Our US Public Policy Strategist Ariana Salvatore and Chief Latin America Equity Strategist Nikolaj Lippmann discuss what Trump’s victory could mean for new trade relationships.----- Transcript -----Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Morgan Stanley's US Public Policy Strategist.Nikolaj Lippmann: And I'm Nik Lippmann, Morgan Stanley's Chief Latin American Equity Strategist.Ariana Salvatore: Today, we're talking about the impact of the US election on Mexico's economy, financial markets, and its trade relationships with both the US and China.It's Friday, November 22nd at 10am in New York.The US election has generated a lot of debate around global trade, and now that Trump has won, all eyes are on tariffs. Nik, how much is this weighing on Mexico investors?Nikolaj Lippmann: It’s interesting because there's kind of no real consensus here. I'd say international and US investors are generally rather apprehensive about getting in front of the Trump risk in Mexico; while, interestingly enough, most Mexico-based investors and many Latin American investors think Trump is kind of good news for Mexico, and in many cases, even better news than Biden or Harris. Net, net, Mexican peso has sold off. Mexico's now down 25 per cent in dollar terms year to date, while it was flat to up three, four, 5 per cent around May. So, we've already seen a lot being priced then.Ariana, what are your expectations for Trump's trade policy with regards to Mexico?Ariana Salvatore: So, Mexico has been a big part of the trade debate, especially as we consider this question of whether or not Mexico represents a bridge or a buffer between the US and China. On the tariff front, we've been clear about our expectations that a wide range of outcomes is possible here, especially because the president can do so much without congressional approval.Specifically on Mexico, Trump has in the past threatened an increase in exchange for certain policy concessions. For example, back in 2019, he threatened a 5 per cent tariff if the Mexican government didn't send emergency authorities to the southern border. We think given the salience of immigration as a topic this election cycle, we can easily envision a scenario again in which those tariff threats re-emerge.However, there's really a balance to strike here because the US is Mexico's main trading partner. That means any changes to current policy will have a substantial impact.So, Nik, how are you thinking about these changes? Are all tariff plans necessarily a negative? Or do you see any potential opportunities for Mexico here?Nikolaj Lippmann: Look, I think there are clear risks, but here are my thoughts. It would be very hard for the United States to de-risk from China and de-risk from Mexico simultaneously. Here it becomes really important to double-click on the differences in the manufacturing ecosystems in North America versus Southeast Asia and China.The North American model is really very integrated. US companies are by a mile the biggest investor. In Mexico – and Mexican exports to the US kind of match the Mexican import categories – the products go back and forth. Mexico has evolved from a place of assembly to a manufacturing ecosystem. 25 years ago, it was more about sending products down, paint them blue, put a lid on it. Now there's much more value add.The link, however, is still alive. It's a play on enhancing US competitiveness. You can kind of, as you did, call it a China buffer; a fender that helps protect US competitiveness. But by the end of the day, I think integration and alignment is going to be the key here.Ariana Salvatore: But of course, it's not just the direct trade relationship between the US and Mexico. We need to also consider the global geopolitical landscape, and specifically this question of the role of China. What's Mexico's current trade policy like with China?Nikolaj Lippmann: Another great question, Ariana, and I think this is the key. There is growing evidence that China is trying to use Mexico as a China bridge.And I think this is an area where we will see the biggest adjustments or need for realignment. This is a debate we've been following. We saw, with interest, that Mexico introduced first a 25 per cent tariff and then a 35 per cent tariff on Chinese imports. And saw this as the initial signs of growing alignment between the two countries.However, Mexican import from China never really dropped. So, we started looking at like the complicated math saying 35 per cent times $115 billion of import. You know, best case scenario, Mexico should be collecting $40 billion from tariffs; that's huge and almost unrealistic number for Mexico. Even half of that would go a long way to solve fiscal challenges in that country.However, when we started looking at the actual tax collection from Chinese imports, it was closer to $3 billion, as we highlighted in a note with our Mexico economist just recently. There's just multiple discounts and exemptions to effective tariffs at neither 25 per cent nor 35 per cent, but actually closer to 2.5 [or] 3 per cent. I think there's a problem with Chinese content in Mexican exports, and I think it's likely to be an area that policymakers will examine more closely. Why not drive-up US or North American content?Ariana Salvatore: So, it sounds like what you're saying is that there is a political, or rhetorical at least, alignment between the US and Mexico when it comes to China. But the reality is that the policy implementation is not yet there.We know that there's currently nothing in the USMCA treaty that prevents Mexico from importing goods from China. But a lot has changed over the past four years, even since the pandemic. So, looking forward, do you expect Mexico's policy vis-a-vis China to change after Trump takes office?Nikolaj Lippmann: I think, I certainly think so, and I think this is again; this is going to be the key. As you mentioned, there's nothing in the USMCA treaty that prevents Mexico from buying the stuff from China. And it's not a customs union. Mexican consumers, much like American consumers, like to buy cheap stuff.However, the geopolitics that you refer to is important. And when I reflect, frankly, on the bilateral relationship between the two countries, I think Mexican policymakers need to perhaps pause and think a little bit about things like the spirit of the treaty and not just the letter of the treaty; and also about how to maintain public opinion support in the United States.By the end of the day, when we see what has happened with regards to China after the pandemic, it has been a significant change in political consensus and public opinion. When I think Americans are not necessarily interested in just using Mexico as a China bridge for Chinese products.During the first Trump administration, the NAFTA agreement was renegotiated as the US Mexico Canada agreement, the USMCA, that took effect or took force in mid 2020. This agreement will come under review in 2026.Ariana, what are the expectations for the future of this agreement under the Trump administration?Ariana Salvatore: So, I think this USMCA review that's coming up in 2026 is going to be a really critical litmus test of the US-Mexico relationship, and we're going to learn a lot about this China bridge or buffer question that you mentioned. Just for some very brief context, that agreement as you mentioned was signed in 2020, but it includes a clause that lets all parties evaluate the agreement six years into a 16-year time horizon.So, at that point, they can decide to extend the agreement for another 16 years. Or to conduct a joint review on an annual basis until that original 16 years lapses. So, although the agreement will stay in force until at least 2036, the review period, which is around June of [20]26, provides an opportunity for the signing parties to provide recommendations or propose changes to the agreement short of a full-scale renegotiation.We do see some overlapping objectives between the two parties. For example, things like updating the foundation for digital trade and AI, ensuring the endurance of labor protections, and addressing Mexico's energy sector. But Trump's approach likely will involve confronting the auto EV disputes and could possibly introduce an element of immigration policy within the revision. We also definitely expect this theme of Chinese investment in Mexico to feature heavily in the USMCA review discussions.Finally, Nik, keeping in mind everything that we've discussed today, with global supply chains getting rewired post the pandemic, Mexico has been a beneficiary of the nearshoring trend. Do you think this is going to change as we look ahead?Nikolaj Lippmann: So, look, we [are] still underweight Mexico, but I think risk ultimately biased with the upside over time with regards to trade.We need evidence to be able to lay it out, these scenarios; Mexico could end up doing quite well with Trump. But much work needs to be done south of the border with regards to all the areas that we just mentioned there, Ariana.When we reflect on this over the next couple of years, there's a couple of things that really stand out. Number one is that first wave of reshoring or nearshoring, which was really focused on brownfield. It was bringing our manufacturing ecosystems where we already had existing infrastructure.What is potentially next, and what we're going to be watching in terms of sort of policy maker incentives and so on, will be some of the greenfield manufacturing ecosystems. That could involve things like IT hardware, maybe EV batteries, and a couple of other really important sectors.Ariana Salvatore: And that's something we might get some insight into when we hear personnel appointments from President-elect Trump over the coming months. Nik, thanks so much for taking the time to talk.Nikolaj Lippmann: Thank you very much, Arianna.Ariana Salvatore: And thank you for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen, and share the podcast with a friend or colleague today.

Our Sustainability analysts Stephen Byrd and Laura Sanchez discuss the range of impacts that the Republican sweep may have on energy policy and the ESG space.----- Transcript -----Stephen Byrd: Welcome to Thoughts on the Market. I'm Stephen Byrd, Morgan Stanley's Global Head of Sustainability Research and Head of Research Product for the Americas.Laura Sanchez: And I'm Laura Sanchez, Head of Sustainability Equity Research for the Americas.Stephen Byrd: Today, Laura and I will talk about the potential impact of the next Trump administration on the US energy transition, and on the US ESG Investing landscape.It's Thursday, November 21st at 8 am in New York.Now that Donald Trump has been re-elected, all eyes are on potential changes to the Inflation Reduction Act or IRA. So Laura, what are your expectations and on what kind of timeframe?Laura Sanchez: There has been a lot of dialogue internally between our clean tech and public policy teams exactly on this question, Stephen. Basically, we continue to believe that a full repeal of the IRA is unlikely because a significant amount of investment has gone to Republican states that has in turn driven a good amount of good paying jobs. On the back of this, we have seen a large number of Republican legislators, as well as large oil and gas companies, write letters to high members of Congress supporting portions of the IRA.Now, unfortunately, that doesn't mean that it won't be noisy. We do think that a partial repeal is likely, potentially a rebranding, and/or a clear phase out of the tax credits, by, let's say, the end of the decade.It will take some time to get clarity around what's in and what's out to the second part of your question. We believe clarity on final changes is likely by the end of 2025 at the earliest, which is when the TCJA, or the Tax Cuts and Jobs Act, is set to expire. And so, a lot of tax related conversations and concessions will happen then.Lastly, a point that I want to make here is that many technologies received support in the IRA, and even though the next 12 months will be volatile or noisy, as I said before, we do think that some of them are relatively safe. And those include the domestic manufacturing tax credit, the production tax credit for nuclear power, and the tax credits for carbon capture and sequestration technology, as well as for clean hydrogen.Stephen Byrd: That's really interesting, Laura. So, it really is a bit more nuanced than we often hear from many investors with portion of the IRA that are clearly at risk, others much less so at risk. That's really helpful. And Laura, a related topic that comes up a lot is concern around tariffs. So, do you see any risk to clean technologies from elevated trade tensions?Laura Sanchez: Yes, I see multi multilayered risks. The first, which is I think well understood by investors, is the potential risk for higher tariffs on goods imported from China. We know that the supply chain for energy storage specifically, and particularly lithium-ion storage batteries, is highly linked to China. And even though solar equipment also tends to come up in conversations with investors, the supply chain there has somewhat decoupled from China.However, a significant amount of supply is still sourced from China domiciled entities that operate in low-cost countries, such as those in Southeast Asia. But another risk, and I think this one is less understood or discussed by investors, is the potential inflationary pressure that could result from number one, higher tariffs on imported materials that are needed in the manufacturing of clean energy technologies. And number two, the potential risk of China responding to US imposed tariffs with additional export bans on minerals or materials that are key for the energy transition.We have analyzed a long list and believe that those at the highest risk of disruption include rare earths, graphite, gallium, and cobalt, which are all used in electric vehicles, but also in other clean tech equipment such as wind and solar systems, stationary battery storage, and electrolysers.Now, Stephen. Along with tariff escalation, President-elect Trump may look to roll back important EPA regulations that were put in place by the current administration to put the country on track to meet Paris aligned goals. What are the most important regulations investors should watch in your view?Stephen Byrd: Yeah, Laura, I think there are going to be several EPA regulations that are going to be targeted for rollbacks. Let me just start first on the truck side of things, the Clean Trucks Plan that's commonly known as the EPA Tailpipe Emissions Rule – could be rolled back. We could also see the greenhouse gas standards and guidelines for fossil fuel fired power plants get rolled back. And lastly, we could see waste emissions charged for petroleum and natural gas systems get rolled back.So, I think the overall message is actually; that the stock implications of this are actually relatively modest in most cases. What this does, in my view, is it sends a signal in terms of greater support from the Trump administration for fossil fuel. Usage in a number of areas, transport, infrastructure, et cetera I think we'll see that in power. And this does line up with some of the work we've done around the growth in data centers that we think will be powered by natural gas fire generation. So, this is consistent with that, and we do expect to see multiple layers of rollback at EPA.Laura Sanchez: And outside of changes to the stick – which are the EPA regulations that you mentioned – and changes to the carrot – which is the IRA – what are other factors or risks that investors with a mandate on sustainability should consider during a second Trump presidency?Stephen Byrd: Yes, for investors that do focus on sustainability, a few things that are on our mind. We could see additional states restrict the ability of state pension funds to consider ESG factors in their investment decision making process. We also, I think will see a lack of federal regulation that will require corporates to disclose certain ESG information. I think that's quite clear. And then also there could be additional legal and regulatory challenges around corporates and asset managers using sustainability as part of their decision-making process, as part of their fiduciary duties. So those are all the things that are on our mind.Laura Sanchez: I think it's worth noting that some states, California particularly, are moving forward with their state level decarbonization goals and greenhouse gas emissions rules. But there is one dynamic to consider or track and that is the EPA granting the state of California a waiver that is needed for the state to move forward with heavy duty low NOx rules. So, linking this back to the EPA rules commentary, Stephen, I think that one, the EPA 2027 low NOx rules is one to keep an eye on because it links to the California waiver and the California rules; and is something that could potentially impact some of those stocks.Stephen Byrd: Well, that's a good point, Laura, and I think that highlights this potential distinction between actions at the state level versus at the federal level, but sometimes those do intersect, such as, with the California heavy duty low NOx rules. So that’s helpful.Well, Laura, thanks so much for taking the time to talk.Laura Sanchez: Great speaking with you, Stephen.Stephen Byrd: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today. 

Our South Asia Energy Analyst Mayank Maheshwari discusses the main drivers behind a shifting electric power landscape in his outlook for Asia energy.----- Transcript -----Welcome to Thoughts on the Market. I’m Mayank Maheshwari, Morgan Stanley’s South Asia Energy Analyst. There’s been an investment surge in renewable energy – to field the world’s rising demands for energy and power. With a new White House administration, however, there are questions about its future. Today I want to dig into the profound shifts impacting the production and consumption of power in Asia.It’s Wednesday, November 20, at 9pm in Singapore. The world consumed 25 trillion units of power last year and Asia accounted for about half of that. Asia demand is booming like the rest of the world, and power consumption is at a tipping point. We forecast global power consumption will grow 26 per cent faster through 2030 than in the last decade. Somewhat similar to the US, we are actually seeing tightness in Asian power markets in coming years as well. But even today countries like India, Singapore, and increasingly Malaysia are seeing power demand grow at 1.5 to 2x faster than pre-COVID levels. So, what’s driving this rapid growth? Outside of the residential power demand, growth is driven by GenAI datacenters, re-shoring of manufacturing facilities, there are new semi-conductor investments that are coming through, and expanding new energy supply chains itself are actually adding to the tightness. Importantly though, regional differences in clean power costs and demand are stark. In Asia, power prices have steadily risen. Multiple regulators are acknowledging the tightness by extending the life of coal plants, building new gas and coal facilities, and even restarting nuclear power generation capacity – as clean power alone cannot by itself handle this surge in demand. Interestingly though, the cost to produce clean power has declined pretty rapidly in 2024 to below-trend levels after a period of significant inflation we saw post-COVID. On average, solar panel prices in Asia declined 50 per cent, and the cost of onshore wind declined 10 per cent – with energy storage costs deflating by a third to levels not seen in the past five years. However, this cost deflation has been a lot more uneven across regions, with the US and Europe seeing much smaller declines due to tariffs and other supply bottlenecks. Asia is hence seeing significant inflection in the economics for power generation companies, especially in South Asia, which had lagged China capacity adds over the last several years. Part of the deflation in the clean power supply chain comes from even the capacity overbuilds that we are seeing in geographies that are looking to build their own clean power supply chains. Regions such as India and Southeast Asia, where clean power demand is growing very quickly, are adding to the glut in capacity on clean power supply chains that we have already seen in China.Amid all the clean power developments in Asia, COP29 announced a[n] updated climate goal. The UN climate conference being held in Azerbaijan this year aims for a 59 per cent to 67 per cent reduction in economy-wide greenhouse gas emissions by 2035. That’s the clean energy update from Asia for now. Listen in tomorrow, as my colleagues engage in a conversation about the impact of the US election results on the sector.Thank you for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or a colleague today.

