Thoughts on the Market

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

While Japan's equities have continued to rally, a roster of sector leading companies and a weak Yen could signal this bullish story is only just beginning.----- 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, I'll be sharing why Japan Equities could be a key part of the bullish story in Asia this year. It's Thursday, May the 25th at 10 a.m. in New York. Japan equities have rallied substantially during the current earnings season and we think further gains are increasingly likely. The theme of return on equity improvement, driven by productive CapEx and better balance sheet management, is clearly finding traction with a wide group of international investors. We first introduced this theme in our 2018 Blue Paper on Japan, where we described a journey from laggard to leader, which we felt was starting to take place due to a confluence of structural reforms such as the Corporate Governance Code and Institutional Investor Stewardship Code, as well as changes in company board composition and outside activist investor pressure. Japan has a formidable roster of world class firms, which we have identified as productivity and innovation leaders in areas such as semiconductor equipment, optical, healthcare, medtech, robotics and traditional heavy industrial automotive, agricultural and commodities trading, specialty chemicals. As well as more recent additions in Internet and E-commerce, many of which sell products far beyond Japan's borders. For the market overall, listed equities ROE has more than doubled in the last ten years, and it's now set to approach our medium term target of 11 to 12% by 2025. Company buybacks are analyzing at a record pace and total shareholder return, that is the sum of dividends and buybacks, is running at 3.6% of market capitalization. Yet Japan equities are still trading on only around 13 times forward price to earnings. And Japanese firms have a low cost of capital, given the country's status as a high income sovereign, with membership of the G7, as highlighted by Premier Kishida hosting its recent summit in his home town of Hiroshima. An additional near-term catalyst for Japan equities is that the yen is tracking significantly weaker year to date at around 135 to the U.S. dollar than company modeling, which was for around 125. Given the export earnings skew of the market, this is a positive.All in all, Japan equities are set, we think, to more than hold their own versus global peers and be a key part of a bullish story in Asian equities this year. Thanks for listening. If you enjoyed the show, please leave us a review on Apple Podcasts and recommend Thoughts on the Market to a friend or colleague today.

Discussions at the recent Group of Seven Nations meeting point to the continued development of a multipolar world, as supply chains become less global and more local. Investors should watch for opportunities in this disruption.----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income Research for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the recent G7 meetings and its implications for markets. It's Wednesday, May 24th at 9 a.m. in New York. Over the weekend, President Biden traveled to Japan for a meeting of the Group of Seven Nations, or G7. G7 meetings typically involve countries discussing and seeking consensus on a wide range of economic and geopolitical issues. And the consensus they achieved on several principles underscores one of our big three secular investment themes for 2023, the transition to a multipolar world. Consider some of the following language from the G7 communique. First, there's discussion of efforts to make our supply chains more resilient, sustainable and reliable. Second, they discuss, quote, "Preventing the cutting edge technologies we develop from being used to further military capabilities that threaten international peace and security." Finally, there's also discussion of the, quote, "importance of cooperation on export controls, on critical and emerging technologies to address the misuse of such technologies by malicious actors and inappropriate transfers of such technologies."So that all may sound like the U.S. is drawing up hard barriers to commerce, particularly with places like China. But importantly, the communique also states an important nuance that's been core to our multipolar world thesis. They say, quote, "We are not decoupling or turning inwards. At the same time, we recognize that economic resilience requires de-risking and diversifying.". So to understand the practical implications of that nuance, we've been conducting a ton of research across different industries. My colleagues Ben Uglow and Shawn Kim have highlighted that the global manufacturing and tech sectors are very exposed to disruption from this theme. But their work also shows that capital equipment and automation companies will benefit from the global spend to set up more robust supply chains.So bottom line, the multipolar world theme continues to progress, but the disruption it creates should also create opportunities.  Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague, or leave us a review on Apple Podcasts. It helps more people find the show. 

As the confidence level of homebuilders building new homes is increasing, will home sales go along with it? Jim Egan and Jay Bacow, Co-Heads of U.S. Securitized Products Research discuss.----- Transcript -----Jim Egan: Welcome to Thoughts on the Market. I'm Jim Egan, Co-Head of U.S. Securitized Products Research here at Morgan Stanley. Jay Bacow: And I'm Jay Bacow, the other Co-Head of U.S. Securitized Products Research. Jim Egan: And on this episode of the podcast, we'll be discussing the U.S. housing and mortgage markets. It's Tuesday, May 23rd at 2 p.m. in New York. Jay Bacow: It's been a while since we talked about the state of the U.S. housing market. And it seems like if I look at least some portions of the data, things are getting better. In particular, the NAHB confidence just showed for the fifth consecutive month that homebuilders are feeling better about building a house, and we're now finally at the point where they say it is a good time to build a house. When you take a step back and just look at the state of the housing market, do you agree? Jim Egan: I think it's a great question. Housing statistics are going in a whole number of different directions right now. So, yeah, let me take a step back. We've talked a lot about affordability on this podcast and it's still challenging. We've talked a lot about supply and it remains very tight, and all of this has really fueled that bifurcation narrative that we've talked about, protected home prices, weaker activity. But if we think about how the lock in effect and that's the fact that all of these current homeowners who have mortgages well below the prevailing mortgage rate just are not going to be incentivized to list their home for sale, then kind of a logical next step from a housing statistics perspective is that new home sales are probably going to increase as a percentage of total home sales. And that's exactly what we're seeing, new home sales in the first quarter of this year, they were roughly 20% of the total single unit sales volumes. That's the largest share of transactions in any quarter since 2006. And this dynamic was actually quoted by the National Association of Homebuilders when describing the increase in homebuilder confidence that you quoted Jay.    Jay Bacow: Okay, but when I think about that percentage, aren't building volumes in aggregate coming down? Jim Egan: They are, though, as a caveat, I would say that if we look at that seasonally adjusted annualized rate, it did increase sequentially a little bit, month-over-month in April. What I would point to here is that from the peak in single unit housing starts, and we think the peak in the cycle was April of 2022, those starts are down 22%. Now, that's finally started to make a dent in the backlog of homes under construction. Now, as a reminder, again, this is something we've talked about here, there are a number of factors from supply chain issues to labor shortages, that we're really serving to elongate, build timelines in the months and years after the onset of COVID. And all of those things caused a real backlog in the number of homes under construction, so homes were getting started, but they weren't really getting finished. We see the number of single unit homes under construction is now down 130,000 units from that peak. Now, don't get me wrong, that number is still elevated versus where we'd expected to be, given the sheer number of housing starts that we've seen over the past year. But this is a first step towards turning more positive on housing starts. And again, homebuilder confidence Jay, as you said, it's climbed higher every single month this year. Jay Bacow: Okay, but you said this is a first step in turning more positive on housing starts. We get the start, we get the unit under construction, we get a completion and then eventually we get a home sale, so what does this mean for sales volumes? Jim Egan: We would think that it's probably likely for new home sales to continue making up a larger than normal share of monthly volumes, but we don't think that sales are about to really inflect materially higher here. Purchase applications so far in May, they're still down 26% year-over-year versus the same month in 2022. Now, that's the best year-over-year number since August of last year, but it's not exactly something that screams sales are about to inflect higher. Similarly, pending home sales just printed their weakest March in the history of the index, and it's the sixth consecutive month that they've printed their weakest month in index history. So it was their weakest February, their weakest January, and so on and so forth, so we think all of this is kind of emblematic of a housing market, specifically housing sales that are finding a bottom, but not necessarily about to move much higher. Jay Bacow: Okay. Now, Jim, in the past, when you've talked about your outlook for home prices, you mentioned your fou

