Thoughts on the Market

While European earnings have been remarkably resilient this year, and consensus estimates for earnings and corporate margins remain high, there may be reason to believe there’s further yet to fall. ----- 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 earnings for the upcoming third quarter reporting season and beyond. It's Thursday, October the 20th, at 2 p.m. in London. Having been cautious on European equities for much of this year, we have recently started to flag the potential for more two-way price action in the near-term, reflecting a backdrop of low investor positioning, coupled with the potential for an inflection in U.S. inflation and interest rates over the next few months. To be clear, we haven't seen either of these two events occur yet, however we are conscious that each week that passes ultimately takes us closer to just such an outcome. Given that high inflation and rising interest rates have been the key drivers pushing equity valuations lower this year, any sign that these two metrics are peaking out would suggest that we are approaching a potential floor for equity PE ratios. However, while this is good news to a degree, history suggests that we need to be closer to a bottom in the economic and earnings cycle before equity markets put in their final price low. So far this year, European earnings have stood out for their remarkable resilience, with the region enjoying double digit upgrades on the back of currency weakness and a doubling of profitability for the energy sector. Looking into the third quarter reporting season, we expect this resilience to persist for a bit longer yet. Currency effects are arguably even more supportive this quarter than last, and the global and domestic economies have yet to show a more material slowdown that would be associated with recessionary conditions. Our own third quarter preview survey also points to a solid quarter ahead, with Morgan Stanley analysts expecting 50% of sectors to beat consensus expectations this quarter versus just 13% that could miss. Longer term, however, this same survey paints a more gloomy picture on the profit outlook, with our analysts saying downside risks to 2023 consensus forecasts across 70% of European sectors and upside risks in just 3; banks, insurance and utilities. In the history of this survey, we have never seen expectations this low before, nor such a divergence between the short term and longer term outlooks. From our own strategy perspective, we remain cautious on European earnings and note that most, if not all of our models are predicting a meaningful drop in profits next year. Specifically, consensus earnings look very optimistic in the context of Morgan Stanley GDP forecasts, current commodity prices, dividend futures and the latest readings from the economic indicators we look at, such as the purchasing managers indices. In addition to a likely top line slowdown associated with an economic recession, we see significant risks around corporate margins, too. Over the last 12 to 18 months, inflation has positively contributed to company profitability, as strong pricing power has allowed rising input costs to be passed on to customers. However, as demand weakens, this pricing power should wane, leaving companies squeezed between rising input costs and slowing output prices. In this vein, our own margin lead indicator suggests that next year could see the largest fall in European margins since the global financial crisis. However, consensus estimates assume that 16 out of 20 European sectors will actually see their margins expand next year. Our concern around overly optimistic earnings and margin assumptions next year is shared by many investors we speak to. However, this doesn't necessarily mean that all of the bad news is already in the price. Analyzing prior profit cycles suggests that equity markets tend to bottom 1 to 2 months before earnings revisions trough, and that it takes about 7 to 8 months for provisions to reach their final low. If history repeats itself in this cycle, this would point to a final equity low sometime in the first quarter of 2023, even if price to earnings ratios bottom later this year. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

As the EU puts new regulations on sustainability funds, how will categorization of these funds be impacted, and how might that change investment strategies? Head of Global Thematic and Public Policy Research Michael Zezas and Head of Fixed Income and ESG Research Carolyn Campbell discuss.----- Transcript -----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Head of Global Thematic and Public Policy Research. Carolyn Campbell: And I'm Carolyn Campbell, I lead our Fixed Income and ESG Research Team. Michael Zezas: And on this special episode of Thoughts on the Market, we'll focus on sustainability funds and their investment strategies within an evolving regulatory context. It's Wednesday, October 19th, at 10 a.m. in New York. Michael Zezas: There are just over 1400 dedicated fixed income sustainability funds with assets under management, around $475 billion off from a peak of $545 billion at the end of 2021. This is a sizable market, but as EU regulators weigh in on what these funds can and can't own, it begs the question what kinds of bonds might they start buying? So Carolyn, let's maybe start with the essentials behind the EU Sustainable Finance Disclosure Regulation, SFDR, and what it requires of financial market participants. Specifically, what are Article 8 and Article 9 products? Carolyn Campbell: So under the SFDR, fund managers are required to classify their funds in one of three ways. The first, Article 8, or what's known as a light green fund, is a sustainability fund that promotes environmental or social characteristics. The dark green funds, which are Article 9 funds, invest in sustainable investments and have an environmental or a social factor as an objective. They also, importantly, cannot do significant harm to other environmental or social objectives. And then lastly, we have the non sustainability funds which are Article 6. Michael Zezas: And despite the regulator's goal to increase transparency and accountability, there's still a high degree of uncertainty in the regulatory landscape around what can and should be included in sustainability funds. What does this uncertainty mean for the types of products that are currently being included in these funds, and how might that change in the future? Carolyn Campbell: So by and large, the regulatory uncertainty has meant that funds are more likely to take a conservative approach when constructing their holdings for fear of regulatory repercussions or just reputational risk. In particular, where investors need to have a "sustainable investment" that does not do significant harm to other environmental objectives, which is what we have in Article 9, we expect to see them gravitate increasingly towards high quality green bonds. And as a reminder, green bonds are different from regular bonds because the net proceeds of those bonds goes towards green projects. Think of it as retrofitting buildings to be more environmentally friendly, investing in climate change adaptation solutions, or building out clean transportation infrastructure. Green bonds fit pretty neatly into these Article 9 funds because they're demonstrably sustainable investments. And since you know where the proceeds are going, it's less likely that they're violating that last part, the ‘do no significant harm’. So some of the Article 9 funds are full green bond funds. But the ones that are not actually only hold around an average of 10% of their fund in green bonds or other types of ESG label bonds like social or sustainability bonds. And we see similar figures in the Article 8 funds as well. So we expect that green bonds of higher quality, meaning that they're aligned with the more rigorous EU green bond standard that report on impact have limited amounts of proceeds going towards refinancing, have limited look back periods etc.. Those stand to benefit from an increased appetite from these sustainability funds for the best types of green bonds. Michael Zezas: Carolyn, you've noted that most ESG funds currently favor low emission sectors, particularly financials. What about sectors that were previously maligned by ESG funds, the so-called high emitting or hard to abate sectors? What is the rate of change approach that might benefit these sectors? Carolyn Campbell: So the SFDR is structured in a way to favor the low emitting sectors because they have to report on the principal adverse impacts and because they can't do significant harm. But what we're increasingly hearing is an appetite to invest directly in the transition. So allocating funds to the higher emitting companies, but those that have viable decarbonization plans and for which an improvement on different ESG metrics may drive better financial performance. When we look to the fund holdings of the fixed income sustainability funds, we see that they're currently underweight these sectors despite some real opportunity from the transition. As ESG has evolved

As U.S. Public Debt continues to break records, should investors be concerned by the amount debt has risen? Or are there other, more influential factors at play?----- 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 be talking about how macro investors may want to view rising U.S. public debt. It's Tuesday, October 18th, at 10 a.m. in New York. U.S. public debt made breaking news headlines this month by rising above $31 trillion for the first time. In a decade, it's projected to hit $45 trillion, according to the Congressional Budget Office or CBO. By the time new hires today are ready to retire, U.S. debt to GDP could be at 185%. The CBO argues that high and rising debt could increase the likelihood of a fiscal crisis, because investors might lose confidence in the U.S. government's ability to service and repay its debt. They also believe that it could lead to higher inflation expectations, erode confidence in the U.S. dollar as a reserve currency, and constrain policymakers from using deficits in a countercyclical way. The government debt load in Japan has stood as a notable counterpoint to concerns of this nature for decades. With gross debt a whopping 263% of GDP, and no fiscal crisis that has occurred or appears to be on the horizon, Japan's situation should mitigate some of the CBO's concerns. Still, the amount of debt matters, especially to those invested in it. As both the level of debt and interest rates rise further, net interest income for U.S. households may contribute more to total income over time. Nevertheless, the level of government debt vis a vis the size of the economy and its contribution to societal income, are not the most pressing issues. The problem with debt has always been predicting the price at which it gets bought and the value it provides investors. The current size of the debt at $31 trillion is just a distraction. This staggering number fundamentally diverts attention from what matters most here. So what does matter the most here? First, the speed at which the debt accumulates. Second, the risk characteristics of the debt that investors will buy. Third, the price at which investors will buy it and the value it provides at that price. And fourth, the major drivers of the yields in the marketplace for it. The amount of debt, the Federal Reserve's retreat from buying it, and foreign investors' waning appetite have left some analysts and investors wondering who will buy at all. The relevant question for macro investors, however, is not who will buy the securities, but at what price. The marginal buyer or seller moves prices, not the largest. Consider that at least 3.5% of outstanding U.S. Treasuries change hands every single day. That's an open invitation for many investors, including those who use leverage, to move prices. So what determines the level of Treasury yields over time? In the end, the most important factor, at least over the past 30 years, has been the Fed's interest rate policy and forward guidance around it. So, bottom line, macro investors should pay more attention to the Fed and the economic data that the Fed care most about than the overall amount of government debt investors will need to purchase or which investors will do the buying. 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.

Last week's September inflation data brought a subsequent rally in stocks, but can this rally hold while the bond market continues to follow the Fed?----- 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, October 17th, at 1 p.m. in New York. So, let's get after it.No rest for the weary as days feel like weeks and weeks feel like months in terms of price action in the financial markets. While there's always a lot going on and worth analyzing, it's fair to say last week was always going to be about the September inflation data one way or another.From our vantage point, inflation has peaked. While 8% is hardly a rate the Fed can live with, the seeds have been sown for lower prices in many goods and services. Housing is at a standstill, commodity prices have fallen substantially since April, and inventory is starting to balloon at many companies at a time when demand is falling. That means discounting should be pervasive this holiday shopping season. Finally, the comparisons get much more challenging next year, which should bring the rate of change on inflation down substantially on a year-over-year basis.At the end of last year, the bond market may have looked to be the most mispriced market in the world. That underpricing of inflation and rates was a direct result of Fed guidance. Recall that last December the Fed was suggesting they would only hike 50 basis points in 2022. More surprisingly, the bond market bought it and ten-year yields closed out the year at just 1.5%. Fast forward to today and we think the bond market is likely making the same mistake but on the other side.We think inflation is peaking, as I mentioned, and we think it falls sharply next year. Shouldn't the rates market begin to ignore Fed guidance and discount that? We can't be sure, but if rates do fall under that premise, it will give legs to the rally in stocks that began last Thursday. As we have been noting in our last few podcasts, the downside destination of earnings-per-share forecasts for next year is becoming more clear, but the path remains very uncertain. More specifically, we're becoming skeptical this quarter will bring enough earnings capitulation from companies on next year's numbers for the final price lows of this bear market to happen now. Instead, we think it may be the fourth quarter reporting season that brings the formal 2023 guidance disappointment.So how far can this rally in stocks run? We think 4000 on the S&P 500 is a good guess and we would not rule out another attempt to retake the 200-day moving average, which is about 4150. While that seems like an awfully big move, it would be in line with bear market rallies this year and prior ones. The other factor we have to respect is the technicals. As noted two weeks ago, the 200-week moving average is a formidable level for the S&P 500 that's hard to take out without a fight. In fact, it usually takes a full-blown recession, which we do not yet have.Bottom line, we think a tradable bear market rally has begun last Thursday. However, we also believe the 200-week moving average will eventually give way, like it typically does when earnings forecasts fall by 20%+. The final price lows for this bear are likely to be closer to 3000-3200 when companies capitulate and guide 2023 forecasts lower during the fourth quarter earnings season that's in January and February. Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people to find the show.

When investing in overseas markets, 'hedging' one's investment not only offers potential protection from the fluctuations of the local currency but potentially may also lead to higher returns.----- 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, October 14th, at 2 p.m. in London.How much is the Japanese stock market down this year? That seems like a pretty basic question and yet, it isn't. If you're a Japan-based investor who thinks about the world in Japanese yen, the market has dropped about 6% year-to-date, a pretty mild decline, all things considered. But if you're a U.S. investor, who thinks about the world in U.S. dollars, the market has fallen 26%.That's a big difference, and it's entirely linked to the fact that when investing overseas, your return is a function of both the changes in that foreign market and the changes in its currency's value versus your own. When a U.S. investor buys Japanese equities, the actual transaction will look something like this. The investor sells their dollars for yen and then uses those yen to buy Japanese stocks. When the investor eventually goes to sell their investment, they need to reverse those steps, selling yen and buying the dollars back. This means that the investor is ultimately exposed to fluctuations in the value of the yen.Given this, there's an increased focus on investing overseas but removing the impact of currency fluctuations, that is, 'hedging' the foreign exchange exposure. There are a few reasons that this can be an attractive strategy for U.S. based investors.First, it reduces a two-variable problem to a one-variable problem. We reckon that most stock market investors are more comfortable with stocks than they are with currencies. An unhedged investment, as we just discussed, involves both, while a hedged investment will more closely track just the local stock market return, the thing the investor likely has a stronger opinion on.Second, our deep dive into the historical impact of currency hedging shows encouraging results, with hedging improving both returns and diversification for U.S. investors when investing overseas. Historically, this has been true for stocks, but also for overseas bonds.Third, investors don't always need to pay extra to hedge. Indeed, hedging can provide extra yield. The general principle is that if you sit in a country with a higher interest rate than the country you're investing in, the hedge should pay you roughly the interest rate difference. One-year interest rates in the U.S. are about 4.5% higher than one-year rates in Japan. Buying Japanese stocks and removing the fluctuations of the yen will pay an investor an extra 4.5% for their trouble, give or take.So why is that? The explanation requires a little detour into foreign exchange pricing and the theory behind it.Foreign exchange markets price with the assumption that everything is in balance. So, if one country has higher one-year interest rates than another, its currency is assumed to lose value over the next year. So, if we think about the investor in our example, they still take their U.S. dollars, exchange them for yen and buy the Japanese equity market. But what they'll also do is go into the foreign exchange market where the dollar is expected to be 4.5% cheaper in one year's time and buy that foreign exchange forward, and 'hedge' the dollar at that weaker level. That means when they go to unwind their position in a year's time, sell their yen and buy dollars, they get to buy the dollar at that favorable lower locked-in exchange rate.Hedging comes with risks. If the US dollar declined sharply, investors may wish that they had more exposure to other currencies through their foreign holdings. But given wide interest rate differentials, volatile foreign exchange markets and the fact that the goal of most U.S. portfolios is to deliver the highest possible return in dollars, investing with hedging can ultimately be an attractive avenue to explore when looking for diversification overseas.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.

Increasing ESG pervasiveness has led to increasing confusion, in particular around how investors might apply these criteria to the utility sector. Head of Sustainability Research and Clean Energy Stephen Byrd and Equity Analyst for the Power and Utilities Industry Dave Arcaro discuss. ----- Transcript -----Stephen Byrd Welcome to Thoughts on the Market. I'm Stephen Byrd, Morgan Stanley's Global Head of Sustainability Research and Clean Energy.Dave Arcaro And I'm Dave Arcaro, Equity Analyst for the Power and Utilities Industry.Stephen Byrd And on this special episode of the podcast, we'll be discussing a new framework for investors to approach ESG analysis within the utility space. It's Thursday, October 13th, at noon in New York.Stephen Byrd Our listeners are no doubt well aware that ESG criteria—that is environmental, social and governance criteria—have become an increasingly important part of the investment process. This growth has been spurred by a continual search for better long term financial returns, as well as a conscious pursuit of better alignment with values. Yet despite ESG's seeming pervasiveness within the financial ecosystem, there's been a genuine confusion and even controversy among investors about how to apply ESG metrics to the utility sector in particular. And so, in an effort to bring clarity to this key market debate, today we're going to share an innovative framework designed to drive both Alpha, which is the returns aspect, and impact, which is the societal benefit. So Dave, let's start with the problem. What causes this investor confusion and how does the new ESG framework address this problem?Dave Arcaro There are a few sources of confusion or debate that we're hearing from investors. The first seems to be centered on the lack of a clear distinction between ESG criteria that are likely to have a direct impact on stock performance, and then those that are more focused on achieving the maximum positive impact on ESG goals. Secondly, there is too much focus directly on carbon emissions, and there isn't enough focus on the social and governance criteria in the utility space. These can also have an impact on stocks and on key utility constituents, things like lobbying, operations, customer relationships. The new ESG framework that we've introduced here addresses these issues. It expands the environmental assessment, incorporates specific social and governance criteria that are most relevant for utilities, like customer and lobbying metrics, and it adds a new perspective. For each of these metrics, we assess which ones truly have an impact on alpha generation and which ones have the largest purely societal impact.Stephen Byrd And stepping back, Dave, we've seen that the utility sector is arguably the best positioned among the carbon heavy sectors in terms of its ESG potential. Can you walk us through that thought?Dave Arcaro Utilities are in a unique position because they can often create an outcome in which everybody wins when it comes to decarbonizing. This is because when utilities shut down coal and replace it with renewables, it often has three benefits; carbon emissions decline, customer bills are reduced because renewables have gotten so cheap and the utility also grows its earnings. So, it's a strong incentive for utilities to set ambitious plans to decarbonize their fleets.Stephen Byrd Now Dave, typically, when considering the E, that is environmental criteria, ESG analysis tends to focus solely or primarily at least on carbon dioxide. Is this a fair approach or should investors be considering other factors?Dave Arcaro We think other factors should come into play here, and we recommend investors consider the rate of change in carbon emissions, the CO2 intensity of the fleet, risks from climate change, and also impacts on biodiversity. Some of these are more readily available than others, but we think the environmental assessment should expand beyond a simple look at carbon emissions.Dave Arcaro So, Stephen, I want to turn it to you. The E part of ESG is always drawing attention when investors talk about utilities. But so far it seems that there's been little focus on the S, social, and G, governance, criteria when assessing U.S. utilities. What are some of the key areas that investors should concentrate on?Stephen Byrd The utility sector really is one of the most heavily regulated sectors, so both social and governance factors can impact the success of the utility business and drive stock performance as well. The short list of metrics that we found to have a clear linkage to share price performance would be one, corporate spending on lobbying activities, especially through 501c4 entities. Two, operational excellence, which for utilities really reflects safety and reliability. Three, risk of customer defection due to high bills and worsening grid reliability. And four, impacts to low-income communities. So, we use these metrics to round out a holistic ESG assessment of the i

As consumption of goods slows post COVID, companies are experiencing a build up in inventory that could have far reaching implications. Head of Global Thematic and Public Policy Research Michael Zezas and U.S. Equity Strategist Michelle Weaver discuss.----- Transcript -----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Head of Global Thematic and Public Policy Research. Michelle Weaver: And I'm Michelle Weaver from the U.S. Equity Strategy Team. Michael Zezas: And on this special episode of Thoughts on the Market, we'll focus on what we see as an inventory problem with far reaching implications. It's Wednesday, October 12th, at 10 a.m. in New York. Michael Zezas: Michelle, can you start by taking us through some of the background on how we ended up with this problem of companies carrying high inventories, which could pressure them to discount prices leading to weaker earnings. Michelle Weaver: I'm sure listeners remember the COVID lockdowns when many of us overspent on a number of goods, especially things like furniture, tech products and leisure equipment. But now, with the recovery from COVID and supply chain bottlenecks easing, we're seeing a new challenge, inventory build coupled with slowing demand. Throughout 2022, we've been dealing with really high inflation, rising interest rates and declining consumer confidence. And while consumer confidence has rebounded from the all time lows that we saw this summer, it remains weak and we think consumers are still going to pare back spending in the face of macro concerns. We think inventory is one of the key problems that will weigh on S&P 500 earnings, and supports our negative call on earnings for the market. Michael Zezas: And how broad based is this problem? Which industries are most at risk? Michelle Weaver: This is a pretty broad problem for publicly traded companies. Inventory to sales for the median U.S. company have been on the rise since the financial crisis and are now at the highest level since 1990. And it's especially a problem for consumer staples, tech and industrials companies. We also looked at the difference between growth rates for inventory and sales. For the S&P 500 overall, there's an 8% mismatch between inventory growth and sales growth, meaning the median company is growing their inventory 8% faster than their growing sales. The median company within goods producing industries has a whopping 19% mismatch between inventory and sales growth. Consumer retailers face some of the biggest risks from these problems, and companies there are already seeing inventory pile up. They have already turned to discounting to try and move out some of this excess inventory. This is also a big problem for tech hardware companies, consumer markets and PCs have been the first to see excess inventory given how much overconsumption these goods saw during COVID. And the tech hardware team is expecting this to broaden out and start causing issues for enterprise hardware. Michael Zezas: And are there any beneficiaries from the current inventory situation? And if so, what drives the advantage for them? Michelle Weaver: Machinery is one industry where inventories remain tight and they're still seeing really strong demand. Inventories across machinery are still in line or below their longer term averages and there's especially big problems in agriculture equipment. Off price retailers who sell their excess inventory from other brands are another area that are expected to benefit from excess inventories. Michael Zezas: And Michelle, how do you expect companies to deal with the glut of inventory they're facing and how will this impact them in the final quarter of this year and into next year? Michelle Weaver: It's likely going to take several quarters for inventory to normalize, but it really varies by industry and we expect inventory to remain an issue for the market into 2023. Faced with a glut of inventory, companies are going to need to decide whether they want to accept high costs to keep holding inventory, destroy inventory, try and keep prices high and take a hit on the number of units sold, or slash prices to stimulate demand. And we think many are going to turn to aggressive discounting to solve their inventory issue. This could spark a race to the bottom as retailers try and cut prices faster than peers and move out as much inventory as possible. And this dynamic will weigh heavily on margins and fuel the earnings slowdown we are predicting. Michael Zezas: Well, Michelle, thanks for taking the time to talk. Michelle Weaver: Great speaking with you, Mike. Michael Zezas: As a reminder, if you enjoy Thoughts on the Market please take a moment to rate and review us on the Apple Podcast app. It helps more people find the show.