On the second part of a two-part roundtable, our panel gives its 2025 preview for the housing and mortgage landscape, the US Treasury yield curve and currency markets.----- Transcript -----Vishy Tirupattur: Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist. This is part two of our special roundtable discussion on what's ahead for the global economy and markets in 2025.Today we will cover what is ahead for government bonds, currencies, and housing. I'm joined by Matt Hornbach, our Chief Macro Strategist; James Lord, Global Head of Currency and Emerging Market Strategy; Jay Bacow, our co-head of Securitized Product Strategy; and Jim Egan, the other co-head of Securitized Product Strategy.It's Tuesday, November 19th, at 10am in New York.Matt, I'd like to go to you first. 2024 was a fascinating year for government bond yields globally. We started with a deeply inverted US yield curve at the beginning of the year, and we are ending the year with a much steeper curve – with much of that inversion gone. We have seen both meaningful sell offs and rallies over the course of the year as markets negotiated hard landing, soft landing, and no landing scenarios.With the election behind us and a significant change of policy ahead of us, how do you see the outlook for global government bond yields in 2025?Matt Hornbach: With the US election outcome known, global rate markets can march to the beat of its consequences. Central banks around the world continue to lower policy rates in our economist baseline projection, with much lower policy rates taking hold in their hard landing scenario versus higher rates in their scenarios for re-acceleration.This skew towards more dovish outcomes alongside the baseline for lower policy rates than captured in current market prices ultimately leads to lower government bond yields and steeper yield curves across most of the G10 through next year. Summarizing the regions, we expect treasury yields to move lower over the forecast horizon, helped by 75 [basis points] worth of Fed rate cuts, more than markets currently price.We forecast 10-year Treasury yields reaching 3 and 3.75 per cent by the middle of next year and ending the year just above 3.5 per cent.Our economists are forecasting a pause in the easing cycle in the second half of the year from the Fed. That would leave the Fed funds rate still above the median longer run dot.The rationale for the pause involves Fed uncertainty over the ultimate effects of tariffs and immigration reform on growth and inflation.We also see the treasury curve bull steepening throughout the forecast horizon with most of the steepening in the first half of the year, when most of the fall in yields occur.Finally, on break even inflation rates, we see five- and 10-year break evens tightening slightly by the middle of 2025 as inflation risks cool. However, as the Trump administration starts implementing tariffs, break evens widen in our forecast with the five- and 10-year maturities reaching 2.55 per cent and 2.4 per cent respectively by the end of next year.As such, we think real yields will lead the bulk of the decline in nominal yields in our forecasting with the 10-year real yield around 1.45 per cent by the middle of next year; and ending the year at 1.15 per cent.Vishy Tirupattur: That's very helpful, Matt. James, clearly the incoming administration has policy choices, and their sequencing and severity will have major implications for the strength of the dollar that has rallied substantially in the last few months. Against this backdrop, how do you assess 2025 to be? What differences do you expect to see between DM and EM currency markets?James Lord: The incoming administration's proposed policies could have far-reaching impacts on currency markets, some of which are already being reflected in the price of the dollar today. We had argued ahead of the election that a Republican sweep was probably the most bullish dollar outcome, and we are now seeing that being reflected.We do think the dollar rally continues for a little bit longer as markets price in a higher likelihood of tariffs being implemented against trading partners and there being a risk of additional deficit expansion in 2025. However, we don't really see that dollar strength persisting for long throughout 2025.So, I think that is – compared to the current debate, compared to the current market pricing – a negative dollar catalyst that should get priced into markets.And to your question, Vishy, that there will be differences with EM and also within EM as well. Probably the most notable one is the renminbi. We have the renminbi as the weakest currency within all of our forecasts for 2025, really reflecting the impact of tariffs.We expect tariffs against China to be more consequential than against other countries, thus requiring a bigger adjustment on the FX side. We see dollar China, or dollar renminbi ending next year at 7.6. So that represents a very sharp divergence versus dollar yen and the broader DXY moves – and is a consequence of tariffs.And that does imply that the Fed's broad dollar index only has a pretty modest decline next year, despite the bigger move in the DXY. The rest of Asia will likely follow dollar China more closely than dollar yen, in our view, causing AXJ currencies to generally underperform; versus CMEA and Latin America, which on the whole do a bit better.Vishy Tirupattur: Jay, in contrast to corporate credit, mortgage spreads are at or about their long-term average levels. How do you expect 2025 to pan out for mortgages? What are the key drivers of your expectations, and which potential policy changes you are most focused on?Jay Bacow: As you point out, mortgage spreads do look wide to corporate spreads, but there are good reasons for that. We all know that the Fed is reducing their holdings of mortgages, and they're the largest holder of mortgages in the world.We don't expect Fed balance sheet reduction of mortgages to change, even if they do NQT, as is our forecast in the first quarter of 2025. When they NQT, we expect mortgage runoff to continue to go into treasuries. What we do expect to change next year is that bank demand function will shift. We are working under the assumption that the Basel III endgame either stalls under the next administration or gets released in a way that is capital neutral. And that's going to free up excess capital for banks and reduce regulatory uncertainty for them in how they deploy the cash in their portfolios.The one thing that we've been waiting for is this clarity around regulations. When that changes, we think that's going to be a positive, but it's not just banks returning to the market.We think that there's going to be tailwinds from overseas investors that are going to be hedging out their FX risks as the Fed cuts rates, and the Bank of Japan hikes, so we expect more demand from Japanese life insurance companies.A steeper yield curve is going to be good for REIT demand. And these buyers, banks, overseas REITs, they typically buy CUSIPs, and that's going to help not just from a demand side, but it's going to help funding on mortgages improve as well. And all of those things are going to take mortgage spreads tighter, and that's why we are bullish.I also want to mention agency CMBS for a moment. The technical pressure there is even better than in single family mortgages. The supply story is still constrained, but there is no Fed QT in multifamily. And then also the capital that's going to be available for banks from the deregulation will allow them – in combination with the portfolio layer hedging – to add agency CMBS in a way that they haven't really been adding in the last few years. So that could take spreads tighter as well.Now, Vishy, you also mentioned policy changes. We think discussions around GSE reform are likely to become more prevalent under the new administration.And we think that given that improved capitalization, depending on the path of their earnings and any plans to raise capital, we could see an attempt to exit conservatorship during this administration.But we will simply state our view that any plan that results in a meaningful change to the capital treatment – or credit risk – to the investors of conventional mortgages is going to be too destabilizing for the housing finance markets to implement. And so, we don't think that path could go forward.Vishy Tirupattur: Thanks, Jay. Jim, it was a challenging year for the housing market with historically high levels of unaffordability and continued headwinds of limited supply. How do you see 2025 to be for the US housing market? And going beyond housing, what is your outlook for the opportunity set in securitized credit for 2025?James Egan: For the housing market, the 2025 narrative is going to be one about absolute level versus the direction and rate of change. For instance, Vishy, you mentioned affordability. Mortgage rates have increased significantly since the beginning of September, but it's also true that they're down roughly a hundred basis points from the fourth quarter of 2023 and we're forecasting pretty healthy decreases in the 10-year Treasury throughout 2025. So, we expect affordability to improve over the coming year. Supply? It remains near historic lows, but it's been increasing year to date.So similar to the affordability narrative, it's more challenged than it's been in decades; but it's also less challenged than it was a year ago.So, what does all this mean for the housing market as we look through 2025? Despite the improvements in affordability, sales volumes have been pretty stagnant this year. Total volumes – so existing plus new volumes – are actually down about 3 per cent year to date. And look, that isn't unusual. It typically takes about a year for sales volumes to pick up when you see this kind of significant affordability improvement that we've witnessed over the past year, even with the recent backup in mortgage rates.And that means we think we're kind of entering that sweet spot for increased sales now. We've seen purchase applications turn positive year over year. We've seen pending home sales turn positive year over year. That's the first time both of those things have happened since 2021. But when we think about how much sales 2025, we think it's going to be a little bit more curtailed. There are a whole host of reasons for that – but one of them the lock in effect has been a very popular talking point in the housing market this year. If we look at just the difference between the effective mortgage rate on the outstanding universe and where you can take out a mortgage rate today, the universe is still over 200 basis points out of the money.To the upside, you're not going to get 10 per cent growth there, but you're going to get more than 5 per cent growth in new home sales. And what I really want to emphasize here is – yes, mortgage rates have increased recently. We expect them to come down in 2025; but even if they don't, we don't think there's a lot of room for downside to existing home sales from here.There's some level of housing activity that has to happen, regardless of where mortgage rates or affordability are. We think we're there. Turnover measured as the number of transactions – existing transactions – as a share of the outstanding housing market is lower now than it was during the great financial crisis. It's as low as it's been in a little bit over 40 years. We just don't think it can fall that much further from here.But as we go through 2025, we do think it dips negative. We have a negative 2 per cent HPA call next year, not significantly down. We don't think there's a lot of room to the downside given the healthy foundation, the low supply, the strong credit standards in the housing market. But there is a little bit of negativity next year before home prices reaccelerate.This leaves us generically constructive on securitized products across the board. Given how much of the capital structure has flattened this year, we think CLO AAAs actually offer the best value amongst the debt tranches there. We think non-QM triple AAAs and agency MBS is going to tighten. They look cheap to IG corporates. Consumer ABS, we also think still looks pretty cheap to IG corporates. Even in the CMBS pace, we think there's opportunities. CMBS has really outperformed this year as rates have come down. Now our bull bear spread differentials are much wider in CMBS than they are elsewhere, but in our base case, conduit BBB minuses still offer attractive value.That being said, if we're going to go down the capital structure, our favorite expression in the securitized credit space is US CLO equity.Vishy Tirupattur: Thank you, Jay and Jim, and also Matt and James.We'll close it out here. As a reminder, if you enjoyed the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

On the first part of a two-part roundtable, our panel discusses why the US is likely to see a slowdown and where investors can look for growth.----- Transcript -----Vishy Tirupattur: Welcome to Thoughts on the Market. I'm Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist. Today in the podcast, we are hosting a special roundtable discussion on what's ahead for the global economy and markets in 2025.I'm joined by my colleagues: Seth Carpenter, Global Chief Economist; Mike Wilson, Chief US Equity Strategist and the firm's Chief Investment Officer; and Andrew Sheets, Global Head of [Corporate] Credit Research.It's Monday, November 18th, at 10am in New York.Gentlemen. Thank you all for taking the time to talk. We have a lot to cover, and so I'm going to go right into it.Seth, I want to start with the global economy. As you look ahead to 2025, how do you see the global economy evolving in terms of growth, inflation and monetary policy?Seth Carpenter: I have to say – it's always difficult to do forecasts. But I think right now the uncertainty is even greater than usual. It's pretty tricky. I think if you do it at a global level, we're not actually looking for all that much of a change, you know, around 3-ish percent growth; but the composition is surely going to change some.So, let's hit the big economies around the world. For the US, we are looking for a bit of a slowdown. Now, some of that was unsustainable growth this year and last year. There's a bit of waning residual impetus from fiscal policy that's going to come off in growth rate terms. Monetary policy is still restrictive, and there's some lag effects there; so even though the Fed is cutting rates, there's still going to be a little bit of a slowdown coming next year from that.But I think the really big question, and you alluded to this in your question, is what about other policy changes here? For fiscal policy, we think that's really an issue for 2026. That's when the Tax Cut and Jobs Act (TCJA) tax cuts expire, and so we think there's going to be a fix for that; but that's going to take most of 2025 to address legislatively. And so, the fiscal impetus really is a question for 2026.But immigration, tariffs; those matter a lot. And here the question really is, do things get front loaded? Is it everything all at once right at the beginning? Is it phased in over time a bit like it was over 2018? I think our baseline assumption is that there will be tariffs; there will be an increase in tariffs, especially on China. But they will get phased in over the course of 2025. And so, as a result, the first thing you see is some increase in inflation and it will build over time as the tariffs build. The slowdown from growth, though, gets backloaded to the end of 2025 and then really spills over into to 2026.Now, Europe is still in a situation where they've got some sluggish growth. We think things stabilize. We get, you know, 1 percent growth or so. So not a further deterioration there; but not a huge increase that would make you super excited. The ECB should probably keep cutting interest rates. And we actually think there's a really good chance that inflation in the euro area goes below their target. And so, as a result, what do we see? Well, the ECB cutting down below their best guess of neutral. They think 2 percent nominal is neutral and they go below that.China is another big curveball here for the forecast because they've been in this debt deflation spiral for a while. We don't think the pivot in fiscal policy is anywhere near sufficient to ward things off. And so, we could actually see a further slowing down of growth in China in 2025 as the policy makers do this reactive kind of policy response. And so, it's going to take a while there, and we think there's a downside risk there.On the upside. I mean, we're still bullish on Japan. We're still very bullish on India and its growth; and across other parts of EM, there's some bright spots. So, it's a real mixed bag. I don't think there's a single trend across the globe that's going to drive the overall growth narrative.Vishy Tirupattur: Thank you, Seth. Mike, I'd like to go to you next. 2024 has turned out to be a strong year for equity markets globally, particularly for US and Japanese equities. While we did see modest earnings growth, equity returns were mostly about multiple expansion. How do you expect 2025 to turn out for the global equity markets? What are the key challenges and opportunities ahead for the equity markets that you see?Mike Wilson: Yeah, this year was interesting because we had what I would say was very modest earnings growth in the US in particular; relative to the performance. It was really all multiple expansion, and that's probably not going to repeat this year. We're looking for better earnings growth given our soft landing outcome from an economic standpoint and rates coming down. But we don't think multiples will expand any further. In fact, we think they'll come down by about 5 percent. But that still gets us a decent return in the base case of sort of high single digits.You know, Japan is the second market we like relative to the rest of the world because of the corporate governance story. So there, too, we're looking for high single digit earnings growth and high single digits or 10 percent return in total. And Europe is when we're sort of down taking a bit because of tariff risk and also pressure from China, where they have a lot of export business.You know, the challenges I think going forward is that growth continues to be below trend in many regions. The second challenge is that, you know, high quality assets are expensive everywhere. It's not just the US. It's sort of everywhere in the world. So, you get what you pay for. You know, the S&P is extremely expensive, but that's because the ROE is higher, and growth is higher.So, you know, in other words, these are not well-kept secrets. And so just valuation is a real challenge. And then, of course, the consensus views are generally fairly narrow around the soft landing and that's very priced as well. So, the risks are that the consensus view doesn't play out. And that's why we have two bull and two bear cases in the US – just like we did in the mid-year outlook; and in fact, what happened is one of our bull cases is what played out in the second half of this year.So, the real opportunity from our standpoint, I think this is a global call as well – which is that we continue to be pretty big rotations around the macro-outlook, which remains uncertain, given the policy changes we're seeing in the US potentially, and also the geopolitical risks that still is out there.And then the other big opportunity has been stock picking. Dispersion is extremely high. Clients are really being rewarded for taking single stock exposures. And I think that continues into next year. So, we're going to do what we did this year is we're going to try to rotate around from a style and size perspective, depending on the macro-outlook. Vishy Tirupattur: Thank you, Mike. Andrew, we are ending 2024 in a reasonably good setup for credit markets, with spreads at or near multi-decade tights for many markets. How do you expect the global credit markets to play out in 2025? What are the best places to be within the credit spectrum and across different regions?Andrew Sheets: I think that's the best way to frame it – to start a little bit about where we are and then talk about where we might be going. I think it's safe to say that this has been an absolutely phenomenal backdrop for corporate credit. Corporate credit likes moderation. And I think you've seen an unusual amount of moderation at both the macro and the micro level.You've seen kind of moderate growth, moderating inflation, moderating policy rates across DM. And then at the micro level, even though markets have been very strong, corporate aggressiveness has not been. M&A has been well below trend. Corporate balance sheets have been pretty stable.So, what I think is notable is you've had an economic backdrop that credit has really liked, as you correctly note. We've pushed spreads near 20-year tights based on that backdrop. But it's a backdrop that credit markets liked, but US voters did not like, and they voted for different policy.And so, when we look ahead – the range of outcomes, I think across both the macro and the micro, is expanding. And I think the policy uncertainty that markets now face is increasing both scenarios to the upside where things are hotter and you see more animal spirits; and risk to the downside, where potentially more aggressive tariffs or action on immigration creates more kind of stagflationary types of risk.So one element that we're facing is we feel like we're leaving behind a really good environment for corporate credit and we're entering something that's more uncertain. But then balancing that is that you're not going to transition immediately.You still have a lot of momentum in the US and European economy. I look at the forecasts from Seth's team, the global economic numbers, or at least kind of the DM economic numbers into the first half of next year – still look fine. We still have the Fed cutting. We still have the ECB cutting. We still have inflation moderating.So, part of our thinking for this year is it could be a little bit of a story of two halves that we titled our section, “On Borrowed Time.” That the credit is still likely to hold in well and perform better in the first half of the year. Yields are still good; the Fed is still cutting; the backdrop hasn't changed that much. And then it's the second half of the year where some of our economic numbers start to show more divergence, where the Fed is no longer cutting rates, where all in yield levels are lower on our interest rate forecasts, which could temper demand. That looks somewhat trickier.In terms of how we think about what we like within credit, we do think the levered loan market continues to be attractive. That's part of credit where spreads are not particularly tight versus history. That's one area where we still see risk premium. I think this is also an environment where regionally we see Asia underperforming. It's a market that's both very expensive from a spread perspective but also faces potentially kind of outsized economic and tariff uncertainty. And we think that the US might outperform in context to at least initially investors feeling like the US is at less relative risk from tariffs and policy uncertainty than some other markets.So, Vishy, I'll pause there and pass it back to you.Vishy Tirupattur: Thanks, Mike, Seth, and Andrew.Thank you all for listening. We are going to take a pause here and we'll be back tomorrow with our year ahead round table continued, where we'll share our forecast for government bonds, currencies and housing.As a reminder, if you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Our head of Corporate Credit Research Andrew Sheets explains why a stronger economy, moderate inflation and future rate cuts could prompt deal-making.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, head of Corporate Credit Research at Morgan Stanley. Today I’ll discuss why we remain believers in a large, sustained uptick in corporate activity. It's Friday, November 15th at 2pm in London. We continue to think that 2024 will mark the start of a significant, multiyear uplift in global merger and acquisition activity – or M&A. In new work out this week, we are reiterating that view. While the 25 percent rise in volumes this year is actually somewhat short of our original expectations from March, the core drivers of a large and sustained increase in activity, in our view, remain intact. Those drivers remain multiple. Current levels of global M&A volumes are still unusually low relative to their own historical trend or the broader strength that we see in stock markets. The overall economy, which often matters for M&A activity, has been strong, especially in the US, while inflation continues to moderate and rate cuts have begun. We see motivations for sellers – from ageing private equity portfolios, maturing venture capital pipelines, and higher valuations for the median stock. And we see more factors driving buyers from $4 trillion of private market "dry powder," to around $7.5 trillion of cash that's sitting idly on non-financial balance sheets, to wide-open capital markets that provide the ability to finance deals. These high level drivers are also confirmed bottom up by boots on the ground. Our colleagues across Morgan Stanley Equity Research also see a stronger case for activity – and we polled over 60 global equity teams for their views. While the results vary by geography and sector, the Morgan Stanley Equity analysts who cover these sectors in the most depth also see a strong case for more activity. The policy backdrop also matters. While activity has risen this year, one reason it might not have risen as much as we initially expected was uncertainty about both when central banks would start cutting rates and the outcome of US elections. But both of those uncertainties have now, to some extent, waned. Rate cuts from the Fed, the ECB, and the Bank of England have now started, while the Red Sweep in US elections could, in our view, drive more animal spirits. And Europe is an important part of this story too, as we think the European Union’s new approach to consolidation could be more supportive for activity. For investors, an expectation that corporate activity will continue to rise is, in our view, supportive for Financial equities. Where could we be wrong? M&A activity does fundamentally depend on economic and market confidence; and a weaker than expected economy or weaker than expected equity market would drive lower than expected volumes. Policy still matters. And while we view the incoming US administration as more M&A supportive, that could be misguided – if policy changes dent corporate confidence or increase inflation. Finally, we think that a more multipolar world could actually support more M&A, as there’s a push to create more regional champions to compete on the global stage. But this could be incorrect, if those same global frictions disrupt activity or confidence more generally. Time will tell. Thanks for listening. If you enjoy the show, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

