Thoughts on the Market

As the U.S. Economy contends with higher inflation, supply chain stress, and rising recession risks, one indicator to keep an eye on is what’s going on at the sector level and how U.S. business conditions may help shape the economic outlook.-----Transcript-----Welcome to Thoughts on the Market. I'm Robert Rosener, Senior U.S. Economist for Morgan Stanley Research. Along with my colleagues bringing you a variety of perspectives, I'll be sharing a read on how industries across the U.S. may be viewing the current economic environment. It's Tuesday, April 19th at noon in New York. As we move through the economic recovery and expansion that has been uneven, it's increasingly important to track what's going on at the sector level. And collaboratively with our equity analysts we do exactly that with our Morgan Stanley Business Conditions Index; a monthly survey to track what's going on across industries. With the MSBCI we try to put all of those stories together into one coherent macro signal, from 0 to 100, where 50 is the even mark, above 50 is expansion and below 50 is contraction.It incorporates a variety of data points on hiring plans, capex plans, advance bookings and how those factors are evolving. Now, amid a more challenging and uncertain economic backdrop with higher inflation, supply chain stress and concerns about rising recession risks, I'd like to dive into a few key findings from our most recent survey to give listeners a picture of how U.S. businesses might be seeing the current environment. First, in our April survey the headline measure for the MSBCI fell to a two year low of 44. We saw that decline in the index as driven by a deterioration in sentiment, because it coincided with a sharp pullback in business conditions expectations - so how analysts are seeing the forward trajectory for activity. And that decline in sentiment was particularly concentrated in the manufacturing sector, where we had a sharp decline in the MSBCI manufacturing component, while service sector activity appeared to bounce a little bit but remained at low levels. When we look at the underlying details, the fundamental components of the survey were more mixed this month. So downside in our survey was led by business conditions expectations, as well as advance bookings and more strikingly, credit conditions. Now some of this can be noise, and we need to look very carefully through the data to see if we can identify a clear trend. Advance bookings, the decline there may have been more noise, but we are monitoring credit conditions very closely as the Fed tries to tighten financial conditions with its monetary policy stance. We also got a bit of insight into supply chain conditions in this report. Responses from analysts in our survey indicated some stalling in the improvement in April, and a pickup in the share of analysts who reported that conditions remained unchanged. Which is broadly consistent with what we've seen in other indicators. Nevertheless, analysts generally expect improvement in supply conditions over the next 3 months.Finally, there was some good news in the survey on business investment plans, what we call capex, as well as hiring plans. There was some moderation, but the two factors remain bright spots in the report, with upside in capex plans, and hiring plans coming back but holding at a fairly solid level. So what does this all tell us about how businesses see the road ahead? First, there's important momentum in hiring and capex. With respect to inflation, the deterioration we saw in supply conditions during the month does point to some upside risk for prices in the near term, and that was also reflected in strong upward pressure in the MSBCI pricing measures during the month. We can also see that businesses are facing increased uncertainty about the outlook. That's clear looking at the deterioration in sentiment, and that's clear looking at the pullback in business conditions expectations. So firms are watching the pace and trajectory of economic activity carefully. So it will continue to be important to watch these stories to judge what's going on at the sector level and how that's all coming together to shape the economic outlook. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

While ongoing inflation has had some positive effects, consumers continue to feel its ill effects and we are beginning to see net negatives for earnings growth as Q1 earnings season begins.-----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, April 18th at 3 p.m. in New York. So let's get after it. Last week, we discussed how stocks were sending different messages about growth than bonds. We laid out our case for why stocks are likely to be the most trusted on this messaging and reiterated our preference for late cycle defensives that we've held since November. This week, we lay out the case for why this earnings season may finally bring the downward revisions to forward earnings forecasts that have remained elusive thus far. While we appreciate how inflation can be good for nominal GDP and therefore revenue growth, we think the inflation we are experiencing now is no longer a net positive for earnings growth for several reasons. First, there's a latent impact of inflation on costs that are now showing up in margins. Secondarily, the spike in energy and food costs, which serve as a tax on the consumer that is already struggling with high prices. In other words, we think the positive effects of inflation on earnings growth have reached their peak, and are now more likely to be a headwind to growth, particularly as inflation forces the Fed to be increasingly bearish, which leads to another headwind - significantly higher long term interest rates. More specifically, the average 30 year fixed mortgage rate is now above 5%, which is more than 60% higher since the start of the year, and why mortgage applications are also down more than 60% from their peak last year. This hasn't gone unnoticed by the market, by the way, which has punished housing related stocks to the tune of 40% or more. Given the long tailed effect that housing has on the economy, we think this is a major headwind to economic and earnings growth more broadly. Perhaps this explains why the de-rating has been so severe in the economically sensitive areas of the market, while defensive areas have actually seen valuations expand. This suggests the market is worrying about higher rates and slower growth, even as the overall index remains expensive. This is also very much in line with our view for defensives to dominate in this late cycle environment. However, the overall index remains a bit of a mystery, with the price earnings multiple down only 11% in the face of much higher interest rates. We chalk this up to the incredibly strong flows into equities from asset owners, which include retail, pension funds and endowments. These investors seem to have made a decision to abandon bonds in favor of stocks, which are a much better inflation hedge. These flows are keeping the main index more expensive, thereby leaving the real message about growth at the sector level. As already suggested, we think that message is crystal clear and in line with our own view that growth is slowing and likely more than most are forecasting. Especially for 2023, when the risk of a recession is increased. With regard to that view, signs are emerging that first quarter earnings season may disappoint, particularly from a guidance and forward earnings standpoint. More specifically, earnings revisions breadth for the S&P 500 has resumed its downward trend over the past 2 weeks, and is once again approaching negative territory. This is largely being driven by declining revisions in cyclical industries where we've been more negative. These include consumer discretionary, industrials, tech hardware and semiconductors. Negative revisions are often an indication that forward earnings estimates are going to flatten out or even fall. When forward earnings fall, it's usually not good for stocks and may even break the pattern of strong inflows to equities, as investors rethink their decision to use stocks at this point as a good hedge against inflation. Bottom line, stick with more defensively oriented sectors and stocks as earnings visibility is challenged for the average company. Secondarily, wait for at least one or two rounds of earnings cuts at the S&P level before adding to broader equity risk. 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.

While there continues to be a lot of market chatter surrounding recession risks and the U.S. Treasury yield curve, there are several key factors that make the most recent dip into inversion different. Chief Global Economist Seth Carpenter and Head of U.S. Interest Rate Strategy Guneet Dhingra discuss.-----Transcript-----Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Chief Global Economist, Guneet Dhingra: and I'm Guneet Dhingra, Head of U.S. Interest Rate Strategy. Seth Carpenter: And on this episode of Thoughts on the Market, we're going to be discussing the sometimes inconsistent signals of economic recession and what investors should be watching. It's Thursday, April 14th at 10 a.m. in New York. Seth Carpenter: All right, Guneet, as I think most listeners probably know by now, there's a lot of market chatter about recession risks. However, if you look just at the hard data in the United States, I think it's clear that the U.S. economy right now is actually quite strong. If you look at the last jobs report, we had almost 450,000 new jobs created in the month of March. And between that, the strength of the economy right now and the multi-decade highs in inflation, the Federal Reserve is ready to go, starting to tighten monetary policy by raising short term interest rates and running off its balance sheet. That said, every time short term interest rates start to rise, they rise more than longer term interest rates do, and we get a flattening in the yield curve. The yield curve flattened so much recently that it actually inverted briefly where 2's were higher than 10's in yield. And as we've talked about before on this very podcast, there has been historically a signal from an inverted 2s10s curve to a recession probability, rising and rising and rising. Some of the work you've been doing recently, I think you've argued very eloquently, that this time is different. Can you walk me through why this time is different? Guneet Dhingra: Yeah, absolutely. I mean, right now you cannot have a conversation with investors without discussing yield curve inversion and the associated recession risks. So I think the way I've been framing it, this time is different because of two particular reasons that haven't been always true. The first one is the yield curve today is artificially very distorted by a multitude of factors. The number one and the most obvious one is the massive amounts of central bank bond buying from the Fed, from the ECB, from the Bank of Japan over the last few years. And so that puts a lot of flattening pressure on the curve, which makes it appear that the curve is too flat, whereas in practice it's just the residual effect of how central banks have affected the yield curve. On top of that, what's also happening is the Fed is obviously trying to address the inflation risk and they are looking to make policy restrictive in the next couple of years. So take the dot plot for instance, right, at the March meeting the Fed gave us a dot plot where the median participant expects the Fed funds rate to get to close to 3% in 2023, and the neutral rate that they see for the economy is close to 2.5%. So in essence, the Fed is telegraphing a form of inversion and ultimately the markets are mimicking what the Fed is telling them, which naturally leads to some curve inversion. So overall, I would say a combination of artificially flattening forces, a restrictive fed, just means that 2s10s curve today is not the macro signal it used to be. Seth Carpenter: Got it, got it, so that helps and that squares things, I think, with the way we on the economics team are looking at it. Because in our baseline forecast, there is not a recession in the US. But if that's right, and if we end up avoiding a recession, you've got a bunch of clients, we've got a bunch of clients who are trying to make trades in a market. What are you telling investors that they should be doing, how do you trade in an environment with an inverted curve? Guneet Dhingra: Right. So I think the way I talk to investors about this issue is the 2s10s curve merely inverting is not the signal used to be, which means for the yield curve to be predictive for a recession this time, the level threshold is much lower. So, for instance, you can imagine an economy where 2s10s curve inverting to minus 50 or minus 75 is the real true signal for a slowdown ahead and a recession ahead. And so what I tell investors today is do not get concerned about the yield curve getting to 0 basis points, there's a lot more room for the yield curve to keep inverting. And the target you should have for yield curve flattening trade should be more like minus 50 or minus 75.  Seth Carpenter: Got it. That that's a very big difference, very far away from where we are now. And in fact, as I mentioned earlier, the inversion that we did see was somewhat short lived and we've actually had a bit of a steepening off the

As investors continue to discuss the uncertainty surrounding the U.S. Treasury market, there may be some good news for bond holders as the year progresses.-----Transcript-----Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy 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, April 13th at 10 a.m. in New York. It's been a tough year for bond investors so far. As inflation picked up, the Fed signaled its intent to hike rates rapidly. That pushed market yields for bonds higher and prices lower. And with the latest consumer price index showing prices rose 8.5% over the past year, bond investors could, understandably, be concerned that there's still more poor returns to come. But we're a bit more optimistic and see reason to think that bonds could deliver positive returns through year-end and, accordingly, play the volatility dampening role they typically play in one's multi-asset portfolio. Accordingly, our cross-asset team is no longer underweight government bonds. And our interest rate strategy team has said that the recent increase in longer maturity bond yields have put that group in overshoot territory. What's the fundamental basis for this thinking? In short, it has to do with something economists typically call demand destruction. Basically, it's the idea that as prices on a product increase, perhaps due to inflation, they reach a point where fewer consumers are willing or able to purchase that product. That in turn crimps economic growth and, accordingly, one would expect that longer maturity bond yields would rise less, or perhaps even decline, to reflect an expectation of lower inflation and economic growth down the road. And we're starting to see evidence of that demand destruction. Last week we talked about how the federal government was attempting to reduce the price of oil by selling some of its strategic petroleum reserve. But it's noteworthy that the biggest declines in the price of oil from its recent highs happened before this announcement, suggesting that the price surge at the pump was already crimping demand, resulting in prices having to come back down to put supply and demand in balance. You can also see similar evidence in the market for used cars. For example, used car dealer CarMax reported this week its biggest earnings miss in four years. Management cited car affordability as a key reason that it sold less cars year over year. So the bottom line is this: bond investors may have taken some pain this year, but that doesn't mean it's time to run from the asset class. In fact, there's good reason to believe it can deliver on its core goal for many investors, diversification in uncertain markets. Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague, or leave us a review on Apple Podcasts. It helps more people find the show.

In light of the U.S. Treasury yield curve recently inverting, many are asking if home prices will be affected and how the housing market might look going forward. Co-Heads of U.S. Securitized Product Research Jay Bacow and Jim Egan discuss.-----Transcript-----Jay Bacow: Welcome to Thoughts on the Market. I'm Jay Bacow, Co-Head of U.S. Securitized Products Research here at Morgan Stanley. Jim Egan: And I'm Jim Egan, the other Co-Head of U.S. Securitized Products Research. Jay Bacow: And on this edition of the podcast, we'll be talking about the state of the mortgage and housing market, amidst an inverted yield curve. It's Tuesday, April 12th at 11 a.m. in New York. Jay Bacow: Now, Jim, lots of people have come on to talk about curve inversion and Thoughts on the Market. But let's talk about the impact to the mortgage and housing market. Now, the big question that everybody wants to know, whether or not they own a home or they're thinking about buying one, is what does an inverted curve mean for home prices? Jim Egan: When we look back at the history of, let's use the Case-Shiller home price index, we look back at that into the 80’s, it's turned negative twice over that 35-year period. Both of those times were pretty much immediately preceded by an inverted yield curve. However, there's a lot of other instances where the yield curve has inverted and home prices have climbed right on through, sometimes they've accelerated right on through. So if we're using history as our guide, we can say that an inverted yield curve is necessary but not sufficient to bring home prices down. And the logical next question that follows from that is, well, what's the common denominator? And in our view, there's a very clear answer, and that clear answer is supply. The times when home prices fell, the supply of homes was abundant. The times when home prices kept rising, we really did not have a lot of homes for sale. And when we look at the environment as we stand today, the inventory of homes for sale is at historic lows. Jay Bacow: OK, but that's the current inventory. What do you think about supply for the next year? Jim Egan: So I think there's two ways we have to think about the 12-month outlook for supply. The first is existing inventory, the second is new inventory, so building homes that come on market. Existing inventory is really driving that total number to historic lows. And we think it's just headed lower from here. One of the big reasons for that is, let's just talk about mortgage rates away from curve inversion. The significant increase we've seen in mortgage rates because of the unique construction of the mortgage market today, we think are going to bring inventories lower. And that's because an overwhelming majority of mortgage borrowers have fixed rate mortgages today, much more than in prior cycles in the past. And what that means is as rates go higher, as affordability deteriorates, which is something we've discussed in previous episodes of this podcast, that's for first time homebuyers. The current homeowner locked into those low fixed rates is not experiencing affordability pressure as mortgage rates go higher. In fact, they're probably less likely to put their home on the market. Selling their home and buying a new home would involve taking out a mortgage that might be 150 to 200 basis points higher. That can be prohibitively expensive in some instances, and so you actually get an environment where supply gets tighter and tighter, which could be supporting home prices. Now the other side of the equation is new homes. If existing inventory is at all-time lows, if prices continue to climb like they have, that should be an environment where we'll see more building. And we do think that inventories are already primed to come on the market over the next year because of the fact that look, we look at building permits, we look at housing starts, we look at completions, those numbers get talked about all the time when they come out monthly and they've been climbing. But they haven't been climbing all that much relative to history. What is up is kind of the interim points between those events, between housing start and completion. Units under construction is back to where we were in kind of late 2004, early 2005. Further up the chain units that have been permitted or authorized but haven't been started yet, that's starting to swell too. Now what’s currently in the pipeline isn't enough to alleviate the tight supply situation we find ourselves in. But it is enough to soften home price growth a little bit. But the real common denominator for home price growth in a curve inverted environment is that existing inventory number, which is at historic lows and continuing to go lower. Jay Bacow: All right, Jim. So mortgage rates are a lot higher, causing people to be locked in to their mortgage, and supply is low and you're saying probably going to stay that way. So what does that mean for

Original Release on March 31st, 2022: As interest in using cryptocurrencies for transactions continues to rise for both consumers and businesses, crypto has begun a cycle of increased stability and popularity - but the question is, can this cycle continue? -----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 will be asking the question - are cryptocurrencies currency? It's Thursday, March 31st at 2:00 p.m. in London. Did you really buy that house with crypto? Or did you just sell your crypto for dollars and use dollars to buy the house? Crypto skeptics think that goods cannot be priced in cryptocurrencies like bitcoin, primarily because their price is too volatile. But at some point, if crypto begins to be used for enough purchases of everyday goods and services, prices may begin to stabilize. Increased stability will further entice consumers to use crypto, and the cycle will continue. The question has always been, will this virtuous cycle ever begin? The answer is now clear, it has already begun. Here are some examples. Firstly, paying with cryptocurrency needs to be as easy as paying with a credit or debit card today. Over 50 crypto companies and exchanges have issued their own crypto cards, and these are attached to the Visa or MasterCard payments networks, meaning they're accepted all around the world. In the last quarter of 2021, Visa said its crypto related cards handled $2.5 billion worth of payments. Now that may sound small, at less than 1% of all Visa's transactions, but it is growing quickly. The difficulty in increasing crypto adoption is getting the merchant to accept crypto. It needs to be easy and cheap, which is something lots of new crypto companies and products are trying to achieve. Secondly, many would argue that something can only be a currency if you can pay your taxes with it. Even that is changing today. Over the past year, local and some national governments have introduced or proposed laws that will allow its residents to use cryptocurrency to pay their taxes. El Salvador famously made bitcoin legal tender in its country in 2021. In the past week, Rio de Janeiro announced it will become the first city in Brazil to allow cryptocurrency payments for taxes starting next year. It isn't just emerging economies, though, that are trying to attract global crypto investors. The city of Lugano in Switzerland has teamed up with Tether, the creator of the largest stablecoin - a type of cryptocurrency that's kept stable versus the U.S. dollar, to make bitcoin and two other cryptocurrencies de facto legal tender. In the U.S., Colorado is hoping to become the first state to accept crypto for taxes later in the year, and Florida's governor is investigating the logistics of doing the same. Both these proposals may be difficult to put into law in the end, as the U.S. constitution doesn't allow individual states to create their own legal tender, but it hasn't stopped these proposals and more from coming in. In both these examples, the receiver of the crypto typically immediately converts to fiat currency, like U.S. dollars, through an intermediary service provider. So let's come back to our original question - did you really buy that house with crypto? In February, a house in Florida was sold for 210 Ether, the second largest crypto, or the equivalent of over $650,000 dollars. Interestingly, the seller received the ether but didn't liquidate into U.S. dollars soon afterwards due to market volatility, because the value of ether in U.S. dollars fell by around 10%. Consumers and businesses are increasingly wanting to transact in cryptocurrency. Maybe most are simply wanting to trade the value of the asset, but as it becomes easier to transact in crypto and legal structures are defined, cryptocurrencies could start to become currency. The question is, will the virtuous cycle continue or be broken? Cryptocurrencies are beginning the long journey of challenging U.S. dollar primacy, and the president's recent executive order on digital assets shows little sign of regulators getting in their way for now. Thanks for listening. If you enjoy Thoughts on the Market, share this and other episodes with a friend or colleague today.  