All over the world elections are taking place that will have profound effects on both local and global economies, so where are policy moves being made and how might investors use these moves to anticipate economic shifts? ----- Transcript -----Welcome to Thoughts on the Market. I'm Seth Carpenter, Global Chief Economist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about political economy and how elections have consequences. It's Tuesday, October 11th, at 8 a.m. in New York. Economics is a relatively new field, born in 1776 after the publication of Adam Smith's 'Wealth of Nations'. But until the 1900s, everyone called it political economy. Politics and economics are still hard to separate. Fiscal policy is only sometimes the result of economic events, but almost always a driver of economic outcomes. And because of its power, uncertainty about policy can be a drag all by itself. Brazil has a second round ballot on October 30th between the incumbent Bolsonaro and former President Lula. Both candidates are likely to change or scrap an existing fiscal rule that caps government spending, but most observers think that Lula is likely to have a looser fiscal stance of the two. And so while our LatAm team questions not whether fiscal deficits will increase, but by how much, last week's congressional elections could lead to a split government which is taken to mean a smaller size of any deficit widening. So our LatAm team is pointing to a different risk that a possible President Lula, and he currently leads in most polls, that there might be an unwinding of recent reforms for state owned enterprises, the public sector and labor markets that were meant to enhance Brazil's competitiveness. As is often the case, politics here is more about the medium term than the immediate. In the U.K., it wasn't exactly the same thing. The newly appointed UK Prime Minister, Liz Truss, announced an ambitious fiscal package, including an energy price freeze and the biggest set of tax cuts since the 1970s. The echo to 1980s supply side economics was plain in terms of politics. In terms of economics, boosting productivity might allow more growth and lower inflation at a time where the opposite of each is at hand. But in a country with a 95% debt to GDP ratio and following on fiscal expansion that drove inflation through demand, the lack of details on how to pay for the tax cuts and the energy subsidies elicited a sharp, immediate market reaction. The gilt curve sold off sharply, and the pound reached an all time low of 103 against the dollar. The Bank of England intervened, buying gilts to contain volatility and to lower rates. And in the wake of that turmoil, Chancellor Kwarteng scrapped the tax cuts for the top bracket but kept the rest, leaving about £43 billion a year of additional cost. The outcome now seems to be a faster pace of hiking by the bank and an awareness that the U.K. will not have the fiscal space needed to avoid a recession. Barring unorthodox moves like scrapping the remuneration of bank reserves at the Bank of England, the Chancellor is going to need to find 30 to £40 billion in spending cuts to stabilize the debt to GDP ratio over the next five years. In Italy, elections brought a center right populist coalition led by Giorgia Meloni to a majority in both the lower house and the Senate. The Coalition's stated policy goals are expansionary. More social spending and labor tax cuts are top priorities, along with increasing pension benefits. Our economists estimate that the proposed measures would increase the deficit by roughly 2 to 4 percentage points of GDP, boosting the debt to GDP ratio next year. Such policies will prove difficult during a time of rising interest rates and heightened market scrutiny about debt dynamics. So, Maloney recently expressed her willingness to respect the EU budget rules, but reconciling that view with the policy priorities is going to be a challenge. Our main concern is less a repeat of the U.K. experience, but rather medium term debt sustainability. So let me finish up back home. For the U.S. midterm elections polls have been shifting but most point to at least one house of the Congress changing hands, thus a split government. Our base case from my colleague Mike Zezas as a result is gridlock, but divided governments do not always lead to such benign outcomes. I was a Treasury official during a government shutdown. It was not fun. And in fact, following the 2010 midterms, divided government led to a debt ceiling standoff, government shutdown, and ultimately contractionary policy in the form of the Budget Control Act. Such an outcome is easily conceivable after this midterm election, and with inflation high, even with weak growth, we could easily see another installment of contractionary policy. With growth only expected to be barely positive, that's a real risk. Policy always matters. Thanks for li

Last week stocks rallied quickly but dropped just as fast as markets continue to hope for a more dovish Fed, but will this 2-way risk continue as evidence for a drop in earnings continues to accumulate?----- 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, October 10th, at 1:30 p.m. in New York. So let's get after it. Last week started with one of the biggest 2 day rallies in history, only to give most of it back by Friday's close. The culprit for this higher 2-way volatility is a combination of deteriorating fundamentals with oversold technicals. As noted last week, September was one of the worst months in what's been a difficult year, and the equity market was primed for a rally, especially with the S&P 500 closing right at its 200 week moving average on the prior Friday. Low quality stocks led the rally as further evidence the rebound was just bear market action rather than the beginning of a new bull. There is also still lingering hope for a Fed pivot, but the economic data that matters the most for such a pivot, jobs and inflation, continue to dash any hopes for a more dovish Fed. The sellout of momentum and retail, to some degree, does keep 2-way risk alive in the short term as it gets quiet for the next few weeks on the earnings front. Over the past month, there has been evidence that our call for lower earnings next year is coming to fruition. Large, important companies across a wide swath of industries have either reported or preannounced earnings and guided significantly lower for the fourth quarter. Some of these misses were as much as 30%, which is exactly what's needed for next year's estimates to finally take the step function lower, we think is necessary for the bear market to be over. The question is, will enough of this happen during third quarter earnings season, or will we need to wait for fourth quarter reporting in January and February when companies tend to formally guide for the next year? We think the evidence is already there and should be strong enough for this quarter for bottoms up consensus estimates have finally come down to reality, but we just don't know for sure. Therefore, over the next two weeks, stocks could continue to exhibit 2-way risk and defend that 200 week moving average at around 3600. One interesting development that supports our less optimistic view on 2023 earnings is in the dividend futures market. More specifically, we've noticed that dividend futures have traded materially lower, even as forward earnings per share forecasts have remained sticky to the upside. One reason this might be happening now is that cash flows are weakening. This is tied to the lower quality earnings per share we predicted earlier this year as companies struggled with the timing and costs versus revenues as the economy fully reopened. Things like inventory, labor costs and other latent expenses are wreaking havoc on cash flow. Accrual accounting earnings per share will likely follow 6 to 12 months later. In short, it's just another sign that our materially lower than consensus earnings per share forecasts next year are likely to be correct. If anything, we are now leaning more toward our bear case on S&P 500 earnings per share for next year, which is $190. The consensus is at $238. Bottom line, the valuation compression in equity markets this year is due to interest rates rising rather than concern about growth. This is evidenced by the very low equity risk premium, currently 260 basis points, that we still observe. The bear market will not be over until either earnings per share forecasts are more in line with our view, or the valuation better reflects the risk via the equity risk premium channel. Bear markets are about price and time, price takes your money, time takes your patience. Let the market wear everybody else out. When nobody is calling for the bottom, you will then know it's finally time to step in. Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcast app. It helps more people to find the show. 

While China’s policy objectives strive for common prosperity, the country’s strict COVID management poses risks to employment and income, so when might Chinese policymakers start to reopen and recover?----- Transcript -----Welcome to Thoughts on the Market. I'm Chetan Ahya, Chief Asia Economist at Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, today I'll be focusing on the expected reopening of China's economy. It's Friday, October 7th, at 8:30 a.m. in Hong Kong. When my colleagues and I discuss Asia's growth outlook with investors, one of the top questions we get is, when will China reopen and what the roadmap will look like. We believe a reopening will happen not because the rest of the world is now living with COVID, but because the effects of China's strict COVID management are now increasingly at odds with its policy objective of achieving common prosperity. The challenges of a sharp rise in youth unemployment and significantly lower income growth, especially for the low income segments of the population, have become more pronounced this year ever since the onset of Omicron. To put this in context, the youth unemployment rate is at 19% and our wage growth proxy has decelerated from around 9% pre-COVID, to just about 2.2% year on year. These issues are further exacerbated by the intensifying spillover effects from weaker exports and a continued drag from property sector. Over the next five quarters, growth in developed markets will likely remain below 2% year on year. The continued shift in DM consumer spending towards services will mean global goods demand will deflate further. And as exports weaken, manufacturing CapEx will also follow suit, which will further weigh on employment creation. As for the property market, the pace of resolution of funding issues and uncompleted projects are still relatively sluggish. With the outlook for the drivers of GDP growth weakening, we think the only meaningful policy lever is a shift in COVID management aimed at reopening, reviving consumption and allowing services sector activity to lift aggregate demand towards a sustainable recovery. As things stand, several steps are necessary for a smooth reopening. They are, number one, renewed campaign to lift booster vaccination rates, especially amongst the elderly population. Number two, shaping the public perception on COVID. And number three, ensuring adequate medical facilities, equipment and treatment methods in the next 3 to 6 months. We therefore anticipate that policymakers will, in the spring of 2023, with the peak COVID and flu season behind us, be able to proceed with a broader reopening plan. Of course, we think that reopening in China will be gradual, as policymakers will remain mindful of the potential burden on the health care system. Against this backdrop, we see the recovery strengthening from second quarter of 2023 onwards. In the next two quarters, we estimate GDP growth will be subpar at around 3%. But as China reopens from the spring of 2023, we expect GDP growth will strengthen to 5.5% in the second half of the year. 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 month over month data begins to show a downturn in home prices, will overall price growth and sales begin to fall steeper than expected? Co-Heads of U.S. Securitized Products Research Jim Egan and Jay Bacow 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 why home prices could turn negative in 2023. It's Thursday, October 6th, at 3 p.m. in New York. Jay Bacow: Jim, it seems like every month the housing data is getting worse when we look at the sales activity. But, now I think I just saw something about home prices falling? What's going on there? I thought we call it home price appreciation, now we're seeing home price depreciation? Jim Egan: There is a lot going on out there. There's a lot of volatility, things are moving fast, and yes, there are home price indices that are showing negative numbers. I would caveat that a lot of those negative numbers are month over month, not the year over year that we've typically talked about here. But that doesn't mean it isn't important. Jay Bacow: In the past we've talked about this bifurcation narrative where we were going to get a big drop in home sales and housing starts, which we've seen, but home prices were more protected. Do you still believe that? Jim Egan: We do still believe in the bifurcation narrative, but the levels of the forecasts have changed, and they've changed for a couple of reasons. I think one reason is that there have been a number of forecast changes, expectations for 2023 are different. Our U.S. economics team has raised their hiking forecast 25 basis points in each of the next three meetings, and our interest rate team on the back of that forecast change has moved up their expectations for the 10 year Treasury. What that move means for us is that the incredible affordability deterioration that we've seen, probably isn't going to get a whole lot better next year. And that's happening in a world in which you mentioned some home prices turning negative. The home price deceleration that we were calling for, from plus 20% all the way down to plus 3% at the end of next year, that relied upon or I can say we expected home prices to fall month over month, but we thought that was going to start in September. It started in July. Sales volumes have been coming in weaker than we thought they would. When we take that weaker than expected housing data, we marry that with different expectations for affordability next year, the forecasts have to change. Jay Bacow: And so what exactly are we forecasting for this year and next year? Jim Egan: So in this world, we do think that sales are going to fall steeper than we thought. We think that starts are going to fall steeper than we thought, and that next year a single unit starts are going to be lower in 2023 than they were in 2022. We had originally been forecasting a return to growth in 2023, but the change to the forecast that's getting the most attention is that we went from plus 3% year over year growth in December of 2023 to -3% year over year growth by the end of next year. Jay Bacow: So if I buy a house today, it might be lower a year from now? That seems worrisome. Jim Egan: Yes. And I think there is a positive and a negative headline to that, right. The negative headline, the worrisome, if you will, that you mentioned is that not only is it down 3% next year, but that's down 7% from where we are right now. The positive headline is that even with that decrease in home prices from today, that only brings us back to January of 2022. That's 32% above where they were in March of 2020. Jay Bacow: All right, that doesn't seem so bad, given that stocks are a lot lower than where they were in January of 2022. So it's more stalling out than a real correction in home prices. But, why wouldn't home prices fall further from there? Jim Egan: We haven't seen anything in the data that changes kind of the underlying narrative that we've been discussing on this podcast in the past. In particular, two things. The first is how robust credit standards have been. If anything, lending standards, which were pretty tight to begin with in the first quarter of 2020, have tightened substantially since then. What that means, again, it constrains sales volumes. We think sales are going to fall more than home prices, but it also means that the likelihood of defaults and foreclosures is limited. And it is those distressed transactions, those forced sellers that we would need to see a leg down in prices. The other point is, away from defaults and foreclosures, actual inventory is still incredibly low. And because current homeowners sit on 30 year fixed rate mortgages, well below the current mortgage rate, when

As globalization slows and companies begin to nearshore their supply chains, investors may be wondering what the costs and benefits are of bringing manufacturing back home.Important note regarding economic sanctions. This research references country/ies which are generally the subject of comprehensive or 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 report to entities, debt or equity instruments, projects or persons that may be covered by such sanctions are strictly informational, 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 report are solely responsible for ensuring that their investment activities in relation to any sanctioned country/ies are carried out in compliance with applicable sanctions.----- Transcript -----Welcome the Thoughts on the Market. I'm Michael Zezas, Head of Global Thematic and Public Policy Research for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between U.S. public policy and financial markets. It's Wednesday, October 5th, at 10 a.m. in New York. We speak often here about the themes of slowing globalization, or slowbalization, and the shift to a multipolar world. It's important to understand these megatrends, as they will likely impact global commerce for decades to come and in many ways we cannot yet anticipate. But one impact we have anticipated is multinational companies spending money to shift their supply chains. Whereas globalization meant companies could focus on lowering their labor and transportation costs through 'just in time' logistics, 'just in case' logistics are the watchword of the multipolar world. Companies will have to invest money to nearshore or friend shore to protect their supply chains from seizing up due to geopolitical conflicts, be it war, such as Russia invading Ukraine leading to sanctions, or the proliferation of policies by Western governments, preventing companies from producing and/or sourcing sensitive technologies overseas. Now, we're increasingly seeing evidence that this dynamic is already at play. Take Apple, for example, which, according to the Wall Street Journal, recently released a supplier list showing that in September of 2021, 48 of its suppliers had manufacturing sites in the U.S., up from 25 just a year before. The article goes on to cite several semiconductor chip makers who have recently opened US based sites. One company recently agreed to invest as much as $100 billion in a semiconductor manufacturing facility in upstate New York. Another announced plans to invest $20 billion for chip factories in Ohio. So it's clear that companies are starting to respond to geopolitical incentives. The long term public policy benefits of these moves could prove to be quite sound, but in the short term they're a challenge to markets. These investments cost money and represent elevated costs relative to what these companies would have enjoyed had the geopolitical environment not become more challenging. That means investors have to price in yet another margin pressure on top of the ones our colleague Mike Wilson continues to highlight in U.S. equities, from labor costs and the fed hiking rates to engineer slower economic growth. So bottom line for investors, shifting to a new geopolitical world order may be necessary, but it will cost something along the way. And for the moment, that means extra pressure on a U.S. equity market that's already got its fair share. 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 investors becoming pervasively bearish on stocks and bonds in the face of a worsening growth outlook, can the U.S. investment grade credit market provide shelter from the storm?----- Transcript -----Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's Global Director of Fixed Income Research. Along with my colleagues, bringing you a variety of perspectives, today I'll share why corporate credit markets may be a sheltering opportunity amid current turbulence. It's Tuesday, October 4th, at 11 a.m. in New York. At a September meeting, the Federal Open Market Committee delivered a third consecutive 75 basis point rate hike, just as consensus had expected. The markets took this to mean a higher peak and a longer hiking cycle, resulting in sharp spikes in bond yields and a sell off in equities. At the moment, both 2 and 10 year Treasury yields stand at decade highs, thanks to pervasively bearish sentiment among investors across both stocks and bonds. As regular listeners may have heard on this podcast, Morgan Stanley's Chief Global Economist, Seth Carpenter, has said that the worst of the global slowdown is still likely ahead. And our Chief U.S. Equity Strategist, Mike Wilson, recently revised down his earnings expectations for U.S. equities. Navigating this choppy waters is a challenge in both risk free and risky assets due to duration risk in the former, and growth or earnings risks in the latter. Against this backdrop, we think the U.S. investment grade corporate bonds, IG, particularly at the front end of the curve, which is to say 1 to 5 year segment, could provide a safer alternative with lower downside for investors looking for income, especially on the back of much higher yields. But investors may wonder, wont credit fundamentals deteriorate if economy slows, or worse, enters the recession and company earnings decline. Here is where the starting point matters. After inching higher in Q1, median investment grade leverage improved modestly in the second quarter and is well below its post-COVID peak in the second quarter of 2020. Gross leverage is roughly in line with pre-COVID levels. Notably, while median leverage is back to pre-COVID levels, the percentage of debt in the leverage tail has declined meaningfully. But if earnings were to decline, as our equity strategists expect, leverage ratios may pick back up. That said, interest coverage is the offsetting consideration. Given the amount of debt that investment grade companies have raised at very low coupons over the years, their ability to cover interest has been a bright spot for some time. Despite sharply higher rates, median interest coverage improved in the second quarter and is around the highest levels since early 1990. This modest improvement in interest coverage comes down to the fact that even though yields on new debt are higher than the average of all outstanding debt, the bonds that are maturing have relatively high coupons. Therefore, most companies have not had to refinance at substantially higher funding levels. In fact, absolute dollar level of interest expense paid out by IG companies actually declined in the quarter and is now well below the peaks of 2021. With limited near-term financing needs, higher rates are unlikely to dent these very healthy interest coverage ratios. The combination of strong in-place investment grade fundamentals, relatively low duration for the 1 to 5 year segment and yields at decade highs, suggests that this part of the credit market offers a relatively safe haven to weather the storms that are coming for the markets. History provides some validation as well. Looking back to the stagflationary periods of 1970s and 80's, while we saw multiple decisions and volatility in equity markets, IG credit was relatively stable with very modest defaults. And while history doesn't repeat, it does sometimes rhyme, so we look to the relative safety of IG credit once again in the current environment. 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 rates and currency markets experiencing increasing volatility, the state of global U.S. dollar supply has begun to force central bank moves, leaving the question of when and how the Fed may react up for debate.----- 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, October 3rd, at 11 a.m. in New York. So let's get after it. The month of September followed its typical seasonal pattern as the worst month of the year, and given how bad this year has been, I don't say that lightly. But as bad as stocks have been, rates and currency markets have been even more volatile. With volatility this severe, some of the cavalry has been called in. The Bank of England's surprise move last week was arguably necessary to protect against a sharp fall in U.K. bonds. Some may argue the U.K. is in a unique situation, and so this doesn't portend other central banks doing the same thing. However, this is how it starts. In other words, investors can't be as adamant the Fed will choose or be able to follow through on its tough talk. Like it or not, the world is still dependent on U.S. dollars, which provide the oxygen for global economies and markets. Former U.S. Treasury Secretary John Connolly's famous quote that "the dollar is our currency, but it's your problem" continues to ring true. It's also one of the primary reasons why several countries have been working so hard to de-dollarise over the past decade. The U.S. dollar is very important for the direction of global financial markets, and this is why we track the growth of global dollar supply so closely. In fact, the primary reason for our mid-cycle transition call in March of 2021 was our observation that U.S. dollar money supply growth had peaked. Indeed, this is exactly when the most speculative assets in the marketplace peaked and began to suffer. Things like cryptocurrencies, SPACs, recent IPOs and profitless growth stocks trading at excessive valuations. Now we find global U.S. dollar money supply growth negative on a year over year basis, a level where financial and economic accidents have occurred historically. In many ways, that's exactly what happened in the U.K. bond market last week, forcing the Bank of England's hand. There are many reasons why a U.S. dollar liquidity is so tight; central banks raising rates and shrinking balance sheets, higher oil prices and inflation in many goods bought and sold in dollars, incremental regulatory tightening and lower velocity of money in the real economy as activity dries up in critical areas like housing. In short, U.S. dollar supply is tight for many reasons beyond Fed policy, but only the Fed can print the dollars necessary to fix the problem quickly. We looked at the four largest economies in the world, the U.S., China, the Eurozone and Japan, to gauge how much U.S. dollar liquidity is tightening. More specifically, money supply in U.S. dollars for the Big Four is down approximately $4 trillion from the peak in March. As already mentioned, the year over year growth rate is now in negative territory for the first time since March of 2015, a period that immediately preceded a global manufacturing recession. In our view, such tightness is unsustainable because it will lead to intolerable economic and financial stress, and the problem can be fixed very easily by the Fed if it so chooses. The first question to ask is, when does the U.S. dollar become a U.S. problem? Nobody knows, but more price action of the kind we've been experiencing should eventually get the Fed to back off. The second question to ask is, will slowing or ending quantitative tightening be enough? Or will the Fed need to restart quantitative easing? In our opinion, the answer may be the latter if one is looking for stocks to rebound sustainably. Which leads us to the final point of this podcast - a Fed pivot is likely at some point given the trajectory of global U.S. dollar money supply. However, the timing is uncertain and won't change the downward trajectory of earnings, our primary concern for stocks at this point. Bottom line, in the absence of a Fed pivot, risk assets are likely headed lower. Conversely, a Fed pivot, or the anticipation of one, can still lead to sharp rallies like we are experiencing this morning. Just keep in mind that the light at the end of the tunnel you might see if that happens, is actually the train of the oncoming earnings recession that even the Fed can't stop. Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcast app. It helps more people to find the show.