While the market waits for the incoming Trump administration to present its policy agenda, our Global Head of Fixed Income and Thematic Research Michael Zezas maps out some areas of early investor interest, including regulation and the US Treasury market.----- Transcript -----Welcome to Thoughts on the Market. I’m Michael Zezas, Morgan Stanley’s Global Head of Fixed Income and Thematic Research. Today on the podcast we’ll be talking about key themes coming out of the US election.It’s Thursday, Nov 14 at 10am in New York.The US election is over, and now the work begins for President Trump and Republican leaders in Congress. They’ll continue to focus in the coming weeks on staffing key roles in the government and fleshing out the policy agenda. When it comes to the economic and markets outlook for 2025, those details will matter a lot – particularly the sequencing and severity of changes to tariffs, immigration, and tax policy. That means for us the next few weeks will be key to learning what next year will look like. But there are still some areas where there’s already some signal for investors to lean on. One is in the financial sector and relates to regulation. A potentially delayed or diluted approach to bank regulation resulting from the policies of the new administration is one reason that our Banks Analyst Betsy Graseck is flagging a more bullish outcome and substantial outperformance potential for the sector. Similarly, our global head of credit research, Andrew Sheets, notes this election outcome should boost M&A activity, where an expected 50 percent pick-up in volumes next year could reach 75 percent or more. Another area is industrials, a sector where companies tend to spend a lot on capital. The Republican sweep substantially increases the chances that key tax benefits reducing the cost of capital expenditures are extended in a timely fashion. And in the U.S. treasury market, there’s signs that the most volatile part of the increase in yields is behind us. While it's true that extending expiring tax cuts means deficits will be higher next year than they otherwise would have been, it's basically just an extension of current policy – so any incremental impact to growth and inflation expectations being priced into this market is still an open question. This should be helpful to fixed income markets finding their footing into year end. But, as we started off with, there’s a lot to be learned in the coming weeks, and we’ll flag here what you need to know and how it may impact the direction of markets. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen to podcasts and share Thoughts on the Market with a friend or colleague today.

As President-Elect Trump’s new administration takes shape, all eyes are on fiscal policy that may follow. Our Global Chief Economist Seth Carpenter uses the United Kingdom’s recent election as a guide for how markets could react to a policy shift in the US.  ----- Transcript -----Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist, and today I'll be talking about the US election and fiscal policy and what lessons we might be able to draw from the fiscal experience in the UK. It's Wednesday, November 13th at 10am in New York.  In a lot of our recent research, the US election has figured prominently, and we highlighted three key policy dimensions that the US administration is going to have to confront. Immigration, tariffs, and, of course, fiscal policy. We're going to keep elections as a theme, but it might be useful to draw some comparisons to the UK to see what lessons we might have for the US. We think the experience in the UK, which recently proposed a new fiscal budget months after an election, is relevant mostly because of the time between taking power and the budget being presented. While markets are in the business of anticipating changes, the process of actually creating policy is a lot more cumbersome and time consuming. In this week, where we've seen lots of expectations already being priced in, it's probably useful to try to think about that process of forming policy in the UK and see what lessons it implies for the US.  Back in May, the UK elected a new government, changing party control after 14 years. A key moment for markets came just over a week ago, though, when the new government's presentation of their budget for the next fiscal year came up. Now, we should remember, the trust government had faced a market test when the announcement of their budget proposals led to a big sell off in interest rates. As a result, markets were keenly attuned this time to the new labor government's budget, particularly because the US fiscal position requires a primary balance to stabilize the debt to GDP ratio. And in particular, when their debt costs rise, when interest rates go up, the primary balances that are needed keep increasing if they want to keep the debt stable. Now, the new labor government proposed to fill a funding gap through tax increases while simultaneously increasing Government investment spending. To manage some of the communication challenges here, many of these proposals, especially about the tax increases, they were made public in advance. The likelihood of additional government spending was also well known, and UK rates had moved higher for months leading up to the formal presentation of the budget. But, markets reacted on the day of the budget reveal, despite all of that prelude. The degree of front loading of the investment spending was seen as a surprise in markets, as was the Office of Budget Responsibility's concurrent assessment that the policy would lead to higher growth, higher inflation, and as a result, a need for higher interest rates. Now, conversations with clients have brought up the similarities of the US and the UK. US interest costs are steadily rising as the cost of the debt reprices to the current yield curve. And, over time, the ratio of interest expense on the debt relative to, say, the GDP of the country, well, that's going to continue to rise as well, and it will very soon eclipse its previous all time high. So, fiscal consolidation would be needed in the United States if we really want to see a stabilized debt to GDP ratio. Markets will need to assess the credibility of fiscal policy and the scrutiny will increase the higher the interest burden gets. The budget process for the US is much less clear cut than that in the UK and deliberations and debates will likely happen over most of 2025. And there's an additional question of how much revenue tariffs might be able to generate on a sustained basis. History suggests that trade diversion tends to limit those revenue gains. All of these facts taken together suggest that the outlook for US fiscal policy will continue to evolve for quite some time.  Well, thanks for listening, and if you enjoy this show, please leave us a review wherever you listen to podcasts and share thoughts on the market with a friend or a colleague today.

Our Chief Asia Economist Chetan Ahya discusses the potential impact of tariffs on China and other Asian countries following the US election.----- Transcript -----Welcome to Thoughts on the Market. I’m Chetan Ahya, Morgan Stanley’s Chief Asia Economist. Today on the podcast – with a Republican White House now in place, tariffs are the key issue that will matter to Asia.It’s Tuesday, November 12, at 2 PM in Hong Kong. With the US election results in, the question now is not if there will be tariff hikes, but when and how much. Will China alone see rising tariffs, or will there be universal tariff imposed on all imports to the US? The previous president Trump administration imposed several tariffs on Chinese imports beginning in 2018. And looking back, our learning is that weaker corporate confidence weighed more heavily on Asia’s growth outlook than the direct effect of tariffs on exports. Just to elaborate on the point on direct impact of tariffs: Despite the tariffs imposed on China during that period, what we observed is that China’s market share in global goods exports improved after the US started to impose tariffs on imports from China. Looking forward, let’s consider a scenario of 50 per cent tariffs on China alone. The hit to global and China corporate confidence may not be as large as it was in 2018 and 2019. This is in part because US-China trade tensions have persisted for several years now. Companies have invested in diversifying their supply chains since then, and the US share in China's exports has declined since 2017. Given all this, the drag on China’s exports may be less than the 1 percentage point that we saw last time. The rest of Asia would also experience a slowdown, but we think the overall drag on growth would be less significant this time. The effects on individual economies would differ based on their exposure to China. We think Australia and Indonesia will be more exposed. Korea, Taiwan, Malaysia, and Thailand would be moderately exposed. And India and Japan would be less exposed given a low share of export to China. But what happens if the US imposes 50 per cent tariffs on China and a 10 per cent universal tariff on the rest of the world? In this scenario, the damage to corporate confidence and the global capex and trade cycle would be much larger. The drag could be similar or greater than what we saw in 2018 and 2019. Asia excluding China has now become more dependent on the US as a source of end-demand. Global supply chains might have to be rewired yet again. This would cause a significant disruption to the corporate sector and a material impact on Asia’s growth trajectory. Of course, the final effect of US tariffs on Asia growth would also depend on the scale of policy support. Asia’s policy makers could allow their currencies to depreciate in response to a strong dollar. Then, against a backdrop of weaker currencies, Asia’s central banks could be constrained in their ability to cut rates immediately – similar to what happened in 2018-[20]19. Hence, they would prefer to take a fiscal easing first. Back in 2017-[20]19, Asia's fiscal deficit widened in aggregate by 1.1 percentage point as policymakers sought to provide some cushion to growth downside. Once currencies stabilize, they will take up monetary easing.Things may move quickly once Trump takes office in January, and we will continue to keep you updated. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

With the Republican party poised to clinch control of the White House and Congress, our CIO and Chief US Equity Strategist says markets are readying for a lighter regulatory environment, supportive tax policy and a possible rebound in investor enthusiasm.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief US Equity Strategist. Today on the podcast I'll be talking about the results of last week’s election and its impact on equity markets.It's Monday, Nov 11th at 11:30am in New York.So let’s get after it.Our work leading up to the election showed that stocks likely to benefit from a Republican sweep did not actually see material outperformance up and through November 5th. In other words, this political outcome was not fully priced. As a result, this allowed for significant outperformance of Financials, Industrials, and other cyclicals last week. We see further follow through to the upside in quality cyclicals as prospects for a lighter regulatory environment, supportive tax policy and a potential rebound in animal spirits should rise following the election outcome. These developments came on the back of a macro backdrop that was already becoming more supportive of cyclical outperformance – and why we upgraded this cohort to overweight in early October. We continue to be sellers though of tariff-exposed consumer stocks and renewable energy stocks. Our upgrade to Financials in early October was rooted in our view that expectations were low going into earnings season while positioning remained light. Our work since then showed that the majority of the group's outperformance into the election could be explained by strong earnings revisions as opposed to rising odds of a Trump win in prediction markets. Now that we have the election results in hand, it appears that expectations for de-regulation are also driving performance upside in addition to improving fundamentals.  While the 2016 playbook would suggest small caps and lower quality equities could see a period  of outperformance following the election, there are a couple of important differences worth considering. First, several of these areas of the market are exhibiting a negative correlation to interest rates today whereas they were showing a positive correlation in 2016. In other words, in today's later cycle environment, these cohorts' adverse sensitivity to rising rates is greater than it was in that period. Should rates see more upside post the election, there is likely less upside this time for small caps and lower quality cyclicals. Furthermore, relative earnings revisions breadth for small cap cyclicals is negative today, whereas it was positive in 2016. Finally, even with the increase in animal spirits following the 2016 election, small caps' relative performance peaked in early December of that year, just one month after the election.While the momentum remains to the upside for US equity markets led by quality cyclicals, it's  worth considering the potential risks. The first one is a material move higher in interest rates driven by a rising term premium. The 50 basis point rise in term premium so far has not been enough to worry equity investors yet. However, should the term premium accelerate materially from here driven by fiscal sustainability concerns, equity valuations would likely face headwinds. Second, one of the more popular views in the macro community is for a stronger dollar. If such strength continues into year-end, it could provide a headwind to multinationals' Earnings growth for 2024 and 2025. A final risk to the positive price momentum is simply price itself. Over the past several months, the price change of the S&P 500 has distanced itself from the fundamentals. More specifically, the year-over-year change in the S&P has rarely been this disconnected from earnings revision breadth and business confidence surveys. However, given the positive reaction to the election so far in markets and from many business leaders, perhaps animal spirits can take earnings guidance higher – which is necessary to maintain the current trajectory in equity markets, especially since that is now expected by stock prices.  Thanks for listening. If you enjoy the podcast, leave us a review wherever you listen, and share Thoughts on the Market with a friend or colleague today.

