Thoughts on the Market

While the ECB followed headline inflation with raised policy rates yet again last week, the Fed meeting this week may be more focused on core inflation and a hiking pause.----- Transcript -----Welcome to Thoughts on the Market. I'm Seth Carpenter, Global Chief Economist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, today I'll be talking about the debate around oil price effects on inflation and growth, and what it means for central banks. It's Monday, September 18th at 10 a.m. in New York. Last week, the European Central Bank raised its policy rate again. We had expected them to leave rates unchanged, but President Lagarde reiterated that inflation is too high and that the Governing Council is committed to returning inflation to target. She specifically referenced oil among rising commodity prices that pose an upside risk to inflation. From the summer lows of around $70 per barrel, the price of Brent oil has risen to over $93 a barrel. How much should oil prices figure in to the macro debate? In previous research our economics team has tried to quantify the pass through of oil prices to inflation and different economies. Our takeaway is that for developed market economies, the pass through from oil prices to even headline inflation tends to be modest on average. In the quarter, following a 10% increase in oil prices, headline inflation rises about 20 basis points on average. For the euro area in particular, we have estimated that an increase like we have seen of $20 a barrel should result in about a 50 basis point increase in headline inflation. For core inflation the pass through tends to be less, about 35 basis points. Especially given the starting point though, such a rise is not negligible, but the effect should fade over time. Either the price of oil will retreat or over the next year the base effects will fall out. But energy prices can also affect spending. Recent research from the Fed estimates the effects of oil prices on consumption and GDP across countries. They estimate that a 10% increase in oil prices depresses consumption spending in the euro area by about 23 basis points. What's the mechanism through which oil price shocks affect consumption? Consumer demand for energy tends to be somewhat inelastic. That is, it's harder to substitute away from buying energy than other categories of spending. So back to the ECB, we had not expected them to hike rates, but we did think it was a close call. Core inflation had started to come down, and when it became clear that core services inflation that peaked and was drifting lower against a backdrop of signs pointing to a weaker euro area economy, we revised our call to no hike. So from our perspective, the ECB has increased the risk of hiking perhaps too much based on headline inflation. The ECB statement last week noted that inflation "is still expected to remain high for too long", but because it seems that they are now done hiking, the debate is going to turn to the duration of this so-called "higher for longer" with the policy rate. With the effects of inflation passing over time, but the drag of GDP showing up over the next few quarters, we get more comfortable expecting rate cuts there as early as June next year. The Fed is meeting this week and the last US CPI print showed headline inflation boosted by higher gasoline prices. Sound familiar? Well, our colleagues in the U.S. team have stressed that the Fed will likely look through the non core inflation. And, as in Europe, the increases in oil prices should lower purchasing power for consumers in the near term, further limiting economic activity and that is part of the objective of higher policy rates right now. With the Fed's focus on core rather than headline inflation, the last data print gives more reason to think the Fed is done hiking. Taking the last CPI print and combining it with last week's data from the Producer Price Index, you can infer a monthly rate of 0.14% for core PCE inflation in August. When the Federal Open Market Committee revisits its June economic projections, they will essentially be forced to revise down their forecasts for core inflation for this year. 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.

With more companies using artificial intelligence to enhance their travel websites, AI could become the industry norm.----- Transcript -----Ed Stanley: Welcome to Thoughts on the Market. I'm Ed Stanley, Head of Thematic Research in Europe. And along with my colleagues bringing you a variety of perspectives, today we'll be taking deep dive into the ways A.I can revolutionize the travel and booking experience. It's Friday, September the 15th at 3 p.m. in London. Ed Stanley: A.I and the company's most advantaged and likely disrupted have been the hot topic of 2023 for equity markets so far. However, the long term impacts and downstream winners and challenged companies remain fairly ambiguous for some sectors, and travel, hotels, OTAs certainly sit in that more hotly debated camp. We also have on the line our US gaming, lodging and leisure analyst Stephen Grambling with Brian Nowak, US head of Internet research. So Brian, if we could start with you to set the scene a little bit. Investors have been wondering about disrupting online travel for years. What does the hotel booking experience of the future look like, do you think? And what does that mean for travel agencies? And then, Stephen, if you want to follow up with your thoughts on the booking evolution and how that looks. So, Brian, first, please. Brian Nowak: Yeah, artificial intelligence, I think, is going to really change the overall online travel experience. I think it's going to become a lot more conversational, interactive, personalized and visual, and probably even video based in nature. You know, I think that right now you think about the travel research process where you might be looking for a hotel in Miami the week of the holidays in December that will sleep four people that has access to a beach and a golf course. That experience, the search for that right now is pretty low quality and requires a lot of multiple searches and tabs and apps, and it takes a while. You know, with the way in which these large language models and applications on top of these large language models can search through unstructured data, I think that these online travel agencies and other emerging A.I travel apps are going to really leverage these capabilities and actually just make the entire travel research process much faster, more interactive and more comprehensive. The other thing I would say on the interactive point is I think we are going to move toward having A.I powered online travel agents. Where if I am looking for that one example of a place to stay in Miami the week of the holidays today, but there are no hotels that fit my criteria, two weeks from now and inventory becomes available I may have an A.I travel agent say, Brian, are you still looking to travel in December? Look at the inventory that popped up. So I would just expect the overall travel research and booking process to become much more conversational, efficient and just high quality for all users, which should drive conversion higher and pull a larger share of wallets from offline to online. I don't know, Stephen, how do you think about the potential impacts on the brands from that? Stephen Grambling: I think to set the stage there, the most sizable place consumers start their booking process has been historically by researching hotels across price, amenities, location, etc. From the brand's perspective, the key was how do you get a consumer to book with you direct, even if the research was done via another channel? And that is what bore out the stop clicking around campaigns that started in 2016. The brands all launched marketing to tell consumers to stop price comparison all over and leverage loyalty to get the cheapest rate plus certain benefits that they could only get if they booked direct. So what happened? In some ways, the jury is still out due to the pandemic. Where do we go from here? I think, as you described, A.I has the ability to perhaps magnify some of the unique aspects of these brand loyalty programs that were so important to that direct booking campaign, that they can harness both business and consumer travel data that tends to have higher frequency, even if they have lower breadth relative to the OTAs. And as we look right now at the current landscape, when you do these queries that Brian was describing, booking channels are still effectively leveraging whatever the output was from search engine optimization, SEO. And so I think that the opportunity there is if you can train these large language models, either from the consumer dictating it via their preferences, whether it's for loyalty, the amenities they want, the experience they want, or the brands can train them by using the data that they have that's differentiated across both business and leisure. That's where they have an opportunity to actually move a little bit up in the funnel. Ed Stanley: Perfect. And you touched on marketing there, you gave some great color on the booking process of the future. Wh

With the global demand of oil reaching a new high, the spillover in performance is changing the fortune for energy equities and oil markets.----- 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 recent changes in oil markets and why recently we turned bullish on energy equities once again. It's Thursday, September 14th at 2 p.m. in London. Prices of both crude oil and refined product have risen substantially over the last two months. Brent crude oil is trading once again a little over $90 a barrel, up 20% since the middle of the year. Diesel prices have rallied even more, up 50% since the mid year point and recently surpassing the $1,000 per tonne mark again. After a fairly lackluster first half, this begs the question what has brought about this sudden change in fortune. For starters, oil demand is simply robust. In June, global oil demand reached 103 million barrels a day, a new all time high. But on top of that, the recent crude price rally has been supported by strong production cuts from OPEC, particularly Saudi Arabia. In April, Saudi Arabia still exported 7.4 million barrels per day of crude oil. By August, this had fallen to just 5.4 million barrels a day, that is an unusually sharp drop in a very short space time. On a 100 million barrel per day market, that may not look like much, but this is enough to drive the market into deficits, cause inventories to decline and prices to rise. What has given refined product prices, like diesel, a further boost has been tightness in the global refining system. Capacity closures during COVID, logistical difficulties in replacing Russian crude in European refineries and an unexpectedly large number of unplanned outages, partly because of a hot summer, have effectively curtailed refining capacity. Like last year, it has been all hands on deck in global refining this summer. Whether oil prices and refining margins will still rally a lot further is hard to know, but prices seem well underpinned at current levels. As long as Saudi Arabia and the rest of OPEC continue their current oil policy, the oil market is simply tight and the current cuts have all the hallmarks of lasting well into next year. On top, we think it will take some time before the current constraints in refining are resolved. Margins may decline somewhat from their current very elevated levels, but we would expect them to remain high by historical standards for some time to come. Then we would also argue that risks to natural gas prices in Europe are once again skewed higher. Prices have fallen substantially this year, and of course, they could fall somewhat further. However, if some tightness returns, they can rally a lot more, skewing that price outlook higher too. Putting this all together creates a favorable outlook for energy equities and that is where our true conviction lies. At the start of the year, we argued that earnings expectations for the energy sector were high and that market sentiment was already bullish and that valuations were stretched. After two years of rating the sector attractive, we downgraded our sector view back in January. However, pretty much all these factors have changed once again. Consensus earnings forecasts have fallen, but given our commodity outlook, we would now expect upgrades to consensus estimates to start coming through once again, making energy possibly the only sector for which this argument can be made. With strong free cash flow ahead, we expect robust dividend growth, strong share buybacks and declining net debt. Combining that with market sentiment that is no longer so buoyant for energy and valuations that have corrected quite a lot, we think energy is once again an attractive sector. Especially for those seeking high income and protection against inflation, against an uncertain geopolitical backdrop. 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.