Though the current market narrative has turned bullish, it may not withstand a downturn in earnings.----- 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, May 22nd at 11a.m in New York. So let's get after it. For the past six months, the S&P 500 has been trading in a narrow range with strong rotations under the surface. When we turned tactically bullish on the index last October at 3500, we did so because the price had reached an attractive level and we believed rates and the dollar were topping. When we exited that trade at 4100 in early December, the price was no longer attractive, given our view that 2023 earnings estimates were materially too high. Fast forward to today and the index is showing some signs that it wants to break higher, even though our concerns remain. The primary difference from the early December highs is that we now have dramatically different leadership. Back then the leaders were energy, materials, financials and industrials, while technology was the big laggard. Small caps were also doing much better and market breadth was strong. The bullish narrative centered around China's reopening, which would put a floor in for global growth. Today, breadth is very weak. Technology, communication services and consumer discretionary are the only sectors up on the year, and even those sectors are exhibiting narrow breadth. Yet investors are more bullish than in early December, or at least far less bearish. The bullish narrative today focuses on technology, specifically on artificial intelligence. While we believe artificial intelligence is for real and will likely lead to some great efficiency to help fight inflation, it's unlikely to prevent the deep earnings recession we forecast for this year. Last week's price action showed frenzied buying by investors who cannot afford to miss the next bull market. We believe this will prove to be a head fake, like last summer for many reasons. First, valuations are not attractive, and it's not just the top ten or 20 stocks that are expensive. The median price earnings multiple is  18 times, which is near the top decile the past 20 years. Second, a very healthy reacceleration is baked in the second half consensus earnings estimates. This flies directly in the face of our forecasts, which continue to point materially lower. We remain highly confident in our model, given how accurate it's been over time and recently. We first started talking about the oncoming earnings recession a year ago and received very strong pushback, just like today. However, our model proved to be quite prescient based on the results and is now projecting 20% lower estimates than consensus, for 2023.  Third, the markets are pricing in 2 to 3 Fed cuts before year end without any material implications for growth. We think such an outcome is very unlikely. Instead, we think the Fed will only cut rates if we definitively enter into a recession or if credit markets deteriorate significantly. 

While the U.S. economy looks to be on track for a soft landing in 2023, even the smallest of setbacks could spell trouble for the end of the year.----- Transcript -----Welcome to Thoughts on the Market. I'm Ellen Zentner, Morgan Stanley's Chief U.S. Economist. Along with my colleagues bringing you a variety of perspectives, today I'll discuss our view around the soft landing for the U.S. economy. It's Friday, May 19th, at 10 a.m. in New York. Last year, we presented our outlook that 2023 would see a soft landing for the U.S. economy. This out of consensus view continues to be our base case expectation. And we looked at several key data points as evidence to support it, including the U.S. housing cycle, income and spending dynamics, the labor market and inflation. To start, economists have long said, "As goes housing, so goes the business cycle." And housing is a very important factor in our outlook for a soft landing. While the decline in housing activity has been record breaking from a national perspective, Morgan Stanley's housing strategists believe the cycle is bottoming. In our forecast, the big drag on economic growth from the housing correction should turn neutral by the third quarter of 2023, providing some cushion against the growth slowdown elsewhere. Second, the incoming data on U.S. income and consumer spending also support our expectation that the economy is slowing but not falling off a cliff. On the one hand, discretionary consumer spending is softening. On the other hand, income is the predominant driver of consumer spending, and even as wage growth continues to slow, our forecasted path for inflation suggests that real wages will finally turn positive in the middle of this year. Third, we look to labor market dynamics, and the April U.S. employment report provides ample evidence that the labor market is slowing but is also not headed for a cliff. The steady decline in job postings with still low unemployment rates since the middle of last year supports our soft landing view. And finally, we closely monitor inflation. The most recent April data suggests that core inflation continues to slowly recede, tracking in line with our forecasts, as well as the Fed's March projections. We think the incoming data continue to support a Fed pause at the June meeting, and after June we can see a wide range of potential outcomes for the policy rate. We expect a gradual slowing in core inflation that keeps the Fed on hold until March 2024, when it begins to normalize policy with quarter percent rate cuts every three months.   To be sure, the possibility of a recession remains a concern this year amid banking pressures with unknown spillovers to the economy from tighter credit. Should credit growth slow more than expected, it would bring larger spillovers to investment, consumption and labor. Against this backdrop, we expect the U.S. economy to experience a sharp slowdown in the middle two quarters of the year, so even small hiccups could push us into a recession. We'll continue to keep you abreast of any new developments. 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 markets remain calm for now, incoming developments across the debt ceiling, inflation and monetary policy could quite quickly turn the tide.----- 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 Thursday, May 18th at 2 p.m. in London. A notable aspect of the current market is its serenity. Over the last 30 days, U.S. stocks have seen the least day-to-day volatility since December of 2021. It's a similar story for stocks in Europe or the movement of major currencies. Across key markets, things have been calm and investors have become more relaxed, with expectations of future volatility also in decline. But why is this happening? After all, major uncertainties around the path of inflation and central bank policy still exist. And the United States, the world's largest economy and most important borrower, still hasn't reached an agreement to keep borrowing by raising the debt ceiling, raising the risk, according to the U.S. Treasury secretary, of running out of money in less than a month. Well, we think a few things are going on. With the debt ceiling, we think this is a great example that real world investors genuinely struggle with pricing a binary, uncertain outcome. It's very challenging to put precise odds on what is ultimately a political decision and hard to quantify its impact. And further complicating matters, the conventional wisdom generally appears to be that any debt ceiling deal would only get done at the last possible moment. In short, investors are struggling, making big changes to their portfolio in the face of what is little better than a political guess and are finding it easier to wait, and hoping that more clarity emerges. I’d note we saw something very similar before the near-miss on the debt ceiling in 2011. Despite being extremely aware of the deadline back then, stocks moved sideways until the last possible moment in August of 2011, afraid of leaning too heavily in one direction before the event. Other factors are also in limbo. We're nearing the end of what was a reasonably solid first quarter earnings season and don't see larger disappointments arriving, potentially, until later in the year. And on our forecasts, the Federal Reserve just made its last rate hike of the cycle and is now on hold for the remainder of 2023. And volatility does have the tendency to be self-reinforcing. Low volatility often begets low volatility, and in turn drags down expectations of what future movements will look like. But importantly, this doesn't represent some form of clairvoyance, expectations about future levels of market volatility often deviate from what actually happens, in both directions. For now, markets remain calm. But don't assume that means investors have some special insight around the debt ceiling, inflation or monetary policy. Incoming developments across all of these areas can change the picture rather quickly. 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. 