Our head of Corporate Credit Research Andrew Sheets provides an overview of uncertainty around policy following the election of a Republican administration.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, head of Corporate Credit Research at Morgan Stanley. Today I’m going to talk about the US election - the implications in the past, present and future. It's Friday, November 8th at 2pm in London. The US Election is over, and the result was relatively clear. Republicans won control of the Presidency, the Senate, and on current projections, are likely to narrowly take the House of Representatives. The so-called ‘sweep’ will provide significant leeway to enact policy. There is going to be lots of time over future weeks and months, and even years, to discuss what all of this is going to mean. But for now, I want to offer a few thoughts on the impact across the past, the present and the future. Looking back, the US election has been a very well-known uncertainty that has hung over this market all year. The polling was close between two candidates with very different policy priorities. To the extent the simply not knowing was holding some investors back, or that investors were worried about a contested outcome, or even worse, political unrest – that issue has now passed. The relief from that passing may help explain some of the recent positive market reaction. For the present, we now sit in this curious middle-place where the uncertainty of the result is behind us, but any uncertainty from policy changes have not yet arrived. Coupled with still strong US economic data, another interest rate cut from the Federal Reserve yesterday, and the tendency of markets to perform well in November and December, and the path of least resistance in the near term may be for markets to continue to trade well.The future, however, may have just become less certain. Credit likes moderation and stability, and we think the current economic mix, with US GDP growth and inflation at both around 2.5 per cent, while the unemployment rate sits near historic lows at 4.2 per cent, has been a good one for credit. It’s been a major driver of our optimistic spread forecasts this year. Yet based on exit polls, US voters were not happy with this economy, and voted for change. The question, which will now dominate investor conversations, is how much of what the new administration has said they will do, will end up happening – on everything from tariffs, to taxes, to immigration. I can assure you that there’s a very wide investor expectations around this. The ambiguity isn’t necessarily a problem now, but we expect these questions to harden as we get into early next year. And given the likely sweep, the odds for larger changes in policy, especially much looser fiscal policy, have risen significantly. Whatever your average expectation for the US economy over the next 24 months now is, we think the bands around that have widened, and that’s also true globally, from Latin America, to Europe, to Asia. To be a little more specific about these wider bands: To the downside, there are now scenarios where tariffs and deportations push up inflation and weaken growth. And to the upside, there are scenarios where potentially lower taxes and looser regulation could drive higher stock markets and more corporate animal spirits. But for credit, both of these present challenges: tight spreads are absolutely not priced for stagflation, while animal spirits and more corporate aggression aren’t necessarily a great story if you’re a lender. A more benign, middle scenario is, of course, still possible, and we’re keeping an open mind. But the future has now become more uncertain. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Our panel of analysts discusses the health of the US consumer through the lens of spending, credit use and home ownership. ----- Transcript -----James Egan: Welcome to Thoughts on the Market. I'm James Egan, Morgan Stanley's co-head of Securitized Product Strategy, and today we're going to take a look at the state of the US consumer from several different perspectives.Recent economic data suggests that the US economy is strong, and that inflation is on a downward trend. Yet, some of the underlying performance data is a little bit weaker. To understand what's happening, I'm joined by my colleagues Arunima Sinha and Heather Berger from the Global and US Economics teams.It's Thursday, November 7th, at 10am in New York.Now, the macro data on the consumer has looked pretty strong. Arunima, can you give a little bit more detail here? And specifically, how has consumer spending in the US been trending relative to where it was last year?Arunima Sinha: So, a good place to start, Jim, would be just to see where consumption spending was last year. And there it ended on a strong note. And in the first three-quarters of 2023, the average quarterly analyzed growth for consumption was just under 3 per cent. And that's where we are this year. We've seen solid growth rates in all three quarters this year, with the third quarter at 3.7 per cent. A particularly interesting aspect has been that the spending on goods has actually accelerated this year, with the third [quarter] number at a blistering 6.0 per cent on a quarterly basis.We have chalked this down to labor income growth remaining robust; and we did an analysis which showed that past growth in labor income boosts real consumption spending. Over this year, labor compensation has been growing strongly. So over 6 per cent in the first quarter and about 3.5 per cent in quarters two and three.And so, we continue to expect that that solid labor income growth is going to continue to boost real consumption spending.James Egan: All right. So, if I'm hearing you correctly – good spending, holding up; services, holding up. What about discretionary versus non-discretionary spend?Arunima Sinha: That's a great question, Jim, especially because discretionary spending is 70 per cent of all nominal personal consumption spending in the US. So just for context, what does discretionary include? It's going to be all the spending on durable goods, some non-durables, and then non-essential services such as health and transport, financial services, etc. And what we also saw – that a larger share of labor income is now being spent on discretionary items relative to the pre-COVID phase.So where are growth rates running? Discretionary spending is running strong on both a nominal and a real basis. So, on a nominal basis, we have about 5.5 to 6 per cent year on year, over this year, and over 3 per cent on a real basis. And these are largely in line with pre-COVID rates, if a little bit stronger now.For non-discretionary spending – that's the spending on food at home, and clothing, energy, and housing services – nominal spending has been decent. So, 4 per cent year on year on the first three quarters this year, and real spending has been a little bit less than the pre-COVID rate. So, between 0.5 per cent to 1 per cent. And so, this suggests what we expected to see, which is there's likely greater price sensitivity among consumers for these non-discretionary categories.What do we see going forward? We think that those increases in labor income are going to continue to provide boosts to discretionary spending. And one of the interesting aspects that we found was that lending standards seem to matter for discretionary spending. So, there's been some slowing down and the tightening of lending standards – and that could provide a further tailwind to discretionary spending.James Egan: Alright, that all sounds pretty positive and makes sense as to why we're getting so many questions about economic data that looks very healthy from a consumer perspective. But then, Heather. Other consumer data is showing a little bit more weakness. Arunima just mentioned credit standards. What are we seeing from the performance perspective on the consumer credit side?Heather Berger: Well, as you mentioned, the consumer credit data has shown more weakness, as more consumers are missing payments on their loans. We initially saw delinquency rates start to pick up in loans concentrated towards consumers with lower credit scores, such as subprime auto loans and unsecured personal loans, as those consumers were more affected early on by high inflation and then rising rates.Delinquency rates for those lower credit score loans are near the highest we have on record in some cases. In the past year, though, we have also seen that delinquency rates have picked up in loans aimed at consumers with higher credit scores, such as credit cards and prime auto loans. The weakness in these is not as extreme as in subprime, but the delinquency rates of the loans taken out recently is still relatively high historically. James Egan: So, it sounds like what you are describing is that there are pockets of consumers that are feeling more weakness than others.Heather Berger: Yes, exactly. And so, on the prime consumer side, even if these consumers have higher credit scores or higher incomes, if they took out loans recently, they likely did so at higher rates, and they're really feeling the pressures of higher debt service costs.We can also see some of the bifurcation between low income and high-income consumers. In some of the more detailed economic data, we have a breakdown of 2023 spending by income group, which is a bit outdated but still useful to see the narrative – and what it shows is that in 2023 higher income consumers made up near the largest share of discretionary spending as they have historically. For lower income consumers, their spending has shifted more towards essentials, with shelter increasing the most as a share of their spending from the prior year.Now, Jim, we really think that the housing backdrop has played a role here, so can you explain a bit more of what's going on there?James Egan: Yes, now my co-head of Securitized Product Strategy, Jay Bacow, and I have been on this podcast a few times talking about the role that the housing market is playing in the economy right now. We've really talked about the lock in effect. And when we're thinking about the role that housing plays in the consumer specifically, we're talking about lower income households, more discretionary spending, shelter increasing that's not happening at the higher end, and we think that's the lock in effect.A majority of homeowners were able to get low fixed rate mortgages for 30 years with 3 or 4 per cent mortgage rates. The effective mortgage rate would be on the outstanding market right now is, average is 4 per cent. Prevailing rates are north of 6 per cent right now. So that has helped that higher end consumer who is more likely to be a homeowner – 65 per cent of the US households are homeowners – maintain that lower level.But I don't want to gloss over that entirely. Other costs of homeownership are increasing. For instance, property taxes and insurance costs are up. Homeowners have realized swelling home equity amounts amid record home price growth in recent years; perhaps giving them more confidence to spend, but that equity hasn't exactly been easy to access.Now, second lean and HELOC balances have been increasing; but the amount of equity that's being withdrawn falls well shy of previous highs, which were set back in 2009. And that's despite the fact that the overall equity in the housing market is $20 trillion larger today than it was back then. While the equity itself should provide a buffer for homeowning consumers from ultimately defaulting, these dynamics could be resulting in some of the short-term delinquency increases that we think we're seeing in products like Prime Auto, for example.But Arunima, can you tie a bow on this for us? What does all of this mean for the consumer moving forward?Arunima Sinha: Moving forward Jim, we really just see a solid consumer. So, for the end of this year, our forecast is real consumption spending growing at 2.6 per cent; at the end of next year at over 2 per cent. And that really is tied to our view on the labor market – that it's going to continue to decelerate, but not in any sudden ways.So that's it. We are seeing a strong consumer, and we are going to be watching for pockets of weakness.James Egan: All right. Arunima, Heather, thanks for taking the time to talk.Arunima Sinha: Thanks so much for having me on, Jim.Heather Berger: Great talking to you both.James Egan: And to our listeners, thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.

With a second Trump term at least partially reflected in the price of global markets, we focus on two key debates for the longer-term: Potential tariffs and fiscal policy. ----- Transcript -----Welcome to Thoughts on the Market. I’m Michael Zezas, Morgan Stanley’s Global Head of Fixed Income and Thematic Research. Today on the podcast – some initial thoughts on the market implications of a second term for President Trump.It’s Wednesday, Nov 6, at 2pm in New York.As it became clearer on election night that Former President Trump was set to win a second term in the White House, markets began to price in the expected impacts of resulting public policy choices. The US dollar rallied, which makes sense when you consider that President Trump has argued for higher tariffs, something that could hurt rest of world growth more than the US.  US Treasuries sold off and yield rose, something that makes sense given President Trump supports tax policy choices that could meaningfully expand deficits. And US equity markets rallied led by key sectors that could benefit fundamentally from extended tax breaks and deregulation, including industrials and energy. But with a second Trump term now at least partially reflected in the price of markets across assets, it gets harder from here to understand how markets move.  There’s several key debates we’ll be tracking, here’s two that are top of mind. First, how will tariffs be implemented? Per the work of our economists, higher tariffs can raise inflation and crimp growth. They estimated that a blanket 10 per cent tariffs and 60 per cent tariffs on China imports would raise inflation by 1 per cent and dampen GDP growth by 1.4 per cent. Some pretty big numbers that would really challenge the soft-landing narrative and positive backdrop for equities and other riskier assets. Other approaches may carry the same risks, but to a lesser degree. Tariffs exercised via executive authority would, in our view, likely have to be targeted to countries and products – as opposed to implemented on a blanket basis. So, the approach to tariffs could represent a substantial difference in the outlook for markets. Second, how quickly and to what degree might US deficits expand? Our presumption has been that fiscal policy action, regardless of US election outcome, wouldn’t become clear until late 2025, largely governed by the need to address several provisions from the Tax Cuts and Jobs Act that expire at the end of that year. But, while not our base case it's of course possible that a Republican Congressional majority could deliver on tax cuts earlier – and perhaps even in larger size. The resolution to this debate could make the difference between yields climbing even higher than they have recently and taking a pause at these levels. Bottom line, as the election ends and the Presidential transition begins, there’s a lot about policy implementation that we can learn to guide our market strategy. We’ll be paying attention to all the key policymaker statements and deliberations, and feed through the signal to you.Thanks for listening. If you enjoy the show, please leave us a review wherever you listen to podcasts and share Thoughts on the Market with a friend or colleague today.

Analyst Nathan Feather discusses why the online dating market is slowing down, and whether or not it can get back on track.----- Transcript -----Welcome to Thoughts on the Market. I’m Nathan Feather, Morgan Stanley’s Online Dating and US Small- and Mid-Cap eCommerce Analyst. Today, people across America are casting their votes. On this podcast, however, we're taking a break from our election coverage. And taking a leap into a different matter on many minds … and hearts. Online dating. Why it fell out of favor and how it might make a comeback.It’s November 5, at 10am in New York. Finding love is a tricky business. Dating has never been easy; but with an epidemic of loneliness and isolation, singles today are finding it harder than ever. For those looking for love, online dating seems to offer endless possibilities. Since its inception just three decades ago, the stigma around online dating has faded, leading more and more daters to put their faith – and money – into the algorithm. In the US, three out of four actively dating singles have used it at some point in their journey. But after years of consistent double-digit growth, the online dating market is now faltering, with US industry revenue growing just 1 per cent this year.  Why? Well, we think the issue lies primarily in weakening user trends with the US user bases of major dating apps in decline. Since last spring, we have seen around a 15 per cent decrease in dating app use by singles actively looking for a relationship. To us this indicates that the product is not matching user expectations as some daters have grown tired of the persistent swiping and dead ends. Consequently, daters' intentions to use online dating in the future have consistently declined. Now, there are many theories about why this is happening. We think there may be residual impact from the pandemic when singles used online dating at record rates. People who found relationships during that time likely left the apps. And those who didn't find a partner also often left the apps, disappointed and less likely to return. But that’s not all; while Millennials embraced the fun and casual experience of swipe apps, Gen Z isn’t so enamored – instead searching for greater authenticity. So, can online dating be fixed or are these issues beyond repair? Well, there are two main schools of thought. The first believes that the issue with online dating is a lack of innovation, and an improved product should lead to improved financials. The second camp argues that daters are fundamentally shifting away from these products to date in person or not at all. We sit firmly in the first camp and think this is a product issue. The apps need to do a better job helping people find lasting relationships. Granted, fixing this is far easier said than done. Human relationships are messy and complicated. But we do think there are clear opportunities. Many of the large apps have stayed relatively unchanged over the past five to 10 years and are meeting the demands of users from then – and not now. With improvements to the user experience and better tailoring to the goals of today’s daters, we believe the apps can reaccelerate user growth. In fact, brands that have consistently improved the user experience have recently fared far better. With that being said, we do think it will take time to find the product improvements that really work and convince daters to give the apps another shot. But as products evolve, we think daters and investors can rekindle their relationship with online dating.If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market today, with a friend, colleague, significant other -- even a situationship. Thanks for listening.

