Fed would soon be done hiking rates. And while a government shutdown wouldn't necessarily add to that trend, it certainly adds some degree of risk to the economy, reinforcing the case for owning bonds. Thanks for listening. If you enjoy the show, please share your Thoughts on the Market with a friend or colleague or leave us a review on Apple Podcasts. It helps more people find the show.

The market for artificial intelligence technologies could reach $275 billion by 2027, but not all companies will be able to generate revenue. Here’s what investors should watch.----- Transcript -----Welcome to Thoughts on the Market. I'm Shawn Kim, Head of Morgan Stanley's Asia Technology Research Team. Along with my colleagues bringing you a variety of perspectives, today I'll discuss why A.I matters for investors and our outlook for the next 5 to 10 years in the evolution of A.I. It's Tuesday, July 11th, at 9 a.m. in New York. In the span of just six months, open A.I has moved from being a niche IT research and development, to a key driver of what is set to become a $3 trillion IT spend by 2029. Despite this rapid progress, we're still in the early stages of A.I technologies. We believe today's machine learning stage of A.I adoption precedes a much larger future market when we reach the inference phase, which is where A.I would be able to make predictions based on novel data. And that, in turn, would eventually expand to an even bigger potential market in endpoint or edge A.I inference. The A.I technology total addressable market or the TAM, which includes semiconductors, hardware and networking, is at $90 billion today and we estimate it will grow to 275 billion by 2027. That's more than half the size of the semiconductor market today. This remarketable growth is actually led by semiconductors, where we see the A.I semiconductor market TAM tripling over the next three years from 43 billion to 125 billion, and signifying our growing the overall A.I market. Companies that we consider A.I leaders are generally showing high growth and returns, consensus shows a three year average EPS growth of 24%, which is more than twice the earnings growth of global stocks on average. Our investment framework addresses three key criteria. One, which parts of the tech supply chain are the biggest beneficiaries of A.I, in terms of revenue exposure and how that exposure is growing relative to their traditional businesses. Two, the quality of those earnings and whether they are based on volume or pricing. And three, whether stock valuations reflect that upside potential. We believe we are far from bubble metrics, although the market will inevitably compare A.I. to the dot.com boom. However, today's leading A.I companies are well-established  with good cash flow characteristics, for the most part, unlike many companies that became casualties of dot.com collapse. As we embark on what we view as a new, decade-long paradigm shift, we expect outperformance to come in waves and think we are currently very early in the enabling technology stage. And like so many technologies, A.I is also a double edged sword. There are companies that are in the right place at the right time now, but also have what it takes to fully commercialize the A.I opportunity over the long term. The flip side is companies that are less relevant to A.I products or services but will infuse optimism in their forward guidance via mentions of A.I. While we expect A.I will be a growth driver for most, it will not generate revenue growth for everyone. Other potential risks include the fact that the chip cycle is not just depending on the A.I, but also on the wider global economic cycle. And furthermore, we believe any big visions of A.I's transforming the world as we know it must rest on a solid foundation of physics, ethics and the law, a big topic we will continue to follow closely and bring you updates. 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. 

As earnings season kicks off, market valuations continue to trend high based on major growth expectations. However, investors may want to keep an eye on liquidity.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, July 10th at 11 a.m. in New York. So let's get after it.   With year to date U.S. equity returns driven nearly 100% by higher valuations, the market either doesn't care about earnings or it expects a major reacceleration in growth both later this year and next. One might argue that the higher valuations are anticipating the end of the Fed's rate hiking campaign, even though the bond market doesn't seem to agree with that conclusion, given the recent rise in yields. In short, the price earnings ratio for the S&P 500 is up approximately 15%, and with interest rates up this year, the equity risk premium has collapsed by 100 basis points to its lowest level since the tech bubble era. With second quarter earnings season beginning this week, 'better than feared' likely isn't going to cut it anymore. While earnings results so far this year remain right on track for the sharp earnings recession we forecast, we don't expect second quarter earnings to disappoint expectations in aggregate, given second quarter estimates have now been revised lower by 7.5% since the beginning of the year. Instead, we would point out that the consensus bottom-up second quarter EPS forecast for the S&P 500 is -7% year over year, hardly exciting. Furthermore, the consensus pushed out the trough earnings per share growth quarter from the first quarter to the second quarter over the last three months. We expect this trend to continue through the balance of the year, which would also be in line with our forecast. In other words, no big second half recovery as the consensus and valuations now expect. More specifically, third quarter is when our forecast starts to meaningfully diverge from the consensus. This means the key driver for stocks during this earnings season will come via company guidance for the out quarter rather than the second quarter results. We suspect some companies will begin to walk down the estimates, while others will continue to tell a more optimistic story. In short, this earnings season should matter more than the prior two, and should provide significant alpha opportunities for investors in terms of both longs and shorts. In our view, the year to date multiple expansion has occurred for a couple of reasons beyond earnings growth optimism. One, excess liquidity provided by global central banks amid a weaker U.S. dollar and the FDIC bail out of depositors. And two, excitement around artificial intelligence’s potential impact on productivity and earnings growth. On the liquidity front we think that support is starting to fade. One way of measuring liquidity is global money supply in U.S. dollars. One of the reasons we turned tactically bullish last October was due to our view that the U.S. dollar was topping. This, along with the China reopening and the Bank of Japan's monetary policy actions, added close to $7 trillion to global money supply over the following six months. We've pointed out previously that the rate of change on global money supply is correlated to the rate of change on global equities, as well as the S&P 500. Over the past few months, global money supply in U.S. dollars has begun to shrink again, just as the Treasury begins to issue over a trillion dollars of supply to restock its coffers post a debt ceiling resolution last month. As an early indicator that market liquidity is fading, nominal ten-year yields broke out last week above the psychologically important 4% level, and real rates are making new cycle highs. Interest rate volatility also picked up as uncertainty about the Fed's next moves increased. Neither higher interest rate levels nor volatility are generally conducive to higher equity valuations. Bottom line, with earnings season upon us, we aren't expecting any fireworks from the earnings reports directly. However, with expectations for growth now much higher than six months ago, we suspect it will be a 'sell the news' event for many stocks, no matter what the companies post, as the market begins to look ahead to what is likely going to disappoint lofty expectations. 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.

Though the debate around the global strength of the dollar in currency markets continues, the dollar’s current high yield in a world of weak global growth could help it appreciate----- Transcript -----Welcome to Thoughts on the Market. I'm James Lord, Morgan Stanley's Head of Foreign Exchange and Emerging Market Strategy. Along with my colleagues bringing you a variety of perspectives, today, I'll be discussing the status of the U.S dollar within global foreign exchange or FX reserves. It's Friday, July 7th, 3 p.m. in London. The debate about the dollar's status as the world's dominant currency usually resurfaces during every business cycle, and as our world increasingly transitions from globalized toward a multipolar model, this debate appears more relevant. Indeed, some economic actors are already de-risking their currency reserves away from the dollar, promoting the use of local currencies as an alternative in international trade and trying to reduce the dollar's global role through other means. Yet, this debate is usually a distraction from determining where the dollar is headed. In contrast to the popular narrative, we believe the dollar can appreciate, even if its use as a reserve currency or invoicing currency in international trade declines. Let's first address the dollar's status as the world's dominant central bank reserve currency. The purpose of FX reserves is to bolster the external stability of an economy and enable central banks to act as lenders of last resort to those in demand of foreign currency. It's intuitive to think that reserve choices might therefore be correlated with the value of currencies themselves, yet relying on that intuition would not have served you well in recent history. Case in point, while the dollar remains the world's dominant reserve currency, its share has dropped by around 20% over the last 20 years, most rapidly over the last ten. Nevertheless, over the last decade, the dollar has been one of the world's strongest currencies, with the Fed's real broad dollar index reaching a near 20 year high in October 2022. The dollar's declining share of global FX reserves has not been relevant in figuring out where the dollar is heading, in part because FX reserve managers are less influential in currency markets today, but more importantly, because other investors have favored U.S. assets. To be clear, this does not mean that watching trends in FX reserves is not important. A sudden, sharp decline in the market share of a reserve currency could well be driven by a sudden loss of confidence in the macroeconomic stability of an economy, diminishing its attraction as an investment destination. If so, the currency of that economy would likely decline. This concern has not driven the decline of the dollar's share of global FX reserves in recent years, as evidenced by its continued strength. Moreover, U.S. assets retain unique appeal for global capital, as the recent boom in U.S. tech stocks and rising optimism about the productivity enhancing implications of A.I show.Meanwhile, the dollar provides one of the highest yields of the world's major currencies, thanks to the Fed's hiking cycle. In a world of weak global growth, this yield will also likely help the dollar to appreciate. For clues about the future direction of exchange rates, we would be watching for signs that investment opportunities in different economies are improving. For now, the dollar offers attractive yields and remains a safe harbor during the current period of slow global economic growth. 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.

Artificial intelligence could help biopharmaceutical companies reduce costs as well as improve their chances of developing successful new drugs.----- Transcript -----Welcome to Thoughts on the Market. I'm Terence Flynn, Morgan Stanley's Head of U.S. BioPharma Research. Along with my colleagues bringing you a variety of perspectives, today, I'll focus on how artificial intelligence and machine learning can reshape the health care sector. It's Thursday, July 6th at 10 a.m. in New York. As we've discussed on this podcast, Tech Diffusion is one of the big three themes we at Morgan Stanley Research are following this year. The other two being the Multipolar World and Decarbonization. As a quick reminder, by tech diffusion, we mean the process by which any transformative technology is adopted widely by consumers and industries. When it comes to the healthcare sector, it's still early but we believe artificial intelligence and machine learning adoption is poised to accelerate significantly. The biopharma industry specifically is moving to unlock the potential of A.I across multiple areas, including drug discovery, clinical development, manufacturing and physician patient engagement. We see two broad areas where A.I enabled investments in drug development could drive significant value in the biopharma space. One is direct cost savings, so think of improved R&D margins, for example. And two is increased probability of success of pipeline programs. Here we estimate that even small improvements in the probability of success could drive significant value. Now, let me put some numbers around this. Over the past ten years, the FDA has granted 430 new drug approvals or about 43 per year. We estimate that every two and a half percentage point improvement in early stage development success rates could lead to an additional 30 new drug approvals over the course of ten years, or nearly a 10% boost. Assuming that each incremental approved drug generates over 600 million in peak sales, we estimate that 60 additional therapies approved over a ten year period would translate into an additional 70 billion in drug development and PV for the biopharma industry. However, biopharma is not the only health care subsector that's poised to benefit from A.I.. Looking at health care services and technology, A.I represents an opportunity to drive meaningful change in efficiency in how care is delivered. A.I tools have predictive capabilities that could be used for early diagnosis and detection of disease, which could lead to improved clinical outcomes and patient experience and reduce the cost of care over time. Many health systems have already begun to migrate data from on premises to the cloud, an important step for capturing the full benefits of A.I. We will continue to monitor further developments in health care, both near-term and long term, and will provide you with our latest analysis and insights. 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.