Since the Fed’s first rate hike and the inversion of the U.S. Treasury yield curve, the outlook on U.S. government bonds has changed, leading to a new take on U.S. Bonds.-----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, April 8th at 2:00 p.m. in London. We've made a key change in our strategic cross-asset allocations, closing our underweight to government bonds and are overweight in cash. We did this via U.S. Treasuries. This is a big debate among investors, many of whom are underweight bonds and questioning when to buy them back. There are a couple of reasons why we made this change. First, U.S. 10 year Treasury yields are now above the 2.6% year-end yield target of Morgan Stanley's U.S. interest rate strategists, meaning our forecast for U.S. bond returns are looking better on a cross asset basis. These forecasts should reflect the impact and the uncertainty of higher inflation, quantitative tightening and the growth outlook. Second, another part of our asset allocation framework is asking what economic indicators say about future cross asset performance. On these measures the outlook for U.S. bonds is also improving. For example, bonds tend to do better on a cross asset basis after the yield curve inverts, which recently happened. Another reason we were underweight bonds is that they often underperform other asset classes during the expansion phase of our cycle indicator, a tool we've developed within Morgan Stanley research to measure the ebb and flow of the economic cycle. But this underperformance starts to shift and stop when this indicator gets very extended, and on its current measures, well, it's very extended. Third, while this change was made with a 12 month horizon in mind, we could see some reasons to take action now rather than wait. Recently, cyclical stocks have been sharply underperforming defensive stocks, and that usually coincides with unusually good bond market performance as investors worry about growth. But recently, bonds have been underperforming, even as defensive stocks have worked. That divergence is unusual, but could normalize. We also have an important release of U.S. Consumer Price Inflation next week. While a peak in inflation has so far been elusive, Morgan Stanley's economists believe it may arrive with next week's number. Of course, there are many risks to adding back to bonds at the current juncture. One of those risks is that the U.S. Federal Reserve remains hawkish, and committed to a large number of rate hikes over the next 12 months. While that is certainly possible, the market is now expecting a faster rate hiking path, reducing the chance of a Federal Reserve surprise. To raise our weight of U.S. bonds back to neutral, we are closing or overweight to cash. Cash has performed well year to date, as many other asset classes have seen price declines. But this outperformance is unusual and warrants a more balanced approach for the time being. 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 the European Central Bank prepares to meet, the war in Ukraine continues to add to uncertainty, forcing investors in Europe to adjust their expectations for the remainder of the year. Chief Cross Asset Strategist Andrew Sheets and Chief Europe Economist Jens Eisenschmidt discuss.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. 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 issuing entity/sector as germane to its overall financial outlook, and should not be read as recommending or advising as to any investment activities in relation to such entities, instruments or projects. Users of this 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 -----Andrew Sheets Welcome to Thoughts on the Market. I'm Andrew Sheets, Morgan Stanley's Chief Cross Asset Strategist.Jens Eisenschmidt And I'm Jens Eisenschmidt. Morgan Stanley's Chief Europe Economist.Andrew Sheets And today on the podcast we'll be talking about the outlook for Europe's economy amid possible rate hikes, business reopenings and the war in Ukraine. It's Thursday, April 7th at 3 p.m. in London.Andrew Sheets Jens, clearly we're dealing with a lot in Europe right now amid the Ukraine conflict and I want to get into that situation and the impacts on the economy. But given that the European Central Bank is meeting in just a few days and there is speculation about possible rate hikes, let's start there. Maybe you could give a bit of a background on what we expect the ECB is going to do.Jens Eisenschmidt Thanks a lot, Andrew. First of all, let me say that we don't expect any change at next week's meeting relative to what the ECB has been saying in March at their last meeting. They're essentially keeping all options open. They have started on a gradual exit from their very accommodative monetary policy. They have increased the pace of policy normalization at their last meeting, and we do not expect the ECB to change that roadmap now. Just as a reminder, the roadmap is asset purchases could end in Q3 and any interest rate hike would come sometime thereafter. And any decision on ending asset purchases and rate hikes is highly data dependent. And that really it takes us to the current situation. Inflation continues to surprise to the upside. We just had a 7.5 percentage point print in March, and this undoubtedly does increase the pressure on the ECB to act. At the same time, there are significant downside risks to the outlook for growth in the Euro area stemming essentially from the Ukraine-Russia conflict, and this puts a premium on treading very carefully with any changes to the monetary policy configuration, hence the emphasis on optionality, flexibility and gradualism by the ECB.Andrew Sheets Jens, when you talk about gradualism, that implies that the inflation that we're seeing in Europe is more temporary, is more transitory, isn't going to get out of hand. Can you talk a little bit about what is different at the moment between inflation in Europe and inflation in the U.S.?Jens Eisenschmidt I think there are a lot of technical aspects that indeed you could be looking at on that question, but I think it's sufficient for our purposes here really to focus on the key difference. In the U.S. there's a huge internal demand component to inflation. While the same is not true for the euro area, where most of the inflation, you could argue, largest part is imported through energy. Another difference is that the outlook for the economy is slightly different. While you would say that in the U.S., if you're talking about an overheated economy, you have a very tight labor market, it's very difficult to see, you know, some sort of self-correcting forces bringing down inflation, which is why the Fed is embarking on a relatively aggressive tightening cycle. Here in the euro area, there is, of course, growth we see in '22 in our base case but at the same time, we are far away from such an overheating situation and even we are here now relying increasingly on fiscal stimulus to keep the growth momentum going given the high energy prices that are coming, dampening growth. So I think the situation is fundamentally a different one.Andrew Sheets And so Jens, maybe digging more into that growth outlook. You mentioned this rise in energy prices. There is uncertainty over the war in Ukraine. And yet in your team's base case, we see GDP growth in Europe growing about 3% this year, which would be pretty good by the standards of the last dec

As the U.S. government attempts to combat high gas prices by drawing on its oil reserves, investors should pay attention to the impacts on the U.S. economy and consumer behavior.----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy 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, April 6th at 10 a.m. in New York.Last week President Biden announced the largest release of oil reserves in history, about 1 million barrels per day for the next 6 months from the government's Strategic Petroleum Reserve. The move is intended to put downward pressure on the price of gasoline by increasing the supply of oil, thereby relieving pressure on the American consumer from higher costs at the pump. Will it work? That remains to be seen, but investors should pay close attention, not just because it impacts their cost of driving, but also because it impacts the outlook for the U.S. economy by affecting how consumers behave.Our U.S. economics team, led by Ellen Zentner, has done some work worth highlighting here. The big takeaway is this; oil price shocks do dampen consumer activity, but not right away. The jump in oil prices seems to have to sustain itself before having a big impact. For example, consumption in real dollar terms seems to weaken after initial oil price increases, but it's not until 2 to 3 months after that shock that consumers start to buy less of other things in order to have enough money to pay the higher costs of filling up their cars. Looking at this effect on a specific product, for instance automobiles, you can see a similar pattern. Spending on cars doesn't seem to change in the first month after a price shock but drops almost 10% thereafter for 8 months.So the bottom line is this; the White House's move on releasing oil reserves has some time to play out. But if it doesn't reduce gas prices in the next couple months, then it becomes one cost pressure among several, including labor costs, that could start slowing the U.S. economy from its currently healthy pace. It's one reason our equity strategy team continues to see higher costs creating some pressure in key sectors of the stock market, notably consumer services, apparel and staples.Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague, or leave us a review on Apple Podcasts. It helps more people find the show.

Original Release on March 30th, 2022: As the Fed kicks off a new rate hiking cycle, investors are looking back at the previous hiking cycle to ease their concerns today. Head of Public Policy Research and Municipal Strategy Michael Zezas and Global Head of Macro Strategy Matthew Hornbach discuss.-----Transcript-----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy for Morgan Stanley. Matthew Hornbach: And I'm Matthew Hornbach, Global Head of Macro Strategy for Morgan Stanley. Michael Zezas: And today on the podcast, we'll be discussing the last Fed hiking cycle and what it might mean for investors today. It's Wednesday, March 30th at 11:00 a.m. in New York. Michael Zezas: Matt, we've recently entered a new Fed hiking cycle as the Fed deals with inflation. But it seems like clients have been focusing with you of late on the question of what drove the Fed during the last hiking cycle, where they paused their tightening and started to reverse course. Why is that something investors are focusing on right now? Matthew Hornbach: Well, Mike, investors are looking for answers about this hiking cycle, and a good place to start is the last cycle. The past week saw U.S. Treasury yields reach new highs and the Treasury curve flattened even more. Markets are now pricing Fed policy to reach a neutral setting this year of around 2.5%. The market also prices Fed policy to reach 3% next year. For context, the Fed was only able to raise its policy rate to 2.5% in the last cycle. So the fact that markets now price a higher policy rate than in the last cycle, after which the Fed ended up cutting interest rates, has people nervous. It's worth noting, though, that a 3% policy rate is still some distance below policy rates in the mid 1990s and the mid 2000s. Michael Zezas: Got it. So then, what do you think of the argument that the Fed may have over tightened in the last cycle? Matthew Hornbach: Well, instead of telling you what I think, let me tell you what FOMC participants were thinking at the time. I went back and read the minutes from the June 2019 FOMC meeting. That was the meeting before the Fed first cut rates, which they did in July. I chose to focus on that meeting because that's when several FOMC participants first projected lower policy rates. And according to the account of that decision, participants thought that a slowdown in global growth was weighing on the U.S. economy. In fact, evidence from global purchasing manager data showed that growth in emerging market and developed market economies was slowing, and was occurring well before the U.S. economy began to slow. And also, data suggested that global trade volumes were well below trend. So Mike, let me put it back to you then. It seems to me that Fed policy wasn't driving economic weakness back then, but that something else was driving this change in global economic activity. And I think, you know where I'm going with this... Michael Zezas: Yes, you're talking about the trade conflict between the U.S. and China, where from 2017 to 2019 there was a slow and then rapidly escalating series of tariff hikes between the two countries. It was a very public pattern of response and counter response, interspersed with negotiations and sharp rhetoric from both sides, eventually resulted in tariffs on hundreds of billions of dollars in traded goods. Now, those tariffs endure to this day, but the tariff hikes stopped in late 2019 after the two sides made a stopgap agreement. But even though this was just a few years ago and perhaps seems tame in comparison to the global challenges that have come up since, like the pandemic and now the Russia-Ukraine conflict, I think it's important to remember that at the time this was a big deal and created a lot of concern for companies, economists and investors. You have to remember that before 2017, the consensus in the US and most of Europe was that free trade was good, and anything that raised trade barriers was playing with fire for the economy. We'd often hear from clients that raising tariffs was just like Smoot-Hawley, the legislation in the U.S. that hiked tariffs in many textbooks credit as a key cause of the Great Depression. So, as the U.S. and China engage in their tariff escalation and in many ways demonstrate, at least on the U.S. side, that the political consensus no longer viewed low trade barriers as intrinsically good, you have corporations becoming increasingly concerned about the direction of the global economy and starting to take steps to protect themselves, like limiting capital investment to keep cash on hand. And this, of course, concerned investors and economists. Matthew Hornbach: Right. So this is more or less what the Fed suggested when it actually moved to cut its policy rate in July of 2019. The opening paragraph of the FOMC statement, in fact, suggeste

With the end of the first financial quarter of 2022 the market has begun to price in some of the continuing risks to economic growth, forcing investors to reconsider the trajectory for the rest of the year.-----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, April 4th, at 11:00 a.m. in New York. So let's get after it. Given how bad first quarter returns were for both stocks and bonds, most investors were probably happy to see it end. Furthermore, the rally in the second half of March made it considerably better for stocks than it was looking just a few weeks ago. In the end, though, bond returns ranked worse than stocks from a historical perspective, with Treasuries posting the worst quarter in 50 years. The tough first quarter was very much in line with our view coming into 2022. To recall, we didn't see many fat pitches given the Fed's resolve to fight the surge in inflation in the face of slowing growth. Whether it was for technical or fundamental reasons, bond and stock markets ignored this risk into year-end. Apparently, they required a more obvious signal, which appeared on January 5th with the minutes of the Fed's December meeting. From that moment, both stocks and bonds made a sharp U-turn and never really looked back for the entire first month of the year. In short, headline indices for both stocks and bonds finally adjusted to the fire part of our narrative, a risk that started to price under the surface back in November. With inflation and the Fed the number one concern during the first quarter, it makes sense that bonds would be worse than equities. It also makes sense that stocks more vulnerable to higher interest rates underperformed. As an example, the Nasdaq performance was considerably worse than both the S&P 500 and the small cap Russell 2000, a very rare occurrence over the past few years. And this is after a major rally in the past two weeks that was led by the Nasdaq. Our conclusion is that markets were preoccupied in the first quarter with the Fed's sharp pivot, more than anything else, and it played out in asset prices appropriately. Of course, the other major driver for markets in the first quarter was the war in Ukraine. While tensions had been building since late last year, it's fair to say markets had ignored that risk, too. The only difference is that the Fed's pivot was well telegraphed, while Russia's invasion was far from a sure thing and more of an unknown known to most, including us. Obviously, such an event did materially factor into the risk for the first quarter by accentuating the fire and ice by making inflation worse whilst simultaneously dampening growth prospects. It also has rattled confidence for both businesses and consumers, especially in Europe. This was not in our calculus when we made our forecast for 2022. As such, we find ourselves incrementally more negative on growth trends than we were at the end of last year. Last fall, we pushed out the timing of the ice part of our narrative to the first half of this year, when we realized that the economy still had plenty of strength left for companies to deliver on earnings growth. But now investors face multiple headwinds to growth that will be harder to ignore. These include the payback in demand from last year's fiscal stimulus, demand destruction from higher prices, food and energy price spikes from the war that serves as a tax and inventory bills that have now caught up to demand. While the employment report for March last Monday was strong once again, the Purchasing Managers Survey for Manufacturing showed a sharp deterioration in the orders component. Relative to inventories it looks even worse, with the inventory component of the index now below orders for the first time since the recovery began. Think of this ratio as the book to bill for the broader manufacturing economy. Perhaps this survey is the moment of recognition for the slowdown, much like the Fed's minutes were for inflation and Fed policy. The bottom line is that the fundamental outlook for stocks has deteriorated in our view since the end of last year. While markets have reflected some of this deterioration, we think it remains vulnerable to disappointing growth and increased risk of a recession next year. As such, we continue to recommend investors position for this late cycle setup. More specifically, that means favor defensively oriented sectors like Utilities, REITs and Healthcare, while avoiding stocks more vulnerable to a payback in consumer demand. Thanks for listening. If you enjoyed Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people to find the show. 