On the eve of a competitive US election, our CIO and Chief US Equity Strategist joins our head of Corporate Credit Research and Chief Fixed Income Strategist to asses how investors are preparing for each possible outcome of the race.----- Transcript -----Mike Wilson: Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief US Equity Strategist.Andrew Sheets: I'm Andrew Sheets, head of Corporate Credit Research at Morgan Stanley.Vishy Tirupattur: And I'm Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist.Mike Wilson: Today on the show, the day before the US election, we're going to do a conversation with my colleagues about what we're watching out for in the markets.It's Monday, November 4th, at 1130am in New York.So let's get after it.Andrew Sheets: Well, Mike, like you said, it's the day before the US election. The campaign is going down to the wire and the polling looks very close. Which means both it could be a while before we know the results and a lot of different potential outcomes are still in play. So it would be great to just start with a high-level overview of how you're thinking about the different outcomes.So, first Mike, to you, as you think across some of the broad different scenarios that we could see post election, what do you think are some of the most important takeaways for how markets might react?Mike Wilson: Yeah, thanks, Andrew. I mean, it's hard to, you know, consider oneself as an expert in these types of events, which are extremely hard to predict. And there's a lot of permutations, by the way. There's obviously the presidential election, but then of course there's congressional elections. And it's the combination of all those that then feed into policy, which could be immediate or longer lasting.So, the other thing to just keep in mind is that, you know, markets tend to pre-trade events like this. I mean, this is a known date, right? A known kind of event. It's not a surprise. And the outcome is a surprise. So people are making investments based on how they think the outcome is going to come. So that's the way we think about it now.Clearly, you know, treasury markets have sold off. Some of that's better economic data, as our strategists in fixed income have told us. But I think it's also this view that, you know, Trump presidency, particularly Republican sweep, may lead to more spending or bigger budget deficits. And so, term premium has widened out a bit, so that’s been an area; here I think you could get some reversion if Harris were to win.And that has impact on the equity markets -- whether that's some maybe small cap stocks or financials; some of the, you know, names that are levered to industrial spending that they want to do from a traditional energy standpoint.And then, of course, on the negative side, you know, a lot of consumer-oriented stocks have suffered because of fears about tariffs increasing along with renewables. Because of the view that, you know, the IRA would be pared back or even repealed.And I think there's still follow through particularly in financials. So, if Trump were to win, with a Republican Congress, I think, you know, financials could see some follow through. I think you could see some more strength in small caps because of perhaps animal spirits increasing a little further; a bit of a blow off move, perhaps, in the indices.And then, of course, if Harris wins, I would expect, perhaps, bonds to rally. I think you might see some of these, you know, micro trades like in financials give back some along with small caps. And then you'd see a big rally in the renewables. And some of the tariff losers that have suffered recently. So, there's a lot, there's a lot of opportunity, depending on the outcome tomorrow.Andrew Sheets: And Vishy, as you think about these outcomes for fixed income, what really stands out to you?Vishy Tirupattur: I think what is important, Andrew, is really to think about what's happening today in the macro context, related to what was happening in 2016. So, if you look at 2016; and people are too quick to turn to the 2016 playbook and look at, you know, what a potential Trump, win would mean to the rates markets.I think we should keep in mind that going into the polls in 2016, the market was expecting a 30 basis points of rate hikes over the next 12 months. And that rate hike expectation transitioned into something like a 125 place basis points over the following 12 months. And where we are today is very different.We are looking at a[n] expectation of a 130-135 basis points of rate cuts over the next 12 months. So what that means to me is underlying macroeconomic conditions in where the economy is, where monetary policy is very, very different. So, we should not expect the same reaction in the markets, whether it's a micro or macro -- similar to what happened in 2016.So that's the first point. The second thing I want to; I'm really focused on is – if it is a Harris win, it's more of a policy continuity. And if it's a Trump win, there is going to be significant policy changes. But in thinking about those policy changes, you know, before we leap into deficit expansion, et cetera, we need to think in terms of the sequencing of the policy and what is really doable.You know, we're thinking three buckets. I think in terms of changes to immigration policy, changes to tariff policy, and changes to tax code. Of these things, the thing that requires no congressional approval is the changes to tariff policy, and the tariffs are probably are going to be much more front loaded compared to immigration. Or certainly the tax policy [is] going to take a quite a bit of time for it to work out – even under the Republican sweep scenario.So, the sequencing of even the tariff policy, the effect of the tariffs really depends upon the sequencing of tariffs itself. Do we get to the 60 per cent China tariffs off the bat? Or will that be built over time? Are we looking at across the board, 10 per cent tariffs? Or are we looking at it in much more sequential terms? So, I would be careful not to jump into any knee-jerk reaction to any outcome.Andrew Sheets: So, Mike, the next question I wanted to ask you is – you've been obviously having a lot of conversations with investors around this topic. And so, is there a piece of kind of conventional wisdom around the election or how markets will react to the election that you find yourself disagreeing with the most?Mike Wilson: Well, I don't think there's any standard reaction function because, as Vishy said -- depending on when the election's occurring, it's a very different setup. And I will go back to what he was saying on 2016. I remember in 2016, thinking after Trump won, which was a surprise to the markets, that was a reflationary trade that we were very bullish on because there was so much slack in the economy.We had borrowing capabilities and we hadn't done any tax cuts yet. So, there was just; there was a lot of running room to kind of push that envelope.If we start pushing the envelope further on spending or reflationary type policies, all of a sudden the Fed probably can't cut. And that changes the dynamics in the bond market. It changes the dynamics in the stock market from a valuation standpoint, for sure. We've really priced in this like, kind of glide path now on, on Fed policy, which will be kind of turned upside down if we try to reflate things.Andrew Sheets: So Vishy, that's a great point because, you know, I imagine something that investors do ask a lot about towards the bond market is, you know, we see these yields rising. Are they rising for kind of good reasons because the economy is better? Are they rising for less good reasons, maybe because inflation's higher or the deficit's widening too much? How do you think about that issue of the rise in bond yields? At what point is it rising for kind of less healthy reasons?Vishy Tirupattur: So Andrew, if you look back to the last 30 days or so, the reaction the Treasury yields is mostly on account of stronger data. Not to say that the expectation changes about the presidential election outcomes haven't played a role. They have. But we've had really strong data. You know, we can ignore the data from last Friday – because the employment data that we got last Friday was affected by hurricanes and strikes, etc. But take that out of the picture. The data has been very strong. So, it's really a reflection of both of them. But we think stronger data have played a bigger role in yield rise than electoral outcome expectation changes.Andrew Sheets: Mike, maybe to take that question and throw it back to you, as you think about this issue of the rise in yields – and at what point they're a problem for the equity market. How are you thinking about that?Mike Wilson: Well, I think there's two ways to think about it. Number one, if it really is about the data getting better, then all of a sudden, you know, maybe the multiple expansion we've seen is right. And that, it's sort of foretelling of an earnings growth picture next year that's, you know, much faster than what, the consensus is modeling.However, I'd push back on that because the consensus already is modeling a pretty good growth trajectory of about 12 per cent earnings growth. And that's, you know, quite healthy. I think, you know, it's probably more mixed. I mean, the term premium has gone up by 50 basis points, so some of this is about fiscal sustainability – no matter who wins, by the way. I wouldn't say either party has done a very good stewardship of, you know, monitoring the fiscal deficits; and I think some of it is definitely part of that. And then, look, I mean, this is what happened last year where, you know, we get financial conditions loosened up so much that inflation comes back. And then the Fed can't cut.So to me, you know, we're right there and we've written about this extensively. We're right around the 200-day moving average for 10-year yields. The term premium now is up about 50 basis points. There's not a lot of wiggle room now. Stock market did trade poorly last week as we went through those levels. So, I think if rates go up another 10 or 20 basis points post the election, no matter who wins and it's driven at least half by term premium, I think the equity market's not gonna like that.If rates kind of stay right around in here and we see term premium stabilize, or even come down because people get more excited about growth -- well then, we can probably rally a bit. So it's much a reason of why rates are going up as much as how much they're going up for the impact on equity multiples.Vishy Tirupattur: Andrew, how are you thinking about credit markets against this background?Andrew Sheets: Yeah, so I think a few things are important for credit. So first is I do think credit is a[n] asset class that likes moderation. And so, I think outcomes that are likely to deliver much larger changes in economic, domestic, foreign policy are worse for credit. I mean, I think that the current status quo is quite helpful to credit given we're trading at some of the tightest spreads in the last 20 years. So, I think the less that changes around that for the macro backdrop for credit, the better.I think secondly, you know, if I -- and Mike correct me, if you think I'm phrasing this wrong. But I think kind of some of the upside case that people make, that investors make for equities in the Republican sweep scenario is some version of kind of an animal spirits case; that you'll see lower taxes, less regulation, more corporate risk taking higher corporate confidence. That might be good for the equity market, but usually greater animal spirits are not good for the credit market. That higher level of risk taking is often not as good for the lenders. So, there are scenarios that you could get outcomes that might be, you know, positive for equities that would not be positive for credit.And then I think conversely, in say the event of a democratic sweep or in the scenarios where Harris wins, I do think the market would probably see those as potentially, you know, the lower vol events – as they're probably most similar to the status quo. And again, I think that vol suppression that might be helpful to credit; that might be helpful for things like mortgages that credit is compared to. And so, I think that's also kind of important for how we're thinking about it.To both Mike and Vishy, to round out the episode, as we mentioned, the race is close. We might not know the outcome immediately. As you're going to be looking at the news and the markets over Tuesday evening, into Wednesday morning. What's your process? How closely do you follow the events? What are you going to be focused on and what are kind of the pitfalls that you're trying to avoid?Maybe Vishy, I'll start with you.Vishy Tirupattur: I think the first thing I'd like to avoid is – do not make any market conclusions based on the first initial set of data. This is going to be a somewhat drawn out; maybe not as drawn out as last time around in 2020. But it is probably unlikely, but we will know the outcome on Tuesday night as we did in 2016.So, hurry up and wait as my colleague, Michael Zezas puts it.Mike Wilson: And I'm going to take the view, which I think most clients have taken over the last, you know, really several months, which is -- price is your best analyst, sadly. And I think a lot of people are going to do the same thing, right? So, we're all going to watch price to see kind of, ‘Okay, well, how was the market adjusting to the results that we know and to the results that we don't know?’Because that's how you trade it, right? I mean, if you get big price swings in certain things that look like they're out of bounds because of positioning, you gotta take advantage of that. And vice versa. If you think that the price movement is kind of correct with it, there's probably maybe more momentum if in fact, the market's getting it right.So this is what makes this so tricky – is that, you know, markets move not just based on the outcome of events or earnings or whatever it might be; but how positioning is. And so, the first two or three days – you know, it's a clearing event. You know, volatility is probably going to come down as we learn the results, no matter who wins. And then you're going to have to figure out, okay, where are things priced correctly? And where are things priced incorrectly? And then I can look at my analysis as to what I actually want to own, as opposed to tradeAndrew Sheets: That's great. And if I could just maybe add one, one thing for my side, you know, Mike – which you mentioned about volatility coming down. I do think that makes a lot of sense. That's something, you know, we're going to be watching on the credit side. If that does not happen, kind of as expected, that would be notable. And I also think what you mentioned about that interplay between, you know, higher yields and higher equities on some sort of initial move – especially if it was, a Republican sweep scenario where I think kind of the consensus view is that might be a 'stocks up yields up' type of type of environment. I think that will be very interesting to watch in terms of do we start to see a different interaction between stocks and yields as we break through some key levels. And I think for the credit market that interaction could certainly matter.It's great to catch up. Hopefully we'll know a lot more about how this all turned out pretty soon.Vishy Tirupattur: It's great chatting with both of you, Mike and Andrew.Mike Wilson: Thanks for listening. If you enjoy the show, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Our US Fintech and Payments analyst reviews a recent survey that reveals key trends on how Gen Z and Millennials handle their personal finances.----- Transcript -----Welcome to Thoughts on the Market. I’m James Faucette, Morgan Stanley’s Head of US Fintech and Payments. Today I’ll dig into the way young people in the US approach their finances and why it matters.It’s Friday, November 1st, at 10am in New York. You’d think that Millennials – also commonly known as Gen Y – and Gen Z would come up with new ways to think about money. After all, they live most of their lives online, and don’t always rely on their parents for advice – financial or otherwise. But a survey we conducted suggests the opposite may be true. To understand how 16 to 43 year-olds – who make up nearly 40 per cent of the US population – view money, we ran an AlphaWise survey of more than 4,000 US consumers. In general, our work suggests that both Millennials and Gen Z’s financial goals, banking preferences, and medium-term aspirations are not much different from the priorities of previous generations. Young consumers still believe family is the most important aspect in life, similar to what we found in our 2018 survey. They have a positive outlook on home ownership, college education, employment, and their personal financial situation. 28-to-43-year-olds have the second highest average annual income among all age cohorts, earning more than $100,000. They spend an average of $86,000 per year, of which more than a third goes toward housing. Gen Y and Z largely expect to live in owned homes at a greater rate in five to 10 years, and younger Gen Y cohorts' highest priority is starting a family and raising children in the medium term. This should be a tailwind for many consumer-facing real estate property sectors including retail, residential, lodging and self-storage. However, Gen Y and Z are less mobile today than they were pre-pandemic. Compared to their peers in 2018, they intend to keep living in the same area they're currently living in for the next five to 10 years. Gen Y and Z consumers reported higher propensity for saving each month relative to older generations, which could be a potential tailwind for discretionary spending. And travel remains a top priority across age cohorts, which sets the stage for ongoing travel strength and favorable cross-border trends for the major credit card providers. In addition to all these findings, our analysis suggests several surprising facts. For example, our survey results contradict the widely accepted notion that younger generations are "credit averse." The vast majority of Gen Z consumers have one or more traditional credit cards – at a similar rate to Gen X and Millennials. Although traditional credit card usage is higher among Millennials and Gen Z than it was in 2018, data suggests this is driven by convenience, not financing needs. Younger people’s borrowing is primarily related to auto and home loans from traditional lenders rather than fintechs. Another unexpected finding is that while Gen Y and Z are more drawn to online banking than their predecessors, about 75 per cent acknowledge the importance of physical branch locations – and still prefer to bank with their traditional national, regional, and community banks over online-only providers. What’s more, they also believe physical bank branches will be important long-term. Overall, our analysis suggests that generations tend to maintain their key priorities as they age. Whether this pattern holds in the future is something we will continue to watch.Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

With the US election as a backdrop, our Head of Corporate Credit Research Andrew Sheets tells three stories that help encapsulate the state of global credit markets.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, head of Corporate Credit Research at Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, today I'll go around the credit world in three short stories. It's Thursday, October 31st at 2pm in London.The US election next Tuesday continues to be a top issue on investor minds, and indeed is a top issue for us here at Thoughts on the Market, where it’s dominating your feed over this week. For credit, our positive view this year has been closely tied to the idea that the asset class likes moderation. For example, in data released yesterday the US economy grew a solid 2.8 per cent in the third quarter, while core inflation moderated to just 2.2 per cent, close to the Fed’s target. And Morgan Stanley’s forecasts for the rest of this year and next see that pattern continuing: Solid US Growth, falling inflation, driving steady further rate cuts from the Federal Reserve and all creating a better-than-expected backdrop for credit that should support tighter than average spreads. That idea that credit likes moderation is core to how we view the election. Outcomes that could drive larger changes in economic policy, domestic policy or foreign policy, are all larger risks. And outcomes that could drive more moderate outcomes across all of these factors are likely going to be better for credit, in our view. But you may also be tired of hearing about the election. And so for you, here is a quick tour of the credit world in three non-election stories. In Asia, Korea will be added to the FTSE World Government Bond Index, an important benchmark for global bond investors. This has significant implications across Korean assets, but for Credit, it may be most important for sparking more interest in Corporate Bonds denominated in local Korean Won.This is a larger market than investors may initially realize, totaling roughly $1 trillion US equivalent in size. And meanwhile, the exposure of foreign investors to this market is historically low. A large market with little global exposure is a potential opportunity. Moving to Europe, you could be forgiven for thinking the mood is pretty dour. Growth has been weaker than in the United States, while the US Election is raising questions around everything from disruptions to trans-Atlantic trade, to the future of NATO, to the war in Ukraine. But over the last month, flows into European credit have been extremely good. Per work by my colleagues, inflows into European credit have reached record levels over the last several months. The start of rate cuts leading investors to lock in still-attractive all-in yields in Europe is a big part of this story. Finally, in the US, we continue to see remarkable shifts in the ease with which investors can trade large volumes of corporate bonds. So-called portfolio trading, where investors buy or sell bonds as a group, continues to grow, with September seeing a new all-time high in activity. Year-to-date, through September, we estimate that roughly $760 billion – with a ‘b’ – has been traded this way. It’s never been easier to trade very large volumes of corporate bonds. The US election on November 5th will continue to dominate investor focus over the coming days. As it should. Credit has been an enormous beneficiary of the recent backdrop that’s seen solid growth, moderating inflation, and moderating policy rates. The vote will have an important bearing on whether that moderation continues, or if something new takes its place. But away from the election there are other important things happening. Korea’s Local Currency Corporate bond market is a large, underinvested market that may get more attention after index inclusion. European Credit is seeing record flows despite its macro uncertainties, an indicator of underlying investor demand. And in the US, the continued rise of portfolio trading is re-shaping market structure and improving the ability to trade ever larger volumes of corporate bonds. Thanks for listening. If you enjoy the show, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today. Oh, and Happy Halloween.