Even though mortgage rates are up 100 points since the beginning of 2023, home prices are likely to stay flat or increase due to tight housing supply.----- 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. Securities Products Research. Jim Egan: And on this episode of the podcast, we'll be discussing U.S. home prices. It's Wednesday, September 13th at 11 a.m. in New York. Jay Bacow: Jim, mortgage rates are up over 100 basis points since the beginning of the year, but I hear you were turning more optimistic on home prices. What gives? Jim Egan: Well, the first thing that I would say is that home price data is pretty lagged and that an increase in mortgage rates is not going to be felt immediately in the data. For instance, let's assume the last week of August ends up being the peak in mortgage rates for this cycle. When would you expect that rate to start showing up in actual purchase mortgages? Jay Bacow: So, if the peak in mortgage rates is the end of August, we will get data on people applying for the mortgage the following week from the Mortgage Bankers Association. But it takes about seven weeks right now to close a mortgage. If the peak was at the end of August, the mortgages are probably closing towards the end of October, almost at Halloween. But if it closes in October, Jim, when will we actually get that data? Jim Egan: Right. The home price data is even more lagged than that. The Case-Shiller prints that we forecast and that we've talked about on this podcast, those come out with a two month delay. So those October sales, we're not going to see until December. Again, for instance, the print we just got at the end of August, that was for home prices in June. Jay Bacow: So in other words, we haven't seen the full impact of this increase in rates yet on the housing market and the data that we can see. But when we do, what's the impact going to be on home prices? Jim Egan: Well, we think the immediate impact is going to be on a few other aspects of the housing market, and then those aspects are going to potentially impact home prices. The most straightforward level here is affordability, right? That's an equation that includes prices, mortgage rates, as well as incomes, and so we're talking about the mortgage rate component. Now, one thing that you and I have said on this podcast before, Jay, is that affordability in the U.S. housing market, it's still challenged, but at least so far this year it really hasn't been getting any worse. That's not the case anymore. Affordability is still very challenged and now it's started to get worse again. By our calculations, the monthly payment on the median priced home is up 18% over the past year, and that's the first time that deterioration has accelerated since October of 2022. Three month and six month changes in affordability have also resumed deteriorating after those were actually improving earlier this year. Jay Bacow: So if homes are getting less affordable, presumably home sales should fall? Jim Egan: We think that would be kind of the probable impact there and it is something that we're seeing. To be clear, affordability is not deteriorating anywhere near as rapidly as it did in 2022, and we don't expect the same sharp declines in home sales. But this really does give us further confidence in our L-shaped forecast, and if anything it could provide a little more pressure on existing home sales. But we're also seeing the impact on the supply side of the equation. Jay Bacow: But wasn't the supply side already incredibly low? For instance, our truly refinanceable index calculates what percent of the universe has at least 25 basis points of incentive to refinance. It's at less than 1% right now. The average outstanding mortgage rate for the agency market is 3.68%. Are we really expecting the supply to fall further? Jim Egan: So that wasn't part of our original forecast and we had been seeing existing inventories really start to climb off of recorded lows. For context, our data there goes back about 40 years, but that's taken an abrupt about face in recent months. The 13% year-over-year decrease in inventory that we just saw this past month, that's the sharpest drop since June 2021, with a contraction coming through both new and existing listings. As affordability has resumed its deterioration with this increase in mortgage rates, homebuilder confidence actually fell month over month for the first time this year. Now, tight supply should continue to provide support to home prices, even as affordability has become more challenged. Jay Bacow: And so what does that support for home prices end up looking like? Jim Egan: The short answer, we expect a return to year-over-year growth with the next print that we're going to get here at the end of Sep

Economic growth data from the summer has bolstered belief in a possible soft landing in the U.S., while China has experienced a faster-than-expected deterioration in the macro environment.----- 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 our views on the markets as we head into the fall. It's Tuesday, September 12th at 10 a.m. in New York. As many of us head back to school, Morgan Stanley Global economics and strategy teams look back on how the economy and the markets have evolved over the summer and look ahead to what changing narratives mean for the economic outlook and asset markets. Our debate centered on two key issues. One, the outperformance of the U.S. economy and the underperformance of China economy. And two, the recent spike in government bond yields at the longer end of the curve. The U.S. economy has been outperforming our expectations and has led markets over the summer to push out the first expected cut into 2024. The concern is that a still hot economy means that the Fed can keep policy restrictive for longer. Acknowledging the strong incoming data, our economists have revised their 2023 growth expectations significantly higher for the U.S. from 0.4% to 1.7%, even as they maintain that the Fed is done hiking and will be on hold until first quarter of 2024. On the other hand, in China, the trajectory of economic growth has been different. Over the summer, data have been pointing to a faster than expected deterioration in the macro environment. We have seen successive and incremental property and infrastructure easing measures, but market confidence has not returned and debates around earnings, spillover effects on global growth and the impact on commodities are growing. Noting the macro and policy challenges since the mid-year outlook, our China economists have revised their 2023 growth expectations lower for China from 5.7% to 4.7% for 2023. And our emerging market equity strategists have moved to equal weight on China and revise down their MSCI Emerging Market Index target. What about our call to be long duration? Ten year Treasury yields have sold off by about 65 basis points since our mid-year outlook on better than expected U.S. growth data, among other factors. Can this continue? Our strategists make modest changes to their rates forecast, but still see a path for low yields, countering the market narrative of growth reacceleration or a higher treasury supply technical. Thus, we reaffirm our conviction to be long duration, despite the rates  market moving away from us. Overall, our conviction on a U.S. soft landing has strengthened. But with monetary policy remaining restrictive, late cycle risks, growth, earnings and defaults remain. We maintain a defensive stance. We prefer bonds over equities and equal-weight stocks, overweight fixed income, underweight commodities, and equal weight cash. Combined with rich valuations, this makes us stay equal-weight equities, with a preference for rest of the world stocks over US stocks. In all, high carry and late cycle environment favor an overweight in fixed income. 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.

Heading into the end of the year, questions remain around Treasury yields and the neutral interest rate.----- Transcript -----Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Chief Global Economist. Guneet Dhingra: And I'm Guneet Dhingra, Morgan Stanley's Head of U.S. Trade Strategies. Seth Carpenter: And today on the podcast, we'll be discussing our updated economic and rates outlook for the rest of the year and into 2024. It's Monday, September 11th, at 10 a.m. in New York. Seth Carpenter: All right, Guneet. We are now about a week into September and we can take stock of what we've learned over the summer. For macroeconomists like me we care about growth, inflation, monetary policy, and I'll say this summer spending indicators came in strong, inflation continued to fall, and we had Jackson Hole, the sort of nerd temple for monetary policy. And I have to say we didn't learn quite as much as I hoped, but we kind of know the Fed has done hiking, or at least very close. But I have to say, in your domain, the Treasury yield is trading roughly 4.25%. On the last day of June, when summer began, it was around 380. Can we just attribute the higher rate to thin liquidity and move on? Guneet Dhingra: You're right Seth, it's not just thin liquidity, but the conditions of August definitely played a meaningful part in sending yields higher. Typically, as investors look to go away for August, positive carry trades are the easiest trades to have on, and playing for higher yields has been positive carry. Which is why I think in August this year and even the last year, yields tended to go higher. But beyond August, seasonality, which might be the simplest explanation, investors have 4 major narratives out there that R-star, the so-called neutral rate of interest has increased, the end of yield curve control in Japan, more Treasury supply and more recently at the end of the summer, and increased supply of corporate debt. Guneet Dhingra: So before we go there Seth, you mentioned Jackson Hole at the end of the summer. The idea that some investors have that because the economy has held up so well, despite the Fed's rate hikes, that the underlying neutral rate or R-star must be higher and so will have higher interest rates not just now, but into the future. What is your take on this whole R* debate and what have you learned from Jackson Hole? Seth Carpenter: Absolutely. So I have to say Jackson Hole was very interesting, but this time there were a lot of very academic minded papers there that were very important to talk about. I can see how they can spur debate, but I'm not sure they provide that much that's actionable in the near term for the Fed or even for markets. And when it comes specifically to R-star, color me a bit skeptical and I say that for a few reasons. One, alternate explanations just abound. We could have got stronger spending because there's more residual impetus from the fiscal policy that's already in the pipeline. And in particular, if we look at where we missed our GDP forecast, a really big part of that was nonresidential structures investment. So that could go a long way to explain it. Second, if R-star really was higher, I think that would mean that the Fed would have to raise the peak rate during this hiking cycle even higher, not just rates off in the future. And so what does that mean? That means that I at least would have expected a parallel shift higher in rates, not just along in selling off. And in fact, you might even see a steeper inversion of the curve as the rate goes higher in the near term, but then has to come down later. So take all of that together, and I guess I'm just really not convinced that there's enough evidence to conclude that R-star is higher. Guneet Dhingra: Yeah, makes a lot of sense, Seth. And listening to you about the growth and economic picture, I'm even more convinced that this R-star story doesn't quite hold water. Seth Carpenter: All right, so then there is the yield curve control story. And I will say, at the risk of patting myself on the back, our Japan team had been expecting a tweak to yield curve control in Japan, and we got it. But I know that you're skeptical that that's really the story here. Why do you push back? Guneet Dhingra: Yeah, I think one of the ways you can actually verify the impact of the yield curve control on the U.S Treasury market, is just break down the price action into different time zones. And what you saw is in the Tokyo time zone, where you would expect a lot of the so-called repatriation flows to play out, we haven't really seen much of a movement in U.S Treasury yields ever since the YCC change announcement. So I would say based on the time zone analysis, it doesn't look like YCC changes are really impacting Treasury yields. Seth Carpenter: Okay Guneet, I get it. So it wasn't from trading happening in Tokyo, but these sort of markets are global. There