With the U.S. possibly imposing tighter trade policies towards China, investors may want to look into diversifying their investments.----- Transcript -----Welcome to the thoughts on the market. I'm Michael Zezas, Global Head of Fixed Income and Thematic Research for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the U.S., China relationship and its impact on markets. It's Wednesday, July 5th at noon in New York. In recent weeks, the Biden administration has focused on the U.S. relationship with China. Treasury Secretary Yellen is headed to Beijing this week for meetings with senior officials in China, following on Secretary of State Blinken's recent visit. Whenever these diplomatic efforts pick up, investors tend to ask if it's a sign that there could be a softening or even a reversal in policy choices by the U.S. in recent years to create more rules and barriers to trade in certain higher tech industries. The interest is because these moves drove concern among many investors that multinational companies would have a harder time doing business in China in the future. But in our view, these policies are not going to reverse, but rather will likely become tighter. Consider that the stated goal of these meetings was to open regular communication channels on economic and security issues. It's obviously important for countries to have regular communication to avoid misunderstandings spiraling into conflict. But this appears to be where the ambition for these meetings ends. There's no more talk of reaching comprehensive free trade agreements, for example. Given that context, it makes sense that we're continuing to see news reports that the Biden administration is preparing fresh non-tariff barriers which would impact China. This includes further tightening export controls on semiconductors in an attempt by the U.S. to protect its technical advantage in an industry that's critical to both its economic and national security. It also includes long awaited outbound investment restrictions, which could crimp foreign direct investment into China. To be clear though, none of this is the same as a hard decoupling of the U.S. and China economies, nor would it have the related shock effect on global markets. The effects here are likely to be incremental adjustments by companies over time to deal with these policies. This is why, for example, we've seen many multinationals announce their diversifying they’re supply chains by investing in new geographies like Mexico and Turkey. But for the most part, they're not pulling existing resources out of China. Given all of that, investors may want to react to this nuanced situation by incrementally shifting international equity allocations to countries whose stock markets have solid valuations and may also benefit from companies' new supply chain investments. Japan in particular stands out to our colleagues in equity strategy, and Mexico and India also appear to be solid options longer term. Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague, or leave us a review on Apple Podcasts. It helps more people find the show.

Original Release on June, 15th 2023: With more Asian economies on pace to join the recovery path set by China, confidence in economic outperformance versus the rest of the world is rising. ----- Transcript -----Welcome to Thoughts on the Market. I'm Chetan Ahya, Chief Asia Economist at Morgan Stanley. Along with my colleagues bringing your variety of perspectives, today I'll be discussing our mid-year outlook for Asia's economy. It's Thursday, June 15 at 9 a.m. in Hong Kong. Asia's recovery is for real. We believe its growth outperformance has just started. We expect a full fledged recovery to build up over the next two quarters across two dimensions. First, we think more economies in the region will join the recovery path. Second, the recovery will broaden from services consumption to goods consumption and in the next six months to capital investments, or CapEx. We see Asia's growth accelerating to 5.1% by fourth quarter of this year. There are three main reasons why we expect this growth outperformance for Asia. First, Asia did not experience the interest rate shock that the U.S. and Europe did. Asian central banks did not have to take rates through restrictive territory because inflation in Asia has not been as intense. Plus, Asia's inflation has already declined and we expect 80% of region’s inflation will get back into central bank's comfort zone in the next 2 to 3 months. The second reason is China. While China's consumption recovery is largely on track, we have seen downside in the last two months, in investment spending and the manufacturing sector. We believe policy easing is imminent as policymakers are keen on preventing a deterioration in labor market conditions and on minimizing social stability risks. Easing should help stabilize investment spending and broaden out the recovery in back half of 2023. Beyond China, India, Indonesia and Japan will also contribute significantly to region's growth recovery. India is benefiting from cyclical and structural factors. Cyclically beating healthy corporate and banking system balance sheets mean India can have an independent business cycle driven by domestic demand, and we are seeing that appetite for expansion translating into stronger CapEx and loan growth. As for Japan, it is in a sweet spot, having decisively left the deflation environment behind, but not facing runaway inflation. Accommodative real interest rates are helping catalyze private CapEx growth, which has already risen to a seven year high. And, in another momentous shift, Japan's nominal GDP growth is now rising at a healthy pace after a long period of flatlining. Finally, we believe Indonesia will be able to sustain a 5% pace of growth. Indonesia runs the most prudent macro policy mix amongst emerging markets. In particular, the fiscal deficit has been maintained below 3%, since the adoption of the fiscal rule and has only exceeded that in 2020 during the worst of the pandemic. This has resulted in a consistent improvement in macro stability indicators and led to a structural decline in the cost of capital supporting private domestic demand. The risks to our next 12 month Asia outlook are hard landing in the U.S., which Morgan Stanley's U.S. economists think it's unlikely and a deeper slowdown in China. But we believe China's recovery will only broaden out in the second half of 2023. And given this, we feel confident about our outlook for Asia's outperformance in 2023 vis-à-vis rest of the world. Thanks for listening. If you enjoyed the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

Original Release on June, 6th 2023: Consumers in the U.S. are largely returning to pre-COVID spending levels, but new behaviors related to travel, credit availability and inflation have emerged.----- Transcript -----Michelle Weaver: Welcome to Thoughts on the Market. I'm Michelle Weaver from the Morgan Stanley U.S. Equity Strategy Team. Sarah Wolfe: And I'm Sarah Wolfe from the U.S. Economics Team. Michelle Weaver: On this special episode of the podcast, we're taking a look at the state of the U.S. consumer as we approach the midyear mark. It's Tuesday, June 6th at 10 a.m. in New York. Michelle Weaver: In order to talk about where the consumer is right now, let's take it back two and a half years. It's January 2021, and households are slowly emerging from their COVID hibernations, but we're still months away from the broad distribution of the vaccine. Consumers are allocating 5% more of their wallet share to goods than before COVID, driving record consumption of electronics, home furnishings, sporting goods and recreational vehicles. All the things you needed to make staying at home a little bit better. Our U.S. economists at Morgan Stanley made a high conviction call in early 2021 that vaccine distribution would flip the script and drive a surge in services spending and a payback in goods spending. Sara, to what extent has this reversion played out and where do you think the U.S. consumer is now? Sarah Wolfe: The reversion is definitely played out, but there's been some big surprises. Basically, the spending pie has just been greater overall than expected, and that's thanks to unprecedented fiscal stimulus, excess savings and significant supply shortages. So we've not only seen a shift away from goods and toward services, but a much larger spending pie overall. The result has been a 13% surge in goods inflation over nearly three years, an acceleration in services inflation, and a return to pre-COVID spending habits that's much greater in real spending terms than in nominal terms. So if we look in the details, where has the payback been the largest? We've seen the biggest payback in home furnishing, home equipment, jewelry, watches, recreational vehicles, but we've seen the most robust recovery in discretionary services like dining out, going to a hotel, public transportation and recreational services. Michelle Weaver: Sara, has the recent turmoil in the banking sector affected the U.S. consumer and do you think there's a credit crunch going on right now? Sarah Wolfe: Bank funding costs have risen meaningfully and are expected to rise further, leading to tighter lending standards, slower loan growth and wider loan spreads. But let me be clear, this is not a credit crunch, nor do we expect it to be. We think about the pass through from tighter lending standards to the consumer to ways directly and indirectly. The direct channel is tighter lending standards for loans on consumer products, including credit cards and autos, and indirectly through tighter lending standards for businesses, which has knock-on effects for job growth. We've already seen the direct channel of consumer spending in the past year, as interest rates on new consumer loan products hit 20 to 30-year highs, raising overall debt service costs and forcing consumers to reduce purchases of interest sensitive goods. Dwindling supply of credit as banks tighten lending standards is also dampening consumption. Michelle Weaver: Great. And given that credit is getting a little bit tougher to come by, can you tell us what's happening with savings and what's happening with the labor market and labor income? Sarah Wolfe: This is very timely. Just a few days ago, we got a very strong jobs report for May. I think that this really supports our call for a soft landing, and even though consumers are increasingly worried about the economic outlook, about financial prospects, it's clear that we still have momentum in the economy and that the Fed can achieve its 2% inflation target without driving the unemployment rate significantly higher. We are seeing under the details that consumer spending is slowing, there's a pullback in discretionary happening, there's a bit of trade down behavior. But with the labor market remaining robust, it's going to keep spending afloat and prevent this hard landing scenario. Michelle, let me turn it to you now, let's drill down into some specifics. What are the latest spending trends around spending plans you're seeing in your consumer survey? Michelle Weaver: Sure. So consumers expect to pull back on spending for most categories that we asked them about over the next six months. And the only categories where they expect to spend more are necessities like groceries and household products. We also added two new questions to this round of the survey to figure out which discretionary categories are most at risk of a pullback in spending. We asked consumers to order categories based on spen