Amidst increased volatility across credit, equity and FX markets, many investors this week are wondering, what is the path ahead for Fed intervention? Chief Cross Asset Strategist Andrew Sheets, Global Chief Economist Seth Carpenter and Head of Thematic and Public Policy Research Michael Zezas discuss.----- Transcript -----Andrew Sheets: Welcome to Thoughts in the Market. I'm Andrew Sheets, Chief Cross Asset Strategist for Morgan Stanley. Seth Carpenter: And I'm Seth Carpenter. Morgan Stanley's Global Chief Economist. Michael Zezas: And I'm Michael Zezas, Head of Global Thematic and Public Policy Research. Andrew Sheets: And on this special edition of the podcast, we'll be talking about intervention, inflation and what's ahead for markets. It's Friday, September 30th at 9 a.m. in San Francisco. Michael Zezas: So, Andrew, Seth, we've been on the road all week seeing clients and that's come amidst some very unusual moves in the markets and interventions by a couple of central banks. Andrew, can you put in a context for us what's happened and maybe why it's happened? Andrew Sheets: Thanks, Mike. So I think you have the intersection of three pretty interesting stories that have been happening over the last couple of weeks. The first, and probably most important, is that core inflation in the U.S. remains higher than the Federal Reserve would like, which has kept Fed policy hawkish, which has kept the dollar strong and U.S. yields moving higher. Now, one of the currencies that the dollar has been strongest against is the Japanese yen, which has fallen sharply in value this year. Now we saw Japan finally intervene into the currency markets to a limited extent to try to support the yen but that support was short lived and we saw the dollar continue to strengthen. The other story that we saw occurred in the U.K., a country we discussed on this podcast recently about some of its unique economic challenges. The U.K. has also seen a weak currency against the dollar. But in addition to that, because of the market's reaction to recent fiscal policy proposals, we saw a very large rise in U.K. bond yields, which caused market dislocations and pushed the Bank of England to intervene in bond markets in a way that drove some of the largest moves in U.K. interest rates, really in recorded history. So a lot's been going on, Mike, it's been a very busy couple of weeks, but it's a story at its core about inflation leading to intervention, but ultimately not really changing a core backdrop of higher U.S. yields and a stronger U.S. dollar. Seth Carpenter: I completely agree with you on that, Andrew. And I think it brings up some of the questions that you and I have got in our client meetings this week, which is, 'where can this end?' Any trend that's not sustainable won't last forever, as the saying goes. So what would cause sort of an end to the dollar's run? And I think a natural place to look is, what would cause the Fed to stop hiking? I think the first thing that's worth strongly emphasizing is, from the Fed's perspective, a narrow monetary policy mandate, the rising dollar is actually a good thing. A stronger dollar means lower imported inflation. A stronger dollar means less demand for U.S. exports from the rest of the world. The Fed is fighting inflation by hiking interest rates, trying to slow the economy and thereby reduce inflationary pressures. Right now, this run in the dollar is doing their job for them. Michael Zezas: I would add to that that we've been getting a lot of questions about, 'when would the Fed or the Treasury see this weakness and want to intervene on behalf of markets?' And I think the answer is it's unlikely to happen anytime soon. And there's really kind of two reasons for that. One, doing so would contradict the Fed and the Treasury's own stated goals of fighting inflation right now. I think there are heavy political and policy incentives that haven't changed that support that being the policy direction for those institutions. And then the second is, even if you intervened right now, our FX research team has pointed out it's probably unlikely to work. At the moment, there aren't a tremendous amount of FX reserves in the system with which to intervene. And so any intervention would probably deliver short term results. So long story short, if the intervention is against your goals and wouldn't likely work anyway, it's probably not going to happen. So, Andrew, I think this kind of brings the conversation back around to you. If there really isn't going to be any net change in the Federal Reserve's stance towards monetary policy, then what should investors expect going forward? Andrew Sheets: So at the risk of sounding simplistic, if we're not going to see a change in policy response from the Fed, then we shouldn't expect a major change in market dynamics. Core inflation remains higher than we think the Fed is comfortable with. That will keep pressure on the Fed to

Asia and EM equities are on the verge of the longest bear market in their history, so what is the likelihood that a sharp fall in prices follows soon after?----- Transcript -----Welcome to Thoughts on the Market. I'm Jonathan Garner, Chief Asia and Emerging Market Equity Strategist at Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, today I'll be discussing the ongoing bear market in Asia and Emerging Market equities. It's Thursday, September the 29th at 8 a.m. in Singapore. We have repeatedly emphasized that patience may be rewarded during what will likely, by the end of this month, become the longest bear market in the history of Asia and Emerging Market equities. Indeed, we argued that the August Jackson Hole speech by Fed Chair Powell, and the mid-September upside surprise in U.S. CPI inflation likely accelerated a downward move towards our bear case targets near term. And in recent weeks, the MSCI Emerging Markets Index has indeed given back almost all of the gains it had recorded from the COVID recession lows. To our mind, this raises the likelihood that a classic capitulation trough, a sudden sharp fall in prices and high trading volumes, could be forming in a matter of weeks. Now, all cycles are not made alike, and this one is unusual in a number of key regards. Most notably, the dislocations in the supply side of the global economy caused by COVID and geopolitics. Moreover, China is not easing policy to the same extent as helped generate troughs in late 2008 and early 2016. Thus, caution is warranted in drawing too firm a set of conclusions from relationships that have held in the past. That said, by the end of this month, the current bear market will likely become the longest in the history of the asset class, overtaking in days duration that triggered by the dot com bust in the early 2000's. And after a more than 35% drawdown, the MSCI Emerging Markets Index is now trading close to prior trough valuations at only 10x price to consensus forward earnings. Our experience covering all previous bear markets back to 1997/1998 suggests to us ten sets of indicators to monitor. We've recently undertaken an exercise to score each indicator from 1, which equates to a trough indicator not enforced at all to 5, which indicates a compelling trough indicator already in place. Currently, the sum of the scores across the factors is 32 out of a maximum of 50, which we view as suggesting that a trough is approaching but not yet fully conclusive at this stage. In our view, the U.S. dollar, which continues to rise, including after the most recent FOMC meeting, gives the least sign of an impending trough in EM equities. Whilst the underperformance of the Korean equity market and the semiconductor sector, the recent sharp fall in oil price and the fall in the oil price relative to the gold price give the strongest signs. In this regard, we would note that within our coverage we recently downgraded the energy sector to neutral, upgrading defensive sectors, including telecoms and utilities. We intend to update the evolution of these indicators as appropriate as we attempt to help clients move through the trough of this unusually long Asia and Emerging Markets equity bear market. 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.

As the Fed continues to increase their peak rate of interest, the path for a soft landing narrows, so what deflationary indicators need to show up in the real economy to take the pressure off of policy tightening?----- 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 narrowing path for a soft landing for the U.S. economy. It's Wednesday, September 28, at 10 a.m. in New York. Last week, we revised our outlook to reflect the expectation that the Fed will take its policy rate to a higher peak between 4.5% to 4.75% by early next year. And that's 75 basis points additional tightening than what we had envisioned previously. Tighter policy should push the real economy further below potential and substantially slow job gains. And while higher interest rates are needed to create that additional slack in the economy, this dynamic raises the risk of recession. There's still a path to a soft landing here, but it seems clear to us that path has narrowed. Now beyond directly interest sensitive sectors such as housing and durable goods, we've seen little evidence that the real economy is responding to the Fed's policy tightening. Just think about how strong monthly job gains remain in the range of 300,000. So in the absence of a broader slowdown, and facing persistent core inflation pressures such as a worrisome acceleration in rental prices, the Fed is on track to continue tightening at a faster pace than we had originally anticipated. Looking to the November meeting, we expect the Fed to hike rates by 75 basis points, and then begin to step down the pace of those rate hikes to 50 basis points in December and 25 basis points in January. We then expect the Fed to stay on hold until the first 25 basis point rate cut in December 2023. While inflation has remained stubborn, the growth environment has softened, and the lagged effect of monetary policy on economic activity points to further slowing ahead. So in response to substantially more drag from higher interest rates, we've lowered our 2023 growth forecast to just 0.5%. We then think a mild recovery sets in in the second half of 2023, but growth remains well below potential all year. In our forecast, weakness in economic activity will be spread more broadly, and monetary policy acts with a 2 to 3 quarter lag on interest rate sensitive sectors such as durable goods. So the sharper slowdown we envision in 2023 predominantly reflects a downshift in consumption growth. Business investment also tends to respond with a lag and will become a negative for growth in the first half of 2023. With growth falling more rapidly below potential, the labor market is on track to follow suit. We now see job gains bottoming at 55,000 per month by the middle of 2023. Lower job growth in combination with a rising participation rate, lifts the unemployment rate further to 4.4% by the end of next year. Inflation pressures have still not turned decisively lower, in particular because of rising shelter costs. High frequency measures point to eventual deceleration, though it should be gradual, even as the labor market loosens on below potential growth. We see core PCE inflation at 4.6% on a year over year basis in the fourth quarter of this year, and slow to 3.1% year over year in the fourth quarter of next year. So inflation is a good deal lower by the end of next year, but that's still too high to allow for rate cuts much before the end of 2023. Turning to risks, we think the risk to the outlook and monetary policy path now skew to the downside and a policy mistake is coming into focus. At the Fed's current pace of tightening uncertainty as to how the economy will respond a few months down the line is high. The labor market tends to be slow moving, but we and frankly monetary policymakers have no experience with interest rate changes of this magnitude. And activity could come to a halt faster than expected. Essentially, the higher the peak rate of interest the Fed aims for, the greater the risk of recession. We are already moving through sustained below potential GDP growth. We now need to see job gains slow materially over the next few months to ease the pressure on the pace of policy tightening. 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 the global oil market has seen a decrease in demand, supply issues are still prevalent, leaving investors to question where oil prices are headed next.----- 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 current state of the global oil market. It's Tuesday, September 27th, at 2 p.m. in London. U.S. consumers have no doubt noticed and appreciated a welcome relief from the recent pain at the gas pump. Up until last week, U.S. gas prices had been sinking every day for more than three months, marking the second longest such streak on record going back to 2005. This gas price plunge in the U.S. was driven in part by the unprecedented releases of emergency oil by the White House. But what else is happening globally on the macro level? Looking at the telltale signs in the oil markets, they tell a clear story that physical tightness has waned. Spot prices have fallen, forward curves have flattened, physical differentials have come in and refining margins have weakened. A growth slowdown in all main economic blocks has pointed to weaker oil demand for some time, and this is now also visible in oil specific data. China has been a particularly important contributor to this. However, prices have also corrected substantially by now. Adjusted for inflation, Brent crude oil is back below its 15 year average price. In this context, the current price is not particularly high. Also, the Brent futures curve has in fact flattened to such an extent that current time spreads would have historically corresponded with much higher inventories expressed in days of demand. That means, in short, that the market structure is already discounting a significant inventory built and/or a large demand decline. Then there is still meaningful uncertainty over what will happen to oil supply from Russia once the EU import embargo kicks in later this year for crude oil, and early next year for oil products. The EU still imports about three and a half million barrels a day of oil from Russia. Redirecting such a large volume to other buyers, and then redirecting other oil back to Europe is possible over time, but probably not without significant disruption for an extended period. For a while, we suspect that this will lead to a net loss of oil supply to the markets in the order of one and a half million barrels a day. To attract enough other oil to Europe, European oil prices will need to stay elevated. The relative price of oil in Europe is Brent crude oil. Elsewhere, there are supply issues too. We started off the year forecasting nearly a million barrels a day of oil production growth from the United States. But so far this year, actual growth in the first six months of the year has just been half that level. We still assume some back end loaded growth later this year, but have lowered our forecast already several times. Then Nigerian oil production has deteriorated much faster than expected, currently at the lowest level since the early 1970s. Kazakhstan exports via the CBC terminal are hampered, OPEC's spare capacity has fallen to just over 1%, and the rig count recovery in the Middle East remains surprisingly anemic. The long term structural outlook for the oil market still remains one of tightness, but for now this is overshadowed by cyclical demand challenges. As long as macroeconomic conditions remain so weak, oil prices will probably continue to linger on. However, that should not be taken as a sign that the structural issues in the oil market around investment and capacity are solved. As we all know, after recession comes recovery. Once demand picks up, the structural issues will likely reassert themselves. We have lowered our near-term oil price forecast, but still see a firmer market at some point in 2023 again. 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.

After last week’s Fed meeting and another rate hike, both stocks and bonds dropped back to June lows. The question is, will this turn to the downside continue to accelerate?----- 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, September 26, at 11 a.m. in New York. So let's get after it. Last week's Fed meeting gave us the 75 basis point hike most investors were expecting, and similar messaging to what we heard at Jackson Hole a month ago. In short, the Fed means business with inflation and is willing to do whatever it takes to combat it. So why was there such a dramatic reaction in the bond and stock markets? Were investors still hoping the Fed would make a dovish pivot? Whatever the reason, both stocks and bonds are right back to their June lows, with many bellwether stocks and treasuries even lower. As we wrote a few weeks ago, we think investor hopes for a Fed pivot were misplaced, and Chair Powell has now made that crystal clear. Secondly, we noted last week that the only remaining hope for stocks would be if the bond market rallied at the back end on the view that the Fed was finally ahead of the curve and would win its fight against inflation, while slowing the economy materially. Instead, interest rates spiked higher, squelching any hopes for stocks. While 15.6x price earnings ratio is back to the June lows, that P/E still embeds what we think is a mispriced equity risk premium given the risk to earnings. Said another way, with a Fed pivot now off the table, the path on bond and equity prices will come down to growth - economic growth for bonds and earnings growth for stocks. On both counts we are pessimistic, particularly on the latter as supported by our recent cuts to earnings forecasts. We have been discussing these forecasts with clients for the past several weeks and while most are in agreement that consensus 2023 earnings estimates are too high, there is still a debate on how much. Suffice it to say, we are at the low end of client expectations. Interestingly, recent economic data have kept the economic soft landing view alive, and interest rates have moved above our rates team's year end forecast. From an equity market standpoint, that means no relief for valuations as earnings come down. This is a major reason why stocks sank to their June lows on Friday. Ultimately, we do think economic surprise data will likely disappoint again, but until it does there is no end in sight for the rise in 10 year yields, especially with the run off of the Fed's balance sheet increasing. As such, our rates team has raised its year end target for 10 year Treasury yields to 4% from 3.5%. This is a very tough backdrop for stocks and epitomizes our fire and ice thesis to a T. In other words, rising cost of capital and lower liquidity in the face of slower earnings growth or even outright declines. Finally, the Fed's historically hawkish action has led to record strength in the U.S. dollar. On a year over year basis the dollar is now up 21% and still rising. Based on our analysis that every 1% change in the dollar has a .5% impact on S&P 500 earnings growth, fourth quarter S&P 500 earnings will face an approximate 10% headwind to growth all else equal. This is in addition to the other challenges we've been discussing for months, like the pay back in demand and higher cost from inflation to name a few. Bottom line Part 2 of our Fire and ice thesis is now on full display, with rates and the U.S. dollar ratcheting higher, just as the negative revisions for earnings appear set to accelerate to the downside. In our view, the bear market in stocks will not be over until the S&P 500 reaches the range of our base and bear targets, i.e. 3000 to 3400 later this fall. Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcast app. It helps more people to find the show.