Both equities and high-yield bonds could benefit from an end to ratings hikes, but may still face risks from company earnings revisions, a potential U.S. government shutdown and other events on the horizon.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Corporate Credit Research at Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, September 8th at 2 p.m. in London. The week after Labor Day is both a refreshing return to more normal market conditions, and a rush. As investors head back to school, so to speak, here are a few big issues that we think they should be focused on. First and most importantly, we think the next few months will be about cementing the idea that both the Fed and the ECB are done raising interest rates for the foreseeable future. Given better than expected core inflation data in the U.S. and worse than expected growth data in Europe, we think neither central bank will raise rates at their meetings this month. And then further out, we think they stay on hold as lowered levels of bank loan growth, slower job growth and a continued decline in core inflation will reinforce the idea that central banks have raised rates enough. For markets, the end of a central bank rate hiking cycle tends to be pretty good for high grade bonds. Indeed, going back over the last 40 years, the dates of the last Fed funds rate increase and the local high point for yields on the U.S. aggregate bond index, line up almost to the month. The logic in this relationship also feels intuitive. If the Fed is done raising rates, one of two things has probably happened. It stopped raising rates at the correct level to bring inflation down without a recession and bonds like that lower inflation and more certainty, or they stopped because they've raised rates too much, slowing growth in inflation much more, a scenario where investors like the safety of bonds. But in riskier markets, the picture greeting investors in September is more murky. Like August, September also tends to see below average returns and above average volatility, and that seasonality doesn't turn helpful until mid-October. Company earnings revisions tend to be weak around this time of year, something our equity strategists believe could repeat. Investors got a lot more optimistic over the summer, raising the hurdle for good news. And there are some specific risk events on the near-term horizon, from a potential shutdown of the US government to a strike in the auto industry. For equities and high yield bonds, we therefore think investors should exercise more patience. A third issue investors will be watching is supply. September is historically one of the heaviest months of the year for corporate bond issuance, but with corporate bond yields now at some of their highest levels in nearly 20 years, will that reduce the incentive for companies to borrow? And meanwhile, one of the reasons assigned to the recent rise in US government bond yields has been the high levels of government borrowing. The next few weeks will give a much better idea of the true impact of that potential supply. 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.

A strong El Niño event in the coming months could have negative effects for food inflation, commodities markets and climate change.----- Transcript -----Welcome to Thoughts on the Market. I'm Stephen Byrd, Morgan Stanley's Global Head of Sustainability Research. Along with my colleagues bringing you a variety of perspectives today, I'll discuss the global risks and impact from a potential El Niño event later this year. It's Thursday, September 7th at 10 a.m. in New York. Over the last few months, as you've been doing your backyard grilling or taking a well-deserved summertime vacation, you may have heard a passing news reference to a climate pattern called El Niño. And although I'm an equity analyst and not a meteorologist, I'm going to talk about El Niño today because it could have some significant impacts for investors. To explain, El Niño refers to a warming of the ocean surface or above average sea surface temperatures in the central and eastern tropical Pacific. It's the counterpart to La Niña, which refers to the cooling effect of the same ocean surfaces. Essentially, El Niño and La Niña represent opposite extremes in the El Niño Southern Oscillation or ENSO. ENSO follows cyclical patterns that repeat at a 2 to 7 year cadence and tend to peak in the November to February window. Current conditions imply about a 70% probability that we could be facing a moderate to strong El Niño event later this year with a range of potentially significant impacts across regions and industries. First, although El Niño starts in the Pacific equator area, it has a significant impact on global weather. El Niño tends to peak around year end, impacting global rains and temperatures. El Niño driven seasonal patterns in the U.S., Argentina and the Andes tend to be wet, while those in Southeast Asia, Australia, Brazil, Colombia and Africa tend to be dry. This dynamic creates conditions that move wildfires and hurricanes from the Atlantic into the Pacific area. El Niño events also impact the global economy and the environmental, social and governance, or ESG, factors for businesses worldwide. More specifically, a moderate to strong El Niño in combination with the Russia-Ukraine war could impact food inflation, raising questions about the emerging markets central banks easing cycles. It could also impact trade and GDP in agro-related economies such as Argentina, India, Australia, Brazil and Colombia, among others. It may also impact several commodities, including sugar, grains, animal meal, proteins, electricity, lithium, copper, iron ore, aluminum and coal. El Niño’s effects can be positive or negative for different sectors and regions. For example, El Niño tends to be a negative in emerging markets. In Latin America, given the size of the agricultural sector and the spillover effect of agriculture into other industries, growth could be affected significantly. The recession we expect in Argentina this year is partially driven by La Niña, which generated an unprecedented drought. We expect El Niño to help grain yields in Argentina and to provide significant positive base effects to GDP in 2024. Finally, when it comes to ESG, El Niño can exacerbate climate change impacts and increase concentrations of greenhouse gasses. Since this is a global issue and impacts all sectors to various degrees, we believe investors should pay close attention. Furthermore, the humanitarian impact of El Niño lasts long after the phenomenon itself, be it through impacts on food security and malnutrition, disease outbreaks, disrupted basic services and sanitation or significant impacts on livelihoods around the world. Typically, extreme weather events hit the poorest communities the hardest. 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.

Investors anticipate new legislation on tech regulation, AI and defense, amid speculation about a potential government shutdown.-----Transcription -----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 Congress coming back in the session and its impact on markets. It's Wednesday, September 6th, at 10 a.m. in New York. Congress returns from summer break this week with a full agenda. Expect to see tons of headlines on various policies that markets care about. Tech regulation, artificial intelligence regulation, defense spending, disaster relief aid and the risk of a government shutdown, are just some of the issues that should be tackled. It can be a bit overwhelming, so here's our cheat sheet for September in D.C. to help cut through the noise and understand why this could be a good set up for U.S bonds. On tech regulation and A.I, don't expect any meaningful movement here. New versions of legislative proposals on data privacy and liability for spreading misinformation may come, but there's still no comprehensive bipartisan agreement that could turn proposals into law. So we continue to expect that this only becomes possible after the 2024 election delivers a new government makeup. On defense spending, we expect that aid to Ukraine will continue and the Congress will approve overall defense spending levels in excess of the cap set by the agreement put in place alongside the hike of the debt ceiling. There's bipartisan agreement here, with the exception of House Republicans. Resolving issues with those holdouts will likely take brinkmanship over a government shutdown and perhaps even an actual government shutdown, but ultimately we see a deal that should be positive for a defense sector which has benefited recently by elevated spending by Western governments. The biggest story to track, though, is that risk of a government shutdown. As we previously discussed on this podcast, a shutdown is a real risk because House Republicans are not in sync with the rest of the House of Representatives and Senate on spending levels for fiscal 2024. Further, there's the sense that both sides may rightly or wrongly perceive political value in a shutdown. So there's both motive and opportunity here. And while a shutdown on its own is not sufficient to ruin our economists' expectation of a soft landing for the U.S. economy, it does add some fresh downside risk to growth in the 4th quarter, which economists already expect would be challenged. Major entertainment events in the U.S. boosted consumption above expectations this summer, and those effects should start to wane at the same time that the student loan moratorium rolls off, meaning many households will again have to direct some level of their income away from consumption toward servicing loans come October 1st. Put it all together, and it's a strong rationale for our view that high grade bonds have value here. U.S. government bond yields should be near their peak, with the market moving beyond the notion that the Fed may have to hike substantially more this economic cycle. 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 valuations may be on the rise, fears around the resiliency of the economy could return and leave unguarded investors on uneven footing.----- 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 Tuesday,  September 5th at 10 a.m. in New York. So let's get after it. In a world of price momentum, opinions about the fundamentals are often driven by the direction of price. Some of this is due to the view that markets are all knowing and often the best leading indicator for the fundamentals. After all, stocks are discounting machines and tell us what's likely to happen in the future rather than what is happening today. The old adage "buy the rumor and sell the news", is another way to think about this relationship. Using this philosophy, the move higher in stocks this year has provided the confidence for many to turn fundamentally bullish from what was an overly bearish consensus backdrop in the first quarter. The entire move in the major U.S. equity averages this year has been the result of higher valuations. However, with forward price earnings multiples reaching 20 times on the S&P 500 last month, not only are stocks anticipating higher earnings and growth, but they now require it. The other reason price momentum works has little to do with the fundamental outlook. Instead, price momentum often leads investors to chase or sell that momentum. It's human nature to want to go with the trend both up and down. Most were too negative on the economy at the beginning of the year, including us. The failure of a few large regional banks and negative price reaction in the stock market reinforced that view. However, when the recession didn't arrive, there was a fundamental reason to reverse that view. The price action in April and May supported that pivot, further feeding the bullish narrative. However, the move in price was very narrow, led by just a handful of Mega-cap growth stocks. In June, breadth improved, dragging investor confidence toward the optimistic fundamental outcome. But since then, breath has rolled over again and remains weak. We recommend maintaining a late cycle mindset, which means a barbell of growth stocks and defensive, not cyclicals or smaller stocks. Going into the second quarter earnings season we suggested it would be a "sell the news event", mainly because stocks had rallied in the mid-July, which was a change from the past several quarters where stocks trended weaker into results. Now that earnings season is over, we know that the price reaction post reporting was some of the weakest we've witnessed in the past decade. We think stocks may be starting to question the sustainability of the economic resiliency we experienced in the first half of the year. Defensives and growth stocks have done better than cyclicals. As an aside, the earnings results have not kept pace with the economy this year outside of a few areas which have been driven mostly by cost cutting rather than top line growth which furthers the idea we are still late cycle, not early or mid. This past week, equity prices have rebounded sharply, led once again by growth stocks. With softer economic data weighing on Treasury yields, stock market participants seem willing to bid valuations back up on the view the late cycle environment is being extended once again. With inadequate evidence to affirm or contradict that view, price continues to be the governing factor for many investors' conclusions about where we are in the cycle. Bottom line price momentum is a key driver of sentiment, especially in a late cycle environment when uncertainty about the outcome is high. We continue to recommend a more defensive growth posture in one's portfolio given that the fears of recession or financial distress could return at any moment in the late cycle environment in which we find ourselves, particularly as we enter September. 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 help's more people to find the show.