According to the Federal Reserve’s latest Senior Loan Officer Opinion Survey, small businesses may be the most vulnerable to banks tightening their lending standards.----- 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 takeaways from the Senior Loan Officer Opinion Survey. It's Wednesday, May 17th at 10 a.m. in New York. We've talked a lot about the effects of the turmoil in the regional banks on credit formation, on this podcast. We thought the ongoing liquidity pressures in the regional banking sector may lead to tighter lending standards, which will eventually translate into lower credit formation. The Senior Loan Officer Opinion Survey, conducted quarterly by the Federal Reserve, provides a window on bank lending practices, including the standards and terms for banks to make loans, as well as the demand for bank loans to businesses and households. The survey results published last week, reflect conditions during the first quarter of 2023 and provide a first glimpse on the effect of the regional banking turmoil on banks outlook for lending over the remainder of 2023. The survey showed that banks expect to tighten standards across all loan categories. Banks cited an expected deterioration in the credit quality of their loan portfolios, customer collateral values, a reduction in risk tolerance, concerns about bank funding costs, banks liquidity position and deposit outflows, as reasons for expecting to tighten lending standards over the rest of 2023. While standards for commercial and industrial, the so-called C&I loans, tightened only marginally, the demand for C&I loans fell to levels not seen since the great financial crisis. Even though lending standards only tightened marginally, the tightening came from some loan officers tightening standards considerably. Further, banks reported changes to their modalities of their lending quite substantially. For example, the spread on loans or their cost of funding broke above the pandemic period and entered levels last seen during the great financial crisis. Loan officers also changed credit lines to small businesses drastically, especially regarding the size and cost. They reduced the maximum size and maturity of credit lines, as well as increased collateral requirements and the cost of credit lines. For small businesses in the U.S., such credit tightening comes at a very difficult time. Small business optimism and the outlook for business conditions already deteriorated significantly over the past year, and small businesses acknowledge that the environment isn't conducive for expansion or CapEx. Why does this matter? As small businesses have continued to lower expectations of sales, there were also moderated plans to raise prices in the near term. We see this dynamic raising the risks of downside surprises to upcoming inflation data. Also worth noting that fewer small businesses describe inflation as their number one concern, in fact, more describe interest rates as the number one concern. One of the special questions in this quarter's survey pertained to commercial real estate, so-called CRE. Banks tightened lending standards across all categories of CRE loans. Action cited included, widening loan spreads, reducing loan to value, raising debt service covers ratios and reducing maximum loan sizes. These survey results are consistent with what we had been predicting. Volatility in the regional banking sector has resulted in lower credit formation, due to both lingering liquidity stress and regulatory changes to come. The former is already playing out and the latter is likely to weigh on economic growth over the long term. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today. 

As investors attempt to find opportunities in an uncertain stock market, earnings disappointments and an ongoing debt ceiling debate loom overhead.----- 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, May 16th, at 1 p.m. in New York. So let's get after it. Having spent the last few weeks on the road engaging with clients from around the world, I figured it would be useful to share some thoughts from our meetings and to touch on the most often asked questions, concerns and pushback to our views. First, conviction levels are low, given broadly elevated valuations and a challenging macro backdrop. While many individual longs and shorts have worked well in the context of a buoyant S&P 500, the most favorite trades have largely played out and clients are having trouble finding the next opportunity. Small cap and low quality stocks have underperformed and we continue to see crowding into mega-cap tech and consumer staples stocks as safe havens in a deteriorating growth environment.Second, there isn't much interest in the S&P 500 as either a long or a short anymore. Most clients we speak with have given up on the idea of a big breakdown of the index level. Conversely, there are few who think the S&P 500 can trade much above 4200, which has proven to be a key resistance since the October lows. What has changed is that the floor has been raised, with the large majority of investors thinking 3800 is now unlikely to be broken to the downside. In short, the consensus believes the bear market ended in October, at least for the high quality S&P 500 and NASDAQ. Third, there is little appetite to dive back into the areas of the market that have significantly underperformed like regional banks, small caps and energy. Other deep cyclicals are also out of favor due to either extended valuation and high earnings expectations In the case of industrials, and recession risk in the case of materials. Instead, most clients we spoke with remained comfortably long, large cap tech stocks, especially given the group's recent outperformance. While consumer staples and other defensives have outperformed strongly since March, there's less confidence this outperformance can continue. Our take remains the same. The market is speaking loudly under the surface, with its classic late cycle leadership and extreme narrowness, it is bracing for further macro and earnings disappointments. However, it is not yet pricing these outcomes at the index level. Such is the typical pattern exhibited by equity markets until clearer evidence of an economic recession arrives, or the risks of one are fully extinguished. With our economist forecasting close to 0% growth this year for real GDP and just modest growth next year, valuations at full levels and several other risks in front of us, we suspect 4200 will hold to the upside as most clients suggest. However, we continue to hold a more bearish tactical view than most clients in terms of the downside risk given our earnings forecast. The majority of our fundamental debate with clients has been over earnings. More specifically, there is broad pushback to our view that margins have not yet bottomed. In addition, many clients do not think revenue growth can fall towards zero or go negative given the still elevated inflation across the economy. Our take is that while many companies have taken decisive cost action, including layoffs, they have not yet cut cost nearly enough for a zero-to-negative revenue growth backdrop. But the odds of such an outcome increasing, in our view, we find it notable that many investors are more sanguine today on the earnings backdrop than they were five months ago. Meanwhile, many clients are worried about the debt ceiling. Most believe it will get resolved, but not without some near-term volatility. However, the discussion has evolved, with many clients framing this event as a lose-lose for markets. Assuming the debt ceiling is not resolved before the Treasury runs out of money, market volatility is likely to pick up meaningfully. Conversely, if the debt ceiling is lifted before the Treasury runs out of money, it will likely come with some concessions on the spending front, which could be a headwind for growth. Secondarily, such an outcome will lead to significant, pent up issuance from the Treasury to pay its bills and rebuild its reserves. This issuance from Treasury, could approach $1 trillion in the six months immediately after the ceiling is lifted, and potentially present a materially tightening to liquidity that could tip the S&P 500 back to the downside. To summarize, clients are less bearish on earnings than we are, although most are still fundamentally cautious on growth in the eco