After another Fed meeting and another historically high rate hike, it’s clear that the Fed is committed to fighting inflation, but how and when will the real economy see the effects? Chief Cross-Asset Strategist Andrew Sheets and Global Chief Economist Seth Carpenter discuss.----- Transcript -----Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley Research. Seth Carpenter: And I'm Seth Carpenter, Morgan Stanley's Global Chief Economist. Andrew Sheets:] And on this special edition of the podcast, we'll be talking about the global economy and the challenges that central banks face. It's Friday, September 23rd at 2 p.m. in New York. Andrew Sheets: So, Seth, it's great to talk to you. It's great to talk to you face to face, in person, we're both sitting here in New York and we're sitting here on a week where there was an enormous amount of focus on the challenges that central banks are facing, particularly the Federal Reserve. So I think that's a good place to start. When you think about the predicament that the Federal Reserve is in, how would you describe it? Seth Carpenter: I think the Federal Reserve is in a such a challenging situation because they have inflation that they know, that everyone knows, is just simply too high. So they're trying to orchestrate what what is sometimes called a soft landing, that is slowing the economy enough so that the inflationary pressures go away, but not so much that the economy starts to contract and we lose millions of jobs. That's a tricky proposition. Andrew Sheets: So we had a Federal Reserve meeting this week where the Fed raised its target interest rate by 75 basis points, a relatively large move by the standards of the last 20 years. What did you take away from that meeting? And as you think about that from kind of a bigger picture perspective, what's the Fed trying to communicate? Seth Carpenter: So the Federal Reserve is clear, they are committed to tightening policy in order to get inflation under control, and the way they will do that is by slowing the economy. That said, every quarter they also provide their own projections for how the economy is likely to evolve over the next several years, and this set of projections go all the way out to 2025. So, a very long term view. And one thing I took away from that was they are willing to be patient with inflation coming down if they can manage to get it down without causing a recession. And what do I mean by patient? In their forecasts, it's still all the way out in 2025 that inflation is just a little bit above their 2% target. So they're not trying to get inflation down this year. They're not trying to get inflation down next year. They're not trying to get inflation down even over a two year period, it's quite a long, protracted process that they have in mind. Andrew Sheets: One question that's coming up a lot in our meetings with investors is, what's the lag between the Fed raising interest rates today and when that interest rate rise really hits the economy? Because, you are dealing with a somewhat unique situation that the American consumer, to an unusual extent, has most of their debt in a 30 year fixed rate mortgage or some sort of less interest rate sensitive vehicle relative to history. And so if a larger share of American debt is in these fixed rate mortgages, what the Fed does today might take longer to work its way through the economy. So how do you think about that and maybe how do you think the Fed thinks about that issue? Seth Carpenter: It's not going to be immediate. In round terms, if you take data for the past 35 years and come up with averages, you know, probably take something like two or three quarters for monetary policy to start to affect the real side of the economy. And then another two or three quarters after that for the slowing in the real side of the economy to start to affect inflation. So, quite a long period of time. Even more complicated is the fact that markets, as you know as well as anyone, start to anticipate central bank. So it's not really from when the central bank changes its policy tools when markets start to build in the tightening. So that gives them a little bit of a head start. So right now, the Fed just pushed its policy rate up to just over 3%, but markets have been pricing in some hiking for some time. So I would say we're already feeling some of the slowing of the real side of the economy from the markets having priced in policy, but there's still a lot more to come. Where is it showing up? You mentioned housing. Mortgage rates have gone up, home prices have appreciated over the past several years, and as a result we have seen new home sales, existing home sales both turnover and start to fall down. So we are starting to see some of it. How much more we see and how deep it goes, I think remains to be seen. Andrew Sheets: So Seth, another issue that investors

With high returns in mind, investors may be looking to get in on the ground floor with the next ambitious and disruptive technology, but how are these ‘moonshots’ identified and which ones could make a near-term impact? Head of Thematic Research in Europe Ed Stanley and Head of the Global Autos and Shared Mobility Team Adam Jonas discuss.----- Transcript -----Ed Stanley: Welcome to Thoughts on the Market. I'm Ed Stanley, Morgan Stanley's Head of Thematic Research based in London. Adam Jonas: And I'm Adam Jonas, Head of the Global Autos and Shared Mobility Team. Ed Stanley: And on this special episode of the podcast, we'll be discussing the bold potential of moonshot technologies, and particularly in the face of deepening global recession fears. It's Thursday, the 22nd of September, at 4 p.m. in London. Adam Jonas: And 11 a.m. in New York. Adam Jonas: Let me start with an eye popping number. Since 2000, 1% of companies have generated roughly 40% of shareholder returns by developing moonshots, that is ambitious and radical solutions to seemingly insurmountable problems using disruptive technology. So here at Morgan Stanley Research, we naturally spend a lot of time wondering what are the potential moonshots of the next decade? What's the next light bulb, airplane, satellite, internet? What technologies are developing literally as I record this that we'll be focused on in 2032? So Ed, I know you really want to dig into the specifics of some of the sectors that are touched on in the Moonshot Technologies report you wrote, but first can you maybe explain the framework for identifying these moonshots? Ed Stanley: So this is a totally different horizon and way of thinking to what most investors are used to. Typically, when looking for investable themes or technologies in public markets, we focus on those that are at or have surpassed a 20% adoption rate, those essentially with the wind at their back already. But clearly, with moonshots, we're looking much, much earlier, but with a much greater risk reward skew. There are a number of potentially groundbreaking technologies out there incubating right now. The next iPhone moment is out there, is being developed, and it should be all of our job to sniff out what, when and where that pivotal product will come from. But the question we've received is how do you whittle that funnel of potential technologies down? So we come at it from first principles. Academic research, either by individuals, governments or companies, tends to be the genesis for most groundbreaking ideas. This then feeds patenting, or in other words R&D, for small and big companies alike to build a moat around that research they pioneered. And then venture capital comes in to support some of those speculative innovations, but importantly, only those that have product market fit, which is what we focus on. Adam Jonas: So Ed, why do you think now is such an interesting time to be thinking about moonshots, given such a challenging macro backdrop? Ed Stanley: It's a great question. So if you take a step back, there are always reasons to be concerned in the markets. But moments of peak anxiety in hindsight tend to be the moments of peak opportunity. I'll steal an overused cliche, necessity is the mother of invention. We're more likely to see breakthroughs in energy technology, for example, at the moment, at the point of peak acute pain than five years ago when there was no real impetus. This is exactly why some of the most innovative companies are born during or just after recession or inflationary periods. In fact, if you look at the stats, one third of Fortune 500 companies were born in the handful of recessionary years over the last century. So macro may be getting worse, but we remain pretty committed to uncovering long term, game changing themes and investments. Adam Jonas: Can you give us a summary of the output and to which moonshots really stood out to you as having the potential for profound change over the medium term? Ed Stanley: Sure. So there are clearly some that are not only profound but frankly unfathomable in terms of their potential impacts. Things like life extension, a startup developing artificial general intelligence, also known as a singularity, and Web3 remains a fascinating sandbox of crypto and blockchain experiments. So there's a wealth of fascinating moonshots in there, but I'd focus on two that have more prescient implications for investors near-term. First is pre-fab housing. It's nothing new as a concept. It's essentially the process of bringing construction into the factory to increase efficiency. But we're now moving from 2D assemblies of walls and roof panels to the real moonshot, which is 3D assembly of the entire house, pre-made, and that is now happening. These pre-built whole houses can be 40 to 50% cheaper and quicker, and so coming back to your question around why now? Moonshots like this have little momentum in good yea

Though the Fed continues to raise interest rates, inflation is still high year over year, so why haven’t rate hikes begun to bring inflation down yet?----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Global Thematic and Public Policy Research for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between U.S. public policy and financial markets. It's Wednesday, September 21st at 10 a.m. in New York. The Fed continues to hike interest rates, but inflation is still running hot in the U.S. as demonstrated by last week's 8.3% year over year growth in the Consumer Price Index. When and how the Fed will eventually succeed in dampening inflation is an important consideration for markets, but investors should also focus on another question. Why hasn't fed hiking worked to bring down inflation yet? Well, there's a strong case to be made that the U.S. economy is less sensitive to changes in interest rates today than it has been in the past. In total, about 90% of all household debt today is fixed rate, meaning that as the Fed hikes rates and market rates rise, consumers’ debts don't cost them more to service. If they did, then rising interest rates would dampen economic growth by dampening aggregate demand. Those higher rates would in theory crimp consumption, as households direct less of their money toward buying goods and services and more toward paying their debts. That, in turn, would ease inflation. Understanding this dynamic is important for investors in a few ways. Take the housing market, for example. After the housing crisis that touched off the global financial crisis in 2008 and 2009, adjustable rate mortgages only now make up a small fraction of all mortgages. Sure, higher mortgage rates means buying a new home is effectively more expensive, but with so many more mortgages in the U.S. carrying a fixed rate and issued to individuals with higher credit scores, the cost of owning a home to current owners hasn't changed. That means there's little incentive for homeowners to sell and or reduce the asking price for their home. Hence, our housing strategists expect home sales to decline meaningfully, but you may not see a lot of price deterioration in the aggregate. The bond market is another place we see this dynamic on display. Our interest rate strategy team expects you'll see the yield curve continue to flatten and invert, with shorter maturity yields rising faster than longer ones. Why? Because shorter maturities typically track the Fed funds rate, which the Fed has clearly stated will continue going higher until there's clear evidence of inflation deceleration, which could take longer given the economy's lessened sensitivity to rising rates. For bond investors, the bottom line is you should consider something that historically has been pretty unusual - longer maturities might perform better even as rates go higher. 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 global economic outlook turns toward a slowdown in growth, some investors may look to China for stability, but, when they do, what will they find?----- Transcript -----Welcome to Thoughts on the Market. I'm Robin Xing, Morgan Stanley's Chief China Economist. Along with my colleagues, bringing you a variety of perspectives, today I will discuss whether China can stabilize global growth amid recession fears. It's Tuesday, September 20th at 9 AM in Hong Kong. The global economic outlook is dimming, and my colleagues have already discussed their expectations for slowdown in developed market economies driven by surging prices and aggressive monetary policy tightening. In this context, investors are likely to turn their attention to China, perhaps hoping it can once again stabilize global growth as it did after the 2008 global financial crisis. China's economy, however, appears to be fragile. While it has bottomed after the contraction due to Shanghai lockdown in the second quarter, it is still modeling not yet through. And we forecast a below consensus 2.8% GDP growth this year, and only a modest rebound to slightly above 5% in 2023. To date, China has deployed the monetary policy easing and the infrastructure investment spending. But these steps have not got a lot of traction because of two key hurdles; continuing COVID restrictions and the trouble in its housing market. We see growth rebounding in next year, but that recovery depends heavily on policy addressing these two key hurdles. Hence, we look for a more concerted policy response in the housing market, and a clearer path towards reopening post the upcoming 20th Party Congress in October. First, to limit the fallout from the housing sector, Beijing will likely ramp up policy support. It is true that China's aging population has pushed the housing market into a structural downward trajectory, but the pace of the recent collapse vastly exceeds that trend. The choke point is homebuyers lack of confidence in developers ability to deliver the pre-sold house, which shrinks new home sales and puts more stress on developers liquidity. We think that Beijing will provide additional funding and intervention to ensure contracted home construction is completed. This, combined with more home purchases, stimulus and the liquidity support to surviving developers could break the negative feedback loop. Second, we expect a gradual exit from COVID-zero next spring. With the more transmissive Omicron, the rolling lockdowns in China are taking their toll on consumption and even posing challenges to supply chains. The renewed lockdowns in several major cities and the recent slowdown in vaccination progress suggest that COVID-zero would not end swiftly after the Party Congress in October. But the key metrics to watch by then will be, first, the pace of vaccination, second, wider adoption of domestic covid treatment and finally shift in public opinion from fearing the virus to a more balanced assessment. Provided that policy can address these two hurdles I just described, China's economic recovery should firm up from second quarter 2023 onwards, with growth of slightly above 5% for next year are our numbers. But even with this rebound, the positives spill over to the rest of the world is unlikely to be on par with history. Construction activities might improve with the stabilizing property sector, which is a familiar driver of Chinese imports. But the key driver will be a turnaround in domestic private consumption, particularly of services, so that demand pull from other economies will be somewhat muted. Thus, while we doubt that China would tip the global economy into recession, neither do we see China at its salvation. 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.

From Europe, to China, to the U.S., global economies are facing unique challenges as the brewing storm of recession risks seem to still indicate a slowdown ahead.----- Transcript -----Welcome to Thoughts on the Market. I'm Seth Carpenter, Global Chief Economist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the rising risks of global recession and what might be ahead. It's Thursday, September 22nd at 10 a.m. in New York. About a year ago, I wrote about the brewing storm of recession risks around the world. Some downbeat economics news has come in since then, but the worst of the global slowdown is ahead of us, not behind us. We have an outright recession as our baseline forecast in the euro area and the U.K. The Chinese economy is on the brink with such weak growth that whether we have a global recession or not might just turn out to be a semantic distinction. First, Europe. It's hardly out of consensus at this point to call for a recession there, but we have been forecasting a recession since the start of the summer. The energy crisis caused by the Russian invasion of Ukraine has created a cost shock that is now effectively locked into the outlook for the next couple of quarters. Consumer bills will stay high, sapping purchasing power, fiscal deficits will take a hit and industries are already rationing energy use. For the UK, leaving Europe has not left behind the energy crisis across the channel. And the UK is also suffering from structural changes to its labor supply and trade relationships, and that's dragging down growth beyond these cyclical movements. That said, new leadership in Parliament is pointing to a huge fiscal stimulus that will mitigate the pain to households and reduce the depth of the recession. Now turning to China, markets have looked at China as a possible buoy for global growth, but this time any such hope really needs to be tempered, China's economy is in a fragile position. In our forecasts growth this year will be about 2.75%, below consensus and well below the potential growth of the economy. And then we think there'll be a rebound in growth next year, we're only looking for a modest 5.25% next year. Those sorts of numbers are not the real game changers people hope for. So far, the fiscal and monetary policy that has been deployed has not got a lot of traction. There are two key restraints on the Chinese economy right now; trouble in the housing market and continuing COVID restrictions. After the party Congress in mid-October things should probably start to change, but we're not expecting a quick fix. Right now construction and delivery of new homes is not getting done, so the cash flow is drying up, creating an adverse feedback loop. So far, the PBOC has rolled out about 200 billion renminbi bank loans to support this delivery, and we expect more intervention and funding over time. So as easy as it is to be gloomy on the outlook, a catastrophic collapse in housing doesn't seem likely. As for COVID, we are now expecting only a gradual exit from COVID zero next spring. The key metrics to watch will be the pace of vaccinations and wider adoption of domestic COVID treatments and a shift in public opinion. In particular, we think getting the over 60 population to at least an 80% booster vaccination rate next spring will flag the removal of restrictions. If there is a silver lining, it's that we still think the U.S. avoids a near-term recession. Despite notching a technical recession in the first half of the year, the U.S. outlook is somewhat brighter. For the first half of the year nonfarm payrolls averaged almost 450,000 per month, that's hardly the stuff of nightmares. But we don't want to be too cheerful. From the Fed's perspective, the economy has to slow to bring down inflation. They are raising interest rates expressly to slow the economy. So far, the housing market has clearly turned, but payrolls have only slowed a bit, and the moderation in wage inflation is probably not as much as the Fed is looking for. To date, we have not seen much slowing in consumer durables, so the economy remains beyond its speed limit and the Fed will keep hiking. How much? Well, depends on how strong the economy stays. So there really isn't much upside, only downside. The Fed is committed to hiking until the demand pressures driving inflation back off, so one way or another, the economy is going to slow. 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. 

While credit and equities have both suffered this year, economic conditions in the U.S. and Emerging Markets may lead to credit having a bit more stability in the coming months.----- 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, September 16th, at 3 p.m. in London. Year-to-date, both credit and equities have suffered. Looking ahead, we think credit is better positioned in both the U.S. and emerging markets, given the outlook for growth, policy and relative valuations. Conventional wisdom can change quickly in markets. Two months ago, there was widespread concern that the United States was already in a recession, given weak readings of quarterly GDP and some of the lowest levels of consumer confidence since the 2009 financial crisis. That weakness drove hope over July and August. Maybe the Federal Reserve had raised interest rates enough. Maybe it was nearly done. But the data since points to an American economy that continues to trundle along. The labor market continues to look extremely healthy, with about 315,000 jobs added last month and over 3.5 million jobs added year-to-date. Manufacturing activity has expanded every month this year. And consumer spending remains solid, one of the reasons core inflation remains elevated. In short, if the U.S. economy is going to slow down, that risk lies ahead of us, not behind us. And as long as the data remains solid and core inflation remains elevated, the Federal Reserve will face pressure to air on the side of caution and keep raising rates to tamp down on inflationary pressure. For investors this backdrop, where economic activity is still solid but might slow in the future, where inflation is high and the central bank is hiking, and where the labor market is tight and the yield curve is inverted, is what's commonly referred to as a "late cycle" environment. It's a set of conditions that has historically been challenging for future returns overall, but it's often been worse for equities relative to credit over the following 12 months, as the former is more sensitive to a potential slowdown in growth that hasn't happened yet. In addition to the economic conditions, relative valuations have also moved in favor of credit markets relative to equities. In the US, 1 to 5 year corporate bonds now yield about 4.9%, rapidly nearing the current earnings yield of the S&P 500 at about 5.9%. Despite just a 1% difference in yield, those short dated bonds have about one fifth of the volatility of stocks over the last 30 days. We hold a similar view on Emerging Markets. The sovereign debt index yields about 7.7%, just 1% less than the earnings yield of the MSCI Emerging Market Equity Index. Not only is EM sovereign debt less volatile than EM equities, but it has more exposure to the countries our analysts think provide the better risk reward. Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts or wherever you listen, and leave us a review. We'd love to hear from you.