Although back-to-school spending appears to be trending higher than in 2022, there are signs that U.S. consumers could feel pinched before the holiday season.----- Transcript -----Sarah Wolfe: Welcome to Thoughts on the Market. I'm Sarah Wolfe from Morgan Stanley's U.S. Economics Team. Simeon Gutman: And I'm Simeon Gutman, an Equity Analyst covering the U.S. Hard Lines, Broad Lines and Food Retail Industries. Sarah Wolfe: And on this special episode of the podcast, we'll focus on back to school shopping trends and what they suggest for the U.S. consumer outlook for the rest of the year. It's Friday, September 1st at 10 a.m. in New York. Simeon Gutman: Sarah, back to school shopping is in full swing as we go into the Labor Day weekend and end of the summer. As an economist who focuses on the U.S. consumer. I know you track it closely. Why is back to school shopping such an important indicator in general, and what is it suggesting about the overall health of the U.S. consumer? Sarah Wolfe: Back to school is a large shopping event across July and August each year, which is an event that is only as strong as the strength of the U.S. household. If households feel good about job prospects and inflation is not eating away at their buying power, you should see that reflected in back to school sales. If we go back to summer 2022, headline inflation was 8% going into back to school shopping, and there were lingering concerns about COVID disrupting school. In 2023, certain headwinds to the consumer are risks to spend, these include higher debt service costs, tighter lending standards and a student loan moratorium expiring in October, but a still strong labor market and abating inflationary pressures that have supported a recovery in real wages should outweigh the downside risk and lead to a moderate back to school spending year. So what does this all mean for what we're seeing in the data? Our early read on July back to school shopping and in-store sales is that they're going to be weaker than the historical average, however, August matters most. If we see August sales in line with the historical average, then back to school sales for 2023 on a year-over-year basis would be quite a bit stronger than 2022 still, but roughly in line with the historical run rate from 2011 to 2019. This jives with our early readings from our AlphaWise Consumer Poll survey that this year back to school shopping is looking stronger than last year, but it is not a blowout. Simeon Gutman: And how about end of year holiday spending? Is back to school a predictor of holiday spending trends? Sarah Wolfe: Back to school shopping is indeed a predictor of holiday shopping trends. However, the early read through to holiday shopping points to a holiday season that's actually weaker than 2022, but in line with the historical run rate as well. Total retail sales on a non seasonally adjusted basis across November and December have been 8% year-over-year from 2011 to 2019 in 2021, the growth was 33% and 2022 was 12%. This was due to stronger than usual demand for goods as a result of COVID and stimulus. So while the consumer remains relatively healthy and is spending more on back to school shopping than last year, it'll be tough to beat 2022 holiday shopping growth. The preliminary forecast for holiday shopping is to see growth in line with the historical run rate, but weaker than next year. We still get a couple more retail sales reports that are going to help us fine tune our holiday shopping forecast. Simeon, turning it over to you, what specific trends are you observing during this back to school shopping season? Simeon Gutman: So far, it's mixed. On the surface, it looks like the consumer is healthy. If we look at durable goods spending the last couple of months, we have June and now July, low 2% range. That's decent. But under the surface, it's a bit of a different story. If you look at the Q2 comps across the coverage universe, they were roughly flat. That's not a great indicator of spending. And we see a shift towards consumables and supplies and must haves. Consumers are not prioritizing discretionary items. Big ticket items are under pressure. The companies that are growing and doing well, they look like they're taking market share, there's a shift towards value, so discount stores, dollar stores, off price stores, and it looks like it's a story of product categories, beauty and auto parts. What we've seen specifically for back to school, July was a strong month, but there was potentially some pull forward from earlier in the season. August seems to be good, but may have slowed a little and we'll see about September. But consumers are definitely shopping more on occasion and it's been a little bit choppy. Sarah Wolfe: These are great insights, Simeon, on how consumer behavior is slowly evolving as the macro backdrop becomes a little bit tougher. You've also highlighted electronics as one particular area t

While recent news of a potential debt deflation loop in China’s equity market is causing concern for investors, Japan’s equity market resilience may bring optimism.----- Transcript -----Welcome to Thoughts on the Market. I'm Daniel Blake from Morgan Stanley's Asia and Emerging Markets Equity Strategy team. Along with my colleagues, bringing you a variety of perspectives, today I'll discuss the Japanese equity market vis-a-vis China. It's Thursday, August 31st at 9 a.m. in Singapore. We recently did a three part series on this show focusing on our economic and market outlook for Japan. We discussed a bullish view on Japan equities, which is driven by three powerful drivers of outperformance coming together, namely macro, micro and the transition to a multipolar world. Recently, however, there's been investor concern about the potential impact on Japan from a Chinese debt-deflation loop, that is a scenario where prices fall, debt rises and economic growth stagnates, and this is the risk that I will discuss today. As a reminder, our economists came into 2023 flagging Japan as a standout developed market for growth momentum. In contrast to a U.S and European slowdown, as Japan continues to benefit from COVID reopening, ongoing stimulatory policy and a competitive currency. Since then, we have seen upside surprises, such as in wages and capital investments amid what we see as confirmation of a move into a structurally higher nominal GDP growth path. Indeed, Japan's recent second quarter GDP figures confirmed that trend, with a surge in real and nominal GDP to 6% and 12% annualized respectively. Following this result, our economists have doubled their 2023 GDP forecast to 2.2%, and this stands in contrast to China's GDP growth trend, where our economists have been reducing forecasts and will see nominal GDP growth slow below that of Japan to 4.8% over the last year. So the key exception to a generally bullish picture for Japan has been its linkages to China. While this may appear to be a legitimate investor concern for the market as a whole, it's important to note that Japanese revenues are driven much more by the U.S and Europe, which together make up a quarter of total sales. Instead, China makes up just 5% less than many assume, and far lower than that of Singapore, Taiwan, Australia or South Korea. However, there are some pockets of China exposure that we note, including in semis and semi-cap equipment, electronic components and factory automation. Another reason for our optimism about Japan's equity market resilience amid the slowdown in China is that China exposed Stocks in Japan have almost fully unwound the outperformance seen during the early COVID zero and post-COVID reopening phases. In contrast, Asia-Pacific ex-Japan companies with high exposures to China, many of them in the technology or resources sector, stand close to their relative highs. So while we do see from here less upside to the aggregate MSCI Emerging Markets Index and the Tokyo Stock Price Index, known as TOPIX, after the post October rally, we do see good reason for Japanese equities to continue to outperform. Valuations on a 12 month forward basis are in line or slightly below their ten year historical averages, and we expect 10% earnings growth in 2023 and 2024 as that nominal GDP growth recovery and corporate reform rolls through the market. The key downside risk will, of course, be not just the Chinese debt deflation loop, but adding on top a US recession, which ironically would be similar to what happened in the 1990s, when in Japan, imbalances, excess leverage and insufficient policy stimulus tipped the economy into structural deflation and stagnation. So while that risk is more relevant for China and Japan is in a completely different situation now, we are closely monitoring the risks of this bear case scenario and what that would mean for parts of the Asia and emerging markets universe. So 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.