Investors are looking to the U.S. Treasury bond market as concerns rise around what the flattening, and potential inversion, of the yield curve might mean.-----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, April 1st at 2:00 p.m. in London. The so-called flattening and inversion of the U.S. yield curve is a dominant story in financial markets. As rates have risen, short term interest rates have risen more, meaning investors receive about the same yield on a 2 year U.S. Treasury as its 10 year version. This is unusual, and raises big questions for both bond investors and the economic outlook overall. Unsurprisingly, investors are usually paid more for investing in longer term bonds because these are generally more volatile. When that's not the case, it often means the market thinks the economy is going to be good in the near term, keeping short term central bank rates high, but possibly weaker in the longer term, which would imply lower future central bank rates and more supportive policy further out. And that feels like a pretty decent encapsulation of the current market debate. The U.S. economy is very strong at the moment, with the US unemployment rate recently falling to just 3.6%. But that strength is driving inflation and leading the Federal Reserve to raise interest rates more aggressively, rate increases that investors fear could weaken growth further out in the future. With implications like this it's no wonder that a lot of other asset classes, from credit markets, to equity markets, to commodities, really care about what the bond market is doing. And for these investors, we think there are a number of interesting implications. Let me start by saying that similar yields on 2 year and 10 year government bonds is not, in itself, a sell signal. Indeed, the last five times these rates were the same, global stocks rose by an average of about 10% over the following year. What we do see, however, is that a flat yield curve starts to support the outperformance of higher quality, more defensive assets. I try to explain this by the idea that investors do try to retain some growth in income exposure, given the strong current economic conditions, but try to move away from assets that could be much more vulnerable if growth deteriorates in the future. Specifically, when the U.S. 2 year and 10 year yields become similar, investment grade bonds start to outperform high yield bonds. Developed market stocks start to outperform emerging market stocks. And defensive sectors like health care and utilities outperform the broader market over the ensuing 12 months. Today, we think all of those strategies make sense. That's not because we necessarily think a recession is likely. Rather, we think it's a prudent reading of history in response to current bond market signals. 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 interest in using cryptocurrencies for transactions continues to rise for both consumers and businesses, crypto has begun a cycle of increased stability and popularity - but the question is, can this cycle continue? -----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 will be asking the question - are cryptocurrencies currency? It's Thursday, March 31st at 2:00 p.m. in London. Did you really buy that house with crypto? Or did you just sell your crypto for dollars and use dollars to buy the house? Crypto skeptics think that goods cannot be priced in cryptocurrencies like bitcoin, primarily because their price is too volatile. But at some point, if crypto begins to be used for enough purchases of everyday goods and services, prices may begin to stabilize. Increased stability will further entice consumers to use crypto, and the cycle will continue. The question has always been, will this virtuous cycle ever begin? The answer is now clear, it has already begun. Here are some examples. Firstly, paying with cryptocurrency needs to be as easy as paying with a credit or debit card today. Over 50 crypto companies and exchanges have issued their own crypto cards, and these are attached to the Visa or MasterCard payments networks, meaning they're accepted all around the world. In the last quarter of 2021, Visa said its crypto related cards handled $2.5 billion worth of payments. Now that may sound small, at less than 1% of all Visa's transactions, but it is growing quickly. The difficulty in increasing crypto adoption is getting the merchant to accept crypto. It needs to be easy and cheap, which is something lots of new crypto companies and products are trying to achieve. Secondly, many would argue that something can only be a currency if you can pay your taxes with it. Even that is changing today. Over the past year, local and some national governments have introduced or proposed laws that will allow its residents to use cryptocurrency to pay their taxes. El Salvador famously made bitcoin legal tender in its country in 2021. In the past week, Rio de Janeiro announced it will become the first city in Brazil to allow cryptocurrency payments for taxes starting next year. It isn't just emerging economies, though, that are trying to attract global crypto investors. The city of Lugano in Switzerland has teamed up with Tether, the creator of the largest stablecoin - a type of cryptocurrency that's kept stable versus the U.S. dollar, to make bitcoin and two other cryptocurrencies de facto legal tender. In the U.S., Colorado is hoping to become the first state to accept crypto for taxes later in the year, and Florida's governor is investigating the logistics of doing the same. Both these proposals may be difficult to put into law in the end, as the U.S. constitution doesn't allow individual states to create their own legal tender, but it hasn't stopped these proposals and more from coming in. In both these examples, the receiver of the crypto typically immediately converts to fiat currency, like U.S. dollars, through an intermediary service provider. So let's come back to our original question - did you really buy that house with crypto? In February, a house in Florida was sold for 210 Ether, the second largest crypto, or the equivalent of over $650,000 dollars. Interestingly, the seller received the ether but didn't liquidate into U.S. dollars soon afterwards due to market volatility, because the value of ether in U.S. dollars fell by around 10%. Consumers and businesses are increasingly wanting to transact in cryptocurrency. Maybe most are simply wanting to trade the value of the asset, but as it becomes easier to transact in crypto and legal structures are defined, cryptocurrencies could start to become currency. The question is, will the virtuous cycle continue or be broken? Cryptocurrencies are beginning the long journey of challenging U.S. dollar primacy, and the president's recent executive order on digital assets shows little sign of regulators getting in their way for now. Thanks for listening. If you enjoy Thoughts on the Market, share this and other episodes with a friend or colleague today.  

As the Fed kicks off a new rate hiking cycle, investors are looking back at the previous hiking cycle to ease their concerns today. Head of Public Policy Research and Municipal Strategy Michael Zezas and Global Head of Macro Strategy Matthew Hornbach discuss.-----Transcript-----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy for Morgan Stanley. Matthew Hornbach: And I'm Matthew Hornbach, Global Head of Macro Strategy for Morgan Stanley. Michael Zezas: And today on the podcast, we'll be discussing the last Fed hiking cycle and what it might mean for investors today. It's Wednesday, March 30th at 11:00 a.m. in New York. Michael Zezas: Matt, we've recently entered a new Fed hiking cycle as the Fed deals with inflation. But it seems like clients have been focusing with you of late on the question of what drove the Fed during the last hiking cycle, where they paused their tightening and started to reverse course. Why is that something investors are focusing on right now? Matthew Hornbach: Well, Mike, investors are looking for answers about this hiking cycle, and a good place to start is the last cycle. The past week saw U.S. Treasury yields reach new highs and the Treasury curve flattened even more. Markets are now pricing Fed policy to reach a neutral setting this year of around 2.5%. The market also prices Fed policy to reach 3% next year. For context, the Fed was only able to raise its policy rate to 2.5% in the last cycle. So the fact that markets now price a higher policy rate than in the last cycle, after which the Fed ended up cutting interest rates, has people nervous. It's worth noting, though, that a 3% policy rate is still some distance below policy rates in the mid 1990s and the mid 2000s. Michael Zezas: Got it. So then, what do you think of the argument that the Fed may have over tightened in the last cycle? Matthew Hornbach: Well, instead of telling you what I think, let me tell you what FOMC participants were thinking at the time. I went back and read the minutes from the June 2019 FOMC meeting. That was the meeting before the Fed first cut rates, which they did in July. I chose to focus on that meeting because that's when several FOMC participants first projected lower policy rates. And according to the account of that decision, participants thought that a slowdown in global growth was weighing on the U.S. economy. In fact, evidence from global purchasing manager data showed that growth in emerging market and developed market economies was slowing, and was occurring well before the U.S. economy began to slow. And also, data suggested that global trade volumes were well below trend. So Mike, let me put it back to you then. It seems to me that Fed policy wasn't driving economic weakness back then, but that something else was driving this change in global economic activity. And I think, you know where I'm going with this... Michael Zezas: Yes, you're talking about the trade conflict between the U.S. and China, where from 2017 to 2019 there was a slow and then rapidly escalating series of tariff hikes between the two countries. It was a very public pattern of response and counter response, interspersed with negotiations and sharp rhetoric from both sides, eventually resulted in tariffs on hundreds of billions of dollars in traded goods. Now, those tariffs endure to this day, but the tariff hikes stopped in late 2019 after the two sides made a stopgap agreement. But even though this was just a few years ago and perhaps seems tame in comparison to the global challenges that have come up since, like the pandemic and now the Russia-Ukraine conflict, I think it's important to remember that at the time this was a big deal and created a lot of concern for companies, economists and investors. You have to remember that before 2017, the consensus in the US and most of Europe was that free trade was good, and anything that raised trade barriers was playing with fire for the economy. We'd often hear from clients that raising tariffs was just like Smoot-Hawley, the legislation in the U.S. that hiked tariffs in many textbooks credit as a key cause of the Great Depression. So, as the U.S. and China engage in their tariff escalation and in many ways demonstrate, at least on the U.S. side, that the political consensus no longer viewed low trade barriers as intrinsically good, you have corporations becoming increasingly concerned about the direction of the global economy and starting to take steps to protect themselves, like limiting capital investment to keep cash on hand. And this, of course, concerned investors and economists. Matthew Hornbach: Right. So this is more or less what the Fed suggested when it actually moved to cut its policy rate in July of 2019. The opening paragraph of the FOMC statement, in fact, suggested that U.S. labor markets remain strong and that economic activity had been rising

As oil and gas prices rise, governments and investors must weigh investment in clean energy initiatives and new capacity in traditional energy commodities. Head of North American Power & Utilities and Clean Energy Research Stephen Byrd and Head of North American Oil and Gas Research Devin McDermott discuss.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-----Stephen Byrd: Welcome to Thoughts on the Market. I'm Stephen Byrd, Morgan Stanley's Head of North American Power and Utilities, and Clean Energy Research. Devin McDermott: And I'm Devin McDermott, Head of Morgan Stanley's North American Oil and Gas Research. Stephen Byrd: And today on the podcast, we'll be discussing the key debate around energy security and energy transition amid the Ukraine Russia conflict. It's Tuesday, March 29th, at 9 a.m. in New York. Stephen Byrd: So, Devin, the Russia-Ukraine conflict has, among other concerns, really put a spotlight on energy supply and demand. I want to get into this perceived tension between energy security, that is making sure there's enough supply to meet demand, and the transition to clean energy. But first, maybe let's start with the backdrop. There's been a lot of discussion around higher energy prices. This is a world you live in every day, and I wondered if you could paint us a picture of both oil and natural gas supply and demand globally. Devin McDermott: Yeah, certainly, Stephen, and it's definitely been a dynamic market here over the last several years, coming out of COVID and the price declines that we saw then and the sharp recovery that we've been in now for about a year and a half across the energy commodity complex. If we start with oil first, we had record demand destruction in the second quarter of 2020 around global lockdowns, industrial activity slowing and along with that, oil prices broke negative for the first time in history. And then coming out of that, we've had the combination of a few factors that drove prices higher. The first has been demand has been on a very strong recovery path since that bottom in the second quarter of 2020, growing alongside people getting out again, aviation starting to pick up, the economy growing on the back of the stimulus that was injected over the past few years around the world, not just in the US. And then constrained supply, and that constrained supply comes from a mix of different factors, but the biggest of which is a reduction in investment around the world. The other factor is decarbonization goals, in particular with the global oil majors, which are big investors in global oil and gas capacity, and they've put their marginal dollar increasingly into low carbon initiatives, New Energy's platforms, renewables, driving decarbonization goals across their global footprint. Now, shifting over to the gas side, gas is a fascinating market. Globally, it's fairly regionally disconnected historically, but we've had this big investment over the past decade in liquefied natural gas or LNG that's really brought these regional markets together into one global picture. And we've been on, up until COVID, a declining path on prices. LNG projects take many years to build, they're expensive, they have long paybacks, and they were first to get chopped when companies cut capital budgets to preserve liquidity back in 2020, but demand was still growing through that timeframe. So it pushed us into this period of supply shortfall and higher prices. And actually, last year, on three separate occasions, we set new all time highs for global non-U.S. natural gas prices, and that recovery path and period of stronger for longer prices has persisted here into 2022. And even prior to Russia Ukraine, it was something that we thought would persist for at least the next several years. Stephen Byrd: You know, it's fascinating before the Russia-Ukraine conflict we already had, you know, tight markets, rising pricing. Now we really need to dig into the Russia-Ukraine conflict and all the impacts. Maybe let's just start Devin with, sort of, how big of a player Russia is in terms of oil and gas, and what the impact is of any current or future sanctions against Russia. Devin

As the Fed continues down a hawkish road for 2022, investors must consider the impact of policy tightening on economic growth and equity risk premiums.-----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, March 28th at 11:00 a.m. in New York. So let's get after it. 2022 has been a year of extraordinary hawkishness from the Fed, and it continues to surprise on the upside with both its formal guidance and informal communications. This has led to almost weekly revisions for more Fed rate hikes from just about everyone, including our economists who now expect 50 basis point interest rate hikes in both May and June, and then 25 basis points in every meeting thereafter. The bond market has definitely gotten the message, too, with one of the sharpest rises in short term interest rates ever witnessed. Longer term rates have also adjusted as the expected terminal rate for this cycle has risen to 2.9%. The questions for equity investors now is whether they believe the Fed will actually tighten this much and what will be the impact on the economy from a growth standpoint. We have several takeaways from these recent moves. First, the Fed appears to be very committed to reducing inflation. Friday's University of Michigan Consumer Confidence Report for March confirmed that high prices are still the key reason this metric has plummeted to levels usually reserved for recessions. Second, 10 year yields are now at a level that takes the equity risk premium to its lowest level since the Great Financial Crisis. As a reminder, equity risk premium is the return and investor receives above and beyond the yield on a Treasury bond. The higher the risk, the greater the equity risk premium. In our view, it makes little sense for the equity risk premium to be so low right now, given the heightened risks to earnings growth from a rise in cost pressures, payback in demand, and a war that has structurally increased the price of food and energy. While stocks are a good hedge from higher inflation, keep in mind that inflation from food and energy is bad for most companies as it acts as a tax on consumers. Only energy and materials companies really benefit from this kind of inflation but they make up a very small slice of the index. Some may argue technology companies are less affected, but we're skeptical as they will feel it too in lower revenues if the consumer spending fades. Third, the risk from further exogenous shocks to growth are also elevated given the war in Ukraine, China's real estate stress, and ongoing battle with COVID, to name a few. This is one reason why market volatility remains so high. Importantly for investors, our work suggests the equity risk premium is also understated relative to this high market volatility. In short, equity investors are not being properly compensated for taking equity like risk at current prices. Finally, these high valuations are not isolated to just a few sectors. The lower equity risk premium is present across all sectors except energy and materials, and these are the two biggest beneficiaries of high commodity inflation. In some ways, the low equity risk premium for these sectors is simply saying the market does not believe the recent boost to earnings and cash flow is sustainable, due to either demand destruction or the eventual supply response. The bottom line is that we remain bearish on the S&P 500 index from a risk reward standpoint, particularly after the recent rally. Our year end base case target of 4400 is 4% below current levels. At the stock level, we continue to recommend investors look for stable cash flow generating companies in defensive sectors like utilities, health care, REITs and consumer staples. 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. 

The new Fed hiking cycle has begun and with it comes expectations for faster rate hikes and quantitative tightening to address inflation, as well as questions around how and when the U.S. economy will be affected. Chief U.S. Economist Ellen Zentner and Senior U.S. Economist Robert Rosener discuss.-----Transcript-----Ellen Zentner: Welcome to Thoughts on the Market. I'm Ellen Zentner, Chief U.S. Economist for Morgan Stanley Research. Robert Rosener: And I'm Robert Rosner, Morgan Stanley's Senior U.S. Economist. Ellen Zentner: On this episode of the podcast, we'll be talking about the outlook for the U.S. economy as the Fed begins a new rate hike cycle. It's Friday, March 25th at 9:00 a.m. in New York. Ellen Zentner: So Robert, last week the U.S. Federal Reserve raised the federal funds rate a quarter of a percentage point, which is notable because it's the first interest rate hike in more than two years, and it's likely to be the first of many. Chair Powell has told us that it's unlikely to be like any prior hiking cycle, so maybe you could share our view on the pace of hikes and where and when it might peak for the cycle. Robert Rosener: Well, it certainly is starting off unlike any recent policy tightening cycle, and recent remarks from Fed policymakers have really doubled down on the message that policy tightening is likely to be front loaded. And we're now forecasting that we're likely to see an even steeper path for Fed policy tightening this year, and we think that as soon as the May meeting, we could see the Fed pick up the pace and hike interest rates by 50 basis points and follow that in June with yet another 50 basis point increase. We're expecting they'll revert back to a 25 basis point per meeting pace after that, but still that marks 225 basis points of policy tightening that we're expecting this year in our baseline outlook. Ellen Zentner: So how does Jay Powell, the chair of the FOMC, fit into this? Do you think he's about in line with this view as well? Robert Rosener: He does seem to be generally in line with this view, but he is negotiating the outlook among a committee that has a diversity of views, and we've been hearing from policy makers, a wide range of policy makers, over the last week. What's been notable is that more and more policymakers are starting to get on board the train that a faster pace of policy tightening is likely to be warranted. And that may very well include rate hikes that come in larger increments, such as 50 basis point increments, over the course of the year as policymakers seek to get monetary policy into more of a neutral setting. Ellen Zentner: So this is all because of inflation. Inflation's broad based, it's rising. I think it felt like there was a very big shift on the FOMC January/February, when the inflation data was really rocketing to new heights. So in order to bring inflation down when the Fed is hiking, how long does it take for those hikes to flow through into the economy to bring inflation down? Robert Rosener: Well, that's a really good question, and certainly that broadening that you mentioned is key. We saw a run up in inflation in the later part of last year that was driven by a few segments, particularly on the goods side. But as we moved into the end of 2021 and early 2022, what we really started to see was a broadening out of inflationary pressures and particularly a broadening into the service sectors of the economy where price pressures began to pick up more notably and began to lead the inflation data higher. Now, as we think about how monetary policy interacts with that, tighter monetary policy needs to slow growth in order to slow inflation. And typically, you would look at monetary policy and not expect it to be really materially affecting the economy for, say, a year out. Something that Chair Powell has stressed is that monetary policy transmits through financial conditions, and financial markets moved to price in a more hawkish Fed outlook as soon as the latter part of last year. Now, as those rate hikes got priced into the market, that acted to tighten financial conditions. So as Chair Powell noted in his press conference, the clock for when rate hikes start to impact the economy doesn't necessarily start on the delivery of those rate hikes. It starts when they affect financial conditions. And so we may start to see that a backdrop of tighter financial conditions begins to reduce some of the steam in the economy and reduce some of the steam in inflation as we move through the course of the year. But with headline CPI currently at around 8%, likely to march higher in the upcoming data, there's a lot of room to bring that down. So we might have to wait some time before we see material relief on inflation. Ellen Zentner: So let's talk about the balance sheet because they're not just hiking rates, right? They're going to reduce the size of their balance sheet, what we call quantitative tighten

While the possibility of a yield curve inversion in the U.S. has news outlets and investors wondering if a recession is on the way, there’s more to the story that should put minds at ease.-----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, March 24th at noon in New York. For most investors, most of the time, the general level of U.S. Treasury yields is more important than the differences between yields on shorter maturity bonds and those on longer maturity bonds. The most widely quoted Treasury yield is usually the one investors earn by lending their money to the government for 10 years. But there are times when the difference between yields on, say, treasuries that mature in 2 years and those that mature in 10 years make the news. And this is one of those times. These yields are tracked over time on a visual representation we call the yield curve. And at some point soon, we expect the yields on 2 year treasuries to be higher than those on 10 year treasuries. This is what we call a 2s10s yield curve inversion. The reason why yield curve inversion makes the news is because, in the past, yield curve inversion has preceded recessions in the U.S. economy. Still, there are two points to make about the relationship between the yield curve and recessions, both of which should put investors' minds at ease. First, using history as a guide, inverted 2s10s yield curves preceded recessions by almost two years on average. While time flies, two years is plenty of time for people to prepare for harder times ahead. Second, despite popular belief, yield curve inversions don't necessarily cause recessions, and neither does significantly tighter fed monetary policy - which also can cause yield curves to invert. In his recent speech, Fed Chair Powell highlighted 1965, 1984, and 1994 as times when the Fed raised the federal funds rate significantly without causing a recession. Another important point is that the yield curve can flatten for reasons unrelated to tighter Fed policy. For example, between 2004 and 2006, the yield curve flattened by much more than Fed policy alone would have suggested. The curve flattening during this period baffled the Fed and investors alike. Former Fed Chair Greenspan labeled the episode "a conundrum" at the time. So what caused the yield curve to flatten so much during that period? Former Fed Chair Bernanke suggested it was a global savings glut. Overseas investors purchased an increasingly larger share of the Treasury market than they had ever bought before. Fast forward to today and the demand from overseas investors has been replaced by demand from the Fed. In fact, the Fed owns almost 30% of outstanding Treasury notes and bonds, which goes some way to explaining how flat the yield curve is today. And, to be clear, fed ownership of those bonds also isn't a reason to think recession is right around the corner. Another common concern about a flat yield curve is that it will cause banks to stop lending. And without banks lending into the real economy, recession might loom large. But our U.S. Bank Equity Research Team is less concerned. Their work shows that bank loans grew during the prior 11 periods of yield curve inversion since 1969. While they found some moderation in loan growth, it was modest. And this year, despite our forecast for an inverted yield curve. The project loans to grow 7% over the year, after loans shrank last year, when the yield curve was actually much steeper. So in the end, while we think the yield curve will invert this year, we don't think investors should worry too much about a looming recession - even if the news does. 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.