The White House recently announced a student loan forgiveness program, prompting questions about implementation, economic implications, and whether the program will have an impact on consumer spending. Sarah Wolfe of the U.S. Economics team and Arianna Salvatore of the U.S. Public Policy team discuss.----- Transcript -----Sarah Wolfe: Welcome to Thoughts on the Market. I'm Sarah Wolfe from Morgan Stanley's U.S. Economics Team. Ariana Salvatore: And I'm Ariana Salvatore from Morgan Stanley's U.S. Public Policy Research Team. Sarah Wolfe: And on this episode of the podcast, we'll focus on student loans, in particular the recent student loan forgiveness program, and we'll dig into the impact on consumers and the economy. It's Thursday, September 15th, at 12 p.m. in New York. Sarah Wolfe: So, Ariana, the White House recently announced plans to forgive individuals up to $20,000 in federal student loans and extend the moratorium on interest payments. However, there was some confusion earlier in the year as both President Biden and Speaker Pelosi expressed doubts about the president's authority to cancel student debt. So is this something that requires an act of Congress, or can the president really do it alone? Ariana Salvatore: As you mentioned, prior to the announcement, there was some unresolved questions out there surrounding the legality of canceling student debt. In revealing the program, the administration cited authority from a 2003 law called the 'Heroes Act' that gives the executive the power to reduce or eliminate student debt during a national emergency, “when significant actions with potentially far reaching consequences are often required”. That being said, don't expect it to go over quietly. Reporting indicates that some Republican attorneys general are looking to bring legal challenges to the plan, which could present a risk to execution. But let's put questions about implementation aside for a second. What does reduced student debt impact more, longer term planning or immediate spending? And how do you quantify the impact on consumer spending? Sarah Wolfe: Thanks, Ariana. I'd like to just take a step back for a second before I talk about the economic impact, just so we could size up the program a bit. We estimate that there's going to be $330 to $390 billion in debt directly forgiven as part of this program. However, we estimate that the fiscal multiplier is actually quite small. So every dollar of debt that's forgiven that's going to get spent and put back into the economy, is really estimated at only 0.1. This is really small when you consider the fiscal multiplier of the COVID stimulus programs. So for example, the stimulus checks, supplemental unemployment benefits, that had a fiscal multiplier of 0.5 to 0.9. So it was much larger. The reason for this is because our survey work shows that people who have their student debt forgiven don't actually change their immediate spending patterns. Instead, it really impacts longer term planning. We're talking about paying down other debts, planning for retirement, perhaps buying a house or having a child earlier, and so there's not really an immediate spending impact on the economy. What does have a larger fiscal multiplier is forbearance coming to an end. Prior to COVID, people were on average paying $260 a month in student loan payments. That's been on hold for two and a half years. So when that resumes again in January, it's likely going to be less than $260 a month because of the loan forgiveness and other measures passed by the White House to limit loan payments per month. However, that's an immediate impact to discretionary income, and as a result, we're going to see a lot of households adjust their spending in the near term to make these new loan payments. Arianna, speaking of student loan forbearance, which I mentioned is set to end at the end of this year after a number of extensions, the White House is hoping that forgiveness is going to kick in right when forbearance comes to an end. Can we actually count on the timing working out like this? Ariana Salvatore: So there's definitely a risk that the program is delayed because of normal implementation hurdles, right. Things like determining eligibility for cancellation among millions of borrowers. The Department of Education memo that was released following the announcement says that 8 million borrowers may be eligible to receive relief automatically because relevant income data is already available. However, the department is also in the process of creating an application so borrowers can apply for forgiveness on their own, but that hasn't gone live yet. The DOE said it would be ready no later than when the pause on federal student loan repayments expires at the end of this year. Unfortunately, there's no real way to know when exactly that will be. Sarah Wolfe: So let me just get this clear. The Department of Education only has the information on 8 million stu

With only 60 days to go until the U.S. midterm elections, investors will want to know how different outcomes could impact markets, both locally and globally.----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Global Thematic and Public Policy Research for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between U.S. public policy and financial markets. It's Wednesday, September 14th, at 10 a.m. in New York. We're less than 60 days from the U.S. midterm elections and investors should pay attention. A lot has changed since we published our midterm election guide earlier this year, so here's what you need to know now. First, there's still key policies in play. Sure, Democrats have had more legislative success in recent months than many expected. By enacting corporate tax increases, a prescription drug negotiation plan, a major appropriation to clean energy transformation, and the China competition bill, Democrats took off the table many of the policy variables whose outcomes would have relied on the outcome of the election. But some key policy variables remain that matter to markets. In particular tech regulation, crypto regulation and tougher China competition measures, such as outbound investment controls, become more possible if Democrats manage to keep control of Congress. That would give them a greater opportunity to enact policies that could otherwise be held up or watered down by partisan disagreement. Second, this means there's a lot at stake for some pockets of global markets. Tech regulation would be a fundamental challenge to the U.S. Internet sector. Crypto regulation could be a key support for financial services by putting the crypto industry on the same regulatory playing field as the banks. And outbound investment controls could be a clear challenge for China equities by putting a substantial amount of foreign direct investment at risk. Finally, investors should understand these impacts aren't just hypotheticals, because, unlike earlier this year, Democrats electoral prospects have improved. Better showings in polls on key Senate races and the generic ballot have translated into prediction markets and independent models, marking Democrats as a modest favorite to keep Senate control, though they're still rated as an underdog to keep control of the House of Representatives. While it's difficult to pinpoint what's driven this change, voter discontent with the Supreme Court's Roe decision, as well as easing of some inflation pressures, may have contributed. Bottom line, the midterm election remains a market catalyst and it's coming up quickly. We'll keep tracking developments and potential market impacts and keep you informed. 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 various global markets contend with high inflation, recession risks, and monetary policy tightening, Japanese equities may provide some opportunities to diversify away from other developed markets.----- Transcript -----Welcome to Thoughts on the Market. I'm Daniel Blake from Morgan Stanley's Asia and Emerging Markets Equity Strategy Team. Along with my colleagues, bringing you a variety of perspectives, today I'll discuss the resilience of Japanese equities in the face of an expected global downturn. It's Tuesday, September 13, at 8 a.m. in Singapore. As Morgan Stanley's Chief Global Economist Seth Carpenter noted in mid-August, the clouds of recession are gathering globally. In the U.S., the Fed is hiking rates and withdrawing liquidity. Europe is suffering from high inflation, looming recession and an energy shortage. And China is facing a rocky path to recovery. In this global context, the external risks for Japan are rising quickly. And yet, compared to the turbulence in the rest of the world, Japanese equities are enjoying rather calm domestic, macro and policy waters. In Japan, we see support for this cycle coming from three sources; domestic policy, the Japanese yen and capital discipline at the corporate sector. First, the monetary policy divergence between the Bank of Japan and global peers has been remarkable, and in our view justified by differences in inflation and growth backdrops. Japanese core inflation is just 1.4%, and if we strip out food and energy, inflation is a mere 0.4% year over year. And so we don't expect any tightening from the Bank of Japan or of fiscal policy over the next six months. Secondly, the Japanese yen is acting as a funding currency and a buffer for earnings, rather than the typical safe haven that historically tends to amplify earnings drawdowns in an economic downturn. And third, improving capital discipline is contributing to newfound earnings resilience and insulating the return on equity, with buybacks tracking at a record pace of ¥10 trillion annualized year to date. In addition to monetary and fiscal policy, Japan's more cautious approach to reducing COVID restrictions and employment focused stimulus programs have meant that the economy is in a different phase vis-a-vis other developed markets. Our expectation for Japan's economy is low but steady growth of 1.3% on average over 2022 and 2023. As for the Japanese yen, we believe that a weaker yen is still a tailwind for TOPIX earnings. As a result of policy and real rate divergence, as well as the negative terms of trade shock from higher commodity prices, the yen has fallen to fresh record lows on a real effective exchange rate basis. The impact of a historically weak currency on the overall economy is still the subject of some debate, but one of the largest transmission channels of a weaker yen into supporting domestic services and employment is through tourism activity, which has been constrained to date by COVID policies. But looking ahead, the combination of reopening and a highly competitive tourism offering should set up a very strong recovery in passenger volumes and spending, as we saw during the European summer this year. So where do all these global and domestic cross-currents leave us with respect to Japanese equities? We remain overweight on the TOPIX index versus our MSCI Asia-Pacific, ex-Japan and emerging markets coverage. We've been above consensus in forecasting an exceptional recovery in TOPIX earnings per share, but we acknowledge that to date it has been largely driven by export oriented stocks. But currently, the external environment for Asia's major exporters is weakening as a result of tighter policies, slower growth and a revision in spending from goods to services. So while this trend will impact, we think, Taiwan, Korea and Singapore more so, China and Japan will also feel the impacts given their large goods trade surpluses. But with all this said, the Japanese market still provides liquid opportunities to diversify away from the U.S. and Europe, where Morgan Stanley strategists are cautious. So while Japanese equities have historically underperformed in global downturns, the current setup leaves us more optimistic on Japan in particular, compared with other regions like the U.S. and Europe. 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. 

Even as the European equity market contends with inflation, a slowing economy and a climate of decreased earnings, there are positives to be found if you know where to look.-----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 equity markets for the remainder of this year. It's Monday, September 12th, at 2 p.m. in London. After a brief rally in European equities earlier in the summer, reality has reasserted itself over the last month with markets unable to escape a tricky macro backdrop characterized by central banks speeding up rate hikes into what is a deepening economic slowdown. In the last couple of weeks alone, our economists have raised their forecasts for ECB rate hikes and cut their GDP numbers to signal a deeper upcoming recession. So let's dig into the investment implications of these challenges in a bit more detail. First on rates, over the last 20 years there has been a close relationship between interest rates and equity valuations, whereby higher rates lead to lower price to earnings ratios. Hence, the fact that central banks are still in the early stages of their hiking cycle suggests a high probability that PE ratios have further to fall. In addition to higher base rates, the pace of quantitative tightening is also speeding up, and our bond strategists forecast higher sovereign yields ahead. Here in Europe, they see ten year bond yields rising to 2% or more later this year, which will be consistent with a further fall in Europe's PE ratio to around 10x or so. That would imply 15% lower equity prices from here. Second, we expect the European economy to slow over the next couple of quarters and this should put pressure on corporate profits which have been resilient so far this year, thanks to strong commodity sector upgrades and a material boost from the weakness we've seen in the euro and sterling. Looking forward, our models are flagging large downside risks to consensus earnings estimates for the next 12 to 18 months and we are 16% below consensus by the end of 2023. To provide some additional context, we note that consensus expects European earnings, excluding the commodity sectors, to grow faster next year than this year. This acceleration looks odd to us when you consider that our economists see slower GDP growth in 23 than 22, and our own margin lead indicator is suggesting we could face the largest year on year drop in corporate margins since the global financial crisis. Our concern on earnings is a significant factor behind our continued preference for defensives over cyclicals. While some investors argue that the latter group are now sufficiently cheap to buy, we question the sustainability of the earnings that is underpinning the low PE ratios given the, first, we have seen very few downgrades so far. Second, margins are currently at record highs for many of these cyclical sectors. And then lastly, cyclicals tend to see larger earnings declines during downturns than the wider market. This gives rise to the old adage that investors should buy cyclicals on high PE ratios, not low ones. Consistent with this view, we have recently downgraded three cyclical sectors to underweight from our top down perspective, these being autos, capital goods and construction. We are also underweight chemicals and retailing. So what do we like instead? Sectors with more defensive characteristics, such as health care, insurance, telecoms, utilities and energy. We also like stocks that offer a high and secure cash return yield, whether that be driven by dividends, buybacks or both. To end on a positive note, the level of buyback activity in Europe has never been stronger than what we are seeing today, whether we measure it by the number of companies that are repurchasing their shares or the amounts of money they are spending to do so. In addition, we note that those European companies who have offered a healthy buyback yield over time have been consistent outperformers. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today. 

As the world turns to the U.K., the country faces a host of domestic and international economic challenges, but there may yet be some bright spots for investors.-----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, September 9th at 2:00pm in London.Queen Elizabeth II passed away yesterday. She was the only monarch most in Britain have ever known, a steady constant over a period of enormous global change. She defined an era, and will be missed. The eyes of the world have now turned to the United Kingdom, and they do so at a time when the country is facing an unusually high level of uncertainty.The U.K. economy, which was recently surpassed in size by India, is still the worlds sixth largest. But it’s currently being buffeted by a host of economic challenges. Some are domestic, some are international, but combined they create one of the trickiest stories in the global economy.First among these challenges is inflation. Rising costs for energy have driven Consumer prices in the U.K. up 10% year-over-year, but even excluding volatile food and energy, U.K. core inflation is still over 6%. And elevated inflation is not expected to be fleeting. Market-based estimates of U.K. inflation, over the next 10 years, are the highest since 1996.Those elevated prices have driven U.K. interest rates higher, but even so, U.K. rates relative to inflation are still some of the lowest of any major economy, which makes holding the currency less attractive. That has weakened the British Pound, but since the U.K. runs a current account deficit, and imports more than it exports, imported things have become more expensive, creating even more inflationary pressure.The U.K’s decision to leave the European Union, its largest trading partner, is another complication. By restricting the movement of labor, it’s created a negative supply shock and increased costs.  And it has increased the fiction in trading abroad, especially with Europe, making it harder for U.K. exporters to take advantage of the country’s weaker currency.The response to all this high inflation will likely be further rate hikes from the bank of England. But this has the potential to feed back into the economy unusually fast. Over here, many student loan payments are tied to the bank of England rate. And the rate on U.K. mortgages is often fixed for only 2 to 5 years, in contrast to the 30 year fixing common in the United States. That means the impact of higher interest rates into higher mortgage costs could be felt very soon.For U.K. assets, the fact that a 10 year U.K. Government bond yields less than a 6-month U.S. Treasury bill, and much less than U.K. inflation, creates poor risk/reward. The Pound could continue to weaken, given all of these myriad economic challenges. But one bright spot might be the equity market, the FTSE 100. Trading at about 9x next year earnings, and benefiting from a weaker currency as many of these companies sell product abroad, we forecast stocks in the U.K. to outperform those in the Eurozone.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 impact of quantitative monetary policies is hard to understand, for investors and academics alike, but why are these impacts so complex and how might investors better understand the market implications?-----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, September 8th, at 10 a.m. in New York. QT is the talk of the town. QT stands for quantitative tightening, which is meant to contrast it with QE, or quantitative easing. QT sounds intimidating, especially when respected investors mention the term and, at the same time, ring the fire alarm on financial news networks. Unfortunately, the exact workings of QT and QE and their ultimate impact on markets aren't well understood. And that's not just a comment about the general public's understanding. It even applies to investors who have long dealt with quantitative policies and for academics who have long studied them. There are four reasons why the impact of quantitative monetary policies, as the Fed has implemented them, is hard to understand. First, different institutions take the lead in determining the impact of QE versus QT. The Fed determines the first round impact of quantitative easing, while the U.S. Treasury and mortgage originators determine the first round impact of quantitative tightening. Second, as the phrase "first round impact" implies, there are second round impacts as well. In the case of quantitative easing, the first round occurs when the Fed buys a U.S. Treasury or Agency mortgage backed security, also known as an agency MBS, from an investor. The second round occurs when that investor uses the cash from the Fed to buy something else. In the case of quantitative tightening, the first round occurs when an investor sells something in order to raise the cash that it needs. What does it need the cash for? Well, to buy a forthcoming Treasury Security or agency MBS. The second round occurs when the U.S. Treasury auctions that security or when a mortgage originator issues an agency MBS in order to raise the cash that the Fed is no longer providing. Third, QE and QT affect different markets in different ways. QE affects the Treasury and agency MBS markets directly in the first round. But in the second round, investor decisions about how to invest that cash could affect a wide variety of markets from esoteric loan products to blue chip equities. In that sense, some of the impact of QE is indirect and could affect some markets more than others. Similarly with QT, investor decisions about what to sell could affect a large number of markets, again some more than others. In addition, what the U.S. Treasury issues and what mortgage originators sell can change over time with financing needs and different market environments. Finally, markets price these different effects with different probabilities and at different times. For example, when the Fed announces a QE program, we know with near certainty that the Fed will buy Treasuries and agency MBS and generally know how much of each the Fed will buy. So investors can price in those effects relatively soon after the announcement. But we don't know, with nearly the same probability, what the sellers of those treasuries and agency MBS will do with the cash until they actually get the cash from the Fed. And that could be months after the announcement when the Fed actually buys the securities. Figuring out the effect on markets from QT is even more complicated because even though we know what the Fed will no longer buy, we don't know exactly what or how much the U.S. Treasury or mortgage originators will sell. If all of this sounds complex, believe me it is. There are no easy conclusions to draw for your investment strategies when it comes to QT. So the next time someone rings the fire alarm and yells QT, first look for where there might be smoke before running out of the building or selling all of your risky 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. 

While home price appreciation appears to be slowing, and a rapid increase in supply is hitting the market, how will housing prices fare through the rest of the year and into 2023? Co-Heads of U.S. Securitized Products Research Jay Bacow and Jim Egan 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. Securities Products Research. Jim Egan: And on this episode of the podcast, we'll be discussing supply and demand in the U.S. housing market. It's Wednesday, September 7th, at 3 p.m. in New York. Jay Bacow: All right, Jim. Housing headlines have started to get a little more bleak. Home price appreciation slowed pretty materially with last week's print. Now, your call has been that activity is going to decrease, but home prices are going to keep growing. Where do we stand on that? Jim Egan: We would say that the bifurcation narrative still holds. We think housing activity metrics, and when we say housing activity we're specifically talking about home sales and housing starts, have some continued sharp declines in the months to come. But we do think that home prices are going to continue growing on a year over year basis, even despite a disappointing print that you mentioned from last week. Jay Bacow: But I have to askv, what are you looking at that gives you confidence in your home price call? Where could you be wrong given the slowdown we just saw? Jim Egan: We say a lot of fancy sounding things when we talk about the housing market, but ultimately they're just different ways of describing supply and demand. Demand is weakening. That's that drop in activity we're forecasting. But supply is also very tight and that contributes to our view that while home price growth needs to slow, it should remain positive on a year over year basis. Jay Bacow: All right, but haven't some metrics of supply been moving higher? Jim Egan: Look, we knew we were not going to be able to say that supply was historically tight forever. Existing inventories are now climbing year over year for the first time in 37 months. And another very popular metric of supply, months of supply, is effectively getting a 1-2 punch right now. Months of supply measures how much the current supply of housing listed for sale, would take to clear at current demand levels. So in a world in which supply is increasing and demand is falling, you have a numerator climbing and a denominator falling, so you're effectively supercharging months of supply, if you will. We were at a cycle low of 2.1 months of inventory, the lowest we've seen in at least three and a half decades, in January of this year. We're at 4.1 months of supply just six months later. Jay Bacow: So that number is a lot higher, but 4.1 months of supply is still really low. Isn't there some old saying that anything less than six months of supply is a seller's market? So wouldn't that be good for home prices? Jim Egan: Yes. And given recent work that we've done, we think that that saying is there for good reason. If we go back to the mid 1980s, so the Case-Shiller index that we're forecasting here that's as far back as this index goes. And every single time that months of supply has been below six, the Case-Shiller index was still appreciating six months forward. Home prices were still climbing, six months forward. So the absolute level of inventory is in a pretty healthy place despite the recent increases. However, that rate of change is a little concerning. We've gone from 2.1 months to 4.1 months over just six months of actual time, and when we look at that rate of change historically, it actually does tend to predict falling home prices a year forward. So, absolute level of inventory leaves us confident in continued home price growth, but the rate of change of that underlying inventory calls continued home price growth in 2023 into question. Jay Bacow: So we're going to have more inventory, but the pace has been accelerating. How do we think about the pace of that increase?Jim Egan: If that pace were to continue at its current levels, that would make us really concerned about home prices next year. But we do think the pace of inventory growth is going to slow and we think that for two main reasons. The two biggest inputs into inventory are new inventories and existing. New inventories, and we've talked about this on the podcast before, we think they're about to really slow down. Homebuilder confidence is down 43% from cycle peaks in November of 2020. Part of that's the affordability deterioration we talked about earlier, but it's also because of a backlog in the building process. Single unit starts are back to 1997 levels. Units under construction, so between starts and completions, are back to 2004 levels - it is taking longer to finish those homes. And we have had a forecast that we