Although Europe has been the global leader when it comes to greening its economy, recent challenges may be a cause for concern.----- Transcript -----Rob Pulleyn: Welcome to Thoughts on the Market. I'm Rob Pulleyn, Morgan Stanley's Head of Utilities of Clean Energy Research in Europe. Jens Eisenschmidt: And I'm Jens Eisenschmidt, Morgan Stanley's Chief Europe Economist. Rob Pulleyn: On this special episode of this podcast, we'll be discussing the future of Europe's energy transition, including whether its clean energy goals are realistic and the implications for investors and Europe's broader economy. It's the 30th of August, 10 a.m. in London. Rob Pulleyn: Europe has long been a global leader when it comes to greening its economy. Strong societal and political support has bolstered the region's transition to clean sources of energy, with a European Green Deal and climate target plan aiming to reduce CO2 emissions by at least 55% by 2030 and achieve net zero by 2050. While substantial progress has been made over the previous decades, the region is now facing several challenges. Jens, can you give us the backdrop to Europe's energy transition and some of what's changed recently? Jens Eisenschmidt: Yes Rob, I mean, you have explained it already. There are big change targets, climate change related targets to the energy transition that Europe has subscribed to. These targets were in place already before the 24th of February in 22, when we saw the Russian invasion in Ukraine that changed the European energy set up profoundly. Now, why is this important? It's important because these targets were done in sort of a plan that relied on a certain energy source that is no longer existing. So let me give you an example. Let's take Germany, which was anyway already quite progressed in its journey onto increasing the share of renewables in electricity production. If you take Germany, they have been turning their back on nuclear power generation, which is another source of emission free power generation, and have embraced as a flex load provider, so as a provider of electricity when renewables are unavailable to natural gas. Now this natural gas supply from Russia is no longer available, as we all know, and of course, that implies that the Germans and other member states of the European Union as well have to change the plan by which they transit to a carbon free economy. And, you know, this is very complicated because it's not only switching one energy source for the other or exchanging one for the other. You also have to look about the infrastructure, you have to see what is essentially giving your energy mix the stability, as I said before, when we don't have sun shining and wind blowing, you need to have a source that's about the question about storage technologies, that's not entirely independent of the energy sources that you have available. And so the last year provided a profound challenge to the way Europe had planned its energy transition, so they have to replan it, and the complexity of that is huge. Essentially, it's something you want to ideally plan at the European level in order to harness all the comparative advantages all the countries have, given example, you have a lot of sun hours in Spain, less so in Germany, so ideally you want to put solar for Europe somewhere south and not so much somewhere north. But that of course means something for the grid, you have to deploy around it. So all that complexity is huge, all the coordination needs are huge and so this is the new situation we are in. Rob Pulleyn: Yeah, that new situation clearly puts increased pressure on Europe, if electricity prices remain elevated, Europe's large industrial base and you mentioned Germany would continue to shoulder this burden. You know margins, pricing, competitiveness would all suffer and the region's place in the global value chain might be at risk. Now, renewables are increasingly cost competitive, but even when the solar power is still very intermittent and that requires either a  stable baseload or at least flexible generation. And as you mentioned, this previously was facilitated partly by Russian gas. Now, with all that in mind Jens, how much investment is needed to fund the transition and is there economic risk associated with this? Jens Eisenschmidt: So the numbers are huge. We have said that number could be around $5 trillion, other sources estimate this to be slightly higher, but more or less the ballpark is the same. We also know that already $1.4 trillion is earmarked from public funds, so EU budget, meaning that $3.6 are left for the private sector to deploy or for member states to come up from national budgets. So the figure itself boiling down to somewhere between $5 to $600 billion a year until at least 2030 and maybe beyond, these figures are not in itself the problem. The problem is how do you, according to which plan, do you deploy this and what is the sort of economic backd

If China economic woes become a true debt deflation cycle, it could export some of that disinflation to the global economy.----- Transcript -----Welcome to Thoughts on the Market. I'm Seth Carpenter, Global Chief Economist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, today, I'll be talking about the global implications of China's economic slowdown. It's Tuesday, August 29th, at 10 a.m. in New York. China's economic woes continue to be center stage. Our Asia team has outlined the risks of a debt deflation cycle there and how policy is needed to avert the possibility of a lost decade. As always, big economic news from China will get global attention. That said, when we turned bullish on China's economic growth last year, we flagged that the typical positive spillovers from China were likely to be smaller this cycle than in the past. We expected growth to be heavily skewed towards domestic consumption, especially of services, and thus the pull into China from the rest of the world would be smaller than usual. We also published empirical analysis on the importance of the manufacturing sector to these global spillovers, and the very strong Chinese growth and yet modest global effects that we saw in the first quarter of this year vindicated that view. Now the world has changed and Chinese growth has slumped, with no recovery apparent so far. The global implications, however, are somewhat asymmetric here. Because we are seeing the weakness now show through to the industrial sector and especially CapEx spending, we cannot assume that the rest of the world will be as insulated as it was in the first quarter. Although we have recently marked down our view for Chinese economic growth, we still think a lost decade can be avoided. Nevertheless, with Chinese inflation turning negative, the prospect of China exporting disinflation is now getting discussed in markets. Much of the discussion about China exporting this inflation started when China's CPI went into deflation in the past couple of months. Although the connection is intuitive, it is not obvious that domestic consumer price numbers translate into the pricing that, say, U.S. consumers will eventually see. Indeed, even before China's prices turned negative, U.S. goods inflation had already turned to deflation because supply chains had healed and consumer spending patterns were starting to normalize. For China to export meaningful disinflation, they will likely have to come through one of three channels. Reduced Chinese demand for commodities that leads to a retreat in global commodities prices, currency depreciation or exporters cutting their prices. On the first, oil prices are actually at the same levels roughly that they were in the first quarter after Chinese goods surged. And they're well off the lows for this year. And despite the slump in economic activity, transportation metrics for China remain healthy, so to date, that first channel is far from clear. The renminbi is much weaker than it was at the beginning of the year. But recent policy announcements from the People's Bank of China imply that they are not eager to see a substantial further depreciation from here, limiting the extent of further disinflation through that channel. So that leaves exporters cutting prices, which could happen, but again, it need not be directly connected to the broader domestic prices within China coming down. So all of that said, the direction of the effect on the rest of the world is clear. Even if the magnitude is not huge, there is a disinflationary force from China to the rest of the world. For the Fed and ECB, other developed market central bankers, such an impulse may be almost welcome. Central banks have tightened policy intentionally to slow their economies and pulled down inflation. Despite progress to date, we are nowhere near done with this hiking cycle. If we're wrong about China, however, should we start to worry about a global slump? Probably not. The Fed is currently trying to restrain growth in the US with high interest rates. If the drag comes more from China, well then the Fed will make less of the drag come from monetary policy. 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.

Proposed regulations for smaller banks show that turmoil in the banking sector may still have an impact on the broader economy.----- 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 links between regulations and the real economy. It's Monday, August 28, at 11 a.m. in New York. In the euphoria of buoyant equity markets over the last few months, the many challenges facing regional banks have receded into the background. While it certainly has not been our view, a narrative has clearly emerged that the issues in the sector that erupted in March are largely behind us. The ratings downgrades by both Moody's and Standard & Poor's of multiple U.S. banks in the last few weeks provide a reminder that the headwinds of increasing capital requirements, higher cost of funding and rising loan losses continue to challenge the business models of the regional banking sector. The rating agency actions come on the heels of proposed rules to modify capital requirements for banks with total assets of 100 billion or more. Separately, the Fed has proposed a capital rule on implementing capital surcharge for the eight U.S. global systemically important banks. Further proposed regulations on new long term debt requirements for banks with assets of $100-700 billion are due to be announced tomorrow. It is early in the rulemaking process for all of these proposals. They may change after the comment period and the rules will be phased in over several years once they are finalized. Nevertheless, they outline the framework of the regulatory regime ahead of us. While we won't go into the detailed discussion of thousands of pages of proposals here, suffice to say that the documents envisage significantly higher capital requirement for much of the U.S. banking sector, and extends several large bank requirements to much smaller banks. One such requirement pertains to the impact on capital of unrealized losses in available for sale securities. Currently, this provision applies only to Category one and Category two banks, that is banks with greater than $700 billion in total assets. But the proposal now expands it to Category three and Category four banks, that is banks with greater than $100 billion in total assets. A recent paper from the San Francisco Fed shows how the regulatory framework of the banking system affects the real economy. Specifically, the paper demonstrates that banks, which experienced larger market value losses on their securities during the 2022 monetary tightening cycle extended less credit to firms. Given the experience of the last 18 months across fixed income markets, extending the impact of such mark-to-market losses to smaller banks, as is being proposed now, would exasperate the potential challenges to credit formation. Against this background, we look at the near term prospects for bank lending. In the latest Senior Loan Officer Opinion survey, reflecting 2Q23 lending conditions, lending standards tightened across nearly all categories for the fourth consecutive quarter. Banks expect to tighten lending standards further across all categories through the year end, with the most tightening coming in commercial real estate, followed by credit card and commercial and industrial loans to small firms. The survey also asked banks to describe current lending standards relative to the midpoint of the standards since 2005. Most banks indicated the lending standards are tighter than the historical midpoint for all categories of commercial real estate and commercial and industrial loans to small firms. The bottom line is that more tightening lies ahead for the broader economy. This survey shows how the evolution of regulatory policy can weigh on credit formation and overall economic growth. Given the disproportionate exposure of the regional banks to commercial real estate debt that needs to be refinanced, commercial real estate is likely to be the arena where pressure has become most evident, another reason why we are skeptical that the turmoil in the regional banking sector is behind us. While the proposed regulatory changes can open doors for non-bank lenders, such as private credit, it is important to note that such lending will likely come at higher cost. 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 the Fed meets this weekend for their annual summit at Jackson Hole, investors are most focused on whether rate hikes will continue and the state of the neutral interest rate.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Corporate Credit Research at Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, August 25th at 2 p.m. in London. The eyes of the market will be on Wyoming this weekend, where the Federal Reserve is holding its annual summit at Jackson Hole. While many topics will be discussed, investors are particularly focused on two: is the Fed done raising interest rates? And is the so-called neutral rate of interest higher than initially thought? The Federal Reserve has been raising interest rates at the fastest pace in 40 years to try to get rates to a level where economic activity starts to slow, easing inflationary pressure. But the level of interest rate that achieves this is genuinely uncertain, even to the experts at the Fed. We believe that they'll feel increasingly comfortable that rates have now hit this level. And in turn, Morgan Stanley's economists do not expect further rate hikes in this cycle. A few things drive our thinking. First, those inflationary pressures are easing. Two key measures of underlying inflation, core PCE and core CPI, slowed sharply in the most recent reading. Leading indicators for car prices and rental costs, which have been big drivers of high inflation last year, now point in the opposite direction. Bank loan growth is slowing and the torrid pace of U.S. job growth is also moderating, two other signs that interest rates are already restrictive. Historically, the Fed being done raising interest rates has been supportive for markets. But the relationship with high grade bonds is especially notable. Since 1984, there have been five times where the Fed has ended interest rate hiking cycles after multiple increases. Each time the yield on the U.S. aggregate bond index peaked within a month of this last hike. In short, the Fed being done has been good for the U.S. Agg Bond Index. And we can see the logic to this. If the Fed has stopped raising interest rates, one of two things may very well be true. First, it stopped at the correct level to support growth while also reducing inflation, and that stability with less inflation is liked by the bond market. Or it has stopped because rates are actually too high and set to slow growth and inflation much more sharply. In the second scenario, investors like the safety of bonds. But behind this question of whether the Fed will pause is another, larger issue. What is the so-called neutral rate of interest that neither slows nor boosts the U.S. economy? During the decade of stagnation that followed the global financial crisis, weak growth led people to believe that this balancing interest rate was extremely low. There are signs this thinking persists, when the Fed surveys its members about where they see the Fed funds rate over the long run, which is a proxy for where this neutral interest rate might be, the median is just 2.5%. In 2012, the Fed thought this same rate was over 4%. So that will be another focus at Jackson Hole, and beyond. The strength of the U.S. economy in the face of higher rates has been a surprising story. Does that mean that the balancing interest rate is much higher, and will the Fed raise their long run estimates of this rate to reflect this? Or is recent U.S. strength still temporary and not yet fully reflecting the effect of higher interest rates? Expect this debate to continue in the months ahead. 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.