Original Release on April 20th, 2023: "Smart chemotherapy" could change the way that cancer is treated, potentially opening up a $140 billion market over the next 15 years.----- Transcript -----Welcome to Thoughts on the Market. I'm Mark Purcell, Head of Morgan Stanley's European Pharmaceuticals Team. Along with my colleagues bringing you a variety of perspectives, today I'll talk about the concept of Smart Chemotherapy. It's Thursday, the 20th of April at 2 p.m. in London. Cancer is still the second leading cause of death globally, accounting for approximately 10 million deaths worldwide in 2020. Despite recent advances in areas like immuno-oncology, we still rely heavily on chemotherapy as the mainstay in the treatment of many cancers. Chemotherapy originated in the early 1900s when German chemist Paul Ehrlich attempted to develop "Magic Bullets", these are chemicals that would kill cancer cells while sparing healthy tissues. The 1960s saw the development of chemotherapy based on Ehrlich's work, and this approach, now known as traditional chemotherapy, has been in wide use since then. Nowadays, it accounts for more than 37% of cancer prescriptions and more than half of patients with colorectal, pancreatic, ovarian and stomach cancers are still treated with traditional chemo. But traditional chemo has many drawbacks and some significant limitations. So here's where "Smart Chemotherapy" comes in. Targeted therapies including antibodies to treat cancer were first developed in the late 1990s. These innovative approaches offer a safer, more effective solution that can be used earlier in treatment and in combination with other cancer medicines. "Smart Chemo" uses antibodies as the guidance system to find the cancer, and once the target is reached, releases chemotherapy inside the cancer cells. Think of it as a marriage of biology and chemistry called an antibody drug conjugate, an ADC. It's essentially a biological missile that hones in on the cancer and avoids collateral damage to the healthy tissues.  The first ADC drug was approved for a form of leukemia in the year 2000, but it's taken about 20 years to perfect this "biological missile" to target solid tumors, which are far more complex and harder to infiltrate into. We're now at a major inflection point with 87 new ADC drugs entering development in the past two years alone. We believe smart chemotherapy could open up a $140 billion market over the next 15 years or so, up from a $5 billion sales base in 2022. This would make ADCs one of the biggest growth areas across Global Biopharma, led by colorectal, lung and breast cancer. Large biopharma companies are increasingly aware of the enormous potential of ADC drugs and are more actively deploying capital towards smart chemotherapy. It's important to note, though, that while a smart chemotherapy revolution is well underway in breast and bladder cancer, the focus is now shifting to earlier lines of treatment and combination approaches. The potential to replace traditional chemotherapy in other solid tumors is completely untapped. A year from now, we expect ADC drugs to deliver major advances in the treatment of lung cancer and bladder cancer, as well as really important proof of concept data for colorectal cancer, which is arguably one of the biggest unmet needs out there. Given vastly improved outcomes for cancer patients, we believe that "Smart Chemotherapy" is well on the way to replacing traditional chemotherapy, and we expect the market to start pricing this in over the coming months. Thanks for listening. If you enjoy this show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today. 

With technology evolving rapidly in education, investors are taking a closer look at how it will financially impact the global education market. Stephen Byrd and Josh Baer discuss.----- Transcript -----Stephen Byrd: Welcome to Thoughts on the Market. I'm Stephen Byrd, Morgan Stanley's Global Head of Sustainability Research. Josh Baer: And I'm Josh Baer from the U.S. Software Team. Stephen Byrd: On the special episode of the podcast will discuss the global education market. It's Friday, May 12th at 10 a.m. in New York. Stephen Byrd: Education is one of the most fragmented sectors globally, and right now it's in the midst of significant tech disruption and transformation. Add to this, a number of dynamically shifting regulatory and policy regimes and you have a complex set up. I wanted to sit down with my colleague Josh to delve into the intersection of the EdTech and the sustainability side of this multi-layered story. Stephen Byrd: So, Josh, let's start by giving a snapshot of global education technology, particularly in this post-COVID and rather uncertain macro context we're dealing with. What are some of the biggest challenges and key debates that you're following? Josh Baer: Thanks, Stephen. One way that I think about the different EdTech players in the market is through the markets that they serve. So in the context of education, that means early learning, K-12, higher ed, corporate skilling and lifelong learning. The key debates here come down to what it usually comes down to for equities, growth and margins. So on the growth side, there's several conversations that we're constantly having with investors. Some business models are exposed to academic enrollments as a driver. To what extent would a weaker macro with higher unemployment lead to stronger enrollments given their historical countercyclical trends? And enrollments have been pressured as current or potential students were attracted to the job market. And on the margin side, some of the companies that we follow in the EdTech space, they're the ones that were experiencing very rapid growth during COVID and investment mode to really capture that opportunity. And so investors debate the unit economics of some of these business models and really the trajectory of margins and free cash flow looking ahead. One other more topical debate, the impact of generative A.I. on education, and maybe we'll hit on that topic later. Josh Baer: Stephen, why do these debates matter from the point of view of ESG, environmental, social and governance perspective? Why should investors view global education through a sustainability lens? Stephen Byrd: Yeah Josh I'd say among sustainability focused investors, typically the number one topic that comes up within the education sector is inequality. So higher education is a key pillar of economic development, but social and economic problems can arise from limited access. Unequal access to education can perpetuate all forms of socioeconomic inequality. It can limit social mobility, and it can also exacerbate health and income disparities among demographic groups. It can also restrict the potential talent pool and diversity of backgrounds and ideas in different academic fields, leading to all kinds of negative economic implications for both growth and innovation. While progress has been made in increasing enrollment among underrepresented students, significant disparities remain in admission and graduation rates. For investors and public equities, I think one of the more useful tools in our note is a proprietary framework that measures sustainability impact. Now that tool is really primarily rooted in the United Nations Sustainable Development goal number four, which lays out targets in education. This framework is rooted in the premise that I mentioned earlier. The COVID-19 pandemic has exacerbated multiple challenges in education. So when we think about business models that we really like, we're focused on models that can improve the quality of student learning, enhance institutions' operations and increase access and affordability. And we think our stocks that we selected really do meet those objectives quite well. Stephen Byrd: Josh, what is the current size of the EdTech and education services markets and why invest now? Josh Baer: First, on the size of the market, we see global education spend of 6 trillion today going to 8 trillion in 2030. So that's a CAGR below the growth of GDP, but we do see faster growth in EdTech. So there's really compelling opportunities for consolidation in the fragmented education market broadly and for EdTech growing at a double digit CAGR, so much faster than the overall education market. Why invest in EdTech? Well, as just mentioned, EdTech addresses these very large markets. It's increasing its share of education spend because it's aligned to several secular trends. So I'm thinking about digital transformation of the entire education industry