Our Global Head of Fixed Income and Thematic Research, Michael Zezas, outlines how investors should navigate the closing days of the presidential campaign -- including a vote-counting period that could extend past Election Day.----- Transcript -----Welcome to Thoughts on the Market. I’m Michael Zezas, Morgan Stanley’s Global Head of Fixed Income and Thematic Research. Today is going to be a little bit different. We’re exactly six days away from the US election. The race is neck-and-neck, and I want to sketch out what investors should expect in the next couple of weeks. It’s Wednesday, October 30, at 10 AM in New York.This is an historic election, and the outcome remains highly uncertain. What’s more, there’s a good chance we won’t know the winner on election night due to close vote counts. My colleagues and I have spent a lot of time on this show trying to give our listeners a sense of how the election might impact different economies around the word as well as markets, sectors, and specific industries. But today I want to take a step back and highlight a few things that investors should keep in mind right now. To sum up what we’ve covered so far: The key policies at stake are taxes, tariffs, and immigration. Congressional composition will be critical in determining the extent of tax cut extensions in either win outcome. Domestic, consumer-oriented sectors are most exposed to tax changes, while clean-tech is the most exposed to potential efforts at a repeal of the Inflation Reduction Act. Macro impacts vary depending on the scope of policies and their sequencing, but we see downside risks to growth in a Republican win outcome. As our listeners know, a candidate needs 270 Electoral College votes to win. Former President Trump’s most likely path to victory is through the Sun Belt – Arizona, North Carolina and Georgia; while Vice President Harris’ most likely path to victory is through the so-called Blue Wall – Michigan, Wisconsin and Pennsylvania. In terms of the Senate, polling and prediction markets have consistently implied higher likelihood of Republicans winning control. Democrats are defending more seats in states that Trump won in 2020, as well as more seats in states Biden won by a small margin. As far as the House of Representatives, Republicans need 11 of the 25 toss-up seats to maintain control of the House, and Democrats need 15. The generic ballot is the most reliable House indicator, in our view. It’s a political poll which asks not which candidate you plan to vote for to represent you in Congress, but rather which political party – Democrat, Republican or Independent – that you would support. The generic ballot historically correlates with the House winner, and it currently favors Democrats. All this leaves us with two key takeaways: First, don’t expect conclusive results on election night. Early vote data from key states reflects our view that vote-by-mail levels are lower than in 2020 but still elevated versus historical levels. And it may take days to get all the mail-in votes counted. Second, full election results may differ from early returns. Why is that? A candidate may have a deficit in election night vote counts but still come back to win the race once all ballots are counted. This depends on two key variables: The share of the electorate who vote by mail; and the skew among those ballots toward Democrats – a blue shift – or Republicans – a red shift. So again, we need to be patient and wait for the final results. And when that happens, we will start digging deep into the post-election outlook for the economy and markets. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen to podcasts and share Thoughts on the Market with a friend or colleague today.

Our U.S. Public Policy and Valuation, Accounting & Tax strategists assess the possible scenarios in the upcoming elections, and what they could mean for both taxpayers and the market.----- Transcript -----Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Morgan Stanley's US public policy strategist.Todd Castagno: And I'm Todd Costagno, Head of Global Valuation, Accounting, and Tax Research at Morgan Stanley.Ariana Salvatore: With less than a week to go until the US election, the race is still neck and neck. Today, we dig into a key issue voters care about: Taxes.Todd Castagno: It's Tuesday, October 29th at 10am in New York.So, Ariana. Taxes are an issue that impact both businesses and individuals. It's a key component of both candidates plans and proposals. How have they evolved over the campaign?Ariana Salvatore: I'd say in general we do tend to see a lot of overlap between Harris' proposals and the ones that the Democrats were campaigning on before she took over the mantle from President Biden in July. That being said, in some instances, her plans go beyond what was requested in the president's fiscal year [20]25 budget request.For example, that $6,000 credit for newborns and the $25,000 homebuyer tax credit. These are areas where we've seen her campaign go beyond the scope of what Biden was campaigning on while he was still in the race. Of course, it's important to remember that any of these proposals would have to pass muster in a Democrat controlled or a split Congress – meaning that there will be some tempering of these plans at the margin.Todd Castagno: So former President Trump campaigned in his first election on tax policy. He's campaigning on tax policy in his current campaign. What are his plans and views?Ariana Salvatore: We've been talking about the Republican sweep outcome as the most deficit expansionary from tax policy changes because Republicans understandably have more fealty to the 2017 Tax Cuts and Jobs Act.That law is set to expire by the end of next year. So, in a Trump win scenario plus Republican Congress, we think you can get most of that 2017 law extended. While in a Trump win scenario with divided government, it's probably a little bit narrower. In general, as I said, deficits skew larger in Republican win outcomes for that reason, with an asymmetry across the other election scenarios. That being said, we do still expect to see deficit expansion in 2026, regardless of who's in power, because these tax cuts will be extended one way or another.But Todd, you've done a lot of work in this area and there are some substantial impacts from a potential corporate rate increase to think through. Can you give us a little bit of detail on what that kind of increase would mean for stocks and bonds?Todd Castagno: Yeah. So, investors have been very focused on the rate and where it matters and where it does not matter. So, if you really think about it, most companies that are exposed to a rate increase or decrease are domestic oriented, consumer companies, retail companies, you know, hospital facilities, industrials; those are the most exposed to a rate increase.Multinationals this time around are less exposed. So, if we go back to 2017, we think about it; that was a different story. We had $2 trillion of trapped cash on the sidelines that did come back – buybacks, dividends, corporate hiring. You know, this time around, that's a different story. So there is exposure but it's mainly consumer-oriented companies.Ariana Salvatore: That makes sense. And you mentioned the 2017 almost as a blueprint for what we saw last time. You mentioned dividends and buybacks.Do you have any sense of how this time around could be different? What do we think companies would likely spend these tax cuts on?Todd Castagno: Well, there are tax cuts. I do think it's going to be different. I do think the $2 trillion does not exist. That's not going to happen. So, you're going to have fewer buybacks, fewer dividends. But you could see some changes in employment. You could see some changes in investment. Things like upfront expensing could help boost the economy, higher jobs, et cetera.One thing, Ariana. You know, tax cuts are expensive. I think that's what we've all contemplated for almost 10 years now. How are we going to pay for these in this new world?Ariana Salvatore: Well Republicans have proposed a few different pay forwards. But to your point, we're not in the same environment as 2017, and we don't expect to see the same ones that were part of the original Tax Cuts and Jobs Act negotiations this time around. Specifically, former President Trump has talked about not extending the SALT cap, which was a revenue raiser that capped the amount of deductions some individuals could take between state and federal taxes. That provision raised about $900 billion over 10 years.Republicans in general are mainly focused on peeling back some parts of the IRA – or the Inflation Reduction Act – as a cost saving measure, as well as letting some of the tax cuts from the 2017 law roll off.We contrast that with the Democrat sweep outcome, where we could see a corporate rate increase to 25 per cent in our view, in spite of Harris’ pledge to bring it up to 28 per cent from the current 21 per cent.Todd Castagno: So, we could talk about the Inflation Reduction Act for a second. You know, that was a bill that was designed to bring energy, clean energy manufacturing back to the United States.It was a very large bill; it was partisan. But what do we think about in this next election outcome of actually repealing some of those items?Ariana Salvatore: It's a great question. And Republicans on the campaign trail have been talking a lot about peeling back the IRA. Importantly, in our view, we don't think a full-scale repeal is likely even in a Republican sweep outcome. There are a few reasons for that, but mainly because if you look at where these projects are being located, it's in Republican held states and districts. And Republicans in the house currently have said that they're not interested in rolling back the law. That being said, there are ways to potentially cap the amount of outstanding money that has not yet been allocated.And the president could work with the treasury or other federal agencies to tighten up some of the criteria or the guidance around accessing some of the tax credits that will limit the overall deployment.Todd Castagno: I think the recent Supreme Court decision also plays into that.With candidates’ tax plans – I’ve run a lot of numbers from a company perspective. You've run a lot of numbers top down from a deficit perspective. What did you come to view?Ariana Salvatore: We do see deficits expanding in 2026 and beyond. That's because, in our view, it's not really in lawmakers’ interest to allow all of the tax cuts – both individual and corporate – from 2017 to expire. We think the largest extension, as I mentioned before, comes in a Republican sweep. But in general, in some form or another, we think that at least a portion of these lower tax rates are going to stay around.That adds $2.8 trillion to the deficit over 10 years on the high end per our estimates; and $700 billion over 10 years in our smallest expansion scenario, a Democrat sweep.So finally, Todd, in either win outcome, what's the timeline of key tax-related events that investors should be paying attention to?Todd Castagno: So, this is the trillion-dollar question. So, most of the individual side of the tax cuts and jobs act expires at the end of 2025. There are certain business provisions that have already started to phase out. There are certain provisions that are permanent, like the corporate rate.When will Congress get to this? They will get to it at some point, but we just don't know when that is. Could it be early 2025? Could it be 2026? And I think investors should pay attention to that because Congress doesn't always act on time; and we also don't know what the extensions will look like. Some things could be extended three years, five years, 10 years. Some things could be permanent.So that's the jigsaw puzzle that we'll have to put together after the election.Ariana Salvatore: Great. Well, I guess three things in life are certain – death, taxes, and the fact that we will be following this issue very closely.Todd, thanks so much for taking the time to talk.Todd Castagno: Great to speak with you.Ariana Salvatore: As a reminder, if you enjoy Thoughts on the Market, please take a moment to rate and review us wherever you listen and share the podcast with a friend or colleague today.

As the U.S. presidential race continues to be neck and neck according to opinion polls, our Chief Fixed Income Strategist considers the possible market implications if some policies proposed during this campaign are implemented.----- Transcript -----Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley’s Chief Fixed Income Strategist. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about understanding market dynamics against the backdrop of U.S. elections. It's Monday, Oct 28th at 1 pm in New York.The outcome of the U.S. elections, now just over a week away, has been at the center of every discussion I have had in the last several days. There have been significant moves, not so much in the opinion polls – but in prediction markets. In the opinion polls, the presidential race remains tight and neck-to-neck in key swing states with poll numbers well within the margin of error. But some prediction markets have shifted meaningfully toward Republicans in the contests for both the presidency and control of Congress. Financial markets have also moved a lot. Stocks exposed to a Republican win outcome have risen a fair bit. To understand the potential policy changes that can have an impact on markets, I think it is crucial to understand the sequencing of those policy changes. Given the moves in the prediction markets, let us first frame a Trump win scenario. It seems reasonable to bucket the possible shifts into three categories – fiscal policy, immigration controls, and tariffs. Meaningful changes in fiscal policy require control of both houses of Congress; and even in a Republican sweep, scenario legislation would still be time-consuming and likely come last. We don’t really have many details on how changes to immigration policy would be implemented and so their timing remains very unclear. On the other hand, given broad presidential discretion on trade policy, Trump’s expressed intentions in his campaign messaging, and the precedent of his first term, tariff changes would likely come first.Our economists have looked at the potential impact of tariffs on the economy. They concluded that broad tariffs imply downside risks to growth through declines in consumption, investment spending, payrolls, and labor income, and upside risks to inflation. Their estimates suggest that imposing all the tariffs currently under discussion could result in a delayed drag of -1.4 per cent on real GDP growth and a more rapid boost of 0.9 per cent to inflation. How do we reconcile the equity market’s reaction to the increasing odds of a Trump win in some prediction markets with the idea that there will be a drag on GDP growth and boost to inflation that our economists assess? Two explanations. Markets could be counting on the prospect that all tariffs would not be imposed. Or at least would be sequenced over an extended period, with some coming much later than others. Also, markets could be putting greater emphasis on the revival of “animal spirits” driven by expectations of regulatory easing, which is hard to define or quantify.Let us look at other markets. In the bond markets, treasury yields have risen notably in the last month. Many investors see the Republican sweep outcome as most bearish for US Treasuries, based on the experience of the 2016 election. As Matt Hornbach, our global head of macro strategy has noted, there are meaningful differences between the Fed’s monetary policy today and the pre-election period in 2016, suggesting that any rise in Treasury yields would be more contained this time, even in a Republican sweep outcome. In 2016, markets were pricing in about 30 basis points of rate hikes over the next 12 months. Contrast that to the current market expectation of about 135 basis points in rate cuts over the next 12 months. Also, in the year after the 2016 election, expectations for the Fed Funds Rate rose nearly 125 basis points. A similar rise in expectations for Fed policy now would require market participants to expect the Fed to stop cutting immediately; and refrain from further cuts through 2025. This seems like a remote possibility – even under a Republican sweep elections scenario. Given the recent moves across markets and the expectations they are pricing in, markets may now be somewhat offside should Harris win, as they would have to reverse the course. Elections are a known unknown. Based on opinion polls, this race remains extremely tight, and multiple combinations of presidential and congressional outcomes are very much in play. We must also contend with the prospect that determining the outcome may take much longer this time.Thanks for listening. If you enjoy the podcast, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