Inspiring change through informed and inclusive innovation. On Access & Opportunity, host Carla Harris, Senior Client Advisor at Morgan Stanley, explores the lived experiences of the people who face systemic inequities and sits down with founders, investors, developers, activists, and educators who are building a more equitable future today.

As debate season begins among Republican presidential candidates, can investors hope to glean market insights for 2025 and beyond?----- 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 impact of presidential debates on markets. It's Wednesday, August 23rd at 10 a.m. in New York. Several candidates seeking the Republican Party's nomination for president take the stage in the debate tonight. Coverage of the event in traditional and financial media has escalated in anticipation of the debate. And while it's a good idea for voters looking to understand the candidates better and make an informed choice to tune in to the debate, for those tuning in looking for something that might guide their perception of how the 2024 election might impact financial markets, our guidance is this: lower your expectations. This debate, the first among many, is likely to tell us a lot less about who the nominee will be than traditional polls. Those polls show former President Trump with solid support that surpasses his main rivals. And while, of course, there's plenty of time for that to change, debates this early in the process haven't historically been reliable indicators of changes in support that may follow. This may be even more true this time around, since President Trump is not attending this debate. And so it will be more difficult to get a read as to which candidates might be better suited than others to make a more persuasive argument to Republican voters than the former president. Additionally, debates this early in the process generally tell us little about potential policy changes that could result from any one of these candidates ultimately being elected in 2024. Stock and corporate bond investors, in theory, might be very interested in what these candidates have to say about a variety of pending corporate tax code changes starting in 2025. But one shouldn't expect candidates to get into that level of detail on the debate stage. General comments about making sure the tax code doesn't work against the economy are far more likely. Further, the ability of any candidate to execute on their policy vision is going to be a function of the makeup of Congress, which again, this debate is unlikely to give us much information about. Bottom line, the 2024 election will be consequential to the markets, but tune in to the debate to inform yourself as a voter. As we've said in previous podcasts, it's too early to expect to learn anything that will help you as an investor.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 August, 1st 2023: 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.

Original Release on July, 27th 2023: 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 supp

Bond yields have seen a surprising increase as a result of real interest rates, which could mean both good and bad news for other asset types.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, a Senior 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 18th at 2 p.m. in London. August is a month in financial markets that is often all or nothing. Sometimes it's quiet, a self-reinforcing state where investors desire to recharge and enjoy the nicer weather means fewer deals and lower activity, reinforcing the desire to enjoy the nicer weather. But there's a flip side. The fact that so many investors' are away in August can also amplify market moves, especially if worries mount, and we see that in the historical data. August has seen the largest average rise in stock market volatility of any month, if we go back to 2010, where it's seen higher volatility in 10 out of the last 14 years. So far, this August is off to another volatile start. The culprits are plenty. Equity markets have been having a great run based almost entirely on expanding valuations, an unusual occurrence, as Lisa Shalett, the CIO of Morgan Stanley Wealth Management and I discussed on this program last week. Data in China has been weaker than expected and across the U.S., Europe and Japan, bond yields have been rising significantly. The bond move is especially notable given how it's been happening. Yields aren't rising because of inflation, as last week's U.S. consumer price inflation reading was a little better than expected, and longer run expectations of U.S. inflation are actually lower on the month. The market also has increased its expectation of further rate hikes from the Federal Reserve or the ECB, although it has added another expected hike for the Bank of England. Rather, the increase in yields this month has been almost entirely due to the so-called real interest rate, that is the yield on bonds over and above expected inflation. In the U.S., ten year real rates are now about 1.9% above expected inflation, which is a similar level to what we saw from 2003 to 2005. There's both bad and good news here. The bad news is that if investors can get a higher guaranteed return over inflation from government bonds, other assets are going to look less attractive by comparison. We continue to hold a more cautious view on U.S. equity markets as well as commodities. But there's also some good news. Higher real rates have made TIPS or Treasury inflation-protected securities more attractive and my colleagues in interest rate strategy like them. The recent volatility in bond markets has cheapend mortgage backed securities, where my colleague Jay Bacow, Morgan Stanley's co-head of securitized products research, has recently moved back to a positive view. And higher yields are improving the funding ratio for many pension funds, encouraging them to buy safer, longer term investment grade bonds. More broadly, higher long term real rates could be a sign that the market is more confident about the long term outlook for the U.S. economy. If we think back to the 1990s, it was a period of higher expected potential growth and higher rates relative to expected inflation. If we think about the sluggish 2010s, it was the opposite with very low rates relative to inflation as the market worried that growth could not achieve escape velocity. It will take years to know if the bond market is really endorsing a stronger long run economic view, but as we hope to emphasize, higher rates aren't necessarily all bad. 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.

Although China’s economy faces challenges in terms of debt, demographics and deflation, the right policy approach could ward off a debt deflation loop.----- Transcript -----Welcome to Thoughts on the Market. I'm Chetan Ahya, Morgan Stanley's Chief Asia Economist. Along with my colleagues, bringing you a variety of perspectives, today I'll be discussing the journey ahead for China as it faces the triple challenge of debt, demographics and deflation. It's Thursday, August 17, at 9 a.m. in Hong Kong. Before we get into China, I want to take you back to the oft-told tale from the 1990s when Japan experienced what we now refer to as the ‘Lost Decade.’ During this period, the combination of economic stagnation and price deflation transformed a bustling economy in the 1980s, into an economy that grew at a little more than 1% annually over a decade. Fast forward to today, where China is confronted with the triple challenge of debt, demographics and deflation, what we are calling the 3Ds. As a result, many investors are now concerned that China will be stuck in a debt deflation loop, just like Japan was in the 1990s. But is China better placed to manage these headwinds even though the risks of falling into debt deflation loop remain high? We think at the starting point, the answer is yes, but with a few historical lessons that I'll get into in a moment. For context, China compares better with the Japan of the 1990s in the following four aspects. First, asset prices in China have not run up as much. Second, per capita incomes are still lower in China, implying a higher potential growth runway. Third, unlike Japan, China has not experienced a big currency appreciation shock. And finally, perhaps the most crucial difference is policy setting. Back in the 90s, the Bank of Japan kept real interest rates higher than real GDP growth between 1991 and 1995. But in contrast to Japan, China's real rates are below real GDP growth currently. To explain, historically, when economies are seeking to stabilize or reduce debt, the key element is to ensure that there is adequate gap between real interest rates and real GDP growth. In Japan's case, real interest rates were maintained about real GDP growth for the first four years. A similar situation occurred in the US post the 1929 stock market crash. As real rates were kept high, it laid the ground for the beginnings of the Great Depression. From both of these examples, the historical track shows two policy missteps. First, policymakers' concern about reigniting misallocation leads them to gravitate towards a hawkish bias. Second, policymakers tend to turn hawkish too quickly at the first signs of a recovery. During the Great Depression, easing of policies had led to recovery from 1933 onwards, but a premature tightening of policies in 1936 led to the double dip in 1937/38. Contrast this with the US after 2008, when the Fed was quick to bring rates to zero and embark on successive rounds of quantitative easing while fiscal policy was deployed in tandem. Sustaining real interest rates 2 percentage points below real GDP growth is key to deleveraging. Why? Because if you think about it, deleveraging will not be possible if the interest rate on your debt is growing faster than the increase in your income. In this context, while China's real interest rates are below real GDP growth currently, we still see the risk that policymakers will not take up reflationary policies to sustain the rates minus growth gap, which keeps the risk of China falling into debt deflation loop alive. So what is the potential outcome? China's policymakers will need to act forcefully. If they don't, the economy could fall into debt deflation loop, persistent deflation would take hold, debt to GDP would keep rising, and GDP per capita in USD terms would stagnate, just as it happened in Japan in the 1990s. But, as history has shown us, that doesn't have to be the outcome. 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.