While interest rates have already weighed on asset markets this year and growth continues to slow, the Fed seems poised to continue on its tightening path, meaning investors may need to prepare for part two of our Fire and Ice narrative.-----Transcript-----Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Tuesday, September 6th, at 9 a.m. in New York. So let's get after it. At the risk of stating the obvious, 2022 has been a challenging year for stock investors of all stripes. The Russell 3000 is down approximately 18% year to date, and while growth stocks have underperformed significantly it's been no picnic for value investors either. As far as sectors only energy and utilities are up this year, and just 24% of all stocks in the Russell 3000 are in positive territory. To put that into context, in 2008, 48% of the Russell 3000 stocks were up on the year as we entered the month of September and then the bottom dropped out. Suffice it to say, this year has been historically bad for stocks. However, that is not a sufficient reason to be bullish in our view. As bad as has been for stocks, it's been even worse for bonds on a risk adjusted basis. More specifically, 20 year Treasury bonds are now down 24% year to date, and the Barclays AG Index is off by 11%. Finally, commodities have been a mixed bag too, with most commodities down on the year, despite heightened concerns about inflation. For example, the CRB RIND Index, which measures the spot prices of a wide range of commodities, is down 7% year to date. Cash, on the other hand, is no longer trash, especially if one has been able to take advantage of higher front end rates. So what's going on? In our view, asset markets are behaving right in line with the fire and ice narrative we laid out a year ago. In short, after ignoring the warning signs from inflation last year and thinking the Fed would ignore them too, asset markets quickly woke up and discounted the Fed's late but historically hawkish pivot to address the sharp rise in prices. Indeed, very rarely has the Fed tightened policy so quickly. Truth be told, as one of the more hawkish strategists on the street last December, I never would have bet the Fed would be doing multiple 75 basis point hikes this year, but here we are. And remember, don't fight the Fed. While the June low for stocks and bonds was an important one, we've consistently been in the camp that it wasn't the low for the S&P 500 in this bear market. Having said that, we are more confident it was the low for long term treasuries in view of the Fed's aggressive action that has yet to fully play out in the real economy. It may have also been the low for the average stock, given how bad the breadth was at that time and the magnitude of the decline in certain stocks. Our more pessimistic view on the major index is based on analysis that indicates all the 31% de-rating in the forward S&P 500 P/E that occurred from December was due to higher interest rates. We know this because the equity risk premium was flat during this period. Meanwhile, forward earnings estimates for the S&P 500 have come down by only 1.5%, and price earnings ratio's back up 9% from where it was. With interest rates about 25 basis points below the June highs, the equity risk premium has fallen once again to just 280 basis points. This makes little sense in a normal environment, but especially given these significant earnings cuts we think are still to come. With the Fed dashing hopes for a dovish pivot on this policy a few weeks ago, we think asset markets may be entering fire and ice part two. In contrast with part one, this time the decline in stocks will come mostly through a higher equity risk premium and lower earnings rather than higher interest rates. In fact, our earnings models are all flashing red for the S&P 500, and we have high confidence that the decline in forward S&P 500 earnings forecasts is far from over. In short, part two will be more icy than fiery, the opposite of the first half of the year. That's not to say interest rates don't matter, they do and we expect bonds to perform better than stocks in this icier scenario. Importantly, if last Thursday marked a short term low for long duration bonds, i.e. a high in yields, the S&P 500 and many stocks could get some relief again as rates come down prior to the next rounds of earnings cuts that won't begin until later this month. Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcast app. It helps more people to find the show. 

There has been a lot of market movement in recent months, so as we exit the summer, what are the market stories and valuations that investors should be aware of?-----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, September 2nd at 3 p.m. in London. As summer draws to a close, there is quite a bit that investors are coming back to. Here's a state of play of our global economic story, and where cross-asset valuations sit today. The global economy faces challenges, but these challenges differ by region. The U.S. economy is seeing elevated inflation and still strong growth, as evidenced by today's report that the U.S. economy added another 315,000 new jobs last month. That makes it likely that the Federal Reserve will have to air on the side of raising rates more to bring inflation down, which would further invert the U.S. yield curve and, in our view, support the U.S. dollar. Europe also has high inflation, but of a different kind. Europe's inflation isn't nearly as pronounced in so-called core elements, and it isn't showing up in wages. Instead, Europe is in the midst of a major energy crunch, that in our base case will push the economy into a mild recession. Markets expect that the European Central Bank will raise rates significantly more than the U.S. Federal Reserve over the next 12 months, but given our risks to growth we disagree, a reason we forecast a weaker euro. The economic situation in the UK is also very challenged, leaving us cautious on gilts and the UK pound. China and Japan are very different and core inflation in both countries is less than 1%. China continues to face dual uncertainties from a weakening property market and zero-covid policy, factors that lead us to think it is still a bit too soon to buy China's equity market, despite large losses this year that have driven much better valuations. We remain more optimistic on Japanese equities on a currency hedged basis, given that it remains one of the few developed market economies where the central bank is not yet tightening policy. To take a closer look at those global equity markets we enter September with the U.S. S&P 500 stock index trading at about 17x earnings. That's down from over 20x earnings at the start of the year, but it's still above average. U.S. small cap valuations, at about 11x earnings, are less extreme. Stocks in Europe, Australia, Japan, China and emerging markets all trade at about 11 to 12x forward earnings at the index level. Of all of these markets our forecasts imply the highest returns, on a currency hedged basis, in Japan. In bonds, it's important to appreciate that yields remain much higher than they were a year ago. As we discussed last week, investors can now earn about 3.3% on 6 month U.S. government treasury bills, U.S. investment grade bonds yield almost 5% and U.S. high yield yields over 8.5%. In Europe, yields on European investment grade credit and Italian 10 year bonds are pretty similar, a spread at which we think European investment grade bonds are more attractive. Markets have been moving over the summer. We hope our listeners have managed some time to rest and recharge and that this discussion has given some helpful context to where the different stories and valuations in the market currently sit. Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts, or wherever you listen, and leave us a review. We'd love to hear from you.

As consumers around the globe scale back on goods spending, how are Asian export markets impacted and where might opportunities lie?-----Transcript-----Welcome to Thoughts on the Market. I'm Chetan Ahya, Morgan Stanly's Chief Asia Economist. Along with my colleagues, bringing you a variety of perspectives, today I'll be focusing on the challenging landscape for Asia's exports post-COVID. It's Thursday, September 1st, at 8:30 a.m. in Hong Kong. As listeners of the show are no doubt aware, the post-COVID recovery around the world has not been uniform, and each region is facing its own specific challenges. In Asia, one of those challenges is that the Asia export engine seems to be losing steam as goods demand continues to deflate. For instance, real export growth decelerated to just an average of 3% on a year on year basis in the past six months, as compared to a peak of 30% in April 2021. Whichever way you slice and dice Asia's exports, it is evident that the underlying trends are soft everywhere. Whether by destination or by product, there is simply pervasive weakness. Let's start with product: when we look at Asia exports by product across the different categories of consumer, capital and intermediate goods exports, we are seeing a synchronized slowdown. Commodities are the only product category which is holding up, supported by trailing elevated prices. But with industrial commodity prices falling by some 30% since their March peak, we think there is every chance that commodity exports will slow significantly too in the coming months. Now let's turn to destination. Demand is slowing in 70% of Asia's export destinations. While exports to the U.S. are still holding up, we expect that the slowing in the U.S. economy plus the continued normalization in goods spending, will weigh on exports to the U.S. too. Against this backdrop of weak aggregate demand, we see more downside for Asia's exports to the U.S. in the coming months. One of the reasons why Asia's exports are deflating rapidly is because developed markets consumers are shifting back into spending on services after an outsized spending on goods earlier during the pandemic. As a case in point, US spending on goods had risen by 20% between January 2020 and March 2021. Since reaching its peak in March 21, goods spending has been on a decelerating path, declining by 5%. We expect further weakness in goods spending as the share of goods spending still has not normalized back towards pre-COVID levels. Against this backdrop, investors should look at countries where domestic demand offsets the weakness in external demand. We continue to be constructive on India, Indonesia and Philippines as they are well placed to generate domestic demand alpha. Within this group, we believe that India is the best placed economy within the region for three reasons. First, we see a key change in India's structural story. Policymakers have made a clear shift in that approach towards lifting the productive capacity of the economy and creating jobs while reducing the focus on redistribution. Second, the India economy is lifting off after a prolonged period of adjustment. The corporate sector has delivered and the balance sheet in the financial sector has also been cleaned up. This backdrop of healthy balance sheets and rising corporate confidence bodes well for the outlook for business investment. Third, against this backdrop, we are seeing unleashing of pent up demand, especially in areas like housing and consumer durables. Finally, what about China - the largest economy in Asia? Typically when export slows down, we would expect China to be able to stimulate domestic demand. But in this cycle, while easing is already underway, the recovery in domestic demand is being held back by the housing market problem and its COVID management approach. We think that China domestic demand recovery should pick up pace by early next year as the full effects of its stimulus kicks in and private confidence lifts, thanks to China's anticipated shift to a living with COVID stance. 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.

While markets wrestle with high inflation and recession worries, investors will want to keep an eye on the rise in risk premiums and the outlook for long-run returns.-----Transcript-----Welcome to Thoughts on the Market. I'm Serena Tang, Morgan Stanley's Head of Cross-Asset Strategy for North America. Along with my colleagues, bringing you a variety of perspectives, today I'll focus on the current state of global cross-asset risk premiums. It's Wednesday, August 31st at 10 a.m. in New York. Markets in 2022 have been incredibly turbulent, and global cross-asset risk premiums have shifted dramatically year to date. Various markets have been buffeted by higher inflation and tighter policy, geopolitical risks and worries about recession. Some impacted much more than others. What this means is that there are segments of markets where risk premiums, that is the excess returns an investor can expect for taking on additional risk, and long-run expected returns look much more attractive than they were at the beginning of the year. And while expected returns and risk premiums have broadly risen, the improvements have been uneven across asset classes and regions. For example, we believe that compared to U.S. stocks, rest-of-world equities have seen equity risk premiums move much higher since December, and currently have an edge over U.S. equities in terms of risk reward, in line with our relative preferences. So let me put some actual numbers around some key regional disparities. Our framework, which incorporates expectations on income, inflation, real earnings growth and valuations, see U.S. equities returning about 7.5% annually over the next decade, compared to just 5.7% at the start of the year. However, a steep climb in U.S. Treasury yields from historical lows mean that from a risk premium perspective, U.S. equities is still below its 20 year historical average by nearly one percentage point. This is in contrast to other regions whose risk premiums have increased significantly more during the sell off. Notably, European equity risk premiums are 8.9%, close to a 20 year high, similarly for emerging markets at 5.3%, and Japanese equity risk premiums at 4.7%, also above average. And remember, higher risk premiums typically signal that it's a good time to invest in riskier assets. For fixed income, with nominal yields rising on the back of more persistent inflationary pressures and quantitative tightening, long-run expected returns are now higher than they were 12 months ago. In fact, we're now back to levels last seen in 2019. Our framework now predicts that ten year U.S. Treasuries can return 3.7% annually over the next decade, up from 2.2% just a year ago. Credit risk premiums, such as for corporate bonds, have also readjusted year to date. As with risk free government bonds, rising yields mean that long run expected returns for these bonds have improved significantly since the start of the year. In terms of numbers, our model forecasts for U.S. high yield risk premium, at 188 basis points compared to near nothing 12 months ago. So what does all this mean? Well, for one thing, as my colleague Andrew Sheets has pointed out in a previous Thoughts on the Market episode, lower prices, wider risk premiums and higher 10 year expected returns have raised our long-run expected returns forecasts for a portfolio of 60% equity and 40% high quality bonds to the highest it's been since 2019, above the 10 year average. So we believe that the case for a 60/40 type of approach remains. For another, it means that the opportunities for investors right now lie in relative value rather than beta, given our strategists macro outlook for the next 12 months is more cautious than our long-run expected forecast. So for example, based on our long-run expected returns, our dollar optimal portfolios favor segments of the markets with more credit risk premium, like high yield and emerging market bonds. And similarly, as I've mentioned before, our current cross-asset allocation has a preference for ex-U.S. equities versus the U.S. because of former's higher equity risk premium. The rest of 2022 will likely continue to be turbulent, but there is good news for investors with a longer term focus. 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. 

Amid global shocks across supply, commodities and the U.S. Dollar, central banks continue to fight hard against inflation, leading many to wonder if a global recession is imminent.----- Transcript -----Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's chief global economist, along with my colleagues, bringing you a variety of perspectives. Today, I'll be revisiting a topic that's front and center: concerns about a global recession. It's Tuesday, August 30th, at 2p.m. in New York.One key market narrative right now is that the clouds of recession have been gathering globally. And the question that I get from clients every day, 'is a global recession upon us?'A recession is our baseline scenario for the Euro area. The flow of natural gas from Russia has been restricted and energy prices, as a result, have surged. We expect a recession by the fourth quarter but, as is so often the case, the data will be noisy. A complete gas cutoff, which is our worst-case scenario. That's still possible. On the other hand, even if somehow we had a full normalization of the gas flows, the relief to the European economy would only be modest. Winter energy prices are already partly baked in, and we've got the ECB with an almost single-minded focus on inflation. There are going to be more interest rate hikes there until the hard data force them to stop.Now, I am slightly more optimistic about the U.S. The negative GDP prints in the first two quarters of this year clearly cast a pall but those readings are misleading because of some of the details. Now, bear with me, but a lot of the headline GDP data reflects inventories in international trade, not the underlying domestic economy. Household spending, which is the key driver of the U.S. economy, averaged about 1.5% at an annual rate in the first half and the July jobs report printed at a massive 520,000 jobs. Since the 1970s, the U.S. has never had a recession within a year of creating so many jobs. But the path forward is clearly for slowing. Consumption spending was slammed by surging food and energy prices and more importantly, the Fed is hiking interest rates specifically to slow down the economy.So what is the Fed's plan? Chair Powell keeps noting that the Fed strategy is to slow the economy enough so that inflation pressures abate, but then to pivot or, as he likes to say, 'to be nimble.' That kind of soft landing is by no means assured. So, we're more optimistic in the U.S., but the Fed is going to need some luck to go along with their plan. The situation in China is just completely different. The economy there contracted in the second quarter amid very stringent COVID controls. The COVID Zero policies in place are slowly starting to get eased and we think more relaxation will follow the party Congress in October. But will freedom of mobility be enough to reverse the challenges that we're seeing on consumer spending because of the housing market? The recent policy action to address the housing crisis will probably help some but I fully expect that a much larger package will be needed. Ultimately, we'll need the consumer to be confident in both the economy and the housing market before we can make a rapid recovery.The world has been simultaneously hit by supply shocks, commodity shocks and dollar shocks. Central banks are pulling back on demand to try to contain inflation. Even if we avoid a global recession, it's really hard to see how economic activity gets all the way back to its pre-COVID trend.It's still the summertime, so I hope it's sunny where you are. You can worry about the storm later.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 Fed messaging making it clear they’re not yet done fighting inflation, the market is left to contend with the recent rally and prepare to adjust growth expectations.-----Transcript-----Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, August 29th, at 11 a.m. in New York. So let's get after it. After the Fed's highly anticipated annual meeting in Jackson Hole has come and gone with a very clear message - the fight against inflation is far from over, and the equity markets did not take it very well. As we discussed in this podcast two weeks ago, the equity markets may have gotten too excited and even pre traded a Fed pivot that isn't coming. For stocks, that means the bear market rally is likely over. Technically speaking, the rally looks rather textbook. In June, we reached oversold conditions with breadth falling to some of the lowest readings on record. However, the rally stalled out exactly at the 200-day moving average for the S&P 500 and many key stocks. On that basis alone, the sharp reversal looks quite ominous to even the most basic tactical analysts. From a fundamental standpoint, having a bullish view on U.S. stocks today is also challenging. First, there is valuation. As we have discussed many times in our research, the Price/Earnings ratio is a function of two inputs; 10 year U.S. Treasury yields and the Equity Risk Premium. Simplistically, the U.S. Treasury yield is a cost of capital component, while the Equity Risk Premium is primarily a function of growth expectations. Typically, the Equity Risk Premium is negatively correlated to growth. In other words, when growth is accelerating, or expected to accelerate, the Equity Risk Premium tends to be lower than normal and vice versa. Our problem with the view that June was the low for the index in this bear market is that the Equity Risk Premium never went above average. Instead, the fall in the Price/Earnings ratio from December to June was entirely a function of the Fed's tightening of financial conditions, and the higher cost of capital. Compounding this challenge, the Equity Risk Premium fell sharply over the past few months and reached near record lows in the post financial crisis period. In fact, the only time the Equity Risk Premium has been lower in the past 14 years was at the end of the bear market rally in March earlier this year, and we know how that ended. Even after Friday's sharp decline in stocks, the S&P 500 Equity Risk Premium remains more than 100 basis points lower than what our model suggests. In short, the S&P 500 price earnings ratio is 17.1x, it's 15% too high in our view. Second, while most investors remain preoccupied with the Fed, we have been more focused on earnings and the risk to forward estimates. In June, many investors began to share our concern, which is why stocks sold off so sharply in our view. Companies began managing the quarter lower, and by the time second quarter earnings season rolled around positioning was quite bearish and valuations were more reasonable at 15.4x. This led to the "bad news is good news" rally or, as many people claim, "better than feared" results. Call us old school, but better than feared is not a good reason to invest in something if the price is high and the earnings are weak. In other words, it's a fine reason for stocks to see some relief from an oversold condition, but we wouldn't commit any real capital to such a strategy. Our analysis of second quarter earnings showed clear deterioration in profitability, a trend we believe is just starting. In short, we believe earnings forecast for next year remains significantly too high. Finally, last week's highly anticipated Fed meeting turned out to be a nonevent for bonds, while it appeared to be a shock for stock investors. Ironically, given the lack of any material move in yields, all of the decline in the Price/Earnings ratio was due to a rising Equity Risk Premium that still remains well below fair market levels. The bottom line, we do think Friday's action could be the beginning of an adjustment period to growth expectations. That's good. In our experience, such adjustments to earnings always take longer than they should. Throw on top of that, the fact that operating leverage is now more extreme than it was prior to COVID, and the negative revision cycle could turn out to be worse than usual. Next week, we will attempt to quantify more specifically how challenging the earnings outcome might be based on an already reported macro data. Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcast app. It helps more people to find the show. 

Though returns offered by cash have been historically bad over the last 10 years, the tide has begun to turn on cash yields and investors will want to take note.-----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, August 26, at 2 p.m. in London. For much of the last 12 years, the question of whether to hold cash in a portfolio was really a question of negativity. After all, for most of that time, holding cash yielded nothing or less than nothing for those in Europe. Holding it implied you believed almost every other investment option was worse than this low bar. Unsurprisingly, the low returns offered by cash over this period led to... low returns. For 8 of the 10 years from 2010 through 2020, holding cash underperformed both U.S. stocks and U.S. Treasuries. And while cash is often like stocks and bonds over time, the returns to holding cash since 2010 were historically bad. But that's now changing, because cash no longer yields nothing. As central banks have raced to raise rates in the face of high inflation, the return on holding cash or near cash investments has jumped materially. One year ago, a 6 month U.S. Treasury bill yielded 0.04%. It now yields 3.25%. That is 3.25% for an investment with very low volatility backed by the full faith and credit of the U.S. government. That's a higher yield than a U.S. 10 year Treasury bond. It is more than double the dividend yield of the S&P 500 stock index. And it's just a quarter of a percentage point less than the dividend yield on U.S. real estate investment trusts. It's important to note that not all short term liquid investments are created equal. While six month U.S. T-bills now yield 3.25%, the average yield on 6 month bank CD's is less than 1%, and the average U.S. savings account yields just 0.2%. In other words, it pays to shop around. And for those in the business of managing money market and liquidity funds, we think this is a good time to add value and grow assets. What are the market implications? For equity markets, if investors can now receive higher yields on low risk cash, we think it's reasonable to think that that should lead investors to ask for higher returns elsewhere, which should lower valuations on stocks. My colleague Michael Wilson, Morgan Stanley's Chief Investment Officer and Chief U.S. Equity Strategist, sees poor risk reward for U.S. equities at current levels. More broadly, we think it supports holding more U.S. dollar cash in a portfolio. That's true for U.S. investors, but also globally, as we forecast the U.S. dollar to continue to strengthen. Holding cash isn't necessarily a sign of caution, it may simply be efficient allocation to an asset that has recently seen a major jump in yield. 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.