After decades of offshoring, the pendulum for US manufacturing is swinging back toward domestic production. Our US Multi-Industry Analyst Chris Snyder looks at what’s behind this trend.----- Transcript -----Welcome to Thoughts on the Market. I’m Chris Snyder, Morgan Stanley’s US Multi-Industry Analyst. Today I’ll discuss the far-reaching implications of shifting industrial production back to the United States. It’s Friday, October 25th, at 10am in New York.Global manufacturing is undergoing a seismic shift, and the United States is at the epicenter of this transformation. After decades of offshoring and relying on international supply chains, the pendulum is swinging back toward domestic production. This movement – known as reshoring – is not just a fleeting trend but a strategic realignment of manufacturing capabilities that is indicative of the “multipolar” theme playing out globally.In fact, we believe the US is entering the early innings of re-Industrialization – a multi-decade opportunity that we size at $10 trillion and think has the potential to restore growth to the US industrial economy following more than 20 years of stagnation. The reshoring of manufacturing to the US is fueled by a combination of factors that are making domestic production both viable and lucrative. While the initial sparks were ignited by policy changes, including tariffs and trade agreements, the COVID-19 pandemic laid bare the risks of elongated supply chains and over-dependence on foreign manufacturing.Meanwhile, the diffusion of cutting-edge technologies, such as automation, artificial intelligence, and advanced robotics, has diminished the cost advantages of low-wage countries. The US -- with its robust tech sector and innovation ecosystem -- is uniquely positioned to leverage technology to revitalize its manufacturing base. Who are the direct beneficiaries? High-tech sectors, such as semiconductors, pharmaceuticals, and advanced manufacturing systems, are likely to be the biggest winners. Traditional industrial sectors, such as automotive and aerospace, are also seeing a resurgence. Finally, companies that invest in more sustainable manufacturing processes stand to gain from both policy-driven incentives and a growing market demand. All told, these businesses should see shorter supply chains, reduced legal and tariff costs, and a more resilient operational structure. As for the broader US economy? We think the implications are pretty profound. In altering the US industrial landscape, reshoring promises not only to boost GDP growth, but it could also stabilize and potentially reverse the trade deficits that have plagued the US economy for years.Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Morgan Stanley’s European Head of Research Product Paul Walsh speaks to Betsy Graseck, Global Head of Banks and Diversified Finance, and Bruce Hamilton, European Asset Managers Diversified Financials Analyst, about the implications of increasing life expectancy for the financial industry.----- Transcript -----Paul Walsh: Welcome to Thoughts on the Market. I'm Paul Walsh, Morgan Stanley's European Head of Research Product, and today we dig into a topic that really affects us all. Retirement.Life cycles are extending as people are living longer, healthier lives. Coupled with government pension funds that are increasingly under pressure, this means that consumers will need to build much more robust investment plans to substitute for salaries to carry them through a longer retirement. And to understand more about the changing financial needs and challenges of an aging population, I'm delighted to be joined by my colleagues, Betsy Graseck, Global Head of Banks and Diversified Finance, and Bruce Hamilton, our European Asset Managers Diversified Financials Analyst. It's Thursday, October the 24th at 3pm in London. Betsy Graseck: And it's 10 am in New York. Paul Walsh: Now Bruce, let's start with you. As people live longer, they will likely spend more time in retirement. Managing and ensuring retirement income over a longer duration could have a significant impact on asset management. What are the broad trends you're seeing in the industry right now?Bruce Hamilton: So, the asset management industry in large part has focused on the accumulation phase of investors journey. Whilst this remains critical as people build assets for retirement – and we see growing allocations from affluent investors to private markets as a trend which is likely to be reinforced by the aging theme – there's a significant need for decumulation products and solutions that can offer returns and income over a prolonged retirement.We see a lot of innovation as asset managers look to develop products to meet this need.Paul Walsh: So Betsy, people are living longer. How ready are consumers for retirement? Are most retirement plans or similar financial services ready to handle this challenge?Betsy Graseck: Some are ready. But given how rapidly the global population is aging, there is an increasing need to provide solutions to individuals. Just to put a number on it, the global population that is 65 years old or older in the year 2000 was only 7 per cent. This is set to hit 10 per cent next year in 2025 and 16 per cent in 2050. All groups need service and advice – with the affluent group needing the most increase in services especially if government pension funds come under more pressure. Paul Walsh: So, I think you set the scene really well there, Betsy, and I guess the obvious question is, how can wealth and financial planners best respond, do you think? Is it by creating new products? Or do we need a much deeper transformation?Betsy Graseck: We see individuals today having a wide range of retirement choices. What we feel they really need here is personalized, customized advice, delivering solutions that can address their unique needs. These span from affluent individuals needing salary replacement strategies to high-net-worth individuals looking for philanthropic and wealth transfer strategies. A focus on integrated, personalized advice, innovative products, and high-quality service that meets clients as they wish to connect effectively will be critical. Paul Walsh: It seems to me that it is – but is this a positive for the financial services sector? And if so, what do you think is the size of this revenue opportunity and over what time period do you think?Betsy Graseck: Well, the way we've looked at this is across the global asset manager and global wealth manager industry, as they will be the ones called upon to address these needs. And we do see a roughly 30 per cent uplift in global revenues by 2028, which equates to [$]400 billion in incremental revenues across the global industry.And that is driven by the expansion of individuals looking for advice, in particular from the affluent group, as well as an increase in fee-based products to address the income needs. Paul Walsh: And there's some big numbers that you've quoted there, Betsy. So let's dig into the financial subsector and industries. What are the biggest untapped opportunities there?Betsy Graseck: Well, the number one is the affluent customer base that we do see having the biggest need for advice, relative to advice seeking today. And as that group, reaches out and receives advice from wealth channels, that is one major driver here. The second driver is the increase in fee-based products to service the income replacement needs.Paul Walsh: And what are the biggest challenges do you think? Obviously, we've talked about the opportunity there, but the biggest challenges to financial services that you see along the way. Betsy Graseck: Well, the way I think about this is what is required to be a winner, and the winners need to be able to integrate their entire organizations to deliver for clients. And also leverage technology efficiently and effectively to be able not only to deliver the highest quality service in the way the client wants to be serviced; but also to optimize cost structures, which then can get reinvested – you know, higher pretext getting reinvested into the business. The challenges are the opposite of institutions that remain siloed and institutions that have, you know, maybe a tech strategy that is not set to respond to the needs of this client set. Paul Walsh: Thanks for that, Betsy; and Bruce, I just want to pivot back to you. Some asset managers are partnering with insurance companies to offer guaranteed income streams and wealth transfer solutions. What are some of the successful models that you've seen so far? Bruce Hamilton: So, asset managers are adopting a range of approaches. Some have acquired insurance subsidiaries, some have taken significant minority stakes, while others have looked to deepen partnerships with insurance. Trade offs include the degree of control versus the capital intensity that ownership of insurance brings. So, we see more than one route, but a continued push towards greater collaboration between asset managers and insurers.Given the potential for the asset managers to access stable, permanent capital, that can then be deployed in a range of investment strategies to offer diversified sources of income via private or structured credit to support returns for the end insurance clients. Theoretically, the best place models to deliver retirement solutions will have elements of wealth advice, plus a hybrid asset management insurance product approach. Given the importance of providing investors with regular and variable income, a guaranteed minimum level of income, plus an ability to generate a return to offer potential for legacy to pass to heirs.Paul Walsh: And of course, Bruce, it's very difficult to talk about product innovation, without bringing in the topic of AI. As asset managers are working to create ever more personalized retirement solutions as we've heard, how and to what extent do you think they are leveraging AI?Bruce Hamilton: So, our interviews with a range of management players confirmed that many of the potential use cases being worked on 12 months ago have now been put into production. It's still early days, and so far, most use cases are focused on areas that can drive efficiencies. So, for example, in RFP report writing, synthesis of research, and some of the middle and back-office processes for asset managers. But over time, AI can clearly feed more bespoke client service by wealth and asset managers with areas such as customized investment proposals and financial planning offering potential.Paul Walsh: Fascinating topic. Betsy and Bruce, thank you so much for taking the time to talk. It's clear that increasing lifespans are reshaping the financials sector by driving product innovation, influencing asset allocation strategies, and, of course, creating new market opportunities. And to our listeners, thanks as always for taking the time to listen in. If you enjoy Thoughts on the Market, please do leave us a review wherever you listen to the show and share the podcast with a friend or colleague today. 

Our Chief Europe Economist Jens Eisenschmidt and Europe Equity Strategist Regiane Yamanari discuss the strain of an aging population on the future of Europe’s economy and markets.----- Transcript -----Jens Eisenschmidt: Welcome to Thoughts on the Market. I'm Jens Eisenschmidt, Morgan Stanley's Chief Europe Economist.Regiane Yamanari: And I’m Regiane Yamanari from the European Equity Strategy Team.Jens Eisenschmidt: Today we are discussing one of the most urgent challenges Europe is facing right now, a declining working age population – and its implication for Europe's economy and potential solutions.It’s Wednesday, October 23rd, at 3 pm in Frankfurt.Regiane Yamanari: And 2 pm in London.So Jens, people are getting older around the world, living longer. Although the rate of change is different from country to country, can you tell us what's the situation in Europe right now?Jens Eisenschmidt: Yes, Europe faces a declining working age population, so much is sure. We have just put out a big report, where we come up with numbers around this issue. We think for the large four Euro area countries – Germany, France, Italy, and Spain – we see a decline in Euro area working population by 2040 by 6.4 per cent. People also get older, so that doesn't necessarily mean the overall population is declining by as much. It simply means that working age population, as a sort of most direct, relevant measure for the economy, is declining.Regiane Yamanari: Why does an aging population hamper economic growth?Jens Eisenschmidt: So, think about the economy producing, in a very stylized sense, with two factors. One is capital and the other one is labor. And typically, these two factors are connected. So, you can't really produce just with one factor. Typically, you need at least some labor to produce something or at least some machinery to produce something with labor.So we just; I mean, it's a very simple way of looking at the economy, but typically very powerful in explaining what's going on. So, if we take this approach and look at our economy through the lens of these two factors and we have one factor declining significantly, this will affect the amount the economy can produce.So, we are talking here about so-called potential growth or potential output. And we think the declining working age population will lead to a decline in potential output. For the Euro area economies I was just mentioning, we think it could be around 4 per cent over the period 2000, from now to 2040. And that amounts to on an annual basis around 25 basis points lower growth potential.Regiane Yamanari: Suppose policy makers want to boost Europe's working age population, which they do. What options do they have? Which European countries most benefit from these policies or options?Jens Eisenschmidt: Yeah, the oldest policy measure, or if you want the most discussed one, typically has been birth rates.Now, many of the policies being implemented here – and they have been implemented for decades already – have been found to be not really changing [the] situation in a profound way. So, birth rates have either stopped increasing again or actually continued dropping. So, policy makers’ attention probably for this reason has turned to other measures.Other measures we think of here mostly in the current debate is increasing net migration, so you're basically getting your working age population replenished to some extent from the outside. Changing participation pattern in your own domestic labor market – typically, it's framed around the question, how much or how high is the share of one cohort versus the other.For instance, males versus females. We have countries where there is a large gap between these two groups, just to name an example here. And you know, closing that gap could help you increasing or offset; some of the projected decline in working age population.Another measure that's often discussed is increasing, retirement age. So essentially working age population is defined by those age between 15 and 64. And of course, if you work for longer, so you increase retirement age, that will also help, to stem against some of the projected decline in working age population.Now, if you look around for the countries that we are discussing in the report, um, then there are different ways these policies affect these countries.So, for instance, in Italy, closing the gap between male and female labor force participation would offset a large part of the projected fall in its working age population because that gap is so large. In France, in terms of our numbers, the most effective measure would be increasing the retirement age. And again, in Germany and Spain, it would probably be migration policies that are most effective.Okay now let's consider the alternative, Regiane. Suppose nothing changes. There are fewer and fewer working age people in Europe. How would this affect companies earning growth?Regiane Yamanari: So, if there are no policy action, and here assuming all else equal, I mean, no change in productivity, for example. Due to a lower GDP growth, we estimate the headwinds of European demographics could lower companies long term earnings growth by 90 basis points. So, from 5.1 to 4.2 per cent by the end of the decade. And this compares to an average growth of 6.4 per cent that we had in the past 10 years.Jens Eisenschmidt: And how would this be reflected in the stock market?Regiane Yamanari: Yeah, so potential lower earnings growth is negative for European equities, right? But it's worth highlighting two points here. First, is that European companies have been diversifying their activities and revenues across the globe in the recent decades. And the revenue exposure of European companies to develop Europe, including the UK has reached a 30-year low. So, we estimate that just 38 per cent of European companies’ revenues are generated in develop Europe, on a free flow market cap weighted basis.And second, I think we see this impact being more idiosyncratic at sector at stock level. Just to give an example, so we have this factor analysis that we have done. We found that companies reducing headcount in Europe have been outperforming companies increasing. So in our view, this impact, it will be idiosyncratic, and it will depend by sector and the the stock.Jens Eisenschmidt: What sectors and industries then do you expect to be most affected by an aging population and the declining labor force?Regiane Yamanari: Yeah, so first of all, I think one thing to mention is that it's very clear that the theme of, aging population is gaining traction in European C-suite commentary. So we found using AlphaSense Large Language Model, when we analyze companies transcripts, a notable rise in mentions of aging population – and in particular, if we compare to the US, to the US companies, we know that labor intensive industries like kept goods, construction and materials, business services are among those at the top of the list.And those mentions have been increasing in most cases when we compare to the average of the last five years.Jens Eisenschmidt: So how are companies adjusting their business models to account for these challenging demographic trends? Regiane Yamanari: So we see, for example, industrial automation, robotics, and software adoption accelerating in the face of declining working age population across Europe, which might surprise some people as some people is relatively under-penetrated by technology.Regiane Yamanari: For example, if we look at industrial robot density in Germany, that is less than half of South Korea. And there are some sectors, for example, like hospitality that our analyst has flagged that the companies have been changing and adopting initiatives related to recruitment, technology adoption, portfolio rationalization – just a few examples here – and adjusting their business models as well to navigate a scenario of reduced labor availability and higher costs. And well, not to mention AI, which we have seen a rapid development and pace of adoption as well.Jens Eisenschmidt: I'm glad you mentioned AI. It was on my mind. I was about to ask you. So, what do you think, uh, the role of AI could be in helping with the demographic challenge?Regiane Yamanari: Our view is mainly on productivity gains. So, we them to start materializing, but they are likely to be small and grow consistently over time. An important portion of AI adopter companies cost base are related to R&D, marketing, distribution costs – and these areas we still are to see broad based application of AI, if this is really to be meaningful at the corporate level or even a national level.So the way we see is that the productivity gains being reflected on margins, but still to be small at this level.Jens Eisenschmidt: So, this one remains to be seen. We will surely be watching closely whether AI can deliver what it seems to be promising to generate productivity gains to offset the demographic challenge.Regiane, thanks a lot for taking the time to talk.Regiane Yamanari: Great speaking with you, Jens.Jens Eisenschmidt: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.

Our Medical Technology expert analyzes the medical potential and market opportunity in technology that allows direct communication between the human brain and an external device.----- Transcript -----Welcome to Thoughts on the Market. I’m Kallum Titchmarsh, from Morgan Stanley’s U.S. Medical Technology Team. On today’s episode – a dive into a topic that sounds like it’s straight out of science fiction. Brain Computer Interfaces, or BCIs.It’s Tuesday, October 22, at 10 AM in New York.The latest version of Tony Stark – better known as his alter ego Iron Man – is a good example of a brain computer interface. When the billionaire businessman-inventor is critically wounded, he builds an armor suit that gives him superhuman abilities. Flying through air. Clearing out obstacles with repulsor blasts. Shooting enemies with guided missiles. All controlled by his brain. This, of course, is the stuff of science fiction. Real world examples of brain computer interfaces – or BCIs – aren’t fantastical. But they are fascinating. Translating thoughts into actions like generating text on a screen or moving a robotic limb.BCIs have been in development for more than a century, but recent advances have brought them much closer to becoming a reality. We expect to see BCIs in commercial medical use in about five years, at which point they can help treat a wide range of health disorders, from motor neuron disease – such as ALS – to depression. The market opportunity for BCIs looks enormous – $400 billion of total addressable market – or TAM – in the US alone. This figure includes two types of BCIs: enabling BCIs, which facilitate behaviors like moving a cursor on a screen, and preventive BCIs, which can prevent adverse events like depressive states or epileptic seizures. We divide the BCI healthcare opportunity into two segments: early TAM and intermediate TAM. The early TAM includes individuals with critical upper limb impairment and select variants of neurological conditions like epilepsy and depression. These patients will likely be the first to receive a BCI. The intermediate TAM includes patients with moderate upper limb impairment and severe lower limb impairment. As BCI technology develops, these patients will eventually become eligible for treatment. There are at least 2.8 million patients in the US forming the early TAM and an additional 6.8 million within the intermediate TAM. Together, these groups represent the $400 billion of potential revenue I already mentioned based on a single implant procedure. The opportunity may be significantly larger when factoring for potential replacement cycles and recurring revenues from software upgrades. But while the estimated TAM is indeed vast, we think penetration will remain limited through the first 20 years of launch. By 2035, we expect just under $1.5 billion of revenue to be generated from BCI implant procedures, hitting north of a $500 million annual run rate in 2036, and reaching the $1 billion annual run rate by 2041. It’s exciting to think BCIs will begin their healthcare application in the coming years, but we anticipate a number of regulatory hurdles on the way to widespread adoption in healthcare and beyond. Will BCIs push into fields like neurogaming, warfare, and even biological optimization of humans? The potential is certainly there, and with it the burden of the safe and responsible use of this cutting-edge technology. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Our CIO and Chief U.S. Equity Strategist explains his preference for cyclical stocks amid a rise in global money supply and current US election dynamics.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief US Equity Strategist. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about our recent upgrade of quality cyclicals and how it will be affected by the US election and liquidity.It's Monday, Oct 21st at 11:30am in New York. So let’s get after it. We continue to have conviction in our recent cyclical shift and Financials upgrade. Indeed, cyclicals traded well last week as most economic data came in stronger than expected. It’s worth noting we recommend investors stay up the quality curve within the cyclical space, however. While Financials have been the best performing sector in the S&P 500 since our upgrade, institutional investors remain under-exposed to Financials based on our data suggesting the sector can run further. In addition to better economic data, there are other factors affecting pro-cyclical stocks. We are focused on two, in particular. The election and global liquidity. We believe a Trump win with a split Congress would provide a pro-cyclical bias with small caps keeping pace with large caps. The markets seem to agree, with the recent cyclicals outperformance led by financials. Meanwhile, consumer stocks negatively exposed to tariff risks under a Trump win have underperformed. Interestingly, there is some overlap between this recent leadership and the post Biden debate period in early July as well as the months surrounding the 2016 election. Finally, we've also witnessed higher interest rates and a stronger US Dollar more recently, which is something to watch closely as a possible headwind for liquidity post election and into 2025. While some argue a Trump win would be a headwind for growth and equity markets, due to tariff risks and slower immigration, we think there's an additional element from the 2016 experience that’s worth considering—rising animal spirits. More specifically, in 2016 Trump's pro-business approach led to the largest three-month positive impact on small business confidence in the past 40 years. It also translated into a spike in individual investor sentiment. It appears to me that markets may be trying to front-run a repeat of this outcome as Trump's win in 2016 came as a surprise to pundits and markets alike.This also means a Harris win could lead to some reversion in terms of overall equity market performance and leadership. Most notably, bonds could potentially rally with defensive and quality growth stocks doing better like earlier this year. Secondarily, even with a Trump win, certain areas of the market may be vulnerable to a ‘sell the news’ phenomena if the upside is already priced amid bullish positioning. On this front, we would also point out that the economic set-up today is very different than the 2016 period when the economy had much more slack and could absorb additional pro-cyclical policies like tax cuts or other forms of fiscal stimulus.Turning to liquidity, we note that global money supply in US dollars has surged at an 18 per cent annualized rate since the end of June. I believe this has also had a positive effect on equity prices, not to mention credit spreads, precious metals, cryptocurrencies and real estate. Bottom line, in the absence of a major swing in election probabilities or global liquidity between now and the election, equity markets are likely to trade with a bullish tilt both at the index level and from a style, sector, factor standpoint. Thanks for listening. If you enjoy the podcast, leave us a review wherever you listen, and share Thoughts on the Market with a friend or colleague today.