A surprising increase in the sale of new homes doesn’t mean that overall demand for housing is on the rise. Find out what to expect for the rest of the year.----- Transcript -----Jim Egan: Welcome to Thoughts on the Market. I'm Jim Egan, Co-Head of U.S. Securitized Products Research here at Morgan Stanley. Jay Bacow: And I'm Jay Bacow, the other Co-Head of U.S. Securitized Products Research. Jim Egan: And on this episode of the podcast, we'll be discussing the U.S. housing market. It's Thursday, June 29th at 11am in New York. Jay Bacow: All right, Jim. We put out our mid-year outlook about a month ago, and since we put out that outlook, we've had a breadth of housing data and it feels like you can pick any portion of that housing data, sales, starts, home prices and it's telling a different story. Which one are we supposed to read?  Jim Egan: I think that's a really important point. The U.S. housing market right now is not a monolith, and there are different fundamental drivers going on with each of these characteristics, each of these statistics that are pushing them in different directions. Let's start with new home sales. I think that was the most positive, we could say the strongest  print from the past month. The consensus expectation, just to put this in context, was a month over month decrease of 1.2%, instead, we got an increase of 12.2%. To put it succinctly, new home sales are basically the only game in town. Existing listings remain incredibly low. We've talked about affordability deterioration on this podcast. We've talked about the lock in effect, the fact that the effective mortgage rate for existing homeowners right now is over three points below the prevailing mortgage rate. That just means there's no inventory. If you want to buy a home right now, there's a much greater likelihood that it's a new home sale than at any point in the past 10 to 15 years. And new home sales were the only housing statistic in our mid-year forecast where we projected a year over year increase in 2023 versus 2022 because of these dynamics. Jay Bacow: All right. So that's the new home sales story. Does that mean that we're just, broadly speaking, supposed to expect more housing activity? Jim Egan: This is the single most frequent question that we've been getting the past two weeks because of this data that's come in. And what we want to be careful to do here is not conflate this growth in new home sales with a swelling in demand for housing. As we stated in the outlook, we expect the recovery in housing activity to be more L-shaped. This behavior is apparent in more higher frequency data points, purchase applications for instance. 2023 remains far weaker than 2022. Average weekly volumes are down 35% year-to-date versus last year, and they're really not showing much sign of inflecting higher. In fact, if we look at just May and June versus 2019 prior to the pandemic, purchase applications are down almost 40%. Now, comps will get easier in the second half of the year. Year-over-year decreases will come down, but total activity is not inflecting higher. This is also showing through existing home sales, which are not showing the same improvement as new home sales. Existing home sales are down 24% year to date versus 2022. Also pending home sales, which missed a little bit to the downside just this morning. Jay Bacow: Okay. So when I think about the process of housing activity at the end, you've got a home sale, existing home sale, a new home sale. At the beginning, you've got either people applying to buy a home or starting to build a home. And the housing start data, that was pretty strong relative expectations as well, right? Jim Egan: It was. And the dynamics that we're discussing here, fewer existing home sales and climbing new home sales, that's leading to new home sales making up a larger share of that total number. And subsequently, homebuilder confidence is growing as a result. We think you can view this large number as perhaps a manifestation of that confidence, but we also want to stress that you need to think about that starch number in terms of single unit starts versus multi-unit starts. And yes, single unit starts were stronger than we anticipated, but they were still down year-over-year and through the first five months of this year, they're down 23%. Again, as with most housing activity data, the year over year comps are going to get easier in the back half of this year. That year over year percent will fall. We think they'll only finish the year down about 12%. But that's still a starch number that looks more L-shaped than a strong recovery. On the other hand, five plus unit starts in May were higher than in any single month since 1986. Multi-unit starts are still really driving the bus here. Jay Bacow: Okay. So with that homebuilder confidence, what are homeowners supposed to be thinking? They just saw the first negative year-on-year print in hom

How will corporate credit markets fare as the Fed keeps rates higher for longer? Look for wider spreads, further decompression and muted excess returns. ----- 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 outlook for corporate credit markets. It's Wednesday, June 28th at 11 a.m. in New York. Our economists are calling for one more 25 basis point rate hike in the upcoming Fed meeting in July and pause thereafter until the end of first quarter of next year. They're also calling for continued growth slowdown because of the policy tightening that we have seen over the last 15 months or so. A restrictive pause, which means rates staying higher for longer, and muted growth will weigh more on the performance of the corporate credit markets, especially as refinancing needs pick up. So our call is for wider spreads, further decompression and muted excess returns for corporate grade markets. Within credit we favor higher quality, which means investment grade credit over leveraged credit, both in bonds and in loans. Let's dig into some details. Industrial grade credit looks attractive from a duration lens, and we expect 7% plus total returns over the next 12 months. From a spread perspective, our base case target, a 150 basis point, calls for modest widening. Although risks are skewed to the downside in the recession bear case scenario to 200 basis points. We think the banking space looks cheap versus the market, especially money center banks. We favor single A's or triple B's and shortening of portfolio duration. Our preference is to own the front end of the curve within the investment graded space. Higher for longer puts more pressure on lower quality borrowers. While the macro outlook is not acutely challenging for credit, it progressively erodes debt affordability. For larger and higher quality borrowers, we expect the net impact to be gradual decline in interest coverage ratios and a voluntary focus on right sizing balance sheets. For smaller and lower quality companies, this adjustment could well be disruptive as 2025 maturity walls come into view. So even in leverage credit, we would look to stay up in quality. The layering of leverage and rate sensitivity in loans informs our preference for bonds in general relative to loans. We expect loan only structures to underperform mixed capital structures. We also expect sponsor commitment will be put to test. That said, higher quality names within the loan market are a way to benefit from the shape of the rates curve and generate better near-term carry. In all, we forecast wider spreads and higher default rates in the lower quality segments of the credit markets. Relative to the modest widening in the investment grade space within high yield and leveraged loans, we expect more significant widening in the range of 120 basis points of widening. This will result in marginally negative excess returns for these segments and will screen even worse when adjusted for volatility and downside risk. We forecast default rates pushing above long-run averages with loan defaults outpacing bond defaults, especially after accounting for distressed exchanges. 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. 

With A.I. rapidly reaching the mass market, investors are pondering the risks and upsides to A.I. diffusion. History may provide some answers.----- Transcript -----Welcome to Thoughts on the Market. I'm Ed Stanley, Morgan Stanley's Head of Thematic Research in Europe. And along with my colleagues, bringing you a variety of perspectives, today I'll be discussing ten key lessons from the last hundred years of tech diffusion. It's Tuesday, the 27th of June at 3 p.m. in London. Tech diffusion is one of the three big themes we at Morgan Stanley Research are following in 2023. The other two being the multipolar world and decarbonization. And when we say ‘tech diffusion,’ which has become a term of art, we mean the process by which any transformational technology is adopted widely by consumers and industries. Think of the light bulb, the first power plant, the internet, and now, A.I.. Our recent analysis of the last hundred years of tech diffusion helps to shed light on ten critical questions around how, when and where stocks will be impacted from the development of A.I.. One of the most important issues to consider is how fast A.I. diffusion is happening and whether regulation can restrain this. Since its pivotal moment when it was released in November, the leading generative A.I. tools are on pace to do in one year what the internet took  seven years to achieve in spilling over to the mass market, and electricity took around 20 years to do the same thing. The next critical question to consider is whether we tend to see upside or downside happen first for industries being impacted. In examining 80 structural positive and negative adoption curves over the last 50 years, we find that downside disruption often occurs sooner and twice as quickly as upside disruption. So how does the downside play out for stocks perceived to be by investors more at risk from these types of technology disruption? The market typically de-rates and waits. So valuations fall somewhere between 50 to 60% in the years 1 to 3 post-a-disruptive-event with consensus sales and profit downgrades taking anywhere around 5 to 7 years to materialize. This process is shorter for business to consumer, B2B and longer for business to business contracts, B2B. And what about the ways that upside plays out? For perceived winners, upgrades need to arrive within 6 to 12 months post the initial re-rating. However, we find that missing the first year of upside tends to have little impact on long term compound returns for investors. Investors also wonder to what degree A.I. might be a bubble. And this is a fair question considering the market excitement and froth in A.I. at the moment, but we're watching Internet search trends to answer this question. And if you look at image generation tools for A.I., we're already about 50% lower than peak search volumes. So it's a trend we're going to have to continue to watch pretty closely. Given all this, at what point do we expect killer apps to emerge that are built on top of these technologies? Well, our analysis of the last 50 examples of these killer apps emerging suggests that they tend to take a year and a half to emerge. This is why it's often very challenging to find domain specific winners in the public markets because they are still likely to be in venture backed scale up stage at the moment. But when the killer apps do emerge, the next question becomes how much value will accrue to the incumbents versus the disruptors. And on this point, history suggests that diffusion of technologies that are transformational like this have tended to lead to changes in stock market leadership over the last hundred years, with ultimately 2.3% of all companies generating all $75 trillion of net shareholder returns since 1990. In this context, are pure play or diversified stocks the best ways to play these themes? Over the long run, we believe that pure play stocks exposed to themes such as A.I., can be expected to be valued at approximately 25% premium to non pure play stocks on average. And the final two questions we get from investors take a more macro tilt. First, how much and when can we expect to see productivity gains? We are already seeing these productivity gains. The question is, what range? And we've seen anywhere between 20 to 55% for software developers, we've seen 14% for call center workers, and healthcare is also a large focus of academic research in terms of A.I. productivity and efficiency gains. Finally, there is the question of deflation. When and how much can we expect from this kind of technology? This remains the most challenging question to answer. Technology of all kinds has proven consistently deflationary, and we think this is no different. But we do suggest that investors familiarize themselves with the emerging debates on virtual assistance, which could accelerate these deflationary spillover effects. We'll continue to track al

While many countries are gearing up to combat climate change, financing these large projects may pose a challenge. ----- Transcript -----Simon Waever: Welcome to Thoughts on the Market. I'm Simon Waever, Morgan Stanley's Global Head of EM Sovereign Credit Strategy. Carolyn Campbell: And I'm Carolyn Campbell, Head of Morgan Stanley's ESG Fixed-Income Research. Simon Waever: On this special episode of the podcast, we'll discuss the credit impact of climate finance in emerging markets. Carolyn Campbell: It's Monday, June 26, at 10 a.m. in New York. Simon Waever: We believe that the ramp up in climate mitigation and adaptation financing from developed markets can be a key credit positive for emerging market countries, if executed correctly. The amounts of financing required in low and middle income countries to adapt to and mitigate the effects of climate change is likely to be over 1 trillion per year by 2030. Carolyn, let's start with that 1 trillion figure and the scale of the challenge. How are low and middle income countries positioned for climate change? Carolyn Campbell: So when we think about climate change, there's two sides of the coin. There's climate change mitigation, which is everything that will slow or prevent the temperature from rising more than a degree and a half above pre-industrial levels, which is the goal of the Paris Agreement. And on the other side, we've got adaptation, which is financing projects that will build resiliency to physical risks, for example, or to help transform the economy away from dependency on industries that are likely to be harmed by climate change. So on the mitigation side, we've seen energy consumption in emerging markets steadily rise over the past couple of decades as their economies continue to develop and their populations grow often at faster rates than we see in developed countries. Now, while we've seen absolute levels of renewable energy usage tick up in these countries, on a proportional basis we're not seeing a material change, and that's because of this absolute rise in energy usage overall. So that leaves a lot of scope for the expansion of low carbon technologies such as wind and solar and so on, and that's obviously very expensive. On the adaptation side, a lot of the emerging markets are located in areas that will bear the brunt of climate change, whether that's through worsening storms or increased droughts, rising sea levels and so on, and they don't have the same infrastructure or economic diversity to deal with these climate impacts. So it's an immense amount of capital required for both types of projects, as you said, likely to be greater than a trillion dollars per year by 2030. And so far, developed markets have actually come up short on their promise to deliver $100 billion annually in climate finance. So all this being said, I think it begs the question how will they pay for it without incurring an unsustainable debt load? Simon Waever: Yep, that is the question. And I would say the good news so far is that more and more sources are being made available with some being more targeted than others. The first main source is loans. So these generally come from either bilateral agreements, so from other sovereigns, or from multilateral institutions such as the World Bank. An example of a new facility being made available just in the past year is the resilience and sustainability trust from the IMF, which has now already made disbursements to six countries with more on the way. And the advantage of this facility, compared to others from the IMF, is that it comes at a lower cost and a longer maturity. The second main source is the capital markets. The instruments people will be most familiar with here are the labeled bonds, such as green, sustainable or even sustainability linked bonds that see their coupons change depending on various targets being met. But today, there's also an increasing use of the debt for nature swaps such as used in Belize and Ecuador recently and the introduction of climate resilient debt clauses. What this means is that if an adverse event happens like a hurricane, etc., there can be an automatic pause or delay in payments, which in theory should help both the country and creditors because you avoid going into any distress situation on the bonds. But another interesting avenue that's opened up in the last decade or so has been to raise financing by turning carbon into a commodity, whether as a voluntary carbon offset or through direct carbon pricing. Carolyn, how would those be used? Carolyn Campbell: Yeah. So on the voluntary carbon side, a credit represents one tonne of carbon reduced, removed or avoided, and a lot of emerging markets are able to sell these credits, not necessarily at the sovereign level directly, but in some cases, yes, to developed markets, either to the sovereigns or to corporates who are willing to buy those emissions to offset against their own. And so those