While the demand for Environmental, Social, and Governance investing has been growing primarily in Europe, a potential new regulatory policy may drive new interest and opportunity for U.S. investors.-----Transcript-----Welcome the Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy 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, March 23rd at 10 a.m. in New York. Taking a break from specific market impacts for the moment, we want to focus on the growth of a new market for investors - the market for ESG investing, which a new regulatory policy may help nudge into the mainstream in the U.S. As you may already know, ESG stands for Environmental, Social and Governance, three factors that represent a measurement of how socially conscious the investment is. The demand for this style of investing has grown substantially in recent years. For example, per our sustainability research team, there are about 2 trillion dollars of dedicated ESG assets under management globally. But about 85% of that is in Europe, showing how U.S. investors have been relatively slower to adopt such strategies. Yet earlier this week, the SEC proposed a new rule that could create new incentives for U.S. investors to adopt ESG strategies. This rule would require companies to provide disclosures about their emissions, as well as governance and strategy for dealing with climate related risks. As our sustainability research team noted in a report this week, having a standard for disclosure can help build the ESG market by giving investors a common template for understanding ESG impacts. That differs from the current state of play, where many companies do disclose on climate related issues, but to different levels and by differing standards, making analytical comparisons difficult. We should note, though, that this is just a first step toward a regulation that could boost the size of the ESG market. Regulatory rules tend to take a long time to finalize and implement. According to Government Accountability Office case studies, it can take anywhere from six months to five years, as proposed rules navigate a series of comment periods, judicial challenges and revisions. So we'll track the process here and report back when there's more to know. Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague, or leave us a review on Apple Podcasts. It helps more people find the show.

While the cost of shelter has risen quickly, the measure of housing inflation has been slow to catch up, creating challenges for renters, homeowners and the Fed.-----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 Tuesday, March 22nd at 2:00 p.m. in London. Our base case at Morgan Stanley is that the U.S. economy sees solid growth over the next two years, with inflation moderating but still being somewhat higher than the Federal Reserve would like. We think this means the Fed raises interest rates modestly more than the market expects, flattening the US yield curve. But what are the risks to this view? Specifically, what could cause inflation to be much higher, for much longer, putting the Federal Reserve in a more pressing bind? I want to focus here on core inflation as central banks have more leeway to look through volatile food or energy prices. This is a story about shelter. The cost of shelter represents about 1/3 of U.S. core consumer price inflation. That makes sense. For most Americans, where you live is your largest expense, whether you rent or pay a mortgage. The CPI measure of inflation assumes that the cost of renting has risen 4.5% in the last year. Now, if that sounds low, you're not alone. At the publicly traded apartment companies covered by my colleague Richard Hill, a Morgan Stanley real estate analyst, rents have risen 10% or more year-over-year. There are reasons that the official CPI number is lower. For one, not everyone renews their lease at the same time. But with a strong labor market and limited supply, the case for higher rents going forward looks strong. Owner occupied housing is even more interesting. Since 2016, U.S. home prices have risen about 56%. But the cost of a house that goes into the CPI inflation calculation, known as "owners’ equivalent rent", has risen only 21%. That's a 35% gap between actual home prices and where the inflation calculation sits. This is a potential problem. Even if home prices stop going up, the official measure of housing inflation could keep rising at a healthy clip to simply catch up to where home prices already are. And given high demand, low supply, and still low interest rates, home prices may keep going up, meaning there's even more catching up to do from the official inflation measure. Higher shelter costs are also a challenge because they're very hard for the Federal Reserve to address. Raising interest rates, which is the usual strategy to combat inflation, makes buying a house less attractive relative to renting. Which means even more upward pressure on rental demand and even higher rents. And higher interest rates make building homes more costly to finance, further restricting housing supply and raising home prices.Housing has long been a very important sector for the economy and financial markets. Over the next 12 months, expect it to be central to the inflation debate as well. 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 is validating our call for a shorter but hotter economic cycle. As the indicators begin to point to a late-cycle environment, here’s how investors can navigate the change.-----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, March 21st at 1:00 p.m. in New York. So let's get after it. A year ago, we published a joint note with our Economics and Cross Asset Strategy teams arguing this cycle would run hotter but shorter than the prior three. Our view was based on the speed and strength of the rebound from the 2020 recession, the return of inflation after a multi-decade absence and an earlier than expected pivot to a more hawkish Fed policy. Developments over the past year support this call - US GDP and earnings have surged past prior cycle peaks and are now decelerating sharply, inflation is running at a 40-year high and the Fed has executed the sharpest pivot in policy we've ever witnessed. Meanwhile, just 22 months after the end of the last recession, our Cross Asset team's 'U.S. Cycle' model is already approaching prior peaks. This indicator aggregates key cyclical data to help signal where we are in the economic cycle and where headwinds or tailwinds exist for different parts of the market.With regard to factors that affect U.S. equities the most, earnings, sales and margins have also surged past prior cycle highs. In fact, earnings recovered to the prior cycle peak in just 16 months, the fastest rebound going back 40 years. The early to mid-cycle benefits of positive operating leverage have come and gone, and U.S. corporates now face decelerating sales growth coupled with higher costs. As such, our leading earnings model is pointing to a steep deceleration in earnings growth over the coming months. These negative earnings revisions are being driven by cyclicals and economically sensitive sectors - a setup that looks increasingly late cycle. Another key input to the shorter cycle view was our analysis of the 1940s as a good historical parallel. Specifically, excess household savings unleashed on an economy constrained by supply set the stage for breakout inflation both then and now. Developments since we published our report in March of last year continue to support this historical analog. Inflation has surged, forcing the Fed to raise interest rates aggressively in a credible effort to restore price stability. Assuming the comparison holds, the next move would be a slowdown and ultimately a much shorter cycle.Further analysis of the postwar evolution of the cycle reveals another compelling similarity to the current post-COVID phase - unintended inventory build from over ordering to meet an excessive pull forward of demand. In short, we think the risk of an inventory glut is growing this year in many consumer goods, particularly in areas of the economy that experienced well above trend demand. Consumer discretionary and technology goods stand out in our view. Now, with the Fed raising rates this past week and communicating a very hawkish tightening path over the next year, our rate strategists are looking for an inversion of the yield curve in the second quarter. While curve inversion does not guarantee a recession, it does support our view for decelerating earnings growth and would be one more piece of evidence that says it's late cycle. In terms of our U.S. strategy recommendations, we continue to lean defensive and focus on companies with operational efficiency with high cash flow generation. This leads us to more defensive names with more durable earnings profiles that are also attractively priced. 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.

The U.S. Federal Reserve recently enacted its first interest rate hike in two years, but there is still more work to be done to counteract rising inflation and markets are watching closely.-----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, March 18th at 2:00 p.m. in London. On Wednesday, the U.S. Federal Reserve raised interest rates for the first time in two years. This is notable because of how much time has passed since the Fed last took action. It's notable because of how low interest rates still are, relative to inflation. And it's notable because rate increases, and decreases, by the Fed tend to lump together. Once the Fed starts raising or lowering rates, history says that it tends to keep doing so. Now, one question looming over the Fed's action this week could be paraphrased as, "what took you so long?" Since the Fed cut rates to zero in March of 2020, the U.S. stock market is 77% higher, U.S. home prices are 35% higher, and the U.S. economy has added over 5.7 million new jobs. Core consumer price inflation, excluding volatile food and energy prices, has risen 6.4% in the last year, indicative of demand for goods outpacing the ability of the economy to supply them at current prices, exactly what a hot economy implies. The reason the Fed waited was the genuine uncertainty around the impact of COVID on the economy, and the risk that new variants would evade vaccines or dash consumer confidence. But every decision has tradeoffs. Easy Fed policy has helped the U.S. economy recover unusually quickly, but that quick recovery now means the Fed has a lot more to do to catch up. Specifically, we think the Fed will need to raise the upper band of its policy rate, currently at 0.5%, to about 2.75% by the end of next year. This is more than the market currently expects, and we think outcomes here are skewed to the upside, with it more likely that rates end up higher than lower. My colleagues in U.S. interest rate strategy believe that this should cause U.S. rates to rise further, with 2 year bond yields rising most and ultimately moving higher than 10 year bond yields. It's rare for 2 year bonds to yield more than their 10 year counterpart, a so-called curve inversion. Nevertheless, this is what we expect. Now, one counter to this Fed outlook is that the U.S. economy simply can't handle higher rates, and that will force the Fed to stop hiking earlier. But we disagree. With a large share of household debt in the U.S. in the form of 30 year fixed rate mortgages, the impact of higher rates may actually be more muted than in the past, as the cost of servicing this debt won't change even as the Fed raises rates. Higher short-term interest rates and an inverted yield curve are one specific implication of these expectations. More broadly, inverted yield curves have historically been key signposts for increased risk of recession. While we think a recession is unlikely, the market could still worry about it, supporting U.S. defensive equities and investment grade over high yield credit. 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 U.S. and its allies have frozen the Central Bank of Russia’s foreign currency reserves, leading to questions about the safety of FX assets more broadly and the centrality of the U.S. dollar to the international financial system.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 to Thoughts on the Market. I'm James Lord, Head of FX and EM 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 currency markets. It's Thursday, March 17th at 3:00 p.m. in London. Ever since the U.S. and its allies announced their intention to freeze the Central Bank of Russia's foreign exchange, or FX, reserves, market practitioners have been quick to argue that this would likely accelerate a shift away from a U.S. dollar based international financial system. It is easy to understand why. Other central banks may now worry that their FX reserves are not as safe as they once thought, and start to diversify away from the dollar. Yet, despite frequent calls for the end of the dollar based international financial system over the last couple of decades, the dollar remains overwhelmingly the world's dominant reserve currency and preeminent safe haven asset. But could sanctioning the currency reserves of a central bank the size of Russia's be a tipping point? Well, let's dig into that. The willingness of U.S. authorities to freeze the supposedly liquid, safe and accessible deposits and securities of a foreign state certainly raises many questions for reserve managers, sovereign wealth funds and perhaps even some private investors. One is likely to be: Could my assets be frozen too? It's an important question, but we need to remember that the U.S. is not acting alone with these actions. Europe, Canada, the UK and Japan have all joined in freezing the central bank of Russia's reserve assets. So, an equally valid question is: Could any foreign authority potentially freeze my assets? If the answer is yes, that likely calls into question the idea of a risk free asset that underpins central bank FX reserves in general, and not just specifically for the dollar and U.S. government backed securities. If that's the case, what could be the implications? Let me walk you through three. First would be identifying the safest asset. Reserve managers and sovereign wealth fund investors will need to take a view on where they can find the safest assets and not just safe assets, as the concept of the latter may have been seriously impaired. And in fact, the dollar and U.S. Government backed securities may still be the safest assets since the latest sanctions against the central Bank of Russia involve a broad range of government authorities acting in concert. A second implication is that political alliances could be key. These sanctions demonstrate that international relations between different states may play an important role in the safety of reserve assets. While the dollar might be a safe asset for strong allies of the U.S., its adversaries could see things differently. To put the dollar's dominance in the international financial system at serious risk, would-be challenges of the system would need to build strategic alliances with other large economies. Finally, is the on shoring of foreign exchange assets. Recent sanctions have crystallized the fact that there is a big difference between an FX deposit under the jurisdiction of a foreign government and one that you own on your home ground. While both might be considered cash, they are not equivalent in terms of accessibility or safety. So another upshot might be that reserve managers bring their foreign exchange assets onshore. One way of doing this is to buy physical gold and store it safely within the home jurisdiction. The same could be said of other FX assets, as reserve managers will certainly have access to printed U.S. dollars, Euros or Chinese Yuan banknotes if they are stored in vaults at home, though there could be practical challenges in making large transactions in that scenario. Bottom line, though, while these are all im

As oil prices rise across the globe, investors wonder if governments will continue to incentivize clean energy development or pivot to greater investment in traditional fossil fuels.-----Transcript-----Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy 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, March 16th, at 10:00 a.m. in New York. With the conflict in Ukraine ongoing, many investors continue to ask questions about the U.S. and European policy response to the rising price of oil. In particular, many ask if governments will continue down the path of incentivizing clean energy development, or pivot to greater exploration of traditional fossil fuels. But as my colleague Stephen Byrd, who heads North America Power Utilities and Clean Energy Research, pointed out in a recent report, this is a false choice, and it's one that many policymakers are likely to reject in favor of embracing an "all of the above" strategy. It's important to understand that focusing only on traditional energy sources wouldn't solve the problem in the near term. For example, switching on any dormant U.S. oil production facilities would only replace a fraction of the oil that Russia produces, so fresh explorations ramp up production would be needed, and that could take a few years. The same could be said about natural gas. The U.S. Has the spare capacity to backfill with Europe imports from Russia, but Europe mostly doesn't have the facilities to accept liquefied natural gas shipped overseas from America. Germany has announced plans to build two liquefied natural gas terminals, but that could take years to complete. The point is, focusing on traditional energy sources alone is no quick fix for high energy prices and energy independence, and therefore there's little opportunity cost in also focusing on renewable energy development. For that reason, we think western governments are likely to include both clean energy and traditional investments in their strategy going forward. You see this echoed in the statements of policymakers, such as U.S. Climate Envoy John Kerry's recent comments that the US is committed to an "all of the above" energy policy. So what does it mean for investors? In short, expect energy companies of all types to have business to do with governments in the coming years. That includes traditional oil exploration companies, but also clean tech companies, as market beneficiaries. 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 global markets face a rise in commodity prices due to geopolitical conflict, investors in Asia and EM equities will want to keep an eye on the divergence between commodity exporters and importers.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 to Thoughts on the Market. I'm Jonathan Garner, Chief Asia and Emerging Market Equity Strategist for Morgan Stanley Research. Along with my colleagues bringing you a variety of perspectives, I'll be talking about geopolitical risk, commodity exposure, and how they affect our views on Asia and EM Equities. It's Tuesday, March the 15th at 8:00 p.m. in Hong Kong. The Russia Ukraine conflict is having a profound impact on the investment world in multiple dimensions. In this episode we focus on just two, commodity prices and geopolitical alignment, and what they mean for investors in Asia and emerging market equities. The major sanctions imposed by the U.S., U.K., European Union and their allies are focused not only on isolating Russia financially but depriving it, in some instances overnight and in others more gradually, of the ability to export its commodities. And Russia is a major producer of oil, natural gas, food and precious metals and rare minerals. Ukraine is also a major food exporter. In our coverage there's a sharp divergence between economies which are major commodity importers, and are therefore suffering a negative terms of trade shock as commodity prices rise, and those which are exporters and hence benefit. Major importers include Korea, Taiwan, China and India, all with more than a 5% of GDP commodity trade deficit. Meanwhile, Australia, Mexico, Brazil, Saudi Arabia, UAE and South Africa are all significant commodity exporters and stand to benefit. Australia's overall commodity trade surplus is the largest at 12% of GDP, and that is before the recent gains in price for almost everything which Australia produces and exports. Meanwhile, on the geopolitical risk front, we've been monitoring the pattern of voting on Russia's actions at the United Nations, where there have been both UN Security Council and General Assembly votes. Although none of the countries we cover actually voted with Russia on either occasion, two major countries, China and India, did abstain twice. South Africa abstained at the General Assembly. The UAE abstained in the Security Council, but then voted with the US and Europe in the General Assembly vote. This pattern of voting, in our mind, may have an impact in raising the equity risk premium, i.e. lowering the valuation, for China and to a lesser extent India in the current environment. All taken together, we are shifting exposure further towards commodity exporting markets and in particular those such as Australia, which are also geopolitically aligned with the major sources of global investor flows. We lowered our bear-case scenario values for China further recently and are turning incrementally more cautious on India. 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. 