This year has seen a sharp rally in the oil and gas markets, leading to high prices and a delicate balancing act for global supply and demand. Important note regarding economic sanctions. This research 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. Users of this report are solely responsible for ensuring that their investment activities in relation to any sanctioned country/ies are carried out in compliance with applicable sanctions.----- Transcript -----Welcome to Thoughts on the Markets. I'm Martijn Rats, Morgan Stanley's Global Commodity Strategist and the Head of the European Energy Research Team. Along with my colleagues, bringing you a variety of perspectives, today I'll be giving you an update on global oil and the European gas market. It's Thursday, the 25th of August, at 4 p.m. in London. As the world emerged from COVID, commodities have rallied strongly. Between mid 2020 and mid 2022, the Bloomberg Commodity Index more than doubled, outperforming equities significantly and fulfilling its traditional role as an inflation hedge.However, this rally largely ran out of steam in June, even for oil. For nearly two years, the oil market was significantly undersupplied. For a while, storage can help meet the deficit, but at some point, supply and demand simply need to come into balance. If that can't happen via the supply side quick enough, it must happen via the demand side, and so the oil markets effectively searched for the demand destruction price.The price level where that happens can be hard to estimate, but in June we clearly got there. For a brief period, gasoline reached $180 per barrel and diesel even reached $190 a barrel. Those prices are difficult for the global economy to absorb, especially if you take into account that the dollar has been strengthening at the same time. With the world's central banks hiking interest rates in an effort to slow down the economy as well, oil demand has started to soften and prices have given up some of their recent strength.Now these trends can take some time to play out, possibly even several quarters. As long as fears of a recession prevail, oil prices are likely to stay rangebound. However, after recession comes recovery. There is still little margin of safety in the system, so when demand starts to improve again, there is every chance the strong cycle from last year repeats itself. This time next year we may need to ask the question, 'What is the demand destruction price?' once again.Now, one commodity that has defied all gravity is European natural gas. Over much of the last decade, Europe was accustomed to a typical natural gas price of somewhere between sort of $6 to $7 per million British thermal units. Recently, it reached the eye-watering level of $85 per MMBtu. On an energy equivalent basis, that would be similar to oil trading at nearly $500 per barrel.Now, the reason for this is, of course, the sharp reduction in supply from Russia. As the war in Ukraine has unfolded, Russia has steadily supplied less and less natural gas to Europe. Now total volumes have already fallen by around about 75%. Furthermore, Gazprom announced that flows through the critical Nord Stream 1 pipeline would temporarily stop completely later this month for maintenance to one of its turbines. In principle, this will only last three days, but the market is clearly starting to fear that this is a harbinger of a much longer lasting shutdown.These exceptional prices are already leading to large declines in demand. During COVID, industrial gas consumption in Europe fell only 2 or 3%. Last month, industrial gas use was already down 19% year-on-year. With these demand declines, Europe can probably manage with the reduced supply, but to keep demand lower for longer gas prices need to be higher for longer. The gas market has clearly noticed. Even gas for delivery by end 2024 is now trading at close to $50 per MMBtu, 10x the equivalent price in the United States.The full implications of all of this for the European economy going forward are yet to become clear, but we'll be sure to keep listeners up to date on the latest developments.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 Asia and EM equities continue to experience what may end up being the longest bear market in the history of the asset class, looking to past bear markets may give investors some insight into when to come off the sidelines.-----Transcript-----Welcome to Thoughts on the Market. I'm Jonathan Garner, Chief Asia and Emerging Market Equity Strategist at Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, today I'll be discussing whether we're nearing the end of the current bear market in Asia and emerging market equities. It's Wednesday, August the 24th, at 8 a.m. in Singapore. The ongoing bear market in Asia and EM equities is the 11th which I've covered as a strategist. And in this episode I want to talk about some lessons I've learned from those prior experiences, and indeed how close we may be to the end of this current bear market. A first key point to make is that this is already the second longest in duration of the 11 bear markets I've covered. Only that which began with the puncturing of the dot com bubble by a Fed hike cycle in February 2000 was longer. This is already a major bear market by historical standards. My first experience of bear markets was one of the most famous, that which took place from July 1997 to September 1998 and became known as the Asian Financial Crisis. That lasted for 518 days, with a peak to trough decline of 59%. And as with so many others, the trigger was a tightening of U.S. monetary policy at the end of 1996 and a stronger U.S. dollar. That bear market ended only when the U.S. Federal Reserve did three interest rate cuts in quick succession at the end of 1998 in response to the long term capital management and Russia defaults. Indeed, a change in U.S. monetary policy and/or a peak in the U.S. dollar have tended to be crucial in marking the troughs in Asia and EM equity bear markets. And that includes the two bear markets prior to the current one, which ended in March 2020 and October 2018. However, changes in Chinese monetary policy and China's growth cycles, starting with the bear market ending in October 2008, have been of increasing importance in recent cycles. Indeed, easier policy in China in late 2008 preceded a turn in U.S. monetary policy and helped Asia and EM equities lead the recovery in global markets after the global financial crisis. Although China has been easing policy for almost a year thus far, the degree of easing as measured by M2 growth or overall lending growth is smaller than in prior cycles. And at least in part, that's because China is attempting to pull off the difficult feat of restructuring its vast and highly leveraged property sector, whilst also pursuing a strategy of COVID containment involving closed loop production and episodic consumer lockdowns. Those key differences are amongst a number of factors which have led us to recommend staying on the sidelines this year, both in our overall coverage in Asia and emerging markets, but also with respect to China. We have preferred Japan, and parts of ASEAN, the Middle East and Latin America. Finally, as we look ahead I would also note that one feature of being later on in a bear market is a sudden fall in commodity prices. And certainly from mid-June there have been quite material declines in copper, iron ore and more recently, the oil price. Meanwhile, classic defensive sectors are outperforming. And that sort of late cycle behavior within the index itself raises the question of whether by year end Asia and EM equities could once again transition to offering an interesting early cycle cyclical play. That more positive scenario for next year would depend on global and U.S. headline inflation starting to fall back, whether we would see a peak in the U.S. dollar and Fed rate hike pricing.For the time being, though, as the clock ticks down to the current bear market becoming the longest in the history of the asset class, we still think patience will be rewarded a while longer. 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. 

The Inflation Reduction Act represents the single biggest climate investment in U.S. history, so how will these provisions influence consumers' pocketbooks and the clean energy market? Head of Global Thematic and Public Policy Research Michael Zezas and Global Head of Sustainability Research Stephen Byrd discuss.----- Transcript -----Michael Zezas Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Head of Global Thematic and Public Policy Research.Stephen Byrd And I'm Stephen Byrd, Morgan Stanley's Global Head of Sustainability Research.Michael Zezas And on this special episode of Thoughts on the Market, we'll focus on the Inflation Reduction Act's bold attempt to stem the tide of climate change. It's Tuesday, August 23rd at noon in New York.Michael Zezas Regular listeners may have heard our previous episodes on the potential impact for the U.S. economy and on taxes from the Inflation Reduction Act. Today, we'll focus on another essential aspect of this new legislation, namely its sweeping support for clean energy, which represents the single biggest climate investment in U.S. history. So, Stephen, there's a ton of important issues to address here. Let's start with an immediate pain point that most of us deal with on a daily basis, the cost of energy. How does the Inflation Reduction Act aim to lower energy costs for Americans?Stephen Byrd The simplest way to think about this is that in the past decade, wind and solar costs in the U.S. declined every year by double digits. What's exciting about the IRA is that there are really important investments that will increase the scale of manufacturing. So, the fundamental point in terms of the benefit of the IRA really is support for a variety of clean energy investments that's going to increase efficiency, reduce per unit costs. This is becoming really essentially a very big business. To put this in context, in the last 12 months utility bills in the U.S. and most of the U.S. have increased by sometimes well into the double digits. And yet clean energy costs remain quite low. Given some of the near-term COVID supply chain dynamics, costs aren't dropping as quickly as they normally would, but before long we're going to see those reductions continue. That should result in lower power costs for customers across the U.S. and that's the single biggest benefit from a sort of deflationary point of view that I can think of around the IRA.Michael Zezas And the IRA also has a stated aim to increase American energy security. In what ways does it attempt to do that?Stephen Byrd Yeah, Michael, it's really interesting. The IRA has some very broad areas of support for domestic manufacturing of all kinds, of not just clean energy but related technologies like energy storage. And we do think that's going to likely result in quite a bit of onshoring of manufacturing activity. That is good for American energy security, that brings our sources of energy production right back home, creates jobs, reduces dependency on other governments. So, for example, the subsidy for solar manufacturing is really very large. It can be as high as essentially $0.17 a watt, and to put that into context, the selling price at the wholesale level for many of these products is around $0.30 a watt. So that subsidy for domestic manufacturing should result in real investment decisions in real U.S. factories, and that will help to improve American energy security.Michael Zezas Now, another aspect of this legislation is its attempt to substantially limit carbon emissions in the U.S. What are some of the measures that are aimed at doing this?Stephen Byrd Decarbonization is a major area of focus, just as you said, for the IRA and this shows up in many ways. I'd say the most direct way would be providing a number of incentives to increase the growth of wind and solar. So, we'll see a great deal of growth there as a result. However, there are other elements that are really interesting. One example is support for nuclear. I think the drafters really wanted to ensure that we didn't lose any additional nuclear power plants. Those plants provide obviously zero carbon energy, but they also provide really important grid reliability services so that's helpful. There is also quite a bit of capital for carbon capture, which should reduce the emissions profile of other sectors as well. There's quite a bit of support for electric vehicles that will help with the pace of electrification. And that's kind of a nice double benefit in the sense that if more consumers choose electric vehicles and the grid becomes cleaner then we get a double benefit. So, we're really seeing very broad-based support for decarbonization in the IRA.Michael Zezas Now, one of the methods here to incentivize decarbonization is through tax credits. What are some of these tax credits? How do they work?Stephen Byrd We have a lot of tax credits in this IRA for what I think of as wholesale players, that is the big clean energy developers. T

While stocks and bonds have rallied since June, investors should be asking if this bear market rebound is a sign that economic growth is on its way up, or if there are negative earning revisions yet to come.-----Transcript-----Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, August 22nd at 11 a.m. in New York. So let's get after it. Taking a few weeks off can sometimes provide a fresh perspective on markets needed at times like today. The fact that it happens to be August, the most popular time for vacations of the year, can also play into that perspective. Over the past 6 weeks many financial markets have had a strong rebound. As an example, both stocks and bonds have rallied sharply from their June lows. The question that equity investors must ask themselves is how much of the rally in stocks is due to the fall in interest rates versus a real improvement in the prospects of a soft landing in the economy? For better or worse our view has remained consistent since April that the primary concern for stocks was no longer inflation, or the Fed's reaction to deal with it, but rather the outlook for growth. In May, the consensus moved strongly into our camp, with the cries for a recession reaching a fever pitch in June. Equity markets became very oversold and the stage was set for a powerful rally. Truth be told, this rally exceeded our expectations for a normal counter trend bear market rally. However, in order to set the stage for the next leg lower, the rally needed to be convincing enough to change the very bearish sentiment to outright bullish. Based on what I have seen in the press and from our peers around the street, that sentiment has flipped with many declaring the end of the bear market and the increasing likelihood of new all time highs as soon as later this year. While there are some strong indications that inflation has peaked from a rate of change standpoint, it's too soon for the Fed to declare victory in our view. In other words, the rising hope for the Fed to pivot away from rising rates or curtailing its balance sheet reduction remains optimistic. Nevertheless, this is the primary justification for why equity markets have rallied and why it can continue. However, even if that were true, there are very few data points suggesting we have reached a trough in growth, either economically or from an earnings growth standpoint. In fact, our growth is suggesting the opposite, with earnings revision breadth accelerating to the downside, along with our other leading indicators. To put it more bluntly, rarely have we been more confident that consensus growth expectations for earnings over the next 12 months are too high. More importantly, the equity market almost never rallies if forward earnings estimates are falling, unless the valuation is completely washed out. In June, one could have credibly argued valuations were discounting a sharp decline in growth and the risk of a recession. At the lows the forward price earnings ratio reached 15.4x and was down almost 30% from the end of last year. At 15.4x is almost exactly our year end target price earnings multiple at the beginning of this year based on our view that the Fed would have to tighten aggressively to combat inflation. The problem with assuming 15.4x was a washed out level for valuations is that all of the degradation was a result of higher interest rates, while the equity risk premium remained flat to down over that time frame. In other words, at no time did the price earnings multiple discount a material slowdown in growth. Now, with the price earnings multiple exceeding 18x last week, valuations are inappropriate if one agrees with our view that earnings estimates are too high. On Friday, stocks reversed lower and that seems to be carrying into this week. Many are once again blaming the Fed and perhaps acknowledging its work in fighting inflation remains unfinished. We agree. However, with price earnings multiples still 17.4x as I record this podcast, valuations are not discounting that resolve, nor is it discounting the negative earnings revisions still to come. The bottom line stocks have experienced a classic bear market rebound after having reached a near record oversold condition on many metrics. With the Fed still very much in the picture and earnings estimates likely to fall further, equity markets are almost as unattractive as they were at the beginning of the year. Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcast app. It helps more people to find the show.

In the past two years Emerging Market sovereign debt has seen rising risks given increased borrowing, higher interest rates and a greater number of defaults, leading investors to wonder, are we heading towards an EM debt crisis? Important note regarding economic sanctions. This research references country/ies which are generally the subject of comprehensive or 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 report to entities, debt or equity instruments, projects or persons that may be covered by such sanctions are strictly incidental to general coverage of the relevant Russian economic 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 report are solely responsible for ensuring that their investment activities in relation to any sanctioned country/ies are carried out in compliance with applicable sanctions.----- Transcript -----Welcome to Thoughts on the market. I'm Simon Waever, Morgan Stanley's Global Head of EM Sovereign Credit Strategy. Along with my colleagues, bringing you a variety of perspectives, today, I'll address the possibility of an emerging markets debt crisis. It's Friday, August 19th, 12p.m. in New York.The most frequent question I get from investors right now is, 'are we heading towards an EM debt crisis?' It's not unreasonable to ask this. After all, a lot of the ingredients that led to prior EM debt crises are in place today. First, EM countries have taken on a lot of debt, not just since the pandemic, but in the past ten years, meaning most countries are at or near multi-decade highs. Second, global central banks are quickly hiking rates, with the Fed in particular a key driver in tightening global financial conditions. Third, which is related, is that servicing and rolling over that debt has suddenly become much more expensive, driven not just by a stronger dollar, but also much higher bond yields. And then fourth, which is perhaps the most important one, is that today we are as close to an extended sudden stop in flows to EM as we have been in a long time. That means that many countries have lost access to markets, so that even if they were willing to pay up to borrow, there's just no demand.Markets are telling us the risks are rising as well. Outside of the 2008 Global Financial Crisis and the 2020 pandemic, you'd have to go back 20 years to find EM sovereign credit spreads trading as wide. And high yield credit spreads are much wider than investment grade spreads, so markets are differentiating already.Finally, just looking at actual sovereign defaults and restructurings, they're already higher than in recent history. We have had six in the past two years and now already three in 2022, namely Russia, Belarus and Sri Lanka.From here, there are likely to be more defaults, but three key points are worth making. One, the countries at risk now are very different to the prior debt crisis in EM. Two, none would be systemic defaults. And three, they would not all happen at the same time.Large countries like Brazil, Mexico, South Africa, Indonesia and Malaysia don't seem to be at risk of defaulting. They are completely different to what they were 20 to 30 years ago. They're now inflation targeters, have mostly free-floating currencies, meaning imbalances are less likely to build up, have large effects reserves and have the majority of that debt in local currency.Instead, the concern now is mostly with the newer issuers that benefited from the abundant global liquidity in the past ten years. And by this I mean the frontier credits, many of which are in Africa, but also in Asia and Central America. And then it's key to actually look at who has upcoming Eurobond maturities, as not all countries do. But even among these credits, the International Monetary Fund stands ready to help and there are FX reserves that can be used. So, it's not clear to me that you're going to see multiple defaults and even if you were to see two or more defaults among them, they're very unlikely to be systemic.But, all in, while there's no denying that EM countries are facing debt sustainability issues, let's not paint all EM with the same brush. The nuances should make for some exciting years ahead for sovereign debt analysts and should also open up the potential for significant alpha within the asset class.Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

The Inflation Reduction Act includes a variety of provisions regarding tax policy, so how will these policy changes affect corporations and what should investors be aware of? Head of Public Policy Research and Municipal Strategy Michael Zezas and Head of Global Valuation, Accounting, and Tax Todd Castagno discuss.-----Transcript-----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Head of Public Policy Research and Municipal Strategy. Todd Castagno: And I'm Todd Castagno, Morgan Stanley's Head of Global Valuation, Accounting and Tax Research. Michael Zezas: And on this special episode of Thoughts on the Market we'll focus on what you need to know about some significant changes to tax policy from the Inflation Reduction Act. It's Thursday, August 18th, at noon in New York. Michael Zezas: President Biden has now signed the Inflation Reduction Act, or IRA, into law. As our listeners may remember, last week we discussed the potential impact of the IRA on the U.S. economic outlook. Today we want to dig deeper into a specific area of this new law, namely taxes. So Todd, there's been some criticism of the IRA with regard to the 15% minimum tax on the largest corporations. What are your thoughts on this provision? Todd Castagno: Thanks, Michael. Let's first discuss how this 15% minimum corporate tax operates. So the law now intends for large corporations that earn on average of $1 billion or more over a three year period to pay at least 15%. Now, what's important is what is that profit base to tax that 15% and its derived from financial statement net income with certain adjustments. That is why this tax is commonly referred to as a book tax, that is primarily based on book or financial statement measures of income. So if you peel back a few layers of what's driving the criticism, there's a recognition that this tax effectively just overrides incentives or timing differences that Congress consciously enacted. Critics will say that Congress should just fix certain areas of the tax codes directly. However, the politics of fixing specific policies directly can be extremely difficult politically. The other point of criticism is that taxing authority has effectively been ceded to independent accounting standards setters. Changes in the accounting rules may now affect changes in minimum tax revenue. There have been some concerns from investors over earnings quality as the tail now wags the dog where accounting can now drive the economics. So those are just a few of the criticisms. It's also important to note, Michael, that we've had a version of a book tax back in the 1980s, so it would be interesting to see longevity of this tax as that tax only lasted effectively 2 to 3 years. Michael Zezas: And another piece of the legislation is a softening and reduction of the Corporate Alternative Minimum Tax on advanced manufacturing activities such as automation, computation, software and networking. What can you tell us about that? Todd Castagno: Good question. When Senator Sinema announced a carve out for advanced manufacturing, we were scratching our heads of what that actually meant. Well, it's quite broader and it really affects most manufacturing. So what the adjustment is, is you start with book income and you'd make an adjustment to basically replace what we book for accounting depreciation with tax depreciation. And so tax depreciation is usually front run it and it's usually accelerated versus book. So what that will mean for manufacturers is that their minimum tax base will be lower given this adjustment. Michael Zezas: And also in the IRA is a 1% stock buyback tax for companies that are repurchasing their own shares. Todd, is that likely to impact corporate profits or change behavior in a meaningful way? Todd Castagno: Overall, we don't believe at a 1% level this will materially affect the level of buybacks or corporate behavior. You could see a modest tilt towards dividends as a more preferential form of capital return. You could also see perhaps some buybacks being pulled forward into 22 as the law takes effect in 2023. You know, we think the bigger risk is that 1% rate skews higher in the future if a future Congress needs more revenue. We should also note that it's net of issuances, so that's important. A lot of firms have large amounts of stock based compensation and they repurchase their shares in order to prevent dilution. And so effect of that issuance will also really reduce the amount of the buyback tax. Michael Zezas: And finally, let's talk about tax credits. Which tax credits stand out to you from this bill and how material might their impact be? Todd Castagno: I think this one is in the eye of the beholder. The reality is that the IRA increased credits significantly across the board for clean energy investment, whether that's electric vehicles, decarbonization. Also, the structure of many of those credits has evolved whe