This year, foreign exchange has been even harder than usual to predict. Even so, the outlook for the U.S. Dollar may prove to be a handy asset moving forward.----- Transcript -----Welcome to Thoughts on the Market. I'm Dave Adams, Head of G10 Foreign Exchange Strategy at Morgan Stanley. And today I'll be talking about our outlook for the U.S. dollar and why it may prove an important driver of investor returns this year. It's Friday, June 23rd at 3 p.m. in London. Foreign exchange has long been known as a hard asset class to predict, and this year has proven to be even harder than usual. Consensus trades left and right have missed the mark, and both disagreement and uncertainty are the highest we've seen in years. So where do we go from here? We think the U.S. dollar is going to keep rallying, rising about 5% or so by the end of the year. Central bankers are likely to keep their feet on the brakes in order to tackle inflation. And in doing so, growth is likely to remain anemic, with risks skewed to the downside. Against this backdrop, we think two key themes are going to emerge: demand for carry and demand for defense. Carry is attractive in a slow growth world and is likely to explain a lot more of investor returns if prices don't move very much. And defensiveness is an alluring quality in financial assets when optimism is low, uncertainty is high and risks abound. It's pretty rare to find a financial asset that offers both of these qualities. Typically, insurance costs you money. But the good news is that the US dollar does. The dollar tends to be negatively correlated versus the equity market, meaning that when equities go down, the dollar goes up, and that relationship has only strengthened in recent years. Meanwhile, U.S. rates are elevated versus the rest of the world thanks to Fed rate hikes. Dollar rates are roughly 2% higher than those in Europe and even 5% higher compared to those in Japan.Foreign exchange is a relative game, and if investors are buying the dollar, they're probably selling something. We think in this high uncertainty environment currencies  which are most sensitive to growth and risk assets would likely weaken the most. In the G10 space, the Australian dollar and the Swedish krona both look vulnerable here, while in emerging markets that's probably the South African rand and the Chinese renminbi. There are plenty of potential risks on the horizon to keep investors worried; banking sector volatility, geopolitical risks, sticky inflation, just to name a few. As the investment outlook remains cloudy and hazy, the U.S. dollar is a handy asset to keep in the portfolio as a positive carry insurance hedge. 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.

As the U.S. Economy still angles for a soft landing, the recent Federal Open Markets Committee meeting may have left more questions than answers.----- Transcript -----Welcome to Thoughts on the Market. I'm Ellen Zentner, Morgan Stanley's Chief U.S. Economist. Along with my colleagues, bringing you a variety of perspectives, today I'll discuss the outcome of the June Federal Open Market Committee meeting and our outlook for the U.S. economy. It's Thursday, June 22nd at 10 a.m. in New York. Hawks and doves entered the battlefield at the June FOMC meeting, wrangling over the extent to which further rate hikes might be needed and how forcefully to convey that. As expected, the FOMC held rates steady at 5.1% and maintained a tightening bias in the statement. But it's also important to note that the statement included an ever so slight change in language that made further rate hikes seem less certain. So in all, this suggests the Fed could raise rates later this year, although when thinking about the very next meeting we think the bar to hike in July is much higher than market pricing implies. And the new summary of economic projections, which is made up of Federal Open Market Committee participants projections for things like GDP growth, the unemployment rate, inflation and the appropriate policy path, FOMC participants revised up the policy path for this year by a full 50 basis points. So that would imply two more 25 basis point rate hikes. They also lifted their growth projections for this year, they revised down the unemployment rate and they revised upward their core PCE inflation forecast. So all in all, that's a summary of economic projections that skewed very hawkish. Now, we find the upward revision to core PCE most perplexing as incoming data on inflation had been in line with the Fed's forecasts, and especially as key measures of core services inflation have consecutively softened. Now in relation to our forecasts, we think this sets up core inflation to fall faster than the Fed currently projects, which should offset the takeaways from a higher peak rate in the DOT plot. The core inflation projection for this year and the level of the Fed funds rate could get revised downward by the time the FOMC meets in September. In our latest outlook, we continue to see a soft landing for the U.S. economy this year, with inflation and wages slowly easing, as well as job gains. Now consistent with this expectation, we continue to look for the Fed to hold the peak rate at 5.1% for an extended period before making the first .25% cut in March 2024. Like the Fed, we have to be humble here and we do see the effects of banking stresses on the economy as highly uncertain, and we'll hone our expectations for the economy and monetary policy as the incoming data unfold. 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.

While high oil prices at the end of last year drove down demand and freed up supply, this year many expect the market to tighten again. So why hasn’t it tightened yet?----- Transcript -----Welcome to Thoughts on the Market. I'm Martijn Rats, Morgan Stanley's Global Commodity Strategist. Along with my colleagues, bringing you a variety of perspectives, today I'll discuss the outlook for the global oil market for the rest of 2023. It is Wednesday, June 21st at 3 p.m. in London. Last year saw severe tightness in most commodity markets. Demand still benefited from the post-COVID recovery, and supply was disrupted by the war in Ukraine. In many markets, prices had to rise to a level where demand destruction occurred. In the oil markets, that led Brent crude oil to rise to $130 a barrel, gasoline to $180 and diesel $190 a barrel. Those prices clearly did the trick. In response, the global economy slowed down and oil demand softened towards year end, resulting in a slight oversupply at market earlier this year. In recent months, however, the main narrative in the oil market has been a one of re-tightening into the second half. The market was clearly in surplus in the first quarter, but was widely expected to tighten again by the second half due to a combination of China reopening, continued recovery in aviation and downside risk to supply from Russia. Those factors should see the market balance in the second quarter and reenter a meaningful deficit in the third and fourth quarter, driving prices higher. In fact, that was also our expectation at the start orrf the year. However, if this was indeed to play out, we should see it by now. Given we are currently in June, the most actively traded Brent contract is the one for August delivery. North Sea oil delivered in August will typically arrive at a refinery around about September, with end products made from that crude oil such as gasoline, diesel and jet typically delivered to end customers by October. Therefore, the oil market is already trading the anticipated supply-demand balance deep into the second half. Yet the expected tightness has not yet emerged. This is not due to China's reopening, which has boosted oil demand broadly as expected. Already in March, Chinese refinery runs and its crude oil imports reached all time highs again. The recovery in aviation, and with that jet fuel consumption, is also broadly playing out as expected. Instead, most reasons for the weaker than expected oil market balance lie on the supply side. For starters, Russian exports have been remarkably resilient. The EU sanctions on the imports of Russian oil were widely expected to result in lower oil production from the country, but this has not materialized. On top, oil production from other non-OPEC countries have surprised to the upside. Notwithstanding low investment levels over the last few years, oil production has grown in a wide variety of countries, including the United States, but also Brazil, Canada, Argentina, Guyana, Colombia, Mexico, Oman and even China. As a result, oil production from non-OPEC countries has started to grow faster than global oil demand once again. When that is the case, the balance in the oil market can only be maintained if OPEC cuts production. And that is indeed what the producers group has been doing. OPEC already announced a production cut back in October of last year, and then again in April of this year, and again earlier this month. However, in doing so, OPEC loses market share to non-OPEC producers and it builds up spare capacity, both factors that typically end up weighing on oil markets. We still foresee a small deficit in the oil market in the third and the fourth quarter, but this is mostly a function of seasonality in demand and OPEC cuts. Those factors are not inherently bullish. If second half tightening does not play out, then market participants may need to consider what lies just beyond that. Our balances for early 2024 do not look so tight. Next year, demand will no longer be supported by another year of China reopening and aviation growth. There will still be supply growth in several non-OPEC countries, and seasonality, which is currently a tailwind, will turn into a headwind. There is still likely a period ahead when global GDP growth re-accelerates and the impact of little investment in new production capacity should start to bite. However, the cyclical and the structural outlook do not always align. Over the next six months, we see oil prices broadly stable at about $75 to $80 a barrel for Brent. What market participants find right in front of them is neutral rather than constructive. Thanks for listening. If you enjoyed the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with  a friend or colleague today.

While the U.S is moving towards a soft landing and Japan is seeing nominal growth, the European economy continues to face restrictive policy.----- 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 our mid-year outlook for macro markets. It's Tuesday, June 20th at 10 a.m. in New York. As we look ahead at macro markets for the next 12 months, central banks are front and center again. Our economists see them finding peak rates mid-year, while growth slows and inflation remains sticky. They also see the U.S. moving towards a soft landing, while the Euro area economy continues to face more restrictive policy. The U.K. continues to muddle through, while Japan delivers a year of nominal growth. Two global risk scenarios that our economists consider, a hard landing in the U.S. and then faster disinflation also in the U.S., should keep macro markets on the defensive. We think sovereign bond yields will end the year lower than in the first half, while the U.S. dollar will end the year stronger. We think macro markets already reflect the base case outlook for a soft landing and gradual adjustments in monetary policy. The view from our economists, which is mostly in the market price, aligns neatly with this consensus. So what will move markets into year end? Price action should, of course, evolve as surprises to this consensus view unfold. As usual, uncertainties around the outlook for monetary policy are murky, raising risks that the outcome will surprise currently held consensus views. One uncertainty involves the stance of monetary policy and the impact of the previous tightening that's been put in place. Have central banks tightened enough already to bring inflation back to target, in a suitable time frame? How long and variable are the lags of monetary policy today? We think rates market volatility, currently at its local lows, under appreciates the multitude of risks that lie ahead. For example, the lack of negative headlines around regional banks in the US have made investors complacent about bank stresses being behind us. However, key data points on bank balance sheets show that things have worsened on the margin since March. As for government bonds, we expect them to end the year with a rally for which investors have been waiting for, and we wouldn't be surprised if the positive returns accrued in line with historical seasonality. For example, strength in July and August, followed by a lull and then further strength in November and December. If you look at the US dollar, there's been a debate around the extent of the dollar's dominance in the global economy. As things stand, foreign investors continue to have a voracious appetite for US dollar denominated assets thanks to their strong returns and the U.S. economy's deep and liquid capital markets. So we forecast continued U.S. dollar strength into year end as tepid growth and asymmetric downside economic risk amplify investor demand for carry and defensive assets. 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 find the show.