This week the market turns to the Federal Reserve as it eyes challenges to growth while remaining committed to combating high inflation with its first rate hike of the tightening cycle.-----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, March 14th at 11:00 a.m. in New York. So let's get after it. With all eyes on the Russian invasion of Ukraine, markets are likely to turn back towards the Fed this week as it embarks upon the first tightening of the cycle and the first rate hike since 2018. This follows a period of perhaps the most accommodative monetary support ever provided by the Federal Reserve, an extraordinary statement unto itself given the Fed's actions over the past few decades. When it comes to measuring how accommodative Fed policy is at the moment, we look at the Fed funds rate minus inflation, or the real short-term borrowing rate. Using this measure tells us that fed accommodation has been in a steady downtrend since the early 1980s. In fact, the real Fed funds rate has been in a remarkably well-defined channel for this entire period. Second, after reaching the low end of the channel in record time during the COVID recession, the real Fed funds rate has turned higher- albeit barely. That low was in November of last year, when Fed Chair Jerome Powell was renominated by President Biden, and he made it clear that the Fed was going to pivot hard on policy. It was no coincidence that this is exactly when expensive growth stocks topped and began what has been one of the largest and most persistent drawdowns in growth stocks ever witnessed. Finally, based on how low the Fed funds rate remains, the Fed has a lot of wood to chop to get this rate back to a more normal level. Furthermore, if Powell is truly committed to making monetary policy restrictive to fight inflation, expensive growth stocks remain vulnerable, in our view. Currently, the bond market is pricing in eight 25 basis point hikes over the next 12 months. If the Fed is successful in executing this expected path, it will have achieved the soft landing it seeks. Inflation will come down as the economy remains in expansion. However, we think that's a big if at this point. First, growth is already at risk as we enter 2022 due to the payback in demand lapsing government transfers, generationally high inflation and rising inventories at the wrong time. Now, the conflict in Ukraine is leading to even higher commodity prices, while the growth outlook deteriorates further. While we are likely to avoid an economic recession in the U.S., we can't say the same for earnings. We think the Fed will keep a watchful eye on the data, but air on the side of hawkishness given the state of inflation. This likely means a collision with equity markets this spring, with valuations overshooting to the downside. While short-term interest rates are still at zero, longer term treasury yields are now approaching a level that may offer some value for asset owners, even if they are unattractive on a standalone basis. This is especially true if one is now more concerned about growth like we are. Let's assume we're wrong about growth slowing, under such a view it's unlikely the Fed hikes faster than what is already priced into the bond market. Therefore, longer term rates are unlikely to raise much more by the time we know the answer to this growth question. Conversely, if we're right about growth slowing more than expected, longer term rates likely have room to fall and provide a cushion to equity portfolios. High quality investment grade credit may also offer some ballast given the significant correction in both rates and spreads. For equity investments, we continue to favor defensive quality stocks as well as companies with high operational efficiency. Yes, boring is still beautiful. 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.

With multiple countries now imposing sanctions, investors in Russian government bonds and currencies will need to consider their options as the risk of default rises.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-----James Lord: Welcome to Thoughts on the Market. I'm James Lord, Head of FX and EM strategy. Simon Waever: And I'm Simon Waever, Global Head of Sovereign Credit Strategy. James Lord: And on this special episode of Thoughts on the Market, we'll be discussing the impact of recent sanctions on Russia for bonds and currency markets. It's Friday, March 11th at 1:00 p.m. in London. Simon Waever: and 8:00 a.m. in New York. James Lord: So, Simon, we've all been watching the recent events in Ukraine, which are truly tragic, and I think we've all been very saddened by everything that's happened. And it certainly feels a bit trite to be talking about the market implications of everything. But at the same time, there are huge economic and financial consequences from this invasion, and it has big implications for the whole world. So today, I think it would be great if we can provide a little bit of clarity on the impact for emerging markets. Simon, I want to start with Russia itself. The strong sanctions put in place have really had a big impact and increasing the likelihood that Russia could default on its debt. Can you walk us through where we stand on that debate and what the implications are? Simon Waever: That's right, it's had a huge impact already. So Russia's sovereign ratings have been downgraded all the way to Triple C and below, which is only just above default, and that's them having been investment grade just two weeks ago. If you look at the dollar denominated sovereign bonds, they're trading at around 20 cents on the dollar or below. But I think it all makes sense. The economic resilience needed to support an investment grade rating goes away when you remove a large part of the effect reserves, have sanctions on 80% of the banking sector, and with the economy likely to enter into a bigger recession, higher oil prices help, but just not enough. For now, the question is whether upcoming payments on the sovereign dollar bonds will be made. And I think it really comes down to two things. One, whether Russia wants to make the payments, so what we tend to call the willingness. And two whether US sanctions allow it, so the ability. Clarifications from the US Treasury suggests that beyond May 25th, payments cannot be made. So, either a missed payment happens on the first bond repayment after this, which is May 27th or Russia may also decide not to pay as soon as the next payment, which is on March 16th. And of course, the reason for Russia potentially not paying would be that they would want to conserve their foreign exchange. And actually, we've already had some issues on the local currency government bonds, so the ones denominated in Russian ruble. James, do you want to go over what those issues have been? James Lord: That's absolutely right. Already, foreigners do not appear to have received interest payments on their holdings of local currency government bonds. There was one due at the beginning of March, and it looks as though, although the Russian government has paid the interest on that bond, the institutions that are then supposed to transfer the interest payments onto the funds of the various bondholders haven't done so for at least the foreign holders of that bond. Does that count as default? Well, I mean, on the one hand, the government can claim to have paid, but at the same time, some bondholders clearly haven't received any money. There's also another interest payment due in the last week of March, so we'll see if anything changes with that payment. But in the end, there isn't a huge amount that bondholders can really do about it, since these are local currency bonds and they're governed under local law. There isn't really much in the way of legal recourse, and there isn't really much insurance that investors can take out to protect themselves. The situation is a bit different for Russian government bonds that are denominated in US dollars, though. So I'd like to dig a little bi

As inflation remains a focal point for the U.S. consumer, higher energy costs will dampen discretionary spending for some. But not all are impacted equally and there may be good news in this year’s tax refunds and the labor market.-----Transcript-----Ellen Zentner: Welcome to Thoughts on the Market. I'm Ellen Zentner, Morgan Stanley's Chief U.S. Economist. Sarah Wolfe: And I'm Sarah Wolfe, also on Morgan Stanley's U.S. Economics Team. Ellen Zentner: And today on the podcast, we'll be discussing the outlook for the U.S. consumer during this year's tax season and after, as inflation remains in the driver's seat and new geopolitical realities raise further concerns. It's Thursday, March 10th, at 9:00 a.m. in New York. Sarah Wolfe: So, Ellen, I know you want to get into the U.S. consumer, but before we dig in, I think it would be useful to hear your view on the overall U.S. economy, especially given the new geopolitical challenges. Ellen Zentner: So, I think it's helpful to think about a rule of thumb for the effects of oil on overall GDP. For every 10% sustained increase in oil prices, it shaves off about one tenth on GDP growth. And so when we take into account the rise in energy prices that we've seen thus far, we took down our growth forecast for GDP this year by three tenths and shaved off an additional tenth when looking further out into 2023. Now, one thing that I think is important for the U.S. outlook versus European and U.K. colleagues is that energy prices are a much bigger factor in an economy like Europe's, and the U.K.'s where they're much more reliant on outside sources, where in the US we've become much more energy independent over the past decade. But I think where I step into your world, Sarah, as we think about higher oil prices, then translate into higher gasoline prices, which hits consumers in their pocketbook. So Sarah, that's a great segue to you on the U.S. consumer because this has been one of your focuses on the team. Consumers don't like higher prices. And, you know, we've been seeing this big divergence between sentiment and confidence. So why aren't those measures moving exactly hand in hand if inflation is the biggest concern there? Sarah Wolfe: Definitely. There's a lot of focus on consumer confidence, which comes from the Conference Board and consumer sentiment, which comes from University of Michigan. Both have been trending down, but there's been a record divergence between the two, where Conference Board is sitting about 48 points higher than sentiment. And inflation plays a huge role in this. So just getting down to the methodology of the surveys, the reason there's been such a divergence is because Conference Board places more of a focus on labor market conditions, whereas University of Michigan sentiment focuses more on inflation expectations. And so when you're in an environment like today, where the unemployment is very low, the labor market is very tight, that's very good for income that gets reflected through the confidence surveys. But at the same time, inflation is extremely high, which erodes real income, and that's getting reflected more in the sentiment survey. So, we are seeing this large divergence between the surveys and they're telling us different things, but I think both are very important to take into account. Ellen Zentner: So let me dig into inflation a little bit further then specifically and how it affects you when you're thinking about our consumer spending outlook. I mean, some of the changes that we've made to CPI forecast, you know, talk us through that and how you're building that into your estimates for the consumer. Sarah Wolfe: So we recently raised our headline forecast for CPI, or Consumer Price Index, inflation for the end of this year by 40 basis points to 4.4%. And we've also lowered our forecasts for real Personal Consumption Expenditure, or PCE, but only about 10 basis points this year to around 2.8%. And the reason that it's not a one for one pass through is, first of all, we're tracking the first quarter spending so much higher than what we had expected, so overall, even though higher gasoline prices will likely hit spending a bit more in the second quarter of 2022, we are already tracking this year much stronger. So on net, the impacts a bit smaller. Also, just because gasoline prices are going up doesn't mean that people spend less. Actually, overall, it tends to mean that people just increase their spending pool. So you have income constrained households at the lower end of the income spectrum, they're gonna pull back their spending on non-gasoline, non-utility expenditures, but on the other end, middle higher income households will just increase their spending pool, you know, gasoline prices go up so they’re just going to be spending a bit more. It doesn't necessarily mean that consumption is going to be lower. If anything, it could add more upside risk to consumer spending.Ellen Zentner: You know,

With the rising cost of oil comes concerns around economic growth, but the distinction between the impact in Europe and the US is important, presenting both challenges and opportunities for investors.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 to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy 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, March 9th at 1:00 PM in New York. This week, the United States closed its markets to imports of Russian oil as another measure in its response to the invasion of Ukraine. In anticipation of this announcement, the price of oil increased to as high as $129 per barrel, leading the average gas price in the United States to reach $4.25. Understandably, this has created a new burden for consumers and also has investors concerned about the macroeconomic impacts of higher fuel prices. Here’s the latest thinking from our economists.We expect the downside to economic growth to be felt more in Europe than the United States. Unlike the US, Europe is a net importer of energy, which means when fuel prices go up they have to pay the price but don’t earn the extra income from selling fuel at a higher price. Accordingly, our European economics team has revised down their expectations for GDP growth by nearly 1% for 2022. The impact in the US should be more muted, with our colleagues dropping their growth forecast by 30 basis points to 4.3%. Again, this is because the US enjoys substantial domestic energy production. So while higher prices at the pump might interfere with some consumer purchases, the income from those fuel purchases will drive consumption elsewhere in the economy. But these views aside, we have to acknowledge these conditions of elevated fuel and commodities prices drive uncertainty around the future economic and monetary impacts that markets will consider. Increasingly, clients want to discuss and debate the idea of stagflation, which is the combination of slowing growth and rising inflation, in both the US and Europe. And that sentiment could persist for some time, as our commodities research team thinks swings in the price of oil between $100 and $150 are possible in the near term.   We’ll have a lot more on that in future podcasts, but for now wanted to point out one tangible takeaway for investors: potential upside for equities in the energy exploration and production sector. Higher prices at the pump means potential for more revenue, yet the sector is valued at a discount to the S&P 500 when accounting for its prices relative to the cash flow of companies in that sector.  Bottom line, the global economy is changing quickly, presenting both challenges and opportunities. We’ll be keeping you in the loop on both. 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 European markets price in slowing growth, increased inflation and geopolitical tensions, pricing power is a potential focus for European investors looking to weather the storm.-----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 impacts of recent geopolitical developments on European markets and why rising stagflation pressures point towards owning companies with good pricing power. It's Tuesday, March the 8th at 1:00 pm in London.Since our last podcast on European equities, the backdrop has changed considerably, with an escalation in geopolitical tensions putting upward pressure on inflation, downward pressure on growth and generally raising European risk premia as uncertainty spikes. Last week my colleague Jens Eisenschmidt, our Chief European Economist, cut his forecasts for European GDP growth for this year and next, while also raising his projections for inflation on the back of higher energy costs. While Jens is not predicting a European recession at this time, investors are becoming incrementally more worried about this possibility as geopolitical tensions extend and oil and gas prices continue to rise. Even if Europe does manage to avoid falling into an outright recession, the stagflationary conditions that are building in the region, namely slowing growth and rising inflation, have important implications for investors. Across the broader market it points to a more challenging backdrop for corporate profits as slowing top line momentum coincides with growing margin pressures from higher input costs. At the same time, heightened geopolitical uncertainty is putting downward pressure on equity valuations as investors rotate out of the region, thereby lowering the price to earnings ratio at the same time as profit expectations retrench. After a near 20% decline from their January highs, it's fair to say that European stocks are pricing in quite a lot of bad news here, with equity valuations now below long run averages and close to record lows vs. U.S. stocks. While we think this provides an attractive entry point for longer term investors, European markets will likely remain tricky in the short term as investor sentiment oscillates between hope and fear. Our experience suggests that markets rarely trough on valuation grounds alone, instead requiring a backdrop of broad capitulation, coupled with a more positive turn in the news flow - conditions that have not yet fallen into place. In many respects stagflation is the worst environment for asset allocators, as slow growth weighs on stocks at the same time as high inflation potentially undermines the case for bonds. Thankfully such an environment has been rare over the last 50 years, however we can still construct a ‘stagflation playbook’ for equity markets when it comes to picking stocks and sectors. Specifically, we identify prior periods when inflation was rising at the same time as growth indicators were falling. We then analyze performance trends over those periods. When we do this, we find that a stagflationary backdrop tends to favor commodity and defensive oriented stocks at the expense of cyclical and financial companies - a trend that has repeated itself over the last month here in Europe. An alternative strategy is to focus on companies that have strong pricing power, as they should have more ability to raise prices to offset higher input costs than other stocks. In a European context, sectors that are currently raising prices to expand their margins, even in the face of rising input costs, include airlines, brands, hotels, metals and mining companies, telecoms and tobacco. To be clear, not every stock in these sectors will enjoy superior pricing power, but we think these areas are a good place to start the search. 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 year of the stock picker is in full swing as investors look towards a future of Fed tightening and geopolitical uncertainty, where some individual stocks will fare better than others.-----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, March 7th at 11:00 a.m. in New York. So let's get after it. Since publishing our 2022 outlook in November, we've taken a more bearish view of stocks for reasons that are now more appreciated, if not fully. First was the Fed's pivot last fall, something most suggested would be a small nuisance that stocks would easily navigate. Part of this complacency was understandable due to the fact that the Fed had never really administered tough medicine in the past 20 years. Furthermore, when things got rough in the markets, they often pivoted back - the proverbial Fed “Put”, or the safety net for markets. We argued this time was different, just like we argued back in April 2020 that this quantitative easing program was different than the one that followed the Great Financial Crisis, or GFC. In short, printing money after the GFC didn't lead to the inflation many predicted, because it was simply filling the holes created on bank and consumer balance sheets that were left over from the housing collapse. However, this time the money printing was used to massively expand the balance sheets of consumers and businesses, who would then spend it. We called it helicopter money at the time. In short, the primary difference between the post GFC Fed money printing and the one that followed the COVID lockdown, is that the money actually made it into the real economy this time and drove demand well above supply. This imbalance is what triggered the Fed to pivot so aggressively on policy. In fact, Chair Powell has admitted that one of the Fed's miscalculations was thinking supply, including labor, would be able to adjust to the higher levels of demand making this inflation transitory. This has not been the case, and now the Fed must be resolute in its determination to reduce money supply growth. Nowhere was this resolve more clear than during Chair Powell's congressional testimony last week, when he was asked if he would be willing to take draconian steps, as Paul Volcker did in the early 1980s to fight inflation. Powell confidently answered, "Yes". To us this suggests the Fed "Put" on stocks is well below current levels, and investors should consider this when pricing risk assets. The other reason most investors and strategists have remained more bullish than us is due to the path of earnings. So far, this positive view has been correct. Earnings have come through, and it's the primary reason why the S&P 500 has held up better than the average stock. Therefore, the key question continues to be whether earnings growth can continue to offset the valuation compression that is now in full swing. We think it can for some individual stocks, which is why the title of our outlook was the year of the stock picker. As regular listeners know, we have been focused on factors like earnings, stability and operational efficiency when looking for stocks to own. Growth stocks might be able to do a little better as earnings take center stage from interest rates, but only if the valuations have come down far enough and they can really deliver on growth that meets the still high expectations. The bottom line is that the terribly unfortunate events in Ukraine make an already deteriorating situation worse. If we achieve some kind of cease fire or settlement that both Russia and the West can live with, equity markets are likely to rally sharply. We would use such rallies to lighten up on equity positions, however, especially those that are vulnerable to the earnings disappointment we were expecting before this conflict escalated. More specifically, that would be consumer discretionary stocks and the more cyclical parts of technology that are vulnerable to the payback in demand experienced over the past 18 months. Another area to be careful with now is energy, with crude oil now approaching levels of demand destruction. On the positive side, stick with more defensively oriented sectors like REITs, healthcare and consumer staples. 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.