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

With the debt ceiling debate seemingly making little headway, it may be critical for investors to track market developments in the near future.----- 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 debt ceiling and its impact on markets. It's Wednesday, May 10th at 10 a.m. in New York. Congressional leaders met at the White House on Tuesday to hammer out a deal to raise the debt ceiling and avoid a government bond default. Reports following the meeting suggest little progress was made. That news shouldn't necessarily be surprising or discouraging. Initial rounds of legislative negotiations are often just a venue for each side to state their position. It often takes the urgency of a nearby deadline to catalyze compromise. While this isn't the first debt ceiling challenge for markets, it may be the most critical one, at least since 2011. As we said before, investors need to take seriously the idea that we do something that hasn't been done before, cross the X-date, the date after which Treasury doesn't have enough cash on hand to meet all obligations as they come due. So it's useful to quickly revisit what that would mean. In short, it puts a bunch of options on the table, but most are not good options, suggesting some markets may have to price in greater downside, at least for a time. A benign and plausible outcome would be that if the X-date is crossed, the resulting concern among policymakers, voters and business leaders around missed debt, Social Security, infrastructure and other payments, creates enough pressure on Congress to quickly force a compromise. Other outcomes are less friendly. The White House could choose to avoid default by ignoring the debt ceiling, citing authority under the 14th Amendment, but that could just shift uncertainty from the legislative process to the judicial one, as courts could ultimately decide if the U.S. defaults. The White House could also choose to prioritize payments to bondholders over other government obligations, but this could interrupt payments into the economy that support a substantial amount of consumption and GDP. And, of course, default would be a possibility, but given its far more considerable economic and political downside relative to the other options, this outcome would not be our base case expectation. So how could markets react? Here's what to watch for. The Treasury bills curve could invert further, with shorter maturity yields rising more relative to longer maturity yields. In equity markets, volatility should pick up considerably, and any resolution that crimps economic growth further would underscore the cautious stance of our equity strategy team. So developments over the next couple of weeks will be critical to track. Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague, or leave us a review on Apple Podcasts. It helps more people find the show.

As oil data in 2023 shows that second-half tightening is less likely, it may be time to alter the narrative around the expected market for the remainder of the year.Important note regarding economic sanctions. This recording references country/ies which are generally the subject of selective sanctions programs administered or enforced by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), the European Union and/or by other countries and multi-national bodies. Any references in this recording to entities, debt or equity instruments, projects or persons that may be covered by such sanctions are strictly incidental to general coverage of the issuing entity/sector as germane to its overall financial outlook, and should not be read as recommending or advising as to any investment activities in relation to such entities, instruments or projects. Users of this recording are solely responsible for ensuring that their investment activities in relation to any sanctioned country/ies are carried out in compliance with applicable sanctions.----- Transcription -----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 how the 2023 global oil market story is changing. It's Tuesday, May the 9th at 4 p.m. in London. Over the last several months, the dominant narrative in the oil market was one of expected tightening in the second half. Although supply outstripped demand in the first quarter, the assumption was that the market would start to tighten from the second quarter onwards and be in deficit once again by the second half, which would lead to a rise in price. At the start of the year, this was also our thesis for how 2023 would play out. However, as of early May, it seems this narrative needs to change. The expectation of second half tightness was largely based on two key assumptions. One, that China's reopening would boost demand, and two, the Russian oil production would  start to decline. By now, however, it seems that these assumptions have run their course and are in fact behind us. On China, both the country's crude imports and its refinery runs were already back at all time highs in March, leaving little room for further improvement. On Russia, oil production has fallen from recent peaks, but probably only about 400,000 barrels a day. From here, we would argue that it's becoming increasingly unlikely it will fall much further. The EU's crude and product embargoes have been in place for some time now. Russian oil that flows now will probably continue to flow. That raises the question whether the second half tightening thesis can still be sustained. After OPEC announced production cuts at the start of April, we argued that OPEC was mostly responding to a weakening in the supply demand outlook. Perhaps counterintuitive, but we lowered oil price forecasts already significantly at the time those cuts were announced. Still, with those cuts, we thought that the second half balances would be about 600,000 barrels per day undersupplied, and that that would be enough to keep Brent in the mid-to-upper $80 per barrel range. New data from this past month, however, has further chiseled away at this deficit, which we now project at just 300,000 barrels a day. This is in effect getting very close to a balanced market, and that limits upside to oil prices, at least in the near term. Even this modest undersupply now mostly depends on seasonality in demand and OPEC production cuts. However, when the second half arrives, oil prices will start to reflect expected balances for early 2024. In the first half of '24, seasonality may turn the other way and OPEC production cuts are scheduled to come to an end. Our initial estimate of 2024 balances showed the market in a small surplus, especially in the first half. Looking beyond the next 12 months, oil prices still have long term supportive factors. Demand is likely to continue to grow over the rest of the decade, while investment levels have been low for some time now. However, the structural and the cyclical don't always align, and this is one of those moments. The second half tightness thesis does not appear to be playing out, and we don't see much tightness in the period just beyond that either. We expect Brent oil prices to stay in their recent $75 to $85 per barrel range, probably skewed towards the bottom end of that range later this year when the market enters a period of seasonal softness again and OPEC's voluntary cuts come to an end. 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 all the volatility surrounding the banking sector, the Fed raising rates and the continued debt ceiling debate, are consumers finally pulling back on spending? ----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues bringing a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, May 8th, at 11 a.m. in New York. So let's get after it. In this week's podcast, I will discuss three major topics on investors' minds. First quarter Earnings results, the Fed's decision to raise rates last week, and how the consumer is holding up in the face of a debt ceiling debate with no easy solutions. First, on earnings, the first quarter earnings per share beat consensus expectations by 6 to 7%. Furthermore, second quarter guidance is held up better than we expected coming into the quarter. That said, it's important to provide some context. First quarter estimates came down 16% over the past year, double the 20 year average decline over equivalent periods and a more manageable hurdle for companies to clear. Furthermore, the macro data improved in January and February as seasonal adjustments and easy comparisons, with the early 2022 break out of Omicron flattered the growth rate. Nevertheless, this improvement also helped earnings results on a year-over-year basis and provided a boost to company confidence about where we are in the cycle. Unfortunately, many of the leading macro data we track have fallen and are now pointing to a similar reacceleration in earnings per share growth that the consensus expects. Ironically, this comes as many companies position 2023 growth recoveries as being contingent on a solid macro backdrop. If one is to believe our leading indicators that point pointed downward trends in earnings per share surprise and margins over the coming months, stocks will likely follow that negative path lower. With regards to the Fed, Chair Powell pushed back on the likelihood of interest rate cuts that are now priced in the bond markets. While bonds and stocks faded after these comments, they closed the week on a strong note. We believe the equity market continues to expect the best of both worlds, interest rate cuts and durable growth. We view the likelihood of reacceleration in growth in conjunction with interest rate cuts is very low. Instead, we believe another chapter of our fire and ice narrative is possible. In other words, a tighter Fed even as growth slows towards recession. This would be a difficult environment for stocks. So what are consumers telling us? Today, we published our latest AlphaWise Consumer Survey. Consumers continue to expect a pullback in spending for most categories over the next six months. Consumers still plan to spend more on essentials like groceries and household supplies. However, they are looking to pull back on discretionary goods spending categories with the most negative net spending intentions are consumer electronics, leisure activities, home appliances and food away from home. Grocery is the only category where low and middle income consumers said they’re planning to spend incrementally more over the next six months. They are not planning to spend more on any services categories. For high income consumers, travel is the only services category where spending intentions are positive and grocery is the only goods category where spending intentions are positive. Interestingly, the high income group indicated negative spending intentions for food away from home and leisure services. Bottom line, the consumer looks to finally be pulling back from an incredible two year run of spending. That was always unsustainable in our view. Some of this may be due to inflation and dwindling savings, but also the very public debate around the debt ceiling, which does not appear to have any easy solution. This is just another wildcard risk for stocks as we head into the summer. 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 for people to find the show. 