With investors anticipating earnings surprises for US stocks, the outlook for municipal bonds is looking brighter.----- Transcript -----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income and Thematic Research for Morgan Stanley. Mark Schmidt: And I'm Mark Schmidt, Head of Municipal Strategy. Michael Zezas: And today, we'll be talking about the core of many investors' fixed income portfolios, municipal bonds. It's Friday, June 16th at 9am in New York. Michael Zezas: As our equity strategists continue to highlight the risk of earnings surprises for U.S. stocks, the outlook for the bond market looks considerably better. A soft landing, so call it, slow growth and slowing inflation, would mean favorable total return prospects across fixed income. In fact, even as the Fed's been raising short term rates, longer term bond yields have been falling as investors anticipate both inflation and growth to decline. So, Mark, for the benefit of listeners, tell us why this is a sweet spot for munis. Mark Schmidt: Thanks, Michael. Municipal bonds, high credit quality and tax exempt income are an opportunity for investors in high tax brackets right now. Credit quality for municipals can seem confusing, but we like to think of it in a pretty simple way. What's the outlook for tax collections? Income tax collections were mixed in April, but sales and property taxes continue to grow. Also, most state and local governments still have plenty of cash on reserve in case the economy performs worse than our economists expect. That cash comes from all the aid that the federal government provided, several hundred billion dollars, in fact, to municipal issuers in response to COVID. That's created a balance sheet buffer that can still support issuers today, even as growth slows. Now, even though credit quality remains pretty good, the good news is we don't think you need to take a lot of risks to enjoy the benefits of tax free income in your portfolio. Michael Zezas: And Mark, investors ask a lot about what the right maturity of bond is for their portfolio. What do you think investors should favor right now? Shorter or longer maturity bonds? Mark Schmidt: Longer maturity bonds generally offer higher returns, but of course, with higher risk as well. Right now, we actually see superior risk adjusted returns in a 1 to 5 year or 1 to 10 year latter. We'd look for investment grade credits in those shorter maturities for investors seeking higher income with higher risk. We'd recommend a barbell approach, one that blends short 1 to 5 year maturities with select maturities between 15 and 20 years. On the long end of the curve, we prefer very high quality AA bonds. With credit spreads and risk free rates at multi-year highs, we just don't think you need to reach for yield in this environment, especially as the economy slows. But Michael, one question that always comes up with regards to municipal bonds is the risk of the tax exemption changing, given how important tax free income is for municipal investors. Congress does change the tax code from time to time, do you expect major legislation out of Washington anytime soon? Michael Zezas: In short, no. Major tax reforms tend to happen once in a generation, and they tend to need one party to control both the White House and both chambers of Congress. And even then, a big tax code change needs to be their priority. So, the earliest this could possibly happen again would be after the 2024 election, so call it 2025. And then again, even then, it's not clear that even if one party were to take control of Congress and the White House, that this would be a priority for them. So in short, it's not something I'd be particularly concerned about. But Mark, turning it back to you. Munis helped to build all kinds of infrastructures in states and cities, colleges, hospitals, airports and toll roads. They all issue municipal bonds. What sectors do you like right now? Mark Schmidt: We think the outlook for most transportation issuers remains pretty good. Summer vacations are right around the corner, and we all definitely want to pack our bags and hit the road. All those travelers going through airports and on toll roads is good news for credit quality. Now, as for one sector where credit quality is more mixed, health care providers are still recovering from all the disruptions related to COVID. You all know the story, of course, as more patients required more specialized care, the demand for nurses and frontline health care workers skyrocketed, leading to higher costs across the board. Those costs are now stabilizing, but we continue to think it will take some time for credit quality to fully recover. When it comes to some of these choices about sectors and credit quality, though, remember that volatility is relative. Compared to other asset classes, fundamentals for investment grade municipal bonds don't change very quickly or v

With more Asian economies on pace to join the recovery path set by China, confidence in economic outperformance versus the rest of the world is rising. ----- Transcript -----Welcome to Thoughts on the Market. I'm Chetan Ahya, Chief Asia Economist at Morgan Stanley. Along with my colleagues bringing your variety of perspectives, today I'll be discussing our mid-year outlook for Asia's economy. It's Thursday, June 15 at 9 a.m. in Hong Kong. Asia's recovery is for real. We believe its growth outperformance has just started. We expect a full fledged recovery to build up over the next two quarters across two dimensions. First, we think more economies in the region will join the recovery path. Second, the recovery will broaden from services consumption to goods consumption and in the next six months to capital investments, or CapEx. We see Asia's growth accelerating to 5.1% by fourth quarter of this year. There are three main reasons why we expect this growth outperformance for Asia. First, Asia did not experience the interest rate shock that the U.S. and Europe did. Asian central banks did not have to take rates through restrictive territory because inflation in Asia has not been as intense. Plus, Asia's inflation has already declined and we expect 80% of region’s inflation will get back into central bank's comfort zone in the next 2 to 3 months. The second reason is China. While China's consumption recovery is largely on track, we have seen downside in the last two months, in investment spending and the manufacturing sector. We believe policy easing is imminent as policymakers are keen on preventing a deterioration in labor market conditions and on minimizing social stability risks. Easing should help stabilize investment spending and broaden out the recovery in back half of 2023. Beyond China, India, Indonesia and Japan will also contribute significantly to region's growth recovery. India is benefiting from cyclical and structural factors. Cyclically beating healthy corporate and banking system balance sheets mean India can have an independent business cycle driven by domestic demand, and we are seeing that appetite for expansion translating into stronger CapEx and loan growth. As for Japan, it is in a sweet spot, having decisively left the deflation environment behind, but not facing runaway inflation. Accommodative real interest rates are helping catalyze private CapEx growth, which has already risen to a seven year high. And, in another momentous shift, Japan's nominal GDP growth is now rising at a healthy pace after a long period of flatlining. Finally, we believe Indonesia will be able to sustain a 5% pace of growth. Indonesia runs the most prudent macro policy mix amongst emerging markets. In particular, the fiscal deficit has been maintained below 3%, since the adoption of the fiscal rule and has only exceeded that in 2020 during the worst of the pandemic. This has resulted in a consistent improvement in macro stability indicators and led to a structural decline in the cost of capital supporting private domestic demand. The risks to our next 12 month Asia outlook are hard landing in the U.S., which Morgan Stanley's U.S. economists think it's unlikely and a deeper slowdown in China. But we believe China's recovery will only broaden out in the second half of 2023. And given this, we feel confident about our outlook for Asia's outperformance in 2023 vis-à-vis rest of the world. Thanks for listening. If you enjoyed the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

While investors are feeling optimistic with the strong performance in markets despite some predicted challenges, it may be too soon to tell if these possible hurdles have been completely avoided.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for 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 Wednesday, June 14th at 2 p.m. in London. It's hard to ignore a sense of relief and increased optimism that's starting to percolate among investors. After a hard 2022, there was widespread trepidation entering this year that slower growth, quantitative tightening and further rate hikes would continue to pressure markets. Yet year-to-date, performance has been pretty good. Is that evidence that these problems aren't really problems anymore? Markets have been strong. But in terms of that strength showing that markets have passed the test of slower growth or policy tightening, I think it's more accurate to say that it's too soon to tell. Let's start with the idea that markets have already weathered a period of weaker growth. While leading economic indicators of the economy are soft, so far, actual activity has held up pretty well. The U.S. economy grew 1.3% in the first quarter and has added 1.6 million new jobs year-to-date. It's the coming quarters, specifically the next 3 to 6 months, where our economists see the weakest stretch of economic activity. Next, how about market resilience suggesting that rate hikes don't matter, or at least don't matter very much? Here we think the question is to what extent rate increases hit with a lag. The optimistic case is that markets are forward looking, and thus have already discounted the full impact of very large recent rate increases by both the Fed and the European Central Bank. But there's also a school of thought that higher rates don't fully hit the economy for 12 months, or more. 12 months ago, the federal funds rate was still just 1%. Maybe the full effects of policy tightening haven't yet hit. Another part of the theme of tighter policy is the reduction of central bank balance sheets or quantitative tightening. Again, it's tempting to view recent market strength as evidence that this dynamic doesn't matter as much as expected, and that may be true. But I think the jury's still out. Year-to-date, the aggregate bond holdings of the world's central banks have actually risen, not fallen, thanks to continued easing from the Bank of Japan and support for the US banking sector from the Federal Reserve. That should now change going forward, with these balance sheets shrinking, giving us a better measure of the true impact. Third is the effect of tighter lending conditions. The optimistic case is that following quite a bit of banking sector volatility in March, recent market resiliency shows that this is just another test that the current market has passed. But lending, like monetary policy, could act with a lag. Morgan Stanley's banking analysts see tighter lending from the U.S. banking sector playing out over an extended period of time, rather than quickly, and all at once. Markets have been resilient year-to-date, a welcome respite from a poor 2022. We don't think, however, that this resilience is yet proof that markets have successfully answered the question of what the impact of lower growth, tighter policy or tighter bank credit will be. Rather, these questions are still sitting there, waiting to be answered over the next several months. Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts, or wherever you listen, and leave a review. We'd love to hear from you.

With the European economy losing momentum amidst a rally in growth stocks globally, the time of European equity outperformance may be in the past for now.----- Transcript -----Welcome to Thoughts on the Market. I'm Graham Secker, Head of Morgan Stanley's European Equity Strategy Team. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the outlook for European equities in the second half of this year. It's Tuesday, June 13th at 2 p.m. in London. After a record burst of outperformance between October and March, European equities have started to underperform their international peers over the last couple of months, and we think this is likely to continue over the summer for two reasons. Firstly, the European economy seems to be losing some momentum, with many of the region's leading economic indicators turning back down over the last month or so. Now, while the magnitude of their reversal is small so far in absolute terms, the European Economic Surprise Index, which tracks how the data comes in relative to expectations, has fallen much more sharply and is now close to a ten year low. We think this is an important development, as this index is often a good lead indicator for future earnings and hence is now pointing to downside risks ahead for corporate profitability in Europe. The second factor starting to drag on Europe's relative performance, is the strong rally in growth stocks that we are seeing globally. While Europe has its own fair share of such companies, its tech weight overall remains considerably below that of most other regions. For example, tech is at about 7% of the European equity market versus 13% for Asia and over 30% for the U.S.. Quite simply, the size of this differential makes it difficult for Europe to keep pace with other regions when growth stocks are outperforming more broadly, such as now. While these two factors are likely to weigh on Europe's relative performance in the near term, we also see downside risks to broader global equity indices over the summer, given the potential for slowing growth and deteriorating liquidity dynamics in both the US and Europe. Taken together, we think these headwinds could see European equities fall by up to 10% over the next few months. Given this backdrop, we have further increased our preference for defensives over cyclicals, by upgrading pharmaceuticals to overweight, to sit alongside telecoms and utilities in our most preferred list. In contrast, we remain underweight cyclical sectors such as autos, capital goods, chemicals and energy. From a style perspective, we think it is too soon to take profits in the growth sectors and hence remain positive on the likes of luxury goods, medtech, semis and software. The biggest change to our view recently has become more downbeat on the outlook for European financials, which we think fits a, "right place but wrong time narrative". Specifically, while the sector looks attractive from a bottom up perspective in terms of low valuations, strong balance sheets and healthy earnings trends, we think the top down macro environment has become more challenging as we near the end of the current rate hiking cycle and with the prospect of slower economic growth and lower bond yields ahead. Notwithstanding our near-term caution, however, we are more positive on European stocks over the longer term, given the backdrop of what we think will ultimately be relatively resilient earnings and low equity valuations. For example, Europe's price to earnings ratio is now down to just 12.5 times versus the U.S. at close to 18 times. Looking out further on a 12 month view, our models suggest 8% price upside from here, which would rise closer to 12% if we include dividends and buybacks. So, when we put all of the above together, we think the outlook for European stocks is perhaps best described as one of short term pain, but for longer term gain. 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.