While the U.S. continues to see high valuations, rising inflation, and slow policy tightening, the story is quite different for many markets outside the U.S.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. 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 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, March 4th at 3 p.m. in London. While Russia’s invasion of Ukraine has implications for financial markets, it has  bigger implications for people. Hundreds of thousands have already been displaced, numbers which are likely to grow in the coming weeks. These refugees deserve our compassion, and support. To those impacted by this tragedy, you have our sympathies. And to those helping them, our admiration.Our expertise, however, is in financial markets, and so that’s where we’ll be focusing today. For those that are most negative on the market right now, the refrain is pretty simple and pretty straightforward. Assets are still expensive relative to historical valuations. Inflation is still high and it's still rising. And central banks are still behind the curve, so to speak, with lots of interest rate increases needed to bring monetary policy back in line with the broader economy. What I want to discuss today, however, was how different some of these concerns can look when you move beyond the United States. Let's start with the idea that assets are expensive. Now, this clearly applies to some markets, but less to others. Stocks in Germany, for example, trade at less than 12 times next year's earnings, Korean stocks trade at 10 times next year's earnings, Brazil, it's 8 times. And many currencies trade at historically low valuations relative to the U.S. dollar. Next up is inflation. While inflation is high in the U.S. and Europe, it's low in Asia, a region that does account for roughly 1/3 of the entire global economy. What do I mean by low? U.S. consumer prices have increased 7.5% Relative to a year ago. Consumer prices in China and Japan, in contrast, are up less than 1%. My colleague Chetan Ahya, Morgan Stanley's Chief Asia Economist, notes that these differences aren’t just some mathematical illusion, but rather reflect real differences in Asia's economy and policy response. Finally, there's the idea that central banks are behind the curve, so to speak. Now, the hindsight here is a little tricky, as the Federal Reserve and the ECB were dealing with enormous uncertainty around the scope of the pandemic for much of last year. But what's notable is that not all central banks took that path. Central banks in Chile, Brazil, Poland and Hungary, just to name a few, have been raising interest rates aggressively for the better part of the last 12 months. In times of crisis, markets often try to simplify the story. But the challenges facing global markets, from valuations, to inflation, to monetary policy, really are different. As events unfold, it will be important to keep these distinctions in mind.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 the Fed continues to signal coming rate hikes this year, the housing market will face implications across home sales, mortgage rates, and fundamentals.-----Transcript-----Jay Bacow: Welcome to Thoughts on the Market. I'm Jay Bacow, Co-Head of U.S. Securitized Products Research here at Morgan Stanley. Jim Egan: And I'm Jim Egan, the other Co-Head of U.S. Securitized Products Research. Jay Bacow: And on this edition of the podcast, we'll be talking about changes in the Fed policy and what the possible implications are for mortgages and the housing market more broadly. It's Thursday, March 3rd at 11:00 a.m. in New York. Jim Egan: Okay, Jay, we've talked about affordability pressures as mortgage rates have moved higher a couple of other times in the past on this podcast, and we would encourage listeners to go back and listen to those prior podcasts for a deeper dive on affordability. But Jay Powell just testified this week that he'll support a 25 basis point hike in March. Furthermore, if inflation pressures are persistent, then he's gonna raise Fed funds by more than 25 basis points at later meetings. The markets priced in six hikes this year. What does that mean for mortgage rates going forward? When I think about affordability, am I gonna have to think of another 150 basis point increase in mortgage rates? Jay Bacow: No. So you saying the market has priced in six hikes is really important, because mortgage rates are based on generally sort of the belly of the Treasury curve. And the belly of the Treasury curve is effectively a function of what the market's expecting the Fed to do, along with how much risk premium there is. And if the market's expecting the Fed to hike six times this year, then if the Fed hikes six times this year and there's no change in risk premium, then mortgage rates aren't really going to move very much from where they are right now. Now, Powell said that he's worried about inflation and so if inflation comes in higher than expected or the market changes their demand for risk premium, then mortgage rates are gonna move. Jay Bacow: But Jim, mortgage rates have already moved a lot, they've gone up 100 basis points this year in just two months. What does this mean for affordability? Jim Egan: From the affordability perspective, it's a problem. But that also really depends on how we define what a problem is. The housing market's been doing very, very well. But when we think about this kind of move in mortgage rates, existing home sales, transaction volumes, they're going to have to fall. Jay Bacow: But haven't existing home sales gone up a lot already? Jim Egan: Yes, and that's where we think it's important to really look at historical experiences during times like this. If we look back to mortgage rates to 1990 we have five other instances of this kind of increase in mortgage rates. Now, one of those was during the housing crisis, so we're going to remove the experience there, but if I look at the other four instances existing home sales climbed very sharply during that first 6 month period, while mortgage rates were climbing by 100 basis points. That's where we are right now, we're seeing that climb. The 12 months after, the subsequent year, which we're going to start to enter March of this year going forward, that's where existing home sales tend to plateau and in a lot of instances come down. And they tend to come down further if mortgage rates continue to climb during that year, which is what we just discussed. So we think it's very likely, and if historical precedent holds, then we've already seen the peak of existing home sales for at least the next 12 months. Jay Bacow: What about home prices? Powell was asked if he thinks that home prices are going to fall and go back to pre-COVID levels, and he said he thought that raising mortgage rates would just slow down home prices, and he doesn't want to see home prices fall. What do we think? Jim Egan: Well, I'd like to believe he's reading our research because that's very much in line with how we think about things right now. We think that home price appreciation at a 19% rate right now is going to have to slow. And as we've said on this podcast before, affordability pressures are really one of, if not the key reason that the rate of HPA has to come down. Simply put, potential homebuyers cannot continue to afford to buy homes, at prices that would allow HPA to continue to climb at almost 20% year over year levels. However, if we think about the other factors that would come into play to bring home prices from a positive level to a negative level, we just do not see those characteristics in the market right now. Supply conditions are very constrained. We think they'll be alleviated somewhat this year, but that's not enough for there to be an overhang of supply that would weigh on home prices. We think that the credit availability in the market has been very conservative. We don't think we

The recent crisis in Ukraine has caused a great deal of uncertainty in the economy and markets. To cut through the noise, we take a look at the three key questions we are hearing from investors.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 to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy for Morgan Stanley. Along with my colleagues, bring you a variety of perspectives, I'll be talking about the intersection between U.S. public policy and financial markets. It's Wednesday, March 2nd at 3pm in New York. As an analyst focusing on the interaction between geopolitical events and financial markets, I'm accustomed to dealing with uncertainties evolving at a rapid pace. But even by those standards, nothing in my career compares to the events of the past two weeks: the Russian invasion of Ukraine and the sanctions response by the US, the UK and Europe. To help cut through the noise, here's answers to the three most frequently asked questions by our investor clients. First, do sanctions mean higher energy costs? In the short term, the answer is likely yes. While sanctions on Russian banks currently permit payments for various energy commodities, there's still restrictions on, and disruptions to, their transportation. With Russia being a key producer of several commodities, including 10% of the world's oil, it's not surprising that global oil inventories have declined and the price of a barrel of oil is sitting above $100. This dovetails with the second question. Should we expect the Fed will shy away from hiking rates? In short, we don't think so, at least at the Fed's March meeting, but it certainly creates substantial uncertainty in the outlook. This conflict seems to be affecting both parts of the Fed's dual mandate in opposite directions. It risks dampening economic growth, but for the reasons we just described, it can also boost inflation. Accounting for both, our economists still expect the Fed to hike 0.25% in March but the conflict adds another layer to an already unprecedented level of complexity for the Fed. This is actually the key point for fixed income markets, in our view, where investors should prepare for ongoing volatility in Treasury and credit markets as the Fed may have to regularly tinker with their own assessment of growth and inflation. Finally, what are the long-term implications for investors? To answer this question, we refer you back to our framework for 'Slowbalization,' or the idea that companies will have to, in certain industries, spend more to adjust supply chains and exit certain businesses as governments create policies that prioritize economic and national security over short term profits. You can see how this trend may already be accelerating after the onset of the Ukraine crisis, with several multinational companies announcing they'll sell stakes in, exit joint projects with or pause sales to Russian companies. But some equity sectors may see upside. Defense and software, for example, could see bigger spending as governments reorient their budgets towards these efforts, most notably Germany announcing it will boost its defense spending to 2% of GDP. Of course, the situation remains fluid, and we'll continue to track it and keep you in the loop on what it means for the economy and markets. Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague, or leave us a review on Apple Podcasts. It helps more people find the show. 

As the conflict between Russia and Ukraine continues to unfold, implications for the oil and gas sector in Europe are beginning to take shape.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 to Thoughts on the Market. I'm Martijn Rats, Global Commodity Strategist and Head of the European Energy Research Team for Morgan Stanley. Along with my colleagues bringing you a global perspective, I'll be talking about developments in the oil and gas sector amidst geopolitical tensions. It's Tuesday, March 1st at 2:00 p.m. in London. As the situation between Russia and the Ukraine continues to develop, implications for commodity markets are beginning to take shape. Russia is a major commodity producer, playing in an especially important role in providing energy for Europe through oil and natural gas imports. With a new round of sanctions announced over the weekend, the precise impact on prices remains to be seen, but we can begin to forecast the direction. First, there is no sign at this stage that, at least at the aggregate level, the flow of commodities has been impacted yet. All of the pipeline and tanker tracking data that we've seen suggests that they continue to be shipped. That shouldn't be too surprising, it's still early days and the sanctions that have been announced so far have been carefully crafted to reduce the impacts on energy flows from Russia. Second, trade patterns will nevertheless likely shift. We can already see this in the oil markets. European refiners are traditionally big buyers of Russian crudes, and even though technically they have continued to be able to buy these grades, they are increasingly reluctant to do so. There have been indications that ship owners are reluctant to send vessels to Russian ports, and that European buyers are uncertain about where sanctions will ultimately go. This is requiring increasingly large discounts. As many buyers already move away from Russian crudes, this also creates more demand for others, including North Sea crudes, which therefore drives up the price of Brent. Third, all of this is happening against the backdrop of tightness in both global oil markets and the European gas markets. We are seeing low and falling inventories, low and falling spare capacity and low levels of investment across both. At the same time, there is a healthy demand recovery ongoing as the world emerges from COVID. Given this tightness, even a modest disruption can have large price impacts. Now, with that in mind, risks to oil and gas prices are still firmly skewed higher, at least in the short term. Finally, I want to point at the growing tension in Europe between diversification and decarbonization. Several key politicians have said over the last several days that Europe should reduce its dependance on Russian oil and gas, and diversify its sources of supply. At the same time, Europe has set ambitious targets to decarbonize. Diversification requires investment in new supply, while decarbonization then requires that those supplies, in the end, will not be used. How that tension will be resolved is hard to know, but this is an issue that at some point will need to be addressed. Bottom line, there is still a lot of uncertainty for commodity markets in the coming weeks and months. We will keep you posted, of course, as new developments take shape. Thanks for listening. If you enjoy Thoughts on the Market, please leave us a review on Apple Podcasts and share the podcast with a friend or colleague today. 

Like many markets, Corporate Credit has faced a rocky start to 2022. For investors, understanding the difference between default and duration risk will be key to positioning for the rest of the year.-----Transcript-----Welcome to Thoughts on the Market. I am Vishy Tirupattur, Global Director of Fixed Income Research. Along with my colleagues bringing you a variety of perspectives, I'll be talking about corporate credit markets against the background of policy tightening and heightened geopolitical tensions. It's Monday, February 28th at 10 a.m. in New York. It's been a rough start for the year for the markets. Central banks' hawkish shift towards removing policy accommodation, the significant flattening of yield curves that followed, rising geopolitical tensions, fading prospects for fiscal support, and growing concerns about stretched valuations have all combined to spawn jitters in financial markets. Corporate credit has been no exception. After two years of abundant inflows, the narrative has turned outflows from credit funds in conjunction with negative total returns. These outflows conjure up painful memories of 2018, the last time the credit markets had to deal with substantial policy tightening. Let us focus on the source - sharply higher interest rates and duration versus credit quality and default concerns. Consider leverage loans, floating rate instruments that have credit ratings comparable to high yield bonds which are fixed rate instruments. Since the beginning of the year, high yield bond spreads have widened almost three and half times more than leverage loan spreads. If you limit the comparison just to fixed rate bonds, the longer duration investment grade bonds have significantly underperformed the lower quality high yield bonds. Clearly, it is duration and not a fear of a spike in defaults that is at the heart of credit investor angst. My credit strategy colleagues, Srikanth Sankaran and Taylor Twamley, have analyzed the impact of rate hikes on interest coverage ratios for leveraged loan borrowers. This ratio is a measure of a company's ability to make interest payments on its debt, calculated by dividing company earnings by interest on debt expenses during a given year. The key takeaway from their work is this - What matters more for interest coverage is the point at which higher rates become a headwind for earnings growth. Loan interest coverage ratios have historically improved early in the hiking cycle as interest expenses are offset by growth in earnings. I draw comfort from the evidence that as long as earnings growth holds up and does not turn negative, corporate credit fundamentals measured in interest coverage ratios are positioned well enough to withstand our economists base case of six 25 basis point rate hikes in this year. While credit fundamentals look fine, valuations are not. Since the beginning of the year, we have seen spread widening, the pace of which has picked up in the last couple of weeks. So, we still prefer taking default risk over duration and spread risk. The risk to this view has increased in the last few weeks. Specifically, if central bank reaction to the heightened geopolitical risk is to control inflation at the expense of growth, lower quality credit may be more exposed. 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 markets react to the conflict between Russia and Ukraine, price moves for corn, wheat, oil and metals may mean new inflationary pressures for central banks to contend with in the coming months.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. 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.This recording references actual or potential sanctions, which may prohibit U.S. persons from buying certain securities, making certain investments and/or engaging in other activities in or pertaining to Russia.The content of this recording is for informational purposes and does not represent Morgan Stanley’s view as to whether or not any of the Persons, instruments or investments discussed are or will become subject to sanctions. Any references in this presentation to entities, debt or equity instruments that may be covered by such sanctions should not be read as recommending or advising as to any investment activities in relation to such entities or instruments. Audience members are solely responsible for ensuring that their investment activities in relation to any sanctioned entities and/or securities are carried out in compliance with applicable sanctions.-----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, February 25th at 3 p.m. in London. Russia's invasion of Ukraine has grabbed the headlines. There are other commentators and podcasts that are far more knowledgeable and better placed to comment on that conflict. Rather than offer assessment on geopolitics, I want to try to address one small tangent of these developments- the potential impact on prices and inflation. Russia and Ukraine are both major commodity producers. Russia produces about 10% of the world's oil, and Russia and Ukraine together account for 1/3 of the world's wheat and 1/5 of the world's corn production, according to the U.S. Department of Agriculture. So, if one is wondering why the price of wheat is up about 18% since the end of January, look no further. These commodities are traded around the world, but specific exposure can be even more acute. Morgan Stanley analysts estimate that Russia supplies roughly 1/3 of Europe's natural gas, while analysis by the Financial Times estimates that Ukraine supplies roughly 1/3 of China's corn. There are also second order linkages. Russia produces about 40% of the world's palladium, a key component for catalytic converters, and about 6% of the world's aluminum. But because Russia also provides the energy for a good portion of Europe's aluminum production, the impact could be even larger on aluminum prices than Russia's market share would indicate. Central banks will need to look at these changing prices and weigh how much they should factor into their medium term inflation outlook, which ultimately determines their monetary policy. For now, we think three elements will guide central bank thinking, especially at the U.S. Federal Reserve. First, higher policy rates are still necessary, despite international developments, given how low interest rates in the U.S. and Europe still are relative to the health of these economies. Slowing demand, which is the point of interest rate hikes, is still important to contain medium term inflationary pressures. Second, these developments may reduce the odds of an aggressive start to central bank action. A few weeks ago, markets implied that the Fed would begin with a large .5% interest rate increase. Our economists did not think that was likely, and continue to believe that the Fed will hike by a smaller .25% at its March meeting. Third and finally, the duration and scale of these commodity price impacts are uncertain. Indeed, I haven't even mentioned the prospect of further sanctions or other interventions that could further impact commodity prices. In the view of my colleagues who forecast interest rates, that should mean higher risk premiums, and therefore higher interest rates on government bonds in the U.S. and Europe. 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. 

Water scarcity brings unique challenges in the path to a more sustainable future. Solving for them will mean both risk and opportunity for governments, corporates, and investors.-----Transcript-----Jessica Alsford Obviously, everyone's minds today are rightly on news out of Europe. We will have an episode to cover this in the coming days, but today we are thinking more long term on sustainability. Jessica Alsford Welcome to Thoughts on the Market. I'm Jessica Alsford, Global Head of Sustainability Research at Morgan Stanley, Connor Lynagh And I'm Connor Lynagh, an equity analyst covering energy and industrials here at Morgan Stanley. Jessica Alsford And on this episode of the podcast, we'll be discussing one of the leading sustainability challenges of the near future, water scarcity, as well as potential solutions that are likely to emerge. It's Thursday, February, the 24th at 3 p.m. in London, Connor Lynagh and it's 10:00 am in New York. Connor Lynagh So Jess, we recently collaborated on the report, 'Changing Tides, Investing for Future Water Access.' Maybe the best place to start here is the big picture. Can you walk us through the demand picture and how challenges are expected to change in the industry? Jessica Alsford So the key issue really is that water is a critical but finite resource, and there's already huge inequality in access to water globally. So over the last century, we've seen water use rising about six fold, and yet there are still around 2 billion people without access to safely managed drinking water and around 3.6 billion without safely managed sanitation. Then add to this the fact that demand is likely to increase by around another 30% by 2050, about 70% of total demand comes from agriculture withdrawals, and clearly we need to increase the amount of food we're producing due to growing population, and there's also going to be incremental water needs from industry and municipalities. A third element to also think about is that this is all happening at the same time that climate change is going to alter the hydrological cycle. And so, this is going to increase the risk of floods in some areas and drought in others. Eight of the 10 largest economies actually have either the same or higher water risk scores than the global average. And so clearly what is already a challenge in terms of providing access to water is only going to become more complicated going forward. Connor Lynagh So Jess, water is pretty unique when you look at the different challenges that the sustainability community is facing. What do you think is particularly unique and noteworthy about the challenge we're facing here? Jessica Alsford So the three really big sustainability megatrends that we look at our climate, food and then water. They're all interrelated and they're all really tricky to solve for. But I think there are some unique characteristics about water that do add some complexities to it. First of all, it is finite. So, in theory, we can produce more food, but it's very difficult to make more water. In addition, it's incredibly difficult and costly to transport water around. So, if you think about energy and food, these can be moved over pretty large distances, but water is really a regionally specific commodity. And then the third element really is that water is underpriced if you compare to the actual cost of providing it. There aren't any free markets really to set prices according to supply and demand and because water is essential to life, it's really not straightforward when it comes to thinking about pricing. Jessica Alsford So Connor, from your perspective, covering some of the stocks exposed to the water theme, what are your thoughts on how water might be priced going forward? Connor Lynagh Yeah, I mean, I think you really hit on a lot of the big issues, which is that pricing is very heavily regulated relative to a lot of commodities out there. You know, a lot of utilities are not really able to cover their costs without subsidies from the government. And so, you know, I think as a base case, there does need to be an increase in pricing to solve for some of this shortfall that we see out there. But that has to be done delicately. We can't disadvantage members of society that are already struggling. And so, I think what we're going to need to see is some sort of market-based pricing, but in select instances. So, Australia already has a relatively well-developed water market. You're seeing some moves in that direction in California as well. But I think as a first step, I think there's going to be increased focus on larger industrial users paying more than their share and allowing consumers to have a relatively advantaged position on the cost structure. Jessica Alsford So pricing is clearly one issue, but we also need to see huge investment in global water infrastructure. What are your thoughts on how this develops over the next few years? Conno