Although Congress has avoided previous shutdowns with last-minute resolutions, investors shouldn’t get complacent in assuming the same outcome again in the fall.----- 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 risk of the U.S. government shutdown. It's Wednesday, August 16th at 10 a.m. in New York. Congress is in recess until September. When they return, they'll have just a few weeks to pass several funding bills in order to avoid a government shutdown. And while it certainly seems like dramatic deadlines and last minute resolutions are all too common in D.C. these days, investors shouldn't get complacent on this one. Let's start with why investors should take seriously the risk of a government shutdown, which happens when Congress fails to authorize spending to keep most government functions open. When that happens, there are both direct economic impacts, such as government workers and contractors not getting paid on time and indirect impacts, such as the economic activity of those workers and contractors being crimped given that they're going without pay. In the 2019 shutdown, for example, 800,000 government workers were affected by this disruption. Our economists estimate that for every week the government is shut down, we should expect a 0.05% point reduction in GDP, with that impact compounding and increasing over time. While that's not a huge number, in the context of an already softening economic growth and profit outlook for stocks, it doesn't help. So if a shutdown presents economic downside, why is that even a possibility? Here's four reasons why. First, Congress faces several challenging negotiations in September, which elevates the complexity of the legislative process ahead of the shutdown deadline. Second, there are disagreements within the Republican Party on what the right level of funding is for the government, meaning one of the two parties has yet to firm up its position to get negotiations going in earnest. Third, there's also disagreement within the Republican Party on aid levels for Ukraine. Finally, there appears to be greater willingness on the part of lawmakers to engage in policy standoffs, as evidenced by the recent debt ceiling negotiation. While history shows that approval ratings for both parties fared poorly following a shutdown, shutdowns happen nonetheless, and quotes from key members of both parties suggest little concern with the political impact of such an event. So what's an investor to do from here? For the moment, not much. We're not expecting much news on this or market reaction until September. Until then, we'll, of course, keep you updated on anything relevant. 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.

With the rupee appreciating, manufacturing and services in a consistent rally and demographic trends on an upswing, India may be better poised for a long-term boom than other markets in Asia.----- Transcript -----Welcome to Thoughts on the Market. I'm Jonathan Garner, Chief Asia and Emerging Market Equity Strategist at Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, today I'll be talking about why India is now our preferred market in Asian equities. It's Tuesday, August 15th at 8am in Singapore. Before we dive into the details of some important changes in view that we've recently published, let's take a step back and set the scene for today's changes in a broader thematic context. Firstly, a reminder that we think we began a new bull market in Asia and EM last October. And from the trough in late October, the MSCI Emerging Markets Index is up around 25%. So the changes we're making are about identifying leadership at the market level as we transition towards a midcycle environment. Secondly, we continue to prefer Japan within our coverage, which remains Morgan Stanley's top pick in global equities but is a developed market. In terms of the changes that we've made on the downgrades side, for Taiwan, it has led the way off the bottom, rising almost 40% since last October. It's a market dominated by technology and export earnings, where the structural trend in return on equity has been positive in recent years as those firms have succeeded globally. Our upgrade last October was a simple cyclical story of distressed valuations at a time of depressed sentiment about underlying demand trends in semiconductors. The situation is very different today. Valuations are back to mid-cycle levels, and while demand remains weak in key areas such as smartphones and conventional cloud, a path to recovery is becoming more evident. Moreover, as has been the case in many prior cycles, a new end use category AI service is generating significant excitement. Our China downgrade, which is linked to our Australia downgrade via the Australian mining stocks, has a different structural set up. The China market, unlike Taiwan, is overwhelmingly dominated by domestic demand stocks and its domestic demand which has failed to recover convincingly in the post-COVID environment. Indeed, the current investor debate is centered on whether China's demographic transition, high domestic debt to GDP ratio and over-investment in property and infrastructure are starting to generate a balance sheet recession. Core inflation is stuck close to zero, with evidence of high unemployment in the young population and weak wages, with households and private firms no longer willing to lever up. Now, recent statements from the Politburo have begun to acknowledge the need to reverse some of the measures that have pressured the property market. But there is no easy way out of the intertwined property and local government financing debt burdens that have built up in the years when the growth model did not transition fast enough. And at the same time, China faces the new challenge of coping with multi-polar world pressures from the US in particular, which is generating new restrictions on inward technology transfers. All that said, we do not rule out moving back to a more positive stance on China, should policy implementation be more aggressive than hitherto. For India, the situation is in stark contrast to that in China, as was borne out to me by a recent visit in June to the Morgan Stanley annual Investment Summit in Mumbai. With GDP per capita, only $2,500 versus $13,000 for China and positive demographic trends, India is arguably at the start of a long wave boom at the same time as China may be ending one. Manufacturing and services PMIs have rallied consistently since the end of COVID restrictions, in contrast to the rapid fade seen in China. Also, real estate transaction volumes in construction have broken out to the upside. Moreover, India's ability to leverage multi-polar world dynamics is a significant advantage. Simply put, India's future looks to a significant extent like China's past, and in this context, it's particularly relevant to note long run trends in exchange rates now show the Indian rupee more stable and actually appreciating whilst the renminbi is depreciating. So considering Indian equities and Chinese equities as a pair in dollar terms, we appear to be at the beginning of a new era of Indian outperformance compared to China. From early 2021, India has broken out dramatically to the upside in performance. And whilst reversion to the mean is often a powerful force in finance, we think this represents a structural break in India's favor. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and recommend Thoughts on the Market to a friend or colleague today.

While the Fed fights generationally high inflation, the U.S. economy continues to grow, supported by high levels of spending. This has affected both the bond and equity markets.----- 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, August 14, at 11 a.m. in New York. So let's get after it. At the trough of the pandemic recession in April 2020, we first introduced our thesis that the health care emergency would usher in a new era of fiscal policy. The result would be higher inflation than monetary policy was able to attain on its own over the prior decade. In the first phase of this new policy regime, we referred to it as helicopter money, as described by Milton Friedman in the early 1970s and then highlighted by Ben Bernanke after the tech bubble as a policy that could always be employed to avoid a deflationary bust. Handing out checks to people is a fairly radical policy, however, the COVID pandemic was the perfect emergency to try it. The policy shift worked so well to keep the economy afloat during the lockdowns that the government decided to double down on the strategy by doing an additional $3 trillion of direct fiscal spending in the first quarter of 2021. This excessive fiscal policy is why money supply growth increased to a record level at 25% year-over-year in early 2021, and why we finally got the inflation central banks had been trying so hard to achieve post the great financial crisis. After the financial crisis, the velocity of money collapsed, while the Fed's balance sheet ballooned to levels never seen before. The reason we didn't get inflation in that initial episode of quantitative easing is because the money created remained trapped in bank reserves rather than in a real economy where it could drive excess demand in higher prices, a dynamic that's been obviously very different this time. Fortunately, the Fed is responding to this generationally high inflation with the most aggressive tightening of monetary policy in 40 years. But this is the definition of fiscal dominance, monetary policy is beholden to the whims of fiscal policy. First, it had to be overly supportive and fund the record deficits in 2020 and 21, and then it had to react with historically tighter policy once inflation got out of control. Back in 2020, we turned very bullish on equities on this shift of fiscal dominance and also subsequently indicated it would lead to a period of hotter but shorter economic earning cycles, mainly because the Fed would not have the same flexibility to proactively try to extend economic expansions. We also argued that catching these cycles on both the upside and downside would be critical for equity investors to outperform. From 2020 to 2022, we found ourselves on the right side of that dynamic both up and down, this year, not so much. Part of the reason we found ourselves offsides this year is due to the very large fiscal impulse restarting last year and remaining quite strong in 2023. In fact, we have rarely ever seen such large deficits when the unemployment rate is so low and inflation well above target. If fiscal policy is showing little constraint in good times, what happens to the deficit when the next recession arrives? The main takeaway for the equity market this year is that fiscal policy has allowed the economy to grow faster than forecasted and has given rise to the consensus view that the risk of recession has faded considerably. Furthermore, with the recent lifting of the debt ceiling until 2025, this aggressive fiscal spending could continue. However, the sustainability of such fiscal policy is the primary reason why Fitch recently downgraded the U.S. Treasury debt. Combined with the substantial increase in the supply of Treasury notes and bonds expected to fund these government expenditures, bond markets have sold off considerably this past month. This should start to call into question the valuations of equities, which were already high even before this recent rise in yields. Furthermore, if fiscal spending must be curtailed due to either higher political or funding costs, the unfinished earnings decline that began last year is more likely to resume as our forecast is still predicting. Equity markets seem to have noticed, with many of the best performing stocks correcting by 10% or more. Even if one is bullish on stocks, such a correction was necessary to reset investor exuberance. The challenge will come this fall if growth fails to materialize as now expected. In that case, a healthy 5 to 10% pullback may turn into the much more significant correction we were expecting to occur in the first half of this year. Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us