With AI gaining momentum among investors and the Fed potentially pausing on rate hikes, signs are now pointing towards the end of the bear market rally.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Chief investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, June 12th at 11 a.m. in New York. So let's get after it. At the beginning of the year, we noted that our view is much more in line with the consensus and we discussed that it might take some time for that to change. Suffice it to say, it has taken longer than we expected. At the end of January, sentiment and positioning had improved enough to put stocks in a vulnerable state, and sure enough, we had a 10% correction in the S&P 500 over the following six weeks, with the average stock down about 13%. Since then, the average stock has lagged the overall index by about 10%. We think this is mostly due to increased liquidity from the depositor bailouts, at the same time artificial intelligence began to gain momentum with investors. The combination of perceived safety and of newfound open ended growth story was too much for investors to resist. Hence, we have one of the most concentrated markets in history. For most of the past two months, sentiment has remained somewhat pessimistic, which is part of the reason why the average stock hasn't done very well. But sentiment has turned outright bullish in the past week. Furthermore, it's not just sentiment, as both retail and institutional flows have returned to the equity markets with technology and artificial intelligence the dominant themes. This past week there were several other warning signs that this bear market rally may have finally exhausted itself after eight months. First, several sell side strategists and market commentators have publicly stated the bear market is now over at this point. Second, we don't find much value in the 20% threshold for declaring new bull markets. Instead, our conclusion is driven more by the fundamentals, valuations and expectations relative to our outlook. In short, our earnings view is much more pessimistic than the current consensus expectation, which is now assuming a second half reacceleration story. We can also find several instances of bear market rallies that exceeded the 20% threshold, only to eventually give way to new lows. One example is particularly relevant, given our 1940s and fifties boom bust framework that we discussed in last week's podcast. After the boom in 1946, following the end of the war, the S&P 500 corrected by 28%, followed by a 24% choppy bear market rally that lasted almost eighteen months before succumbing to new lows a year later. Thus far, it appears similar to the current bear market, which corrected 27 and a half percent last year and is now rallied 24% from its intraday lows, but is still 10% below the highs. Third, when we called for a bear market rally last October, it was predicated on two key assumptions. First, market concern around the Fed and terminal rate had likely peaked, and second, the US dollar was also peaking. Both of these developments occurred as long term interest rates and the U.S. dollar topped last October. Falling rates and the US dollar have combined to drive both valuations and earnings expectations higher. On the latter point, the U.S. dollar index is now flat on a year-over-year basis, which compares to up 21% at its peak last fall. The question is how much did a weaker dollar help the top line for multinational companies and the S&P 500 overall? Furthermore, will this dollar weakness continue or will it flatten out and or even reverse into a headwind? It's hard to know for sure, but our house view is for a stronger dollar, and it's important to acknowledge the S&P 500 has become very negatively correlated to the dollar over the last decade. Finally, we think the Fed's potential pause on rate hikes this week could serve as the perfect bookend to this bear market rally that began with a peak in the Fed's terminal rate last fall. In many ways, it's often easier to travel than arrive at the destination. The bottom line, sentiment and positioning are now 180 degrees from where they were on January 1st. This means stocks are no longer set up for the disappointment we think is coming in the form of much weaker than expected earnings this year. This reset can happen either slowly as companies miss expectations one by one, or quickly from another exogenous shock that is just too much for the market to absorb. In that latter case, the equity risk premium is likely to spike, price earnings multiples are likely to fall sharply and we may make a new bear market price low before estimates fall in earnest. We suspect the weaker liquidity backdrop from greater Treasury issuance discussed la

While the forecast for global bonds remains strong for the latter half of 2023, other asset classes could see bifurcated results across regions.----- Transcript -----Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist. Andrew Sheets: And I'm Andrew Sheets, Morgan Stanley's Chief Cross-Asset Strategist. Seth Carpenter: And on part two of the special two-part episodes of the podcast, we're going to focus on Morgan Stanley's year ahead strategy Outlook. It's Friday, June 9th at 10 a.m. in New York. Andrew Sheets: And 3 p.m. in London. Seth Carpenter: All right, Andrew, in the first part of this two part special, you were grilling me on the economic outlook. You were taking me to task on all of our views, pointing out the different ways in which our clients, investors around the world were pushing back at different parts of our story. And now, it's payback time. Let me ask you, basically, what are we thinking as a research house in terms of where the best trades are likely to be for markets? We're looking for a soft landing in the U.S., but that doesn't mean a good outcome. So very weak economic activity and policy rates that are still restrictive. So what is that type of backdrop going to mean for one of the most closely watched assets in the world, the U.S. dollar? Andrew Sheets: Sure. So we do think that this backdrop, despite the fact that on the surface it looks decent, you have the U.S. and Europe avoiding recession. You have stronger growth in Asia, but you have a lot of uncertainties that are front loaded, and you still have slowing growth, you still have tight monetary policy. And we think this is going to still lead to a somewhat more difficult backdrop for markets over the next three months. And so I think in that context, the U.S. dollar looks quite attractive. The US dollar pays investors to hold it, it's a so-called positive carry currency against most major currencies and it's a diversifying currency, so as an asset it helps protect your portfolio. And I also think kind of within this context, if any economy is going to be able to handle higher interest rates, well, it might be the U.S. where a large share of consumer debt is fixed in a long term mortgage, which is very different from what we see in Australia or the UK or Sweden. So, we think that the dollar will do better, we think the dollar will do better in large part because of this attractiveness in a portfolio context that it offers investors a positive yield, while at the same time offering portfolio protection. Seth Carpenter: All right. So, if you're feeling reasonably upbeat about the dollar, presumably that spills over to dollar denominated assets. At the end of last year, the strategy team published a piece that was called ‘The Year of Yield.’ Are you still feeling that good about bonds in the United States in particular? Is it really fixed income securities that are your strongest call? Andrew Sheets: So, we still feel good about bonds, but I would say that the start of the year has been a pretty mixed picture. I think kind of relative to what we were expecting at the start of the year, the Fed and the ECB have raised rates more. Growth has been somewhat stronger, inflation has been somewhat higher. I would say none of those things are good for the bond market and yields instead of falling have kind of trended sideways. So they've done okay, but they've not done as well as we on the strategy side initially thought. But, you know, looking ahead, we think that the case for high quality fixed income is still quite good. We still think we see slowing in the second half of the year, which we think will be supportive for bonds. We think, certainly based in large part on the forecasts from you and the economics team, that the Fed and the ECB are largely done with their rate hikes, which we think will be supportive for bonds, and we think that inflation will moderate over the course of the year, which could also be supportive. So, we still think that when we look across global assets, while we see positive returns from most bond and equity markets, we think it's high grade bonds that generally offer the best risk adjusted return on our forecasts. Seth Carpenter: Okay, So risk adjusted return on bonds seem attractive to you. The natural follow up question to that is what about equities? Equities have actually performed reasonably well this year. On our first part of this podcast, I said that we are looking for a soft landing. What's the call on equities in the United States? Is this going to be a great second half of the year for equities? Andrew Sheets: So we think the equity picture is quite bifurcated. In some ways, I think it ties quite nicely to the bifurcated global economic picture that you and the economics team are talking about. Where growth in Asia is accelerating, this year, it's accelerating in the second half of the year, whi

As we look toward the second half of 2023, the U.S. and Europe are likely to see very slow growth but avoid a recession, while Asia may be poised to become an engine of economic growth.----- Transcript -----Andrew Sheets: Welcome to Thoughts in the Market. I'm Andrew Sheets, Morgan Stanley's Chief Global Cross-Asset Strategist. Seth Carpenter: And I'm Seth Carpenter, Morgan Stanley's Global Chief Economist. Andrew Sheets: And on this special two part episode of the podcast, we'll be discussing Morgan Stanley's global mid-year outlook. Today we'll focus on economics, and tomorrow we'll turn our attention to strategy. It's Thursday, June 8th at 3 p.m. in London. Seth Carpenter: And it's 10 a.m. in New York. Andrew Sheets: Seth, it's great to sit down with you. We've been talking over the last several weeks as Morgan Stanley's gone through this outlook process. And this is a big joint collaborative forecasting process across Morgan Stanley research, where the economists and the strategists get together and think about what the next 12 to 18 months might look like. And, you know, we're sitting down at this really fascinating time for markets. The U.S. labor market is at some of its strongest levels since the late 1960s. Core inflation is at levels that we really haven't seen since the 1980s. The Federal Reserve and the European Central Bank have been raising rates at a pace that hasn't really been seen in 30 or 40 years. So, as you step back from all of these quite unusual occurrences, Seth, how do you frame where the global economy is at the moment and where is it headed? Seth Carpenter: I'd say there's one major dichotomy that I'll first start with in the global economy. On the one hand, Asia as a region really poised to have the strongest economic growth. And in very sharp contrast, when I think about the rest of the world, the United States and the Euro area, we see those as being actually quite weak. Second, China, you can't get out of a discussion of the global economy without talking about China. And there, the first quarter saw massive growth in China as all of the restrictions from COVID were removed, and as the government shifted the rest of its policies towards being supportive of growth. Now, there's been a little bit of a stumble in the second quarter, but we think that's temporary. And so you'll see a cyclical boost to Asia, coming out of China. Layer on top of this our structurally bullish views on economies like India and Indonesia, where there's a medium term, really positive note, you have all of these coming together, and it sets the stage for Asia really to be an engine of economic growth. The sharp contrast, the United States, the euro area. The inflation that you referenced has led central banks to raise interest rates for one reason and one reason alone. They want to slow those economies down, so the inflationary impulses start to fade away. Andrew Sheets: So Seth that's great context, and I'd like to drill down a little bit more detail on two economies in particular, the United States and China. For the United States, this idea of a soft landing, I think investors will point to the fact that given how strong the labor market is, given how high inflation is, given how inverted the yield curve is, given how much banks are tightening lending conditions, all those factors make it less likely historically that a recession is avoided. So, why do you think a soft landing is the most likely option here? Why do you think that that's our central scenario? Seth Carpenter: Yeah, I completely agree with you, Andrew. The discussion, the debate, the push back, the soft landing part of our thesis is definitely central to all of that discussion. Maybe I'll just start a little bit with the definition because I think the phrase soft landing can mean different things to different people. What I don't mean is that we just have great economic growth and inflation comes down on its own. Quite to the contrary, we are looking for economic growth in the United States to slow so much that it basically comes to a standstill. This year and next year are both likely to be years where economic growth is substantially below the long run productive capacity of the economy. Why? Because the Fed is raising interest rates, making the cost of borrowing, making the cost of extending credit higher, so that there is less spending in the economy so that those inflationary impulses go away. So that's what we're thinking is going to happen, is that we'll have really, really weak growth. But your question also gets into is if you're going to have that much slowing in the economy, why not a recession? And here, it's always fraught to say this time is different. But I think you highlighted what is really different about this cycle. It's the first time the Fed is pulling inflation down, instead of trying to limit its rise, in 40 years. But in addition to that, we're coming out of COVID. And I don't