While shifts in stock and bond correlation have increased the volatility of a 60:40 portfolio, investors may still find some balance in diversification. Chief Cross Asset Strategist Andrew Sheets and Chief Investment Officer for Wealth Management Lisa Shalett discuss.-----Transcript-----Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley Research.Lisa Shalett: And I'm Lisa Shalett, Chief Investment Officer for Morgan Stanley Wealth Management.Andrew Sheets: And on part two of this special episode, we'll be continuing our discussion of the foundational 60/40 portfolio.  It's Wednesday, August 17th at 4:00 PM in London.Lisa Shalett: And it's 11:00 AM here in New York.Andrew Sheets: So Lisa, I know the positive correlations won't lift the 60:40 portfolio’s volatility too much, but would you say that investors have been inclined to accept more equity risk in recent decades because the cushioning effect of fixed income and this idea that if anything goes wrong, the Fed will kind of ride to the rescue and support markets?Lisa Shalett: Yes I do. And I think, you know, part of the issue has been that we've been not only in a regime of falling interest rates, which has supported overall equity valuations, but we've lived in a period of suppressed volatility with regard to the direction of policy. We've been in this forward guidance regime, if you will, from the central bank where not only was the central bank holding down the cost of capital but they were telegraphing the speed and order of magnitude and pace of things which took a huge amount of volatility out of the market for both stocks and bonds and permitted risk taking. I mean, my goodness, you know, when was the last time in history that we had such negative “term premiums” in the pricing of bonds? That was a part of this function of this idea that the Fed's going to tell us exactly what they're going to do and there's this Fed put, and any time something unexpected happens, they will, you know, “come to save the day.”And so I think we're at the beginning, we're literally in my humble opinion in the first or second innings of the market fundamentally wrapping their heads around what it means to no longer be in a forward guidance regime. Where the central bank, in their ambitions to normalize policy to crush inflation have to inherently be more data dependent and data dependency is inherently more volatile. And so I do think over time we are going to see these equity risk premiums, which, you know, as we've discussed earlier, had gotten quite compressed, widen back out to something that is more normal for the amount of risk that equities genuinely represent.Andrew Sheets: And Lisa, I think that's such a great point about the predictability of monetary policy cause you're right, you know, that's another interesting similarity with the period prior to 2000. That period was a period of a much more unpredictable Fed between, you know, 1920 and the year 2000 where in more recent years, the Fed has become very predictable. So, that's another good thing that we should, as investors, think about is does that shifting predictability of Fed action, does the rising uncertainty that the Fed is facing, you know, is that also an important driver of this stock bond correlation. So boiling it all down, how are you talking about all of this to clients to help them reposition portfolios to navigate risk and potential return?Lisa Shalett: I think at the end of the day you know, the most important thing that we're sitting with clients and talking about is that these fundamental building blocks of asset allocations, stocks and bonds, while they may correlate to one another differently, while they're each inherent volatilities may move up and therefore the volatility of that 60:40 portfolio may readjust some, the reality is, is that they’re still very important building blocks that play different roles in the portfolio that are both still required. So, you know, your stocks are still going to be that asset class that allows you to capture unexpected growth in the economy and in the overall profit stream, while fixed income and your rates market is still going to be that opportunity to cushion, if you will, disappointments in growth.As we know that they, come over the course of a cycle. In that regard, as we look to this repricing of interest rates and what it may mean, we are encouraging our clients to look much more deliberately, actively, at being diversified across styles, across factors, across market capitalizations because these dynamics are changing. If we look back over the last 13 years, because the narrative around falling interest rates and Fed forward guidance and low volatility, and these correlations, these very stable correlations, and everything's going our way, you didn't need to look very far beyond just owning that passive S&P 500 index. Now, as things begin to normalize and get more inher

In the current era of tighter Fed policy, the status quo of stock and bond correlation has changed, calling the foundational 60:40 portfolio into question. Chief Cross Asset Strategist Andrew Sheets and Chief Investment Officer for Wealth Management Lisa Shalett discuss.-----Transcript-----Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley Research.Lisa Shalett: And I'm Lisa Shalett, Chief Investment Officer for Morgan Stanley Wealth Management.Andrew Sheets: And on part one of this special episode, we'll be discussing the foundational 60/40 stock bond portfolio. In an era of tighter policy, is a diversified portfolio of stocks and bonds fundamentally broken? It's Tuesday, August 16th at 4:00 PM in London.Lisa Shalett: And it's 11:00 AM here in New York.Andrew Sheets: Lisa, it's so good to talk to you again. So, you know, one of the most important, fundamental building blocks of asset allocation is the so-called 60/40 portfolio, a portfolio of 60% stocks and 40% bonds, and both of us have been writing about that this year because this strategy of having diversified stocks and bonds worked unusually well for the 40 years up through 2021, but this year has suffered a real historical reversal, seeing some of the worst returns for this diversified balanced strategy we've seen in 40 or 50 years. So when you think about these dynamics, when you think about the historically poor performance, can you give some context of what's been happening here and what our listeners should make of it?Lisa Shalett: Sure, absolutely. I think as we know, we've gone through this 13-year period through the pandemic when the narrative was very much dominated by Federal Reserve intervention repression and keeping down of interest rates and in fact, falling interest rates, that produced financial market returns both for stocks and for bonds. But as we know, entering 2022, that narrative that was so concentrated on the direction of interest rates, you know, faced a major pivot from the Federal Reserve itself who, as we know, was facing an inflation fight which meant that they were going to have to move the federal funds rate up pretty significantly. The implication of that was pretty devastating for both stocks and bonds, that combined 60/40 portfolio delivered aggregate returns of about -12 to -13% on average that's the performance for that diversified portfolio benchmark in over 50 years. But again, we have to remember a lot of that performance was coming from a starting point where both stocks and bonds had been extraordinarily valued with those valuations premised on a continuation of Federal Reserve policy that unfortunately because of inflation has had to changeAndrew Sheets: Lisa I'm so glad you mentioned that starting point of valuations because, you know, it matters, I think in two really important ways. One, it helps us maybe understand better what's been happening this year, but also, you know, usually when prices fall, and this year prices are still down considerably from where they started, that means better valuations and better returns going forward. So, you know, could you just give a little bit more context of you and your team run a lot of estimates for what asset classes can return potentially over longer horizons. You know, maybe what that looked like for a 60/40 portfolio at the start of this year, when, as you mentioned, both stocks and bonds were pretty richly valued, and then how that's been developing as the year has progressed.Lisa Shalett: Yeah. So, fantastic question. And, you know, we came into 2022 quite frankly, on a strategic horizon given where valuations were, not very excited about either asset class. You know for bonds, we were looking for maybe 0-2% or somewhat below coupon, because of the pressures of repricing on bonds. And for stocks we were looking for something in the, you know, 4-5% range, which was significantly below what historical long term capital market assumptions, you know, might expect for many institutional clients who benchmark themselves off of a 7.5 or 8% return ambition. So, when we entered this bear market, this kind of ferocious selloff, as we noted, from January through June, there were many folks who were hoping that perhaps valuations and forward looking expectations of returns were improving. Importantly, however, what we've seen is that hasn't been the case because what you have to do when you're thinking about valuation is you've gotta look at stock valuations relative to the level of interest rates.And we're now in a scenario where, you know, the terminal value for the US economy may be something very different than it was and that means somewhat lower valuations. So, you know, if I had to put a number on it right now, my expectations for equity returns going forward from the current mark to market is really no better, unfortunately, than perhaps where it was in January. For bonds on the other hand, we

Based on July reports inflation may finally be cooling down, and the labor market remains strong, so how might this new data influence policy changes in the September FOMC meeting?-----Transcript-----Welcome to Thoughts on the Market. I'm Ellen Zentner, Chief U.S. Economist for Morgan Stanley Research. Along with my colleagues, bringing you a variety of perspectives, I'll be catching you up to speed on U.S. inflation, the labor market and our outlook for Fed policy. It's Monday, August 15th, at 11 a.m. in New York. Let me start with some encouraging news. If we look at the July readings for both the Consumer Price Index data and the Producer Price Index, inflation finally appears to be cooling. And that should take some pressure off the Fed to deliver another 75 basis point hike in September. So that's the good news. However, inflation is still elevated and that suggests the Fed still has a lot of work to do, even if there's a reduced need for a third consecutive 75. We're forecasting a 50 basis point hike at the September and November meetings and 25 basis points in December for a peak interest rate of 3.625%. Okay, let's look a bit more under the hood. July CPI on both headline and core measures surprised to the downside, and the PPI came in softer as well. Together, the reports point to a lower than previously anticipated inflation print that will be released on August 26th. Now, the recent blowout July employment report led markets to price a high probability of a 75 basis point hike. But the inflation data then came in lower than expected and pushed the probability back toward 50 basis points. Based on the outlook for declining energy prices, we think headline inflation should continue to come down and do so quite quickly. However, core inflation pressures remain uncomfortably high and are likely to persist. For the Fed signs of a turn around in headline inflation are helpful and are already showing up in lower household inflation expectations. However, trends in core are more indicative of the trajectory for underlying inflation pressures, and Fed officials came out in droves last week to stress that the steep path for rates remains the base case. Sticky core inflation is a key reason why we expect the Fed to hold at 3.625% Fed funds, before making the first cut toward normalizing policy in December 2023. Now, let me speak to July's surprising employment report. As the data showed, the labor market remains strong, even though some of the data flow has begun to diverge in recent months. Leading up to the recent release, the market had taken the softening in employment in the household survey, so that is the employment measure that just goes out to households and polls them, were you employed, were you not, were you part time, were you full time, and generally because that's been very weak, the market was taking it as a potential harbinger of a turn in the payrolls data, payrolls data are collected from companies that just ask each company how many folks are on your payrolls. Household survey employment was again softer in July, coming in at 179,000 versus 528,000 for the payroll survey. Now, this seems like a sizable disparity, but it's actually not unusual for the household and payroll surveys to diverge over shorter periods of time. And these near term divergences largely reflect methodological differences. But what's interesting here and worth noting is that these differences in data likely reflect a shift in the form of employment. While the economy saw a large increase in self-employment in the early stages of the pandemic, the data now suggest workers may be returning to traditional payroll jobs, potentially because of higher nominal wages and better opportunities. If the economy is increasingly pulling workers out of self-employment and into traditional payroll jobs, similar pull effects are likely reaching workers currently out of the labor force. And this brings me to one of our key expectations for the next year and a half, which is a continued increase in labor force participation, in particular driven by prime age workers age 25 to 54. Higher wages, better job opportunities and rising cost of living will likely bring workers back into the labor force, even as overall job growth slows. Fed researchers, in fact, have recently documented that a delayed recovery in labor force participation is quite normal, and that's something we think is likely to play out again in this cycle. 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 inflation persists, economic concerns such as recession rise, and consumer spending patterns begin to shift, is there any evidence to suggest consumers are already trading down to value and discount products? U.S. Softlines Analyst Kimberly Greenberger and Hardlines, Broadlines and Food Retail Analyst Simeon Gutman discuss.-----Transcript-----Kimberly Greenberger: Welcome to Thoughts on the Market. I'm Kimberly Greenberger, Morgan Stanley's U.S. Softlines Analyst. Simeon Gutman: And I'm Simeon Gutman, Hardlines, Broadlines and Food Retail Analyst. Kimberly Greenberger: And on this special episode of Thoughts on the Market, we'll be discussing shifting consumer spending patterns amid persistent inflation and concerns about the economy. It's Friday, August 12th, at 11 a.m. in New York. Kimberly Greenberger: As our listeners are no doubt aware, many retail segments were big pandemic beneficiaries with record sales growth and margins for 2+ years. But now that spending on goods is normalizing from high levels and consumers are facing record high inflation and worrying about a potential recession, we're starting to see signs of what's called "trade down", which is a consumer migration from more expensive products to value priced products. So Simeon, in your broad coverage, are you seeing any evidence that consumers are trading down already? Simeon Gutman: We're seeing it in two primary ways. First, we're seeing some reversion away from durable, high ticket items away to consumable items. And the pace of consumption of some of these high ticket durable items is waning and pretty rapidly. Some of these are items that were very strong during the pandemic, electronics, some sporting goods items, home furnishings, to name a few. So these items we're seeing material sales deceleration as one form of trade down. As another in the food retail sector, we're definitely seeing signs of consumers spending less or finding ways to spend less inside the grocery store. They can do that by trading down from national brands to private brands, buying less expensive alternative, buying frozen instead of fresh and even in the meat counter, buying less expensive forms of protein. So we're seeing it manifest in those two ways. What is the situation in softlines, Kimberly? Is your coverage vulnerable to trade down risk? Kimberly Greenberger: Absolutely. In softlines retail, which is apparel, footwear, accessories retail, these are discretionary categories. Yes, there's sort of a minimum level of spending that's necessary because clothing is part of the essentials, food, shelter, clothing. But Americans' closets are full and they're full because last year there was a great deal of overspending on the apparel category. So where we have seen trade down impact our sector this year, Simeon, is we have seen consumers budget cutting and moving away from some of those more discretionary categories like apparel especially. We just have not yet seen any benefits to some of the more value oriented retailers that we would expect to see in the future if this behavior persists. Simeon Gutman: So when we're thinking about the context of our collaborative work with other Morgan Stanley sector analysts around trade down risks, what do you hear, Kimberly, about the impact on segments such as household products and restaurants? Kimberly Greenberger: We have found most fascinating, actually, the study of those real high frequency purchases. Because in order to understand how consumer behavior is changing at the margin, we think it's most important to look at what consumers were spending on last week, two weeks ago, three weeks ago as a better indication of what they're likely to spend on for the next three or six months. How that behavior has been changing is that on those of very high frequency purchases like the daily tobacco purchase or the daily food at home purchase, as you mentioned, is that there is trade down from higher priced brands and products into more value oriented brands and products. The same thing is happening in fast food. Another category that we consume on a somewhat more frequent basis than, for example, eating in casual dining restaurants where we're sitting down for a meal. So now we've got a good number of months of evidence that this is, in fact, happening, and that gives us more conviction that it's likely to continue through the second half of the year. So Simeon, in your view, what parts of retail are the likely winners and laggards should this trade down behavior persist and broaden out, particularly if a recession did materialize? Simeon Gutman: So in the event of a recession, I think the typical answers here are a little bit easier to identify. The two big beneficiaries, the channel beneficiaries, would be the dollar slash discount stores and then secondarily, off price. First, the dollar and discount stores, they are already seeing some initial signs of trade down and that is most

As bitcoin has been experiencing a steep decline in the last 6 months, investors are beginning to wonder when Cryptocurrencies will finally bottom out and start the cycle anew.Digital assets, sometimes known as cryptocurrency, are a digital representation of a value that function as a medium of exchange, a unit of account, or a store of value, but generally do not have legal tender status. Digital assets have no intrinsic value and there is no investment underlying digital assets. The value of digital assets is derived by market forces of supply and demand, and is therefore more volatile than traditional currencies’ value. Investing in digital assets is risky, and transacting in digital assets carries various risks, including but not limited to fraud, theft, market volatility, market manipulation, and cybersecurity failures—such as the risk of hacking, theft, programming bugs, and accidental loss. Additionally, there is no guarantee that any entity that currently accepts digital assets as payment will do so in the future. The volatility and unpredictability of the price of digital assets may lead to significant and immediate losses. It may not be possible to liquidate a digital assets position in a timely manner at a reasonable price.Regulation of digital assets continues to develop globally and, as such, federal, state, or foreign governments may restrict the use and exchange of any or all digital assets, further contributing to their volatility. Digital assets stored online are not insured and do not have the same protections or safeguards of bank deposits in the US or other jurisdictions. Digital assets can be exchanged for US dollars or other currencies, but are not generally backed nor supported by any government or central bank.Before purchasing, investors should note that risks applicable to one digital asset may not be the same risks applicable to other forms of digital assets. Markets and exchanges for digital assets are not currently regulated in the same manner and do not provide the customer protections available in equities, fixed income, options, futures, commodities or foreign exchange markets.Morgan Stanley and its affiliates do business that may relate to some of the digital assets or other related products discussed in Morgan Stanley Research. These could include market making, providing liquidity, fund management, commercial banking, extension of credit, investment services and investment banking.-----Transcript-----Welcome to Thoughts on the Market. I'm Sheena Shah, Lead Cryptocurrency Strategist for Morgan Stanley Research. Along with my colleagues, bringing you a variety of perspectives, today I address the question everyone seems to be asking about the crypto cycle: when will crypto prices find a bottom? It's Thursday, August 11th, at 5 p.m. in London. After a 75% peak to trough fall in bitcoin's price between November 2021 and June this year, it seems like almost everyone in the market is asking the same question. When will crypto prices find the bottom? We will discuss three topics related to this question; the pace of new bitcoin creation, past bitcoin cycles and dollar liquidity. What can bitcoin's creation tell us about where we are in the crypto cycle? Bitcoin's relatively short history means there is little available data, and yet the data is quite rich. In its short 12 year history, bitcoin has experienced at least 10 bull and bear cycles. Bitcoin creation follows a 4 year cycle. Within these 4 year cycles, price action has so far followed three distinct phases. First, there is a rapid and almost exponential rise in price. Second, at a peak in price, a bear market follows. And third, prices move sideways, eventually leading into a new bull market. The question for investors today is, is bitcoin's price moving out of the second phase and into the third? Only time will tell. There have only been three of these halving cycles in the past, and so it is difficult to conclude that these cycles will repeat in the future. What about past bear markets? The 75% peak to trough fall in bitcoin's price and this cycle is currently faring better than previous cycles, in which the falls after peaks in 2011, 2013 and 2017 ranged between 85 and 95%. There is, therefore, speculation about whether this cycle has further to drop. Previous cycles have shed similar characteristics. In the bull runs there was speculation about the potential of a particular part of the crypto ecosystem. In 2011, it was the excitement about Bitcoin and the development of ecosystem technologies like exchanges and wallets. In 2020 to 2021, this cycle, there were NFTs, DeFi and the rising dominance of the institutional investor. In previous cycles, the bear runs were triggered by regulatory clampdowns or a dominant exchange being hacked. In 2013, a crackdown in China led to the world's largest exchange at that time, BTC China, stopping customer deposits. In this cycle, the liquidity tap dried