The Federal Reserve pausing on hiking interest rates has historically been good for markets. But given current conditions, history may not repeat itself.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Assets Strategist for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, May 5th at 2 p.m. in London. The Federal Reserve raised interest rates 25 basis points this week and have now raised their benchmark policy rate 5% over the last 14 months. That's the fastest increase in over 40 years, and for now we think it's enough. Morgan Stanley's economist forecasts the Fed won't make additional rate hikes or cuts for the rest of this year. In market parlance, the Fed will now pause. The question, of course, is whether the so-called pause is good for markets. In 1985, 1995, 1997, 2006 and 2018, buying stocks once the Fed was done raising rates resulted in good returns over the following 6 to 12 months. And this result does make some intuitive sense. If the Fed is no longer increasing rates and actively tightening policy, isn't that one less challenge for the stock market? Our concern, however, is that current conditions look different to these past instances, where the last rate hike was a good time to be more optimistic. Today, current levels of industrial production and leading economic indicators are weaker, inflation is higher, bank credit is tighter, and the yield curve is more inverted than any of these prior instances since 1985, where a pause boosted markets. In short, current data suggest higher inflation and a sharper slowdown than past instances where the last Fed hike was a good time to buy. And for these reasons, we worry about lumping current conditions in with those prior examples. So far, I've focused on performance following a pause in Fed rate hikes from the perspective of equity markets. Yet the picture for bonds is somewhat different. Whereas future performance for stocks is quite dependent on the growth outlook, U.S. Treasury bonds have historically done well after the last Fed rate hike under a variety of growth scenarios, whether good or poor. For now, we continue to favor high grade bonds over equities, even if we think the Fed may now be done with its rate hikes. We think that's consistent with the current data looking weaker than prior instances. In turn, stronger growth and lower inflation than we forecast would make conditions start to look a little bit more similar to instances where the last rate hike was a buy signal and would make us more optimistic. Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts, or wherever you listen, and leave us a review. We'd love to hear from you.

The banking sector appears stronger in Europe than it does in the U.S., but some other European sectors may be at risk of lower profitability.----- Transcript -----Welcome to Thoughts on the Market. I'm Graham Secker, Head of Morgan Stanley's European Equity Strategy Team. Along with my colleagues bringing you a variety of perspectives, I'll be talking about our latest thoughts on European equities. It's Thursday, May the 4th at 3 p.m. in London. Over the last couple of months, we have seen global technology stocks significantly outperform global financial stocks, aided by lower bond yields and concerns around the health of the U.S. regional banking sector. Historically, when we have seen tech outperform financials in the past, it has usually been accompanied by material underperformance from European equities. However, this time the region has proved much more resilient. Part of this reflects the benefits of lower valuation and lower investor positioning. However, we also see two broader macro supports for Europe just here. First, we see less downside risk to the European economy than that of the U.S., where many of the traditional economic leading indicators are down at recessionary levels. In contrast, similar metrics for Europe, such as consumer confidence and purchasing managers indices, have actually been rising recently. In addition, a healthier and more resilient banking sector over here in Europe suggests there is potentially less risk of a credit crunch developing here than we see in the U.S.. Second, we think Europe is also seen as an alternative way to get exposure to an economic recovery in China, given that the region has stronger economic ties and greater stock market exposure than most of its developed market peers. While this is not necessarily manifesting itself in overall aggregate inflows into European equity funds at this time, we can clearly see the theme benefiting certain sectors, such as luxury goods, which has arguably become one of the most popular ways to express a positive view on China globally. Notwithstanding these relative advantages, we do expect some near-term weakness in European stocks over the next quarter, with negative risks from the U.S. potentially outweighing positive risks from China and Asia. While first quarter results season has started strongly, we believe earnings disappointment will gradually build as we move through 2023 and our own forecasts remain close to 10% below consensus. Catalysts for this disappointment include slower economic growth, from the second quarter onwards, continued falls in profit margins and building FX headwinds given a strengthening euro. Our negative view on the outlook for corporate profitability often prompts the question as to which companies are over-earning and hence potentially most at risk from any mean reversion. To help answer this question, we ranked European sectors across five different profitability metrics where we compared their current levels to their ten year history. This analysis suggests that the European sectors who are currently over-earning, and hence most at risk of future disappointment include transport, semiconductors, construction materials, energy and autos. In contrast, sectors where profitability does not look particularly elevated at this time include retailing, diversified financials, media, chemicals, real estate and software.   More broadly, we believe this analysis supports our cautious view on cyclical stocks within Europe just here, particularly for the likes of energy and autos, where profits are already falling year on year and where we see more downgrades ahead. Instead, we maintain a preference for stocks with higher quality and growth characteristics. We think these should be relative outperformers against the backdrop of economic weakness, falling bond yields and better relative earnings trends. 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. 