On the heels of Congress’s raising the debt ceiling, markets are wondering: What’s next from D.C.? Here are three things we’re watching.----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income and Thematic Research for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about what we're watching in Washington, D.C.. It's Wednesday, June 7th at 3 p.m. in New York. Now that the debt ceiling has been raised and the risk of a U.S. default is behind us for quite some time, it begs the question, what could come next out of Washington, D.C. that markets need to care about? While there's nothing definitively impactful on the horizon from our perspective, here's three things we're watching. First, we continue to expect that, any day, the White House could announce new restrictions on outbound investments towards China. If this were to occur, its scope would matter greatly. Limited restrictions might not matter, but wide ranging restrictions could seriously interrupt foreign direct investment into China at a time when investors are asking questions about the sustainability of China's economic recovery in light of some recent weak data. Second, we have to keep an eye on the emerging discussion around AI regulation. To be clear, there don't yet appear to be any well-formed views by either party on how regulation should develop. So Congress is likely far from action. But the shape of any eventual action will likely determine which use cases for AI will be permitted. So paying attention to these emerging debates will be important. Finally, candidates for president in the 2024 U.S. election have started to emerge. This has stoked questions about potential looming changes in policies that matter to markets. This includes tax policy, where key corporate and personal tax changes are set to expire starting in 2025, making the outcome of the election potentially impactful to corporate margins and therefore equity and credit markets. This certainly bears watching and we'll be investing substantial time in researching this topic in the coming months. But we caution that it's far too early to draw any conclusions about the likelihood of election outcomes and resulting policy paths. So in our view, it's still just a bit too early to impact markets. Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague. Or leave us a review on Apple Podcasts. It helps more people find the show. 

Consumers in the U.S. are largely returning to pre-COVID spending levels, but new behaviors related to travel, credit availability and inflation have emerged.----- Transcript -----Michelle Weaver: Welcome to Thoughts on the Market. I'm Michelle Weaver from the Morgan Stanley U.S. Equity Strategy Team. Sarah Wolfe: And I'm Sarah Wolfe from the U.S. Economics Team. Michelle Weaver: On this special episode of the podcast, we're taking a look at the state of the U.S. consumer as we approach the midyear mark. It's Tuesday, June 6th at 10 a.m. in New York. Michelle Weaver: In order to talk about where the consumer is right now, let's take it back two and a half years. It's January 2021, and households are slowly emerging from their COVID hibernations, but we're still months away from the broad distribution of the vaccine. Consumers are allocating 5% more of their wallet share to goods than before COVID, driving record consumption of electronics, home furnishings, sporting goods and recreational vehicles. All the things you needed to make staying at home a little bit better. Our U.S. economists at Morgan Stanley made a high conviction call in early 2021 that vaccine distribution would flip the script and drive a surge in services spending and a payback in goods spending. Sara, to what extent has this reversion played out and where do you think the U.S. consumer is now? Sarah Wolfe: The reversion is definitely played out, but there's been some big surprises. Basically, the spending pie has just been greater overall than expected, and that's thanks to unprecedented fiscal stimulus, excess savings and significant supply shortages. So we've not only seen a shift away from goods and toward services, but a much larger spending pie overall. The result has been a 13% surge in goods inflation over nearly three years, an acceleration in services inflation, and a return to pre-COVID spending habits that's much greater in real spending terms than in nominal terms. So if we look in the details, where has the payback been the largest? We've seen the biggest payback in home furnishing, home equipment, jewelry, watches, recreational vehicles, but we've seen the most robust recovery in discretionary services like dining out, going to a hotel, public transportation and recreational services. Michelle Weaver: Sara, has the recent turmoil in the banking sector affected the U.S. consumer and do you think there's a credit crunch going on right now? Sarah Wolfe: Bank funding costs have risen meaningfully and are expected to rise further, leading to tighter lending standards, slower loan growth and wider loan spreads. But let me be clear, this is not a credit crunch, nor do we expect it to be. We think about the pass through from tighter lending standards to the consumer to ways directly and indirectly. The direct channel is tighter lending standards for loans on consumer products, including credit cards and autos, and indirectly through tighter lending standards for businesses, which has knock-on effects for job growth. We've already seen the direct channel of consumer spending in the past year, as interest rates on new consumer loan products hit 20 to 30-year highs, raising overall debt service costs and forcing consumers to reduce purchases of interest sensitive goods. Dwindling supply of credit as banks tighten lending standards is also dampening consumption. Michelle Weaver: Great. And given that credit is getting a little bit tougher to come by, can you tell us what's happening with savings and what's happening with the labor market and labor income? Sarah Wolfe: This is very timely. Just a few days ago, we got a very strong jobs report for May. I think that this really supports our call for a soft landing, and even though consumers are increasingly worried about the economic outlook, about financial prospects, it's clear that we still have momentum in the economy and that the Fed can achieve its 2% inflation target without driving the unemployment rate significantly higher. We are seeing under the details that consumer spending is slowing, there's a pullback in discretionary happening, there's a bit of trade down behavior. But with the labor market remaining robust, it's going to keep spending afloat and prevent this hard landing scenario. Michelle, let me turn it to you now, let's drill down into some specifics. What are the latest spending trends around spending plans you're seeing in your consumer survey? Michelle Weaver: Sure. So consumers expect to pull back on spending for most categories that we asked them about over the next six months. And the only categories where they expect to spend more are necessities like groceries and household products. We also added two new questions to this round of the survey to figure out which discretionary categories are most at risk of a pullback in spending. We asked consumers to order categories based on spending priority and identify categorie

The recovery in 2024 and 2025 looks promising, but the worst of the earnings cycle is likely not over, even for technology stocks.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues bringing a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, June 5th at 11 a.m. in New York. So let's get after it. For the past several years, our overarching view on markets has been driven by our hotter but shorter cycle regime framework. More specifically, we wrote a report over two years ago that argued this cycle will run hotter, but shorter than what we've experienced over the past 50 years. We based this thesis in part on our comparison to the post-World War II time period, which looks quite similar to today in many respects. First and foremost, the excess savings buildup during World War II and the COVID lockdowns were released into the economy at a time when supply was constrained. The punch line is that both the fundamentals and asset prices returned to prior cycle highs at a historically fast pace. There's booming inflation in earnings in 2021, then led to the Fed tightening policy at the fastest pace in 40 years, a policy reaction that proved to be surprising to many investors. Now, we suspect many will be surprised again by the depth of their earnings decline in 2023, as well as the subsequent rebound in 2024 and ‘25. In a major deviation from the past 30 years, we think stocks are now positively correlated to the rate of change and inflation. We also believe this new inflationary cycle is better for stocks and bonds, at least over the secular time horizon of 7 to 10 years. However it will be volatile, with significant cyclical ups and downs that should be traded if one wants to fully capture the excess returns in this new regime. In short, the boom bust period that began in 2020 is currently in the bust part of the earnings cycle, a dynamic that has yet to be priced during the bear market that began 18 months ago. There are two key assumptions we think are now being made by many investors that may be erroneous. First, the worst of the interest rate hikes are now behind us. And second, technology stocks already experienced the worst of the earnings recession last year and can now look forward to accelerating growth in the second half of 2023. In fact, that reacceleration in earnings growth is now built into consensus expectations. Suffice it to say, we respectfully disagree with that conclusion. More importantly, this is a big change from the beginning of the year when our earnings outlook was not out of consensus. We think this has to do with companies sounding more optimistic about the second half, combined with the newfound excitement around artificial intelligence, or A.I., and what that means for both growth and productivity. While there will undoubtedly be individual stocks that deliver accelerating growth from spending on A.I. this year, we do not think it will be enough to change the trajectory of the overall cyclical earnings trend in a meaningful way. Instead, it may pressure margins further, as companies decide to invest in A.I. despite decelerating growth in the near term. 

Original Release on May 11th, 2023: While personal computer sales were on the decline before the pandemic, signs are pointing to an upcoming boost.----- Transcript -----Welcome to Thoughts on the Market. I'm Erik Woodring. Morgan Stanley's U.S. IT Hardware Analyst. Along with my colleagues, bringing you a variety of perspectives, today I'll discuss why we're getting bullish on the personal computer space. It's Thursday, May 11th, at 10 a.m. in New York. PC purchases soared during COVID, but PCs have since gone through a once in a three decades type of down cycle following the pandemic boom. Starting in the second half of 2021, record pandemic driven demand reversed, and this impacted both consumer and commercial PC shipments. Consequently, the PC total addressable market has contracted sharply, marking two consecutive double digit year-over-year declines for the first time since at least 1995. But after a challenging 18 months or so, we believe it's time to be more bullish on PCs. The light at the end of the tunnel seems to be getting brighter as it looks like the PC market bottomed in the first quarter of 2023. Before I get into our outlook, it's important to note that PCs have historically been a low growth or no growth category. In fact, if you go back to 2014, there was only one year before the pandemic when PCs actually grew year-over-year, and that was 2019, at just 3%. Despite PCs' low growth track record and the recent demand reversal, our analysis suggests the PC addressable market can be structurally higher post-COVID. So at face value, we're making a bit of a contrarian bullish call. This more structural call is based on two key points. First, we estimate that the PC installed base, or the number of pieces that are active today, is about 15% larger than pre-COVID, even excluding low end consumer devices that were added during the early days of the pandemic that are less likely to be upgraded going forward. Second, if you assume that users replace their PCs every four years, which is the five year pre-COVID average, that about 65% of the current PC installed base or roughly 760 million units is going to be due for a refresh in 2024 and 2025. This should coincide with the Windows 10 End of Life Catalyst expected in October 25 and the 1 to 3 year anniversary of generative A.I. entering the mainstream, both which have the potential to unlock replacement demand for more powerful machines. Combining these factors, we estimate that PC shipments can grow at a 4% compound annual growth rate over the next three years. Again, in the three years prior to COVID, that growth rate was about 1%. So we think that PCs can grow faster than pre-COVID and that the annual run rate of PC shipments will be larger than pre-COVID. Importantly though, what drives our bullish outlook is not the consumer, as consumers have a fairly irregular upgrade pattern, especially post-pandemic. We think the replacements and upgrades in 2024 and 2025, will come from the commercial market with 70% of our 2024 PC shipment growth coming from commercial entities. Commercial entities are much more regular when it comes to upgrades and they need greater memory capacity and compute power to handle their ever expanding workloads, especially as we think about the potential for A.I. workloads at the edge. To sum up, we're making a somewhat contrarian call on the PC market rebound today, arguing that one key was the bottom and that PC companies should outperform in the next 12 months following this bottom. But then beyond 2023, we are making a largely commercial PC call, not necessarily a consumer PC call, and believe that PCs have brighter days ahead, relative to the three years prior to the pandemic. 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.