While geopolitical tensions currently weigh on markets, investors should look to the fundamentals in order to anticipate the depth and duration of the ongoing correction.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. 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 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 Wednesday, February 23rd at 11 a.m. in New York. So let's get after it. This past week tensions around Russia/Ukraine dominated the headlines. When unpredictable events like this occur, it's easy to simply throw up one's arms and blame all price action on it. However, we're not so sure that's a good idea, particularly in the current environment of Fed tightening and slowing growth. From here, though, the depth and duration of the ongoing correction will be determined primarily by the magnitude of the slowdown in the first half of 2022. While the Russia/Ukraine situation obviously can make this slowdown even worse, ultimately, we think that preexisting fundamental risks we've been focused on for months will be the primary drivers, particularly as geopolitical concerns are now very much priced. While most economic and earnings forecasts do reflect the slowdown from last year's torrid pace, we think there's a growing risk of greater disappointment in both. We've staked our case primarily on slowing consumer demand as confidence remains low thanks to the generationally high inflation in just about everything the consumer needs and wants. Many investors we speak with remain more convinced the consumer will hold up better than the confidence surveys suggest. After all, high frequency data like retail sales and credit card data remain robust, while many consumer facing companies continue to indicate no slowdown in demand, at least not yet. However, most of our leading indicators suggest that the risk of consumer slowdown remains higher than normal. Secondarily, but perhaps just as importantly, is the fact that supply is now rising. While this will alleviate some of the supply shortages, it could also lead to a return of price discounting for many goods where inflationary pressures have been the greatest. That's potentially a problem for margins. It's also a risk to demand, in our view, if the improved supply reveals a much greater level of double ordering than what is currently anticipated. In short, the order books - i.e. the demand picture - may not be as robust as people believe. Overall, the technical picture is mixed also within U.S. equities. Rarely have we witnessed such weak breath and havoc under the surface when the S&P 500 is down less than 10%. In our experience, when such a divergence like this happens, it typically ends with the primary index catching down to the average stock. In short, this correction looks incomplete to us. Nevertheless, we also appreciate that equity markets are very oversold and sentiment is bearish even if positioning is not. With the Russia Ukraine situation now weighing heavily on equity markets, relief would likely lead to a tactical rally, but we acknowledge that uncertainty remains extremely high. The bottom line for us is that we really don't have a strong view on the Russia/Ukraine situation as it relates to the equity markets. However, we think a lot of bad news is priced at this point. Therefore, we would look to sell strength into the end of the month if markets rally on the geopolitical risk failing to escalate further. Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people to find the show.

The challenges of inflation can be felt around the world, but understanding the regional differences is key to an effective 2022 for both central banks and investors.----- 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 Chief Global Economist.Andrew Sheets And on part 2 of this special episode of Thoughts on the Market, we'll be continuing our discussion on central banks, inflation, and the outlook for markets. It's Tuesday, February 22nd at 1:00 p.m. in London.Seth Carpenter And 8:00 a.m. in New York.Andrew Sheets So Seth, you lay out the challenge that central banks face because they are being pulled in two directions. If they raise rates too quickly, the economy could slow too quickly. That means real people lose their jobs, real businesses have trouble getting loans. On the other hand, if they don't raise rates quickly enough, there's a risk that inflation would be higher and that has a real impact on the economy and people's lives. When it comes to, kind of, which side of caution to air on, how do you think central banks are thinking about that at the moment? And what would you be watching to indicate which side of that debate they're starting to come down on?Seth Carpenter I think if we're looking at the developed market, central banks, the Fed, the ECB, the Bank of England right now, I think they have a high conviction that the current stance of policy is just too accommodative given the state of the real economy and where inflation is. So I think right now all of them believe they need to get going, that starting now is fine. That mindset I don't think though will last too terribly long because over time we will start to see some outright tightening. So for the Fed, where does that point change? I think once they start to run off their balance sheet, probably sometime around the middle of this year, they're going to start to get much more cautious, they're going to look at markets and say how much of this tightening is being transmitted first through financial markets and then to the economy. So they'll be looking at credit spreads, they'll be looking at risk markets to ask, are we getting some traction? We think, especially if we're right and a bunch of the inflation that we're seeing now is this frictional inflation, that comes down in the latter half of the year. We think that hiking cycle is going to slow down over time. And so much like the Bank of England's forecast based on market pricing, we think there's probably a bit too much that's baked into markets in terms of how much hiking they do. They start off reasonably swiftly, knowing that they were too far away, knowing that they were being very accommodative. But in the latter half of the year, the pace of tightening starts to slow down.Andrew Sheets Seth, another question that I get quite a bit is at what point will market volatility cause the Fed or another central bank to change their policy? There's an idea in the market that if stocks drop or if credit spreads widen, or if there's higher volatility, then central banks would look at that and respond to that. From a central bank standpoint, how do you think central banks think about market volatility? And what are some important ways that you think investors either correctly or kind of incorrectly think about that reaction function?Seth Carpenter I can say over the 15 years that I spent at the Fed drafting policy documents, briefing the committee on policy options, thinking about how markets are affecting the economy, I can tell you the following. The market tends to have an overdeveloped sense of how sensitive central banks are to equity market reactions in particular. Equity market changes are important, it can be a very high frequency signal that there is cause to investigate what's going on in the economy. But they give many, many, many false signals as well, and so I would say that a sharp drop in equity prices would be the sort of thing that would get the attention of central bankers but would not force their hand to make a change. Instead, there would be further investigation. In addition, the whole point of tightening monetary policy is to tighten financial conditions and thereby slow the economy. So, it is not a question of are we getting credit spread widening? Are we getting softer asset prices? The answer to that is that's part of the plan. I think the real question is how large is the move in asset prices and how quick is the move in asset prices? If we have a very orderly tightening of financial conditions that plays out over several months, I don't think that's the sort of thing that causes the central bank to reverse course. If instead, over the course of a month you get a very sharp and disruptive widening and spreads, I think that really does cause a substantial reconsideration of the plan.Andrew Sheets So, Seth, I think it'

Inflation has reached levels not seen in years, but there is an important distinction to be made between frictional and cyclical inflation, one that has big implications for central banks this year.----- 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 Chief Global Economist.Andrew Sheets And on this episode of Thoughts on the Market, we'll be discussing inflation, central banks and the outlook for rate hikes ahead. It's Friday, February 18th at 1:00 p.m. in LondonSeth Carpenter and 8:00 a.m. in New York.Andrew Sheets So, Seth, it's safe to say there's focus on inflation at the moment in markets because we're seeing some of the highest inflation rates in 30 or 40 years. When we think about inflation, though, it's really two stories. There is inflation being driven by more temporary supply chain and COVID related disruptions. And then there is a different type of inflation, the more permanent stickier type of traditional inflation you get as the economy recovers and there's more demand than supply can meet. How important is this distinction at the moment and how do you see these two sides of inflation playing out?Seth Carpenter Andrew, I think you've laid out that framework extraordinarily well, and I think the distinction between the two types of inflation is absolutely critical for central banks and for how the global economy is likely to evolve from here. My take is that for the US, for the Euro area, for the UK, most of the excess inflation that we're seeing is in fact, COVID-related and frictional. And so, what we can see in the data is that we have an easing now in supply chain disruptions. Supply chain disruptions are still at a very high level, but they're coming down and they're getting better. Similarly, in the US and to some degree in the UK, there have been some labor market frictions because of COVID that have meant that some of the services inflation has also been higher than it might be otherwise. I don't want to diminish completely the idea that there's some good old fashioned cyclical macroeconomic inflation there, because that's also very important. But I think the majority of it is in the frictional type of COVID-related inflation. The key reason why that matters is what has to get done to bring that inflation back down to central bank targets. If the majority of this excess inflation is standard macro cyclical inflation, central banks are going to have to engage in sufficiently tight policy to slow the economy to create slack and bring down inflation. Now, the estimates are always imprecise, but estimates in the United States for, say, the Phillips curve, and when I say the Phillips curve, I mean either the relationship between the unemployment rate and inflation or more generally, the relationship between where the economy is relative to its potential to produce and how much there's currently aggregate demand in the economy. If we have three percentage points of excess inflation that has to be dealt with by creating slack, you're probably going to have to either cause a recession or wait many, many years to gradually chip away things to bring it down over time. It's just too large of an amount of excess inflation if it is truly that standard macro cyclical inflation.Andrew Sheets So, Seth, it's been a while since we've had to deal with rate hikes in the market. And as you just laid out, there are estimates of how much the Fed would have to raise interest rates to address inflation, these so-called Phillips Curve models and other models. But there's a lot of uncertainty around these things. How much uncertainty do you think there is around how rate hikes will act with inflation? And how do you think central banks think about that uncertainty?Seth Carpenter So I would completely agree there's uncertainty right now, and I think there are at least two important chains in that transmission mechanism, the first one that we're just talking about is how much of the inflation is cyclical and as a result, how much is going to respond to a slower economy. But the main part that I think you're getting at is also how do rate hikes - or any sort of monetary policy tightening - how does that affect the real economy? How much does that slow the economy? And I think there, it's a very open question. What we know is that over the past several decades there has been a long run downward trend in real interest rates and nominal interest rates. As a result, there's going to be a real tension for central banks trying to find just that sweet spot. How much do you need to raise interest rates to slow the economy without raising it so much that you actually tip things over into a recession? I think it's going to be difficult. And central bankers justifiably then take things very cautiously. Take the Fed as a particular example, they're tightening with two policy tools

The ongoing situation around Ukraine has captivated headlines and investors alike. While the resolution remains unclear, we can begin to predict how markets would react to possible outcomes.This presentation references actual or potential sanctions, which may prohibit U.S. persons from buying certain securities, making certain investments and/or engaging in other activities in or pertaining to Russia. The content of this presentation is for informational purposes and does not represent Morgan Stanley’s view as to whether or not any of the Persons, instruments or investments discussed are or will become subject to sanctions. Any references in this presentation to entities, debt or equity instruments that may be covered by such sanctions should not be read as recommending or advising as to any investment activities in relation to such entities or instruments. Audience members are solely responsible for ensuring that their investment activities in relation to any sanctioned entities and/or securities are carried out in compliance with applicable sanctions.----- Transcript -----Michael Zezas Welcome to Thoughts on the Market. I'm Michael Zezas Head of U.S. Public Policy Research and Municipal Strategy for Morgan Stanley.Marina Zavolock And I'm Marina Zavalock, Head of Emerging Europe, Middle East, and Africa Equity Strategy at Morgan Stanley.Michael Zezas And on this special edition of the podcast, we'll be discussing ongoing developments around Ukraine and how markets might react to various outcomes. It's Thursday, February 17th at 9:00 a.m. in New York.Marina Zavolock And it's 2:00 p.m. in London.Michael Zezas So, Marina, we've spent a lot of time in recent weeks tracking developments in the ongoing situation around Ukraine, on whose border Russia's amassed a substantial military presence and there are warnings of a potential invasion. This would be no small event, potentially the largest military action in Europe since World War Two, with great risk to many people. Recent news has all sides continuing to express hope for a diplomatic solution, and let's hope that can be achieved. But for this podcast, we want to focus narrowly on the market's impact because this situation has been a key driver of recent moves in many global markets. So, let's keep it simple to start, which markets are most vulnerable to a military confrontation and why?Marina Zavolock So, of course, we see Ukrainian and Russian markets as most directly vulnerable. Ukraine is directly exposed from an economic perspective, and the Ukrainian market has more downside risks due to this direct fundamental exposure and the country's reliance on external financing as well. The risk for Russian markets are more related to sanctions, given the strong economic backdrop. There are various sanctions under discussion aimed firstly at deterring a Russian invasion of Ukraine. Should Russia invade, we would expect the U.S. and Europe to act quickly to impose new sanctions, both to impact Russia’s decision making and ability to sustain any invasion, while at the same time limiting the impact on global commodities and supply chains to the extent possible.Marina Zavolock The situation is, of course, very fluid, as you described. Sanctions have not yet been finalized, but I'll mention three of the material sanctions that are reportedly under discussion. First, SDN list sanctions on a number of Russian banks and possibly other Russian companies. This would mean US persons would be prohibited from dealing with these companies, be it in business transactions or trading of securities. Second, Export controls restricting the export of technology products containing U.S. made components or software to Russia. Third, New sovereign debt sanctions on the secondary market – adding to the primary market sanctions already in place – this could mean exclusion from large fixed income indices in a worst case. Overall, from a Russian stock market perspective, we see the Russian banking sector as potentially most exposed, given a number of banks appear targeted by SDN list sanctions, and would also be affected meaningfully by any ban on U.S. technology. Michael Zezas So those outcomes seem pretty substantial here in terms of their impact. So obviously the outcome of this confrontation matters quite a bit. How do you think the stock markets you're tracking are set up to react to various outcomes, whether it be de-escalation from here or some form of further escalation?Marina Zavolock So to assess the risk reward for different Russian and Ukraine related assets and commodities, we published a framework earlier this year to outline these scenarios: de-escalation, limbo (where uncertainty persists), partial escalation, and material escalation. For Russian equities in particular, we use two key variables that investors tend to focus on: the market's implied cost of equity and dividend yield. On implied cost of equity, Russia currently trades at 19%, which is about

Original Release on February 2nd, 2022: The Federal Reserve continues to face a host of uncertainties, leading to volatility in the Treasuries market. This trend may lead some investors to reconsider the municipal bond market.----- Transcript -----Welcome the Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy 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, February 2nd at 10 a.m. in New York. A couple weeks back, we focused on the tough job ahead for the Federal Reserve. It's grappling with an uncertain inflation outlook driven by unprecedented circumstances, including the trajectory of the pandemic, and the still unanswered questions about whether supply chain bottlenecks and swelling demand by U.S. consumers for goods over services have become a persistent economic challenge. Against that backdrop, it's understandable that keeping open the possibility of continued revisions to monetary policy is part of the Fed's strategy. Not surprisingly, that uncertainty has translated to volatility in the Treasury market and, as expected, some fresh opportunity for bond investors.For that, we looked in the market for municipal bonds, which are issued by state and local governments, as well as nonprofits. Credit quality is good for munis as the combination of substantial COVID aid to municipal entities and a strong economic recovery have likely locked in credit stability for 2022. But until recently, the price of munis was quite rich, in part reflecting this credit outlook, an expectation of higher taxes that would improve the benefit of munis tax exempt coupon, and a recent track record of low market volatility. But the bond market's reaction to the Fed undermined that last pillar, resulting in muni mutual fund outflows and, as a result, a move lower in relative prices for muni versus other types of bonds.While this adjustment in valuations doesn't exactly make munis cheap, for individuals in higher tax brackets, they're now looking more reasonably priced. And, as a general rule of thumb, when the fundamentals of an investment remain good, but prices adjust for purely technical reasons, that's a good signal to pay attention.So what does this mean for investors? Well, that fed driven volatility isn't going away, so munis could certainly still underperform some more from here. But for a certain type of investor, we wouldn't let the perfect be the enemy of the good. If you're in a higher tax bracket and need to replenish the fixed income portion of your portfolio, it could be time to curb your caution and start adding back some muni exposure.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 Fed grapples with new data from last week's Consumer Price Index report, markets are pricing a move away from the dovish policy of the past and investors should pay attention.----- 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, February 15th at 10 a.m. in New York. So let's get after it.While there are many moving parts in any market environment, investors often become infatuated with one in particular. In our view, going into last Thursday's consumer price index report was one of those times. For the days leading into it every conversation with investors, traders, and the media obsessed over the report and whether markets were appropriately priced. For the inflation bulls the release did not disappoint, coming in significantly stronger than expected with the components of the report just as hot.Immediately after its release, both short- and longer-term interest rates surged. Additional policy hawkishness was quickly priced too, as markets concluded the Fed was falling even further behind the curve. Market chatter of an emergency Fed meeting made the rounds, indicating the possibility of immediate cessation of quantitative easing or even an intra-meeting rate hike. By the end of the day on Thursday markets had priced in a 90% chance of a 50 basis point hike at the March meeting, and six to seven 25 basis points worth of hikes by the end of the year. Balance sheet runoff, or quantitative tightening, is also expected to begin by the middle of this year at the rate of $80 billion a month.When we first started talking about ‘Fire and Ice’ last September, our view that the Fed would have to go faster than expected to fight the building inflationary pressure was met with quite a bit of skepticism, and for a good part of the fall markets disagreed too. Some of this was due to the fact that most investors in markets like to see the hard data before positioning for it. The other reason is likely due to how the Fed and other central banks have behaved since the financial crisis, with their dovish policy bias. Fast forward to today and the data is irrefutable. Doves are quickly going extinct, and it's become almost a competition as who can have the most hawkish forecasts at this point.While we don't doubt the Fed and other central banks resolve to try and get inflation back under control, the market is now all in on the idea that they will do their job to fight inflation. However, we find ourselves a bit more skeptical that they will be able to get as much policy tightening done as is now expected and priced. Furthermore, when something is this obvious and consensus, it's usually time to start focusing on something else.As noted in the past several weeks, we think the equity markets will now begin to focus on growth or the lack thereof. In short, one should begin to worry about the ‘ice,’ now that ‘fire’ is finally appreciated. One of the reasons we are skeptical of the Fed and other central banks will be able to deliver on the policy tightening now expected, is the fact that growth is already slowing. An unusual circumstance at the beginning of any monetary policy tightening cycle, particularly one that is so ambitious. Whether it's the pay back in demand, or the sharp decline in real personal disposable income, we think the rate of consumption is likely to disappoint expectations in the first half of 2022. Furthermore, this weaker consumption is arriving just as supply chains are finally loosening up, something that is likely to be aided by the end of Omicron and the labor shortages it has created in the transportation and logistics industries. In that regard, Friday's consumer confidence survey release looks to be the more important macro data point of the week, not the CPI.Bottom line, this correction started six months ago with the sharp rise in inflation and the Fed's pivot to address it. It will likely end when growth expectations are reset to more realistic levels sometime this spring. Until then, remain defensively biased with equity allocations.Thanks for listening. If you enjoyed Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app, it helps more people to find the show.