While the Fed navigates a soft landing for the U.S. economy and stock valuations remain high, how can investors navigate the risks and rewards of a surprisingly strong equity market? Lisa Shalett is Morgan Stanley Wealth Management’s Chief Investment Officer. She is not a member of Morgan Stanley Research.----- Transcript -----Andrew Sheets: Welcome to Thoughts in the Market. I'm Andrew Sheets, Fixed Income Strategist at Morgan Stanley. Lisa Shalett: And I'm Lisa Shalett, Chief Investment Officer for Morgan Stanley Wealth Management. Andrew Sheets: And today on the podcast, we'll be discussing what's been happening year to date in markets and what might lie ahead. It's Friday, August 11th at 1 p.m. in London. Lisa Shalett: And it's 8am here in New York City. Andrew Sheets: So, Lisa, it's great to have you here. I think it's safe to say that as a strategy group, we at Morgan Stanley have been cautious on this year. But I also think this is a pretty remarkable year. As you look back at your experience with investing, can you kind of help put 2023 in context of just how unusual and maybe surprising this year has been? Lisa Shalett: You know, I think one of the the key attributes of 2023 is, quite frankly, not only the extraordinarily low odds that history would put on the United States Federal Reserve being able to, quote unquote, thread the needle and deliver what appears to be an economic soft landing where the vast and most rapid increase in rates alongside quantitative tightening has exacted essentially no toll on the unemployment rate in the United States or, quite frankly, average economic vigor. United States GDP in the second quarter of this year looked to accelerate from the first quarter and came in at a real rate of 2.4%, which most folks would probably describe as average to slightly above average in terms of the long run real growth of the US economy over the last decade. So, you know, in many ways this was such a low odds event just from the jump. I think the second thing that has been perplexing is for folks that are deeply steeped in, kind of, traditional analytic frameworks and long run correlative and predictive variables, the degree to which the number of models have failed is, quite frankly,  the most profound in my career. So we've seen some real differences between how the S&P 500 has been valued, the multiple expansion that we have seen and things like real rates, real rates have traditionally pushed overall valuation multiples down. And that has not been the case. And, you know, I think markets always do, quote unquote climb the wall of worry. But I think as we, you know, get some distance from this period, I think we're also going to understand the unique backdrop against which this cycle is playing out and, you know, perhaps gaining a little bit more of an understanding around how did the crisis and the economic shocks of COVID change the labor markets perhaps permanently. How did the degree to which stimulus came into the system create a sequencing, if you will, between the manufacturing side of the economy and the services side of the economy that has created what we might call rolling slowdowns or rolling recessions, that when mathematically summed together obscure some of those trends and absorb them and kind of create a flat, flattish, or soft landing as we've experienced. Andrew Sheets: How are you thinking about the valuation picture in the market right now? And then I kind of want to get your thoughts about how you think valuations should determine strategy going forward. Lisa Shalett: So this is a fantastic question because, you know, very often I'm sitting in front of clients who are, you know, very anxious about the next quarter, the next year. And while I think you and I can agree that there certainly are these anomalous periods where valuations do appear to be disconnecting from both interest rates and even earnings trends, they don't tend to be persistent states. And so when we look at current valuations just in the United States, if you said you're looking at a market that is trading at 20x earnings the implication is that the earnings yield or your earnings return from that investment is estimated at roughly 5%. In a world where fixed income instruments and credit instruments are delivering that plus at historic volatilities that are potentially half or even a third of what equities are, you can kind of make the argument that on a sharp ratio basis, stocks don't look great. Now, that's not all stocks. Clearly, all stocks are not selling at 20x forward multiples. But the point is we do have to think about valuation because in the long run, it does matter. Andrew Sheets: I guess looking ahead, as you think about the more highly valued parts of the market, where do you think that thinking might most likely apply, as in the current valuation, even if it looks expensive, might be more defendable? And where would you be most c

A recent landmark study around weight-loss medicine could spark near-term growth opportunities in pharmaceuticals.----- Transcript -----Mark Purcell: Welcome to Thoughts on the Market. I'm Mark Purcell, Head of Morgan Stanley's European Pharmaceuticals Team. Terence Flynn: And I'm Terence Flynn, Head of the U.S. Biopharma Team. Mark Purcell: And on this special episode of Thoughts on the Market, we'll give you an update on the global obesity challenge. It's Thursday, the 10th of August, and it's 1 p.m. in London. Terence Flynn: And 8 a.m. in New York. Terence Flynn: Now, a year ago, we came on the show to discuss our views on the global obesity challenge, and the problem has since received significant media attention. We believe that the narrative around obesity has indeed changed, with a more empathetic media tone, exponential social media growth and increased recognition across health care professionals and policymakers. Mark, what exactly happened over the last year? Mark Purcell: Well, Terence I mean the uptake of obesity medicines in the US has been much stronger than we anticipated. In fact, obesity drug demand has outstripped supply, as you said, driven by social media activity, but also a rapid expansion in reimbursement. When we look back, about 12 million individuals suffering with obesity were covered by insurance and employee opt-ins for the first generation of these appetite suppressing medicines. For newer, higher efficacy GLP-1 medicines, about 40 million lives are covered, and that is more than the estimated number of individuals living with diabetes in the US, which is projected to be about 37 million. Terence Flynn: Great. Thanks, Mark. Now the greater focus on weight management has spilled over into an increasingly weight centric approach to treating diabetes. What changes are you seeing and how are they impacting the industry? Mark Purcell: Terence you're absolutely right. Look, for many years, treatment guidelines for diabetes focused on blood sugar control only. Just before the pandemic, there was an increasing focus on controlling cardiovascular risks as w ell, such as preventing heart attacks. In the past 12 months, there's been increased focus on weight management for diabetes, which can help prevent the progression of diabetes and potentially reverse the course of the disease if you catch it early enough. It's estimated about 40% of GLP-1 prescriptions in the US are for patients early in the course of their disease. These dynamics have driven a profound acceleration in the uptake of GLP-1 medicines in diabetes, and we now project GLP-1 sales in diabetes alone to exceed $56 billion in 2030. Terence Flynn: Mark, I know this SELECT trial has been a focus and this was the first large randomized trial to test whether long term treatment with a weight loss drug can meaningfully improve patients cardiovascular health. Now, this trial appears just to be the tip of the iceberg when it comes to market expansion. Maybe you could walk us through your thoughts on the recent data. Mark Purcell: Yeah, thanks Terence. I mean, SELECT is a really important obesity landmark study. It addresses the question does weight management save lives? The trial was designed to show a 17% reduction in the risk of heart attacks and strokes and cardiovascular deaths in non-diabetic individuals suffering from obesity who are treated with GLP-1 medicines. And we just got the data top line the other day, and in fact, these medicines are showing a 20% reduction in heart attacks, strokes and cardiovascular death. As you said, I mean, this is just the tip of the iceberg when it comes to new growth opportunities for weight loss medicines, with positive data to be presented at the American Heart Association meeting in November, the SELECT data and also data in heart failure, and then next year we get exciting data in obstructive sleep apnea, in chronic kidney disease and also in peripheral arterial disease. Back to you, Terence. What is your outlook for the size of the obesity market in the US and globally over the next 5 to 10 years? Terence Flynn: Thanks, Mark. As you mentioned earlier, the uptake of obesity medicines in the US over the last year has been stronger than we anticipated. There have been some supply chain shortages that have capped an acceleration uptake in the US, and delayed the rollout of these medicines outside of the US. But a number of companies are making significant manufacturing investments today which will help improve supply on a global basis, but also create barriers to entry in the future. We're projecting that sales of the new obesity medicines in the US would have exceeded $7 billion this year, if the supply challenges had not been an issue. But if we extrapolate these strong early dynamics in the US, we project the global obesity market could reach over $70 billion in 2030. Our prior estimate was over $50 billion. Mark Purcell: And Teren

Forthcoming U.S. restrictions on some tech investments in China may present new opportunities as companies adapt to these constraints.----- 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 developments in the US-China economic relationship. It's Wednesday, August 9th at 10 a.m. in New York. News this week broke that the U.S. government is close to finalizing rules that would limit U.S. investment into China related to cutting edge tech sectors, such as quantum computing and artificial intelligence. The long awaited move, which we've discussed many times on this podcast, is yet another sign that the rewiring of the global economic system continues, transitioning from one of globalization to that of a multipolar world. But when news breaks like this, it's helpful to remember that the headlines can sound worse than the reality. Yes, it's likely that the global economy, and therefore markets, would be better off if the U.S. and China could find a way to deepen their economic ties, but the fraying of those ties need not be a substantial negative either. And these new outbound investment restrictions are a great example of that point. The proposed rule will, reportedly, restrict investment in companies who derive more than half their revenue from the sensitive technologies in question. Effectively, that means the U.S. will mostly be concerned with U.S. investors not funding development of new technology through startups. It could potentially leave the door open for more traditional forms of U.S. investment into China, namely through working with larger companies on market access and supply chain solutions. So while many companies are still likely to seek diversification away from China for their supply chains, they still have the ability to do this over time, as opposed to an abrupt decoupling that investors would likely see as carrying much greater risk to the global economy and markets. So, this gives investors a better chance to identify the opportunities that emerge as companies and governments spend money to adopt to these new constraints. Security as an investment theme is something we see potential in, with the defense sector and many industrial subsectors as beneficiaries. Geographically, we see Mexico, India and broader Asia as best positioned to capture investment and jobs from supply chain realignment, given their labor costs and proximity to key end 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.

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.