With the rapid adoption of electric vehicles, onshoring the critical battery supply chain poses significant challenges and will drive sizable investments.----- Transcript -----Welcome to Thoughts on the Market. I'm Adam Jonas, Head of Morgan Stanley's Global Auto and Shared Mobility Team. Along with my colleagues bringing you a variety of perspectives, today we'll be talking about the global EV battery supply chain. It is Thursday, June 1st at 9 a.m. in New York. The rapid adoption of electric vehicles has brought to investor attention some rather inconvenient truths. We all know EVs require batteries, but today's battery supply chain involves some high environmental externalities, emissions, water usage, labor practices. And 70 to 90% of the upstream battery supply chain runs through the People's Republic of China. Re-architecting and on-shoring the EV battery supply chain is easier said than done. In our recent Global Insights report, we introduced a framework centered on two core variables. One, the rate of EV adoption, faster versus slower, and two EV supply chain sourcing, China dependent versus more diversified. At the crux of our analysis is the tradeoff between near-term EV penetration and on-shoring policies. Billions of taxpayer dollars are being thrown at an industry where the technology is still in its early stages of finding scalable industrial standards. Even as mineral extraction, refining and battery assembly all occurred on-shore, you still have to consider that battery manufacturing involves high carbon emissions and EVs require more energy intensive metals vis-à-vis internal combustion vehicles. We explore three scenarios across our framework. First, the China case, which entails rapid EV penetration, increasing the West's dependance on China. Second, the derisking case, which entails a more diversified supply chain with rapid even adoption requiring significant policy action. And third, the slow EV case, where the focus on on-shoring translates to more gradual EV adoption and continued prevalence of internal combustion vehicles versus market expectations. With this report, I brought together my research colleagues across autos, batteries, mining and clean tech, to assess implications for sectors and stocks that are better positioned or more challenged based on our scenario framework. We assess policy gaps and break down CapEx spend totaling up to 7 to $10 trillion. In our view, it may require well over a decade to achieve industrialization and standardization, gated by a host of geopolitical, environmental and economic considerations. If we're going to make batteries in the West, we're going to have to make them differently. The materials must be sourced, processed and refined far more sustainably. So we ask what is the new fracking equivalent for lithium? The lithium ion battery is the most consequential technology for decarbonizing transportation. Yet lithium is associated with supply shortages, intensive water consumption and permitting bottlenecks. Technologies that mitigate carbon emissions do exist, like direct lithium extraction, battery recycling, solid state batteries and others. But the journey of U.S. and European battery on-shoring will involve scaling these technologies. This is where innovation levered by the private sector and accelerated by the taxpayer can play a deterministic role. So who wins in a rewired battery supply chain? Ultimately, we think it'll be those firms that employ cost efficient and environmentally sustainable technologies in strategically beneficial geographies. Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague, or leave us a review on Apple Podcasts. It helps more people find the show.

While an agreement on suspending the debt ceiling seems likely to make it through Congress, investors may want to monitor bank deposits for lingering risks.----- Transcript -----Welcome to the Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income and Thematic Research for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the U.S. debt ceiling and its impact on markets. It's Wednesday, May 31st at 9 a.m. in New York. Today should bring a key step forward in resolving the debt ceiling dispute in Washington, D.C.. After the White House and Republican leadership reached an agreement over the weekend to pair a debt ceiling increase with a fiscal plan that caps spending growth for a time, the legislative plan advances to a vote in the House today. That vote is expected to succeed, with the only question being by how big a majority. After that, the deal moves to the Senate, which will likely have to work the weekend to enact the legislation before the June 5th X-date. So it seems then that we're closer to taking a key negative catalyst off the table for markets and the economy. As you might recall from our prior podcasts, without a debt ceiling resolution before the X-date, the White House may have had to choose from some less than ideal options to avoid default. For example, they could have prioritized payments to bondholders over other governmental obligations, but that could have interrupted up to 18% of personal income in the U.S., creating substantial economic risk. Further, the fiscal deal that enabled this raise of the debt ceiling doesn't appear to contain substantial enough spending cuts in the short term to hamper the economy. The Congressional Budget Office says it will cut deficits by about $70 billion in the first year, a very small number in the context of a roughly 26 and a half trillion dollar U.S. economy. But there's one lingering risk worth monitoring. When the debt ceiling is raised, Treasury will start issuing Treasury bills to rebuild the balance in its general account so it can pay its obligations. That action could reduce deposits in the banking system, to the extent that they are bought by investors that aren't money market funds. We can't say that this would definitively be a negative catalyst for, say, midcap banks which have been dealing with deposit outflows, but it's a risk market participants will have to continue to monitor. Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague, or leave us a review on Apple Podcasts. It helps more people find the show. 

As congress debates a debt ceiling deal, investors are proactively purchasing Treasury bills and thus causing a drain on the reserves which could amplify risks.----- 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 U.S. debt ceiling amid recent volatility in the banking sector. It's Tuesday, May 30th at 10 a.m. in New York. The looming deadline for the U.S. debt ceiling has been a significant concern for markets. In similar standoffs in both 2011 and 2013, the Congress raised the debt limit only at the last minute. The closer we got to the so-called "X-date", the more the Treasury ran down the amount of Treasury bills outstanding to stay under the limit. Bills maturing around the X-date were seen as less desirable and their prices fell a bit, but the scarcity of other bills made their price go up, and therefore, their yield fall. The bills market got dislocated, as we say, but the story did not end with the increase in the debt limit. To restock its account at the Fed, the Treasury issued a lot of Treasury bills, pulling in cash from the market. One lesson we can take from history is that there is short term volatility, but everything gets resolved in the end. But before we do that, it's worth considering what aspects of the world are different now than back in 2011 or 2013. Since February, the concerns about the banking sector's balance sheet have heightened financial stability questions. Although our baseline view is that the recent developments are more idiosyncratic than systemic, the uncertainty is substantial. That potential fragility is one key difference between now and then. Another key difference between now and previous episodes is the existence of the Fed's reverse repo facility, the RRP, which now stands at about two and a quarter trillion dollars. As short term interest rates have risen, depositors have taken cash out of banks and shifted it to money funds, and money fund managers have been putting the proceeds into the Fed's RRP facility. This transaction takes reserves away from the banking sector. As we get closer to the X-date and Treasury bills have fallen in yield, money funds have had additional incentive to shift their holdings into the RRP. At a time of volatility in the banking sector, this drain on reserves could amplify the risks. But Congress raising the debt limit would not be the end of the story. The Treasury will want to restock its account of the Fed from near zero back to its recent target of about $500 billion. And to do so, the Treasury will be issuing at least $500 billion in Treasury bills to replenish its account and maybe as much as $1.2 trillion in the second half of 2023. Some of the bills will go to money funds, and thus the Treasury's account can rise as the RRP facility falls. But whatever amount of the Treasury bills are purchased by investors other than these  money funds, well that will result in yet another drain on bank reserves. The flows are large and will be coming at a time of continued uncertainty for banks balance sheets. Even after the Congress raises the debt limit, it will not quite be the time to breathe a heavy sigh of relief. Thanks for listening. And 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.

Optimistic investors have pushed stocks and bond yields to the high end of the recent range. But inflation, banks and the debt ceiling status are still raising questions that have gone unanswered.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for 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, May 26th at 2 p.m. in London. A hot topic of conversation at the moment is that three big questions that have loitered over the market since January still look unresolved. The first of these is whether inflation is actually coming down. Surprisingly, high inflation was a dominant story last year and a major driver of the market's weakness. A number of low inflation readings in January gave a lot of hope that inflation would now start to fall rapidly, as supply chains normalized and the effect of central bank policy tightening took effect. Yet the data since then has been stubbornly mixed. Headline inflation is coming down, but core inflation, which excludes food and energy, has moderated a lot less. In the U.S., the annualized rate of core consumer price inflation over the last three, six and 12 months is all about 5%. Today's reading of Core PCE, the Fed's preferred inflation measure, came in above expectations. And in both the UK and the Eurozone, core inflation has also been coming in higher than expected. We still think inflation moderates as policy tightening hits and growth slows, but the improvement here has been slow. One reason our economists think that would take quite a bit of economic weakness to push the Fed, the European Central Bank or the Bank of England, to cut rates this year. That ties nicely into the second issue. Over the last two months, there's been a lot more excitement that the Federal Reserve may now be done raising interest rates, thanks to all of the tightening they've already done and the potential effect of recent U.S. bank stress. But with still high core inflation and the lowest U.S. unemployment rate since 1968, this issue is looking much less resolved. Indeed, in just the last two weeks, markets have moved to price in an additional rate hike from the Fed over the summer. Third and more immediate is the U.S. debt ceiling. Risks around the debt ceiling have been on investors' radar since January, but as U.S. stocks have risen this month and volatility has been low, we've sensed more optimism, that a resolution here is close and that markets can move on to other things. But like inflation or Fed rate increases, the U.S. debt ceiling still looks like another key debate with a lot of questions. U.S. Treasury bills or the cost of insuring U.S. debt, have shown more stress, not less, over the last week. As of this morning, a one month U.S. Treasury bill is yielding over 6%. Optimism that inflation is now falling, the Fed has done hiking and the debt ceiling will get resolved, have helped push both stocks and bond yields to the high end of the recent range. But with these issues still raising a lot of questions, we think that may be as far as they go for the time being, presenting an opportunity to rotate out of stocks and into the aggregate bond index. 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.