Congress is finally set to begin debt ceiling negotiations. What are some possible outcomes and how might the negotiations affect economic growth?----- 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 debt ceiling and its impact on markets. It's Wednesday, May 3rd at 9 a.m. in New York. Earlier this week, the Treasury Department informed Congress that at the start of June, it could run out of money to pay government obligations as they come due. This X-date appears much earlier than most forecasters expected, catching markets by surprise. Some investors even expressed to us disbelief, pushing the idea that the real X-date would be later, and Treasury is just trying to stir negotiations in Congress to raise the debt ceiling. Here's our take. The X-date is likely a moving target due the complex interplay of the timing of incoming tax receipts, government outlays and maturing debt securities. So, while it's possible the date ends up being sometime later this summer, the government might not be able to forecast that with a high degree of certainty. In that case, negotiations have to start now to avoid a situation where the X-date sneaks up on Congress, leaving little time to deliberate and risking default. And that seems to have prompted negotiations, with a May 9th meeting at the White House set to kick things off. But we emphasize that an early resolution remains uncertain. Both parties remain far apart on how they'd like to deal with the debt ceiling and in some ways haven't formed consensus within their own parties on the issue either. So the negotiating dynamic is likely to be tricky. That in turn means a range of policy solutions are plausible here, including a temporary suspension of the debt ceiling, unilateral measures by the administration to avoid default, a budget austerity package in exchange for raising the debt ceiling, or perhaps a clean debt ceiling raise. Of course, that level of uncertainty is generally not something markets like. Not surprisingly, we're seeing further inversion of the yield curve for Treasury bills, with notes maturing in June rising to around 5.3%. However, it does dovetail with our general preference for bonds over equities in developed markets this year. If the negotiation lingers too long, investors could become more concerned about the impact of the economic growth outlook, either because payment prioritization puts government transfer payments at risk or budget austerity reduces the trajectory of net government spending. In that case, equity markets could come under pressure, but longer maturity bonds could benefit. 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 trend toward a multipolar world accelerating, companies are finding that investing in productivity may help protect margins. Ravi Shanker and Diego Anzoategui discuss.----- Transcript -----Ravi Shanker: Welcome to Thoughts on the Market. I'm Ravi Shanker, Morgan Stanley's North American Freight Transportation Analyst. Diego Anzoategui: And I'm Diego Anzoategui from the U.S. Economics Team. Ravi Shanker: And on this special episode of the podcast, we discuss what we see as The Great Productivity Race, that's poised to accelerate. It's Tuesday, May 2nd at 10 a.m. in New York. Ravi Shanker: The transition away from globalization to a decentralized multipolar world means companies' ability to source labor globally is contracting. This narrowing of geographical options for companies is making cheap labor, particularly for skilled manufacturing, harder to find. But there is a potential positive, a rebound in productivity which has been anemic for more than a decade. Ravi Shanker: So Diego, what's the connection that you see between the slowing or even reversal of globalization and productivity trends? Diego Anzoategui: If you think about it, the decision to upgrade technologies and increase productivity is like any other type of capital investment. Firms decide to improve their production technologies, either to deal with scarce  factors of production or to meet increasing demand. COVID 19 was a negative shock to the labor supply in the U.S., and there is still a long road ahead to reach pre-pandemic levels. On top of that, we think that slowing globalization trends will likely limit labor supply further, causing real wages to increase, and keeping firms under pressure to improve productivity to protect margins. But we think firms will boost productivity investment in the medium term once business sentiment picks up again. And we are past the slowdown in economic activity that we expect in 2023 and into 2024. Expectations are key because the decision to innovate is forward looking, adopting new technologies takes time and the benefits of innovation come with a lag. Diego Anzoategui: Ravi, as a result of COVID and the geopolitical uncertainties from the war in Ukraine, companies have been dealing with a number of significant challenges recently, from supply chain disruptions to worker shortages and energy security. How are companies addressing these hurdles and what kinds of investments do they need to make in order to boost productivity? Ravi Shanker: Look, it's a good question and certainly a focus area for virtually every company anywhere in the world. The last five years have been very challenging and a lot of those challenges have revolved around labor availability and labor cost in particular. So I think companies are approaching this with two broad buckets or two broad focus areas. One is, I think they are trying to reinvest in their labor force. I think for too long companies' labor force was viewed as sort of a source of free money, if you will, an area to cut costs and gain efficiency. But I think companies have realized that, hey, we need to reinvest in our workforce, we need to raise their wages, improve their benefits, give them better working conditions, and make them a true resource that will obviously contribute to the success of the company over time. And the second bucket they're looking at is just broader long term investments in things like automation and productivity technologies, because many of these labor trends are structural, that are demographic issues, that are geopolitical issues, that are not going to reverse anytime soon. So you do need to look for an alternative, particularly in areas where, you know, jobs that people don't want to take on or where the value added from a labor is not as good as automating it. That's where companies are highly focused on the next generation of tools, whether that's automation or A.I. and machine learning. Diego Anzoategui: It seems that A.I. technology holds great promise when it comes to raising productivity growth. In fact, our analysts here at Morgan Stanley believe that A.I. focused productivity revolution could be more global than the PC revolution. What is your thinking around this? Ravi Shanker: Look, I think it's still too early to tell what impact A.I. will have on labor productivity as a whole and the impact of labor at corporations around the world. Take, for example, my sector of freight transportation. We don't make anything, but we move everybody else's stuff. And so by nature of freight transportation, is a very process driven industry and process driven industries by nature kind of iterate to find more efficiency and better ways of doing things, and that's where a lot of these new productivity tools can be very helpful. At the same time, it is also a very labor intensive industry that has some significant demographic challenges, whether it's a truck driver shortage, the inabil

As the banking sector is in the news again, investors wonder about an increase in borrowing from the Fed and possible restrictions on the horizon.----- Transcript -----Welcome to Thoughts on the Market. I'm Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist. Along with my colleagues, bringing you a variety of  perspectives, I'll be talking about the ongoing tensions in the regional banking sector. It's Monday, May 1st at 2 p.m. in New York. At the outset, I would note that the news we woke up to this morning about JP Morgan's acquisition of First Republic is an important development. As Betsy Graseck, our large cap banks equity analyst noted, as part of this transaction JP Morgan will assume all $92 billion remaining deposits at First Republic, including the $30 billion of large bank deposits which will be repaid in full post consolidation. We believe that this is credit positive for the large cap bank group, as investors have been concerned that large banks would have to take losses against their $30 billion in deposits in the event First Republic was put into FDIC receivership. That said, we will be watching closely a key metric of demand for liquidity in the system, the borrowings from the Fed by the banks. The last two weeks saw consecutive increases in the borrowings from the Fed facilities by the banks, the discount window and the Bank Term Funding Program. That the banking system needed to continue to borrow at such high and increasing levels suggested that liquidity pressures remained and may have actually been increasing over the past two weeks. In light of the developments over the weekend, it will be useful to see how these borrowings from the Fed change when this week's data are released on Thursday. Last Friday, the Federal Reserve Board announced the results from the review of the supervision and regulation of the Silicon Valley Bank, led by Vice Chair for Supervision Michael Barr. The regulatory changes proposed are broadly in line with our expectations. The most important highlights from a macro perspective include the emphasis on banks management of interest rate risk and liquidity risk. Further, the report calls for a review of stress testing requirements. The Fed is now proposing to extend the rules that already apply to large banks now to smaller banks, banks with $100 billion to $700 billion in assets. These changes will be proposed, debated, reviewed and these changes will not be effective for a few years because of the standard notice and common periods in the rulemaking process. What are the market implications? We think that the recent events in the regional banking sector will cause banks to shorten assumptions on deposit durations, while potential regulatory changes would likely impact the amount of duration banks can take on their asset side. This is a steepener for rates, negative for longer duration securities such as agency mortgage backed securities and a dampener for the bank demand for senior tranches of securitized credit. While the implementation of these rules will take time, markets would be proactive. In the near-term, the challenges in the regional banks sector will likely result in lower credit formation and raise the risk of a sharper economic contraction.  Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