As investors face the multitude of risks ahead, one may need to think like the Tiger and use the rotation towards value stocks, and away from growth, to leap over higher hurdle rates this year. ----- Transcript -----Welcome to Thoughts on the Market. I'm Jonathan Garner, Chief Asia and Emerging Market Equity Strategist for Morgan Stanley Research. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about Asia and emerging market equities in the year ahead. It's Monday, February the 14th at 8:30 p.m. in Hong Kong.Welcome to the Year of the Tiger from the Morgan Stanley team in Asia. Ferocious, brave, and intelligent, the tiger inspires us to navigate the multitude of risks which confront investors today. For us in Asia, we're at first sight on the sidelines of the action as expectations build for a sea-change this year in monetary policy in the US and Europe.Indeed, we have a degree of sympathy with the argument that the different phase of the monetary and fiscal cycle in China, in essence a moderate easing, is a key reason to be more constructive on Asian markets performance this year in both absolute and relative terms.However, divergent policy cycles are only part of the story. North Asia has already benefited substantially from the major shift towards good spending and away from services, which has been such a unique feature of the COVID driven recession and recovery. Now, as that starts to reverse, given the reopening trend in the US and Europe, we may see earnings growth in markets like Korea and Taiwan slow. Moreover, significant challenges in relation to COVID management still beset the region, most notably in Hong Kong, which is experiencing its largest surge in cases since the pandemic began.A key call that Morgan Stanley's equity strategy team made three months ago, in our year ahead outlook, was that investors on a worldwide basis should rotate away from growth stocks. That is, stocks with high expected earnings growth and high valuations towards value stocks. That is those with lower valuations, more dividend yield support, and lower anticipated earnings growth, not least due to the fact that many businesses in the value style category tend to be more established than growth stocks.This rotation has indeed taken place, as evidenced not just by Nasdaq's underperformance in the US, but also the underperformance of growth stocks in Asia and emerging markets. This has been reflected in indices like Kosdaq in Korea or the TSE Mothers Index in Japan. In fact, in Japan banks and insurers, stocks which investors have not focused on for a long time, are leading in performance in 2022. Whilst in China, bank stocks have been outperforming internet stocks for some time now.For those of us who worked through the 1999 to 2002 cycle in global equities, things seem very familiar. History rhymes rather than repeats, but the catalyst for growth stock underperformance then, as now, was a sudden repricing of interest rate hike expectations with a shift higher in nominal and real interest rates. That higher hurdle rate depresses valuations for equities generally, but particularly for higher multiple growth stocks, further motivation for the rotation towards value stocks.So. investors may need to start thinking like the tiger in order to leap over that hurdle and land safely on the other side.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.

Headlines today are focused on US Consumer Price Inflation rising 7.5% versus 1 year ago. The question on the minds of consumers and investors alike is, where will it go from here?----- 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, February 11th at 2 p.m. in London.This week for the ninth month in the last 10, U.S. consumer price inflation was higher than expected, rising 7.5% Versus a year ago. Investors are currently having a very lively discussion around where inflation is headed, but also how much it matters. And I wanted to share a few of our thoughts.One important thing about these rising prices is they aren't all rising for the same reason. COVID related disruptions are still impacting the production of everything from meat to automobiles. And say, with fewer new cars being built that means the cost of used cars has risen almost 50%. Now cars aren't a large share of the so-called inflation basket, the collection of goods and services that is used to determine how much overall prices are rising or falling. But if a small share of something rises 50%, the overall number can still rise quite a bit.Then there are rising prices that we see today, but where the story has been building for some time. The assumed cost of shelter, for example, should be linked to the price of housing. But due to how this data is measured, there can be some pretty significant lags.Consider the following. From the start of 2017, so about five years ago, U.S. home prices have risen 50%. But the assumed rise in the cost of shelter, that goes into the inflation calculation, suggests that the cost of shelter has risen just 16% over that same period. As this gap closes and shelter costs catch up to where home prices already are, that will get reported as a lot of additional inflation, even if home prices have stopped rising.Another part of this story is the narrative and the timing of it. Per a quick check of the headlines this morning, Thursday’s inflation data was the top story for The Wall Street Journal and The New York Times.Yet, based on Morgan Stanley's current forecasts, U.S. inflation is actually peaking right about now. We think the direction of data matters enormously in terms of how it's interpreted because there's a very human tendency to extrapolate whichever direction it happens to be heading. Today, the rate of inflation's been heading up, creating fears that it will continue to move higher. But if we're right that inflation peaks in the next month or two, April or May could feel very different.Unfortunately, we're not quite there yet. The inflation rate is still rising, creating uncertainty about what central banks will do and how they'll respond. That uncertainty is driving volatility and should warrant lower prices for things that are very central bank sensitive. We think yields for government bonds in the U.S., the U.K., and the Eurozone will continue to move higher, and that spreads on mortgages, sovereign bonds, and corporates can move modestly wider.On the other hand, we feel better about assets that are less sensitive to this inflation uncertainty, including the less expensive stock markets outside the U.S. Stocks in the United Kingdom which my colleague Graham Secker, Morgan Stanley's Chief European Equity Strategist, discussed on this program recently are one such example.Finally, keep in mind that the inflation debate could feel very different in just a month or two. If the inflation data peaks soon, as our economists expect, it could provide some relief as we look ahead to April or May.Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts, or wherever you listen, and leave us to review. We'd love to hear from you.

Original Release on January 25th, 2022: With inflation on the minds of consumers and the Fed reacting with a sharp turn towards tightening, 2022 may be a year for investors to focus on incorporating tax-efficient strategies into their portfolios. Morgan Stanley Wealth Management’s Chief Investment Officer Lisa Shalett and Chief Cross-Asset Strategist Andrew Sheets 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 today on the podcast, we'll be discussing the importance of tax efficiency as a pillar of portfolio construction. It's Tuesday, January 25th at three p.m. in London.Lisa Shalett And it's 10:00 a.m. here in New York.Andrew Sheets Lisa, welcome back to the podcast! Now, as members of Morgan Stanley Wealth Management's Global Investment Committee, we both agree that the current portfolio construction backdrop is increasingly complicated and constrained. But tax considerations are also important, and this is something you and your team have written a lot on recently. So I'd really like to talk to you about both of these issues, both the challenges of portfolio construction and some of the unique considerations around tax that can really make a difference to the bottom line of investment returns. So Lisa, let's start with that current environment. Can you highlight why we believe that standard stock bond portfolios face a number of challenges going forward?Lisa Shalett We've been through an extraordinary period over the last 13 years where both stocks and bonds have benefited profoundly from Federal Reserve policy, just to put it bluntly, and, you know, the direction of overall interest rates. And so, our observation has been that, you know, over the last 13 years, U.S. stocks have compounded at close to 15% per year, U.S. bonds have compounded at 9% per year. Both of those are well above long run averages. And so we're now at a point where both stocks and bonds are quite expensive. They are both correlated to each other, and they are both correlated to a large extent with Federal Reserve policy. And as we know, Federal Reserve policy by dint of what appears to be inflation that is not as transitory as the Fed originally thought is causing the Fed to have to accelerate their shift in policy. And I think, as we noted over the last three to six weeks, you know, the Fed's position has gone from, you know, we're going to taper and have three hikes to we're going to taper be done by March. We may have as many as four or five hikes and we're going to consider a balance sheet runoff. That's an awful lot for both stocks and bonds to digest at the same time, especially when they're correlated with one another.Andrew Sheets And Lisa, you know, if I can just dive into this a little bit more, how do you think about portfolio diversification in that environment you just described, where both stocks and bonds seem increasingly linked to a single common factor, this this direction of Federal Reserve policy?Lisa Shalett One of the things that we've been emphasizing is to take a step back and to recognize that diversification can happen beyond the simple passive betas of stocks and bonds, which we would, you know, typically represent by, you know, exposures to things like the S&P 500 or a Barclays aggregate. And so what we're saying is, within stocks, you've got to really make an effort to move away from the indexes to higher active managers who tend to take a diversified approach by sector, by style, by market cap. And within fixed income, you know, we're encouraging, clients to hire what we've described as non-core managers. These are managers who may have the ability to navigate the yield curve and navigate the credit environment by using, perhaps what are nontraditional type products. They may employ strategies that include things like preferred shares or covered call strategies, or own asset backed securities. These are all more esoteric instruments that that hiring a manager can give our clients sources of income. And last, you know, we're obviously thinking about generating income and diversification using real assets and alternatives as well.Andrew Sheets And so, Lisa, one other thing you know, related to that portfolio construction challenge, I also just want to ask you about was how you think about inflation protection. I mean, obviously, I think a lot of investors are trying to achieve the highest return relative to the overall level of prices relative to inflation. You know, how do you think from a portfolio context, investors can try to add some inflation protection here in a smart, you know, intelligent way?Lisa Shalett So you know what we've tried to say is let's take a step back and think about, you know, our forecast for, you know, whether inflation is going to accelerate from here o

Many investors are asking when Congress will withdraw its fiscal policy support. Our answer? It already has, and 2022 could be a year where fiscal policy becomes a non-factor in the economic outlook.----- Transcript -----Welcome the Thoughts on the Market. I'm Michael Zezas as Head of Public Policy Research and Municipal Strategy 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, February 9th at 10 a.m. in New York.As the Fed keeps signaling its intent to withdraw its extraordinary monetary support for the economy, a common question we're hearing is when will Congress do the same with fiscal policy support? Our answer is simple: it already has.Now, we're usually getting this question from investors concerned that COVID relief aid is continuing to create inflation pressure in the economy. But the last tranche of aid was approved over a year ago, and direct aid to support households from that program have largely expired, including the child tax credit, supplemental unemployment benefits, and renter and mortgage protections.But what about all those infrastructure and social spending plans President Biden proposed? Even here there's no sizable fiscal expansion in sight. The bipartisan infrastructure framework was mostly offset by new revenues. And on the Build Back Better plan, Senator Joe Manchin appears to have made deficit neutrality a condition for his support for it. So any legislative comeback for that plan likely won't result in more fiscal support for the economy.For investors, this is a throwback to periods where fiscal policy was an afterthought. In many recent years, like 2018, 2020 and 2021, fiscal policy was a key variable to the U.S. economic outlook. This year, it looks like a non-factor. That syncs with our framework for forecasting U.S. fiscal policy outcomes, which currently points to the U.S. having moved from a phase of proactive fiscal expansion, to one of stability. That's because legislative decisions by Congress that expand the deficit are typically a function of motive and opportunity. The motive is strong when there's perceived political value to the short-term economic boost that comes with the deficit expansion. The opportunity is there when one party controls Congress and the White House. Both these conditions were met after the 2020 election, resulting in another round of substantial COVID aid. But with inflation on the rise and issue polls showing it's beginning to bother voters, that motive is waning. As a result, expect U.S. fiscal policy to remain neutral until an election or an economic downturn opens a path for it.But while fiscal policy might not be a macro factor, it could still drive some sector outcomes. For example, a deficit neutral build back better plan could still feature a corporate minimum tax, creating headwinds for financials and telecom. But it could also include substantial spending on carbon reduction, potentially directing a lot of fresh capital to the clean tech sector. And of course, it's important to remember 2022 is an election year, so expect the fiscal conversation to evolve.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.

Despite having been one of the worst performing stock markets over the last 5 years, the UK is seeing a dramatic turnaround reflected in the FTSE100 index. Investors may want to take a closer 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 our positive view on U.K. equities and why we think the FTSE 100 offers a compelling opportunity here. It's Tuesday, February the 8th at 3 p.m. in London.Having been one of the worst performing stock markets over the last five years, the UK has seen a dramatic turnaround in 2022, with the headline FTSE 100 index, which is the UK equivalent of the S&P 500, outperforming the S&P by around 8% or so, so far, and posting the second-best return of any major global stock market after the Hang Seng in Hong Kong. Looking forward, we think the reversal of fortunes for UK equities can continue for three reasons.First, we think the Footsie 100 index offers a good blend of offense and defense. On the latter, we note the defensive sectors account for 37% of UK market capitalization, which is higher than any other major country or region. Reflecting this, the UK index has outperformed the wider European market two thirds of the time during periods when global equities are falling.When it comes to offense, we know that the UK market is a key relative beneficiary of rising real bond yields, to the extent that a move up in US real yields to our target of minus 10 basis points by year end would imply UK stocks outperforming the rest of the European market by as much as 12% this year. The reason behind the UK's positive correlation to real yields is again down to its sector mix. As well as being quite defensive, the index also has a significant weight in value stocks, such as commodities and financials. These are sectors that tend to perform best when real yields are rising, and investors are becoming more valuation sensitive.While the UK has always had something of a value bias, this relationship is currently even stronger than normal and this leads me to the second driver behind our positive view on the FTSE 100 here, namely that the index is cheap. So cheap, in fact, that you have to go back to the 1970s to find the last time UK equities were this undervalued versus their global peers. To provide some context to this narrative, the FTSE 100 is on a 12-month forward price to earnings ratio of 12.5 versus Europe on 15 times, and the S&P closer to 20 times. As well as a low PE, the UK also offers a healthy dividend yield of 3.6%, which is around twice that on offer from global indices.The third and final support to our positive view on UK equities is that consensus earnings expectations are very low, thereby creating a backdrop for subsequent upgrades that should support price outperformance. For example, consensus forecasts less than 3% earnings growth over each of the next two years, which represents the lowest growth forecast in over 30 years. We think this is too pessimistic and note the consensus expectations for the equivalent Eurozone index are much closer to normal at around 8 percent. The most likely source of upgrade risk around UK earnings comes from our positive view on the oil price, given the energy stocks accounted for 25% of all UK profits last year. With our oil team expecting the Brant oil price to rise to $100 later this year, we see scope for material profit upgrades for individual oil stocks and the broader FTSE 100 index too.One last point a positive view on the UK is primarily focused on the headline Large Cap FTSE 100 index. We are less constructive on UK mid-caps, as this part of the market is more expensive and hence gets less of a benefit from rising real yields. The more domestic nature of the mid-cap index also means it's more exposed to the growing pressure on UK households from rising energy bills, food prices, and tax increases. In contrast, the FTSE 100 is a very international index, with around 70% of revenues coming from outside the UK. This makes it less sensitive to domestic economic matters and also a beneficiary if we see any renewed weakness in the sterling currency. To conclude, we think international investors should take a closer look at the UK as we think there's a good chance it ends up being one of the best performing global stock markets in 2022.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 we head towards the final weeks of winter, we are predicting a period of continued slow growth. As evidence we look not to our shadow but at earnings estimates and inventories.----- 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 colleague bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, February 7th at 11:30 a.m. in New York. So let's get after it.In the United States, February 2nd is known as Groundhog Day. A 135-year-old tradition of taking a groundhog out of his cage to determine if he can see his shadow. In short, a sunny February 2nd means six more weeks of winter, while a cloudy day suggests an early spring. Well, last week the most famous groundhog, who lives in Pennsylvania, saw his shadow informing us to expect more cold weather for six more weeks. While this tradition lives on, its track record is pretty spotty with a 50% hit rate. Flipping a coin sounds a lot easier. However, it does jive with our market forecast for at least six more weeks of winter, and ice, as growth slows further into the spring. Signs of weakness are starting to appear, and we think they go beyond Omicron. While we remain optimistic that this could be the final major wave of the pandemic, we're not so sure growth will rebound and accelerate as many others are suggesting.First, fourth quarter earnings beat rates are back to 5%, which is the long-term average. However, this is well below the beat rates of 15-20% observed over the past 18 months, a period of over earning in our view. The key question now is whether we are going to return to normal, or will we experience a period of under earning first, or payback? We've long held the view that payback was coming in the first half of 2022 as the extraordinary fiscal stimulus faded, monetary policy tightened, and supply caught up with demand in many end markets. Over the past few weeks several leading companies that weren't supposed to see this payback have disappointed with weaker than expected guidance on earnings. These stocks sold off sharply, and we think there are likely more disappointments to come as consumption falls short of expectations. Consumer confidence remains very soft due to higher prices, with our recent proprietary surveys suggesting consumers are expecting to spend more on staples categories over the next six months, versus the last six months. Spending on durables, consumer electronics and travel/leisure is expected to decline for lower income cohorts in particular.Second, inventories are now building fast and driving strong economic growth. However, the timing of this couldn't be worse if demand is fading more than expected. As noted in prior research, we think it could also reveal the high amounts of double ordering across many different industries. If that's correct, we are likely to see order cancelations, and that will only exacerbate the already weakening demand. In short, this supports a period of under-earning by companies as a mirror image to the past 18 months when inventories were lean and pricing power was rampant.Of course, the good news is that this likely means inflation pressures will ebb as companies lose pricing power. Eventually, this will lead to a more sustainable situation for the consumer and the economy. However, we think this could take several quarters before it's finally reflected in either earnings growth forecasts, valuations, or both. What this means for the broader market is probably six more weeks of downward bias. We continue to target sub-4000 on the S&P 500 before we would get more interested in trying to call an end to this ongoing correction. In the meantime, favor a defensive positioning. We've taken a more defensive posture in our recommendation since publishing our year ahead outlook in mid-November. Since then, it's paid off, although it hasn't been consistent. With last week's modest rally in cyclicals relative to defensives, we think it's a good time to fade the former and by the latter, since we still feel confident in our forecast for slowing growth even if the groundhog's track record isn't great.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.