Our Head of Corporate Credit Research Andrew Sheets discusses why uncertainty around the election’s outcome could be detrimental for credit investors.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, today I'll discuss the US Election, and how it might matter for Credit. It's Friday, October 18th, at 4pm in London. Morgan Stanley’s positive view on credit this year has been anchored on a simplistic thesis. Credit is an asset class that hates extremes, as it faces losses if a company fails, but doesn’t earn extra if that company’s profits double or even triple. Credit, to an unusual degree, is an asset class that loves moderation. And here at Morgan Stanley, we’ve been forecasting … a lot of moderation. Moderate growth for the U.S. and Europe. Moderating inflation, that continues to fall into next year. And a moderation of central bank interest rates, rather than the type of sharp declines that you tend to see around recessions; as we think Fed funds will settle in a little bit below three-and-a-half per cent by the middle of next year. This moderate economy, coupled with moderate levels of corporate aggressiveness should be music to a credit investor’s ears, and support richer-than-average valuations, in our view. So how does the upcoming U.S. election on November 5th fit into this otherwise benign picture? Who runs a government matters, especially when it’s the government of the world’s largest and strongest economy. This election is also notable for the differences between the two candidates, who are presenting sharply contrasting visions of economic, domestic and foreign policy. Against this backdrop, we suggest credit investors try to keep a few things top of mind. First, and most broadly, the idea that “credit likes moderation” remains our north star. Outcomes that could drive larger changes of economic policy, or larger uncertainty in policy in general, are probably going to be a larger risk for credit.Second, of all the various policies under discussion, tariffs feel especially important as they can be largely implemented without congressional approval, and are thus far easier to see go into effect. Tariff proposals could create significant dispersion at the single-name level in credit, and pose significant risks for sectors like retail, which import a large share of their ultimate goods. For time-limited investors, tariffs are the policy area where we’d spend the most time – and where much of our Credit Research around the election has been focused. Third, it’s notable that as we head into this election, expected volatility, in equities or credit, is elevated even as the stock market sits near all time highs, and credit spreads are historically low. So this begs the question. Do these options markets know something that the rest of the market does not? We’re skeptical. Historically, when you’ve seen high volatility alongside all-time-highs in the market – and it’s not all that common – it’s tended to be a positive short-term indicator, rather than a negative one. And one way we could perhaps explain this is that it suggests that investors are still a little bit nervous, and not as positive as they otherwise could be. The U.S. election is close in time, uncertain in outcome, and has stakes for future policy. That high implied volatility we see at the moment, in our view, could reflect known unknowns, rather than some hidden factor. Tariff policy, being largely independent of congress and thus easier to implement, is probably the most relevant for single-name credit exposures. And most broadly, credit likes moderation, and should do best in outcomes that are more likely to achieve that.  Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Our expert panel explains whether the US election will impact energy policy, including how the Inflation Reduction Act’s possible fate and increased tariffs could transform the sector.----- Transcript -----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Global Head of Fixed Income and Thematic Research.David Arcaro: I'm Dave Arcaro, Morgan Stanley's US Power and Utilities Analyst.Andrew Percoco: And I'm Andrew Percoco, the North American Clean Tech Analyst here at Morgan Stanley.Michael Zezas: And today we're discussing another key election related topic that generates a lot of political and market debate: Energy policy.It's Thursday, October 17th at 10am in New York.The outcome of the 2024 election will likely determine the direction of U.S. climate policy for years to come. David, what are the key focus areas for investors as they evaluate the various election outcomes on the utilities and clean energy industries?David Arcaro: Yeah, Mike, investors are highly focused on the Inflation Reduction Act, the IRA, especially as it pertains to the election and the clean energy space. This was a law that was passed in 2022, and it really has supportive policies across the entire clean energy spectrum. It's got tax credits and incentives for solar, wind, offshore wind, green, hydrogen, nuclear, you name it. Battery storage. And some of those tax credits go all the way to 2032 and beyond in some cases.So, it's a very supportive policy when it comes to the clean energy industry and the growth outlook. So, the big question is what's going to happen to the Inflation Reduction Act – depending on which administration is in place following the election.Our core view is that the IRA stays in place; that the core wind, solar storage and nuclear tax credits all remain, regardless of the outcome of the election. And then separately, investors are focused on tariff policy as it pertains to clean energy. It is a global industry. A lot of the equipment and materials are imported around the world. And so, any changes to the tariff approach could have an impact on the space as well.Michael Zezas: Got it. And so how does the outlook for renewables change under different election outcomes?David Arcaro: Yeah, really, the outlook for renewables growth is not very different in our view, regardless of the outcome of the election.We think it's a strong growth outlook either way. And part of that is because we've got policies that we expect to stay in place that will be supportive regardless of the outcome, as I mentioned with the Inflation Reduction Act. And then we've also got demand. It's a very strong demand backdrop for the renewable space – and that's because in the electric industry, we're seeing an inflection in electricity usage across the US.It's been stagnant for years and years, but now with data center growth, with industrial production accelerating, and manufacturing and onshoring, we're seeing a big change in the growth outlook for electricity usage. And that means we need more power plants. We need more to be built, and renewables are going to be the predominant new resource for producing electricity in the US.Some of these companies like data centers, they want renewables to power their operations. And most utilities, electric companies that are building power plants, they're going to be using renewables more than anything else. There are impediments to building fossil plants, it's challenging to permit and there's supply chain delays and issues.So, we think there's a very strong growth outlook for renewables based on that demand and the policy support going forward, regardless of the outcome.Michael Zezas: And Andrew, how about corporate tax policy, including renewable energy tax credits?Andrew Percoco: I mean, as Dave mentioned, we think IRA repeal risk is very low, and I think the only scenario where IRA repeal is a relevant conversation is in a Republican sweep scenario. But even under this scenario, we would expect any repeal measures to be targeted in nature and not a wholesale repeal of the bill. So, the question then becomes, you know, what is safe and what's at risk of getting cut.So, to start off with what's safe; maybe three items that I'll highlight. One would be domestic manufacturing tax credits. There's been a lot of bipartisan support for the onshoring of manufacturing. So, the clean energy manufacturing tax credits within the IRA look like they are on solid footing, regardless of the election outcome.Now, why do domestic manufacturing tax credits have bipartisan support? One, there's a general view that we need to reduce our reliance on China for our energy infrastructure and, two, the job creation angle. The IRA has created over 150, 000 new jobs, and a lot of those jobs are in states where there is a large representation of Republican voters. So, the local pushback would be pretty severe if IRA was repealed in full.Number two, area of IRA that we think is safe would be nuclear tax credits. There's a general understanding across both sides of the aisle that nuclear is an important and reliable form of clean energy, and that we need to support the existing fleet of assets.And then third again, as Dave mentioned, solar storage and wind investment tax credits. These have been around for a while, well before the IRA was in place and they've had bipartisan support. They've been extended multiple times, even under past Republican administrations. So, we would not expect any changes to those core tax credits in a Republican sweep.On the flip side, you know what's potentially at risk in a Republican sweep? Number one would be consumer facing tax credits like the EV tax credits. This is something that the Republicans have definitely taken aim at on the campaign trail.Number two would be offshore wind. Former President Trump has definitely had [a] very candid view of offshore wind, and the issues that it poses on local communities. So, this could be another area where, they look for some targeted repeal. And then the third would just be delayed implementation of any unfinalized rules, by the time they take office.Michael Zezas: Makes sense. And finally, what other key election implications should investors focus on at this point when it comes to clean energy?Andrew Percoco: Yeah, I think the biggest would be around tariffs. It's frankly the hardest to predict but could have some pretty meaningful near-term implications for clean energy.Just to zoom out for a second, the clean energy supply chain is global with a heavy concentration in China and Southeast Asia. So, if there is higher tariffs put in place against these regions, it could create some disruption in supply chains and impact the pace at which we deploy renewables in the US. But frankly, at the same time, it should just accelerate a trend that we're already seeing in the US, which is the onshoring of manufacturing, thanks in part due to the IRA.So ultimately could create some near-term disruption but doesn't change the secular growth for the renewable space since developers in the US have already started to make the shift towards domestic supply.Michael Zezas: Yeah, that makes sense, Andrew. And obviously tariffs have been top of mind for investors as we've talked about here. Well, David, Andrew, thanks for taking the time to talk.And as a reminder, if you enjoy Thoughts on the Market, please take a moment to rate and review us wherever you listen and share Thoughts on the Market with a friend or colleague today.

Mortgage rates aren’t directly influenced by Federal Reserve policy. However, the Fed’s recent cut likely will have a domino effect on the US housing market, say our Co-Heads of Securitized Products Research Jay Bacow and James Egan.----- Transcript -----Jay Bacow: Welcome to Thoughts on the Market. I'm Jay Bacow, Co-Head of Securitized Products Research at Morgan Stanley.James Egan: And I'm Jim Egan, the other Co-Head of Securitized Products Research at Morgan Stanley. And on this episode of the podcast, we're going to discuss the impacts of a 50-basis point cut from the Fed on the US housing and mortgage markets.It's Wednesday, October 16th at 1 pm in New York.Now, Jay, the Fed cut 50 basis points at its last meeting. What are your views on the mortgage market in the aftermath of that cut?Jay Bacow: We think that is constructive for mortgages and we recommended a long mortgage basis versus rates. The healthy economy and a Fed that doesn't want to fall behind the curve should be good for risk assets in general. We think there's a likelihood of vol possibly falling and that is constructive for agency mortgages in particular.Now it's a positive narrative. But, the valuations matter, and we have to admit that the valuations are not that compelling with spreads on agency mortgages trading near the tights since the regional bank crisis. However, if you look further back, mortgages start to look attractive, particularly relative to other high quality fixed-income assets.For instance, agency mortgages are basically trading at the average spread they've traded at since the GFC. Corporate credit, on the other hand, is trading within a few basis points of the tights since the GFC. If risk assets are going to do well, and we're certainly seeing that in corporate credit and in the stock market, we think mortgages are particularly priced attractively relative to most of them.James Egan: Alright, so relative value for mortgages makes sense, but can you talk a little bit about the technicals here?Jay Bacow: The technicals are where we feel more confident. One of the reasons why mortgage spreads have been wide for the past two years – it's an environment where the Fed and the domestic banks, the two largest holders of mortgages, have been reducing their holdings.Now, we still expect the Fed to reduce their holdings of mortgages, but we think the bank demand is going to turn positive. That's due to not just clarity around the Basel III Endgame that should be coming soon, but more directly related to this conversation – as the Fed cuts rates that directly impacts the amount of yield that banks earn of the cash sitting at the Fed.Now, that is projected to continue to go down as the Fed cuts rates. What's not projected to continually go down very much is the yield on the securities that they can be buying in mortgages. So, the incentive for them to move out of cash and into securities, and those securities likely to be mortgages, is picking up as the Fed cuts rates. And it's not just the banks that are going to be more active. It's also overseas investors. As the Fed cuts rates and the Bank of Japan hikes, the FX (foreign exchange) hedging costs, which is basically a function of the interest rate differential between the two banks is likely to decrease, which means that overseas investors will be more active.A steeper curve is going to be positive for REIT demand. And then over time, as the Fed cuts rates and money market yields go down, those retail investors are likely to be incentivized to move out of money market funds into core funds with higher yields, which will be supportive of money manager demand – although that's likely a 2025 story.James Egan: All right, Jay, thank you for that. But one of the questions that you and I have received a lot since the Fed's cut is: Okay, the Fed cut 50 basis points. Why haven't mortgage rates come down by 50 basis points on the follow?Jay Bacow: Well, so, mortgage rates, obviously in the US, the vast majority of them are 30-year fixed rate mortgages. And so, if you have one, the Fed actions don't impact that. If you have an adjustable-rate mortgage, it will reset – but typically those resets happen every six months. Although you're probably getting asked about the prevailing mortgage rate; and the prevailing mortgage rate – because it's the 30-year fixed rate, it's not a function of Fed funds – but it's more of a function of the yields further out the curve. Although maybe Jim, you can do a better job explaining this.James Egan: So, when it comes to interest rates and mortgages, Jay, as you mentioned, we're going to be more focused on the five- and 10-year part of the curve than we are on Fed funds.To provide a little bit of an example there, from the fourth quarter of 2023 until the Wednesday morning that the Fed cut, 30-year mortgage rates had decreased by 180 basis points. The Fed had yet to cut a single basis point. But, just taking a step back from that cut specifically, mortgage rates have come down significantly from the fourth quarter of 2023.Jay Bacow: Right, and those mortgage rates coming down significantly has improved affordability. But what's maybe a little surprising is that hasn't really led to a pickup in sales volumes. How should we think about that moving forward?James Egan: So as mortgage rates have come down, we have seen an increase in mortgage applications, but that's been driven almost entirely by refinance applications.Purchase applications, and that's going to be what's behind home sales, those have been more or less treading water for the past 12 months. This relationship makes sense, in our view. As mortgage rates have come down, housing remains unaffordable. It's just more affordable than it was in the second half of 2023.But, if you were one of the people who bought a home over the past 24 months, and, to put that into context, that was the lowest number of home sales over a 24-month period since the second quarter of 2013. But if you were one of those people, there's a good chance that you're in the money to refinance right now.Jay Bacow: And that's something that we're seeing in the data. We've talked about the truly refinance indicators on this podcast in the past, and it measures the share of mortgages that have at least 25 basis points of incentive to refinance after accounting for closing costs.Right now, only about one in six of the outstanding borrowers have incentive to refinance. Now, that's up from pretty close to zero at the end of 2023, but if you just look at borrowers that have taken out their mortgage in the past two years, almost two-thirds of them have incentive to refinance.Now, Jim, does that mean that purchase volumes are doomed to languish around these levels?James Egan: No, but the reaction might not be as strong as some people are hoping for. While affordability has improved, it remains challenged. And the lock in effect has become a very popular phrase in the US housing and mortgage markets. And that's still in play. 75 per cent of the conventional mortgage universe still has a mortgage rate below 5 per cent.Even with the prevailing rate at 6 per cent today, the effective mortgage rate on the outstanding universe is 200 basis points out of the money. That's better than 350 [basis points] out of the money like we saw last year. But that would still be the worst that it's been in 40 years.Jay Bacow: And presumably, that is why we have this continually tight inventory.James Egan: Exactly. Now, as rates come down, we are starting to see listings increase, but it's barely made a dent in the historically low nature of the existing housing supply. The existing home sales typically grow in the 12 to 24 months following affordability improvement, but not necessarily in that initial period while affordability is improving.So relative to history, we're actually not underperforming that much from a sales perspective. And we should be beginning that 12 to 24 months sweet spot in the fourth quarter of [20]24. We just started that two to three weeks ago. While we expect existing home sales to increase, we think the growth is going to be modest relative to history and we're calling for 5 per cent growth in the coming 12 months.On the home price side, a lot of this is in line with our current view. So, we think you're going to continue to see the pace of growth slow. It's already started to slow. We think we get from about 5 per cent today to 2 percent by the end.Jay Bacow: All right, so the Fed cutting rates is not likely to cause mortgage rates to drop materially. We expect a modest pickup in housing activity. We expect home price growth to slow, but still end the year positive; and it should be supportive for mortgage spreads versus treasuries.Jim, always a pleasure talking to you.James Egan: Pleasure talking to you too, Jay.Jay Bacow: Thanks for listening. And if you enjoy this podcast, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Our Chief Korea and Taiwan Economist discusses the reforms needed to overcome Korea’s urgent demographic crisis.----- Transcript -