With the world moving towards a more complex and decentralized multipolar structure, how will technology and infrastructure markets fare going forward?----- Transcript -----Welcome to Thoughts on the Market. I'm Ed Stanley, Morgan Stanley's Head of Thematic Research in Europe. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about the complex issue of security in the multipolar world. For some time, the world has been trending away from a globalized, unipolar structure characterized by stability and mutual cooperation. And in its place, we've been moving towards a multipolar structure, more complex, more decentralized. And this theme is one that Morgan Stanley's Global Research Department has been exploring deeply over the last three years. And the time is right to revisit that theme now because it's accelerating. And we see two plausible outcomes from here, a de-risking or a decoupling, lie ahead for companies. Our base case is still for a gradual phased de-risking between regions and companies are already in the process of facing up to that new reality, by diversifying their highly concentrated supply chains. But the possibility of a full and disorderly decoupling scenario now warrants more serious consideration. It's no longer the tail risk it was when we first addressed the theme three years ago. What has acted as a more recent accelerant to this trend is the extent of top down policy measures we've witnessed over recent years. The number of such policies designed to restrict trade have increased fivefold in the last five years, as measured by the UN. And these restrictions have covered everything from rare earth battery minerals, to grain exports and solar panel imports, to specialist machinery for microchip production. Add to this the ever greater incentives to reshore supply chains and critical components back to the U.S. and Europe, in the form of the CHIPS Act, the U.S. IRA and Europe's response to it, and it becomes clearer why this multipolar world and de-risking theme continue to gather pace. After all, Europe's market share of critical inputs and technologies stand at about 6% versus China's at over 50%. And that scale of imbalance will take time and substantial resources to even partially reverse. And while this is a complex theme with many moving parts, there is one relatively simple conclusion. Whether the world continues to gradually de-risk or more abruptly decouple, greater spending on security and critical infrastructure will be essential. Consequently, the industrial and tech sectors will likely need to allocate the most capital to achieve this de-risking process. But we also see promise for more than 80 companies exposed to the critical infrastructure buildout, which should see higher demand and should be able to generate strong return on capital in the process. These are the types of companies that should be well-placed, as this theme evolves. Our new security framework suggests that space infrastructure, artificial intelligence and batteries may be areas of greatest focus for the markets going forward. 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.

While government bonds have been less than desirable investments for the past two years, the tide may be turning on bond returns.----- Transcript -----Welcome to Thoughts on the Market. I'm Matthew Hornbach, Global Head of Macro Strategy for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about global macro trends and how investors can interpret these trends for rates and currency markets. It's Thursday, April 27th at 2 p.m. in New York. Over the past 2 years, government bonds have been less than desirable investments. This year, the inflation phenomena came out of hibernation and appears unwilling to go away anytime soon. In 2022, one of the worst years on record, U.S. Treasuries delivered a total return of -12.5%. Securities that offer fixed interest payments like government bonds tend to lose value when inflation rises, because the future purchasing power of those cash flows declines. But that doesn't always happen, of course, and certainly not to this degree. For most of the past 20 years, government bonds dealt reasonably well with positive inflation rates, even if those rates were rising. But last year was different, for two reasons primarily. First, inflation rose at a rate we haven't seen since the late 1970s. And second, central banks responded aggressively by tightening monetary policies. How have these factors changed so far this year? Well, inflation has started to moderate both in terms of consumer prices and wages. And in response, central banks have become less aggressive in their recent policy maneuvering. Investors have also benefited from the clarity on the speed with which central banks have moved and how fast they may move in the future. This would seem like good news for government bond returns, and so far it has been. However, at the same time, investor nerves remain frayed, even if less so than last year. But why? First, investors remain worried about inflation, but for different reasons than last year. Throughout 2022 concern focused on the speed with which inflation was rising and just how high it would go. This year, however, concerns remain around how far inflation will fall, a process known as disinflation. The consensus view amongst investors is that inflation will remain above the Fed's 2% goal unless the Fed engineers a deep recession. And to do so, the Fed will either have to tighten monetary policy even further or keep monetary policy tight for an extended period of time. Neither scenario seems particularly supportive of government bond returns. Second, investors are worried about the upcoming debt ceiling negotiations. The concern isn't so much that the government will default on its debt obligations, although that is a possibility. Rather, it's more about whether the government will have to delay paying other obligations, such as federal employee salaries or Social Security. A cessation of those payments, even if temporary, could slow economic activity in the United States. And even if the debt ceiling is raised in time, material risks to regional banking institutions still remain. Putting it all together, the higher yields available in the government bond markets and the increasing risk to economic activity, including those from the lagged effects of monetary policy tightening, leave us hopeful on the future returns of the asset class. Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people find the show. 

As multinational companies look towards a future of higher innovation costs and a shrinking labor pool, some corporate sectors may fare better than others in the multipolar world.----- 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 great productivity race and the multipolar world. It's Wednesday, April 26th at 9 a.m. in New York. Client questions this week have focused on the U.S. debt ceiling, as Republicans in the House of Representatives work to pass their version of a debt ceiling raise. But we think this bill is just one step in a longer process, so we'll return to this topic when there's something more concrete to say about the ultimate resolution and its market implications. Stepping away from that topic gives us the opportunity to focus on a longer term trend impacting the markets, something our research team is calling the Great Productivity Race. It's the idea that U.S. multinational companies in particular will have to spend to develop and integrate new technologies, including artificial intelligence , into their production in order to keep up output. Why is that? In part, it has to do with one of our big three themes for 2023, the transition to a multipolar world. In a multipolar world, where the U.S. is looking to safeguard advantages and technologies and key areas of production, the labor pool for U.S. multinationals is contracting. Efforts to re-friend, and near-shore critical industries have strong political support. But this narrows the geographical options for companies making cheap labor, particularly for skilled manufacturing, harder to find. And that exacerbates a U.S. economic challenge already present for several reasons. That means companies are likely to invest in improving their own productivity through technology. And as our economists point out, there's historical precedent for this. For one academic study, the great Mississippi Flood of 1927 led many people to emigrate from some adjacent counties. Those areas modernized agricultural production much faster than others. Another academic study shows that conversely, metro areas that had a significant inflow of low skilled workers in the eighties and nineties were slow to adopt automated production processes. So investors need to know that some corporate sectors will be able to handle this well and others will be challenged. Those best positioned are ones less reliant on labor and with ample resources to invest in productivity. Those more challenged rely heavily on labor and have less resources on their balance sheets.  Our colleagues in equity research are digging into which sectors fit into which category, and in a future podcast we’ll share with you what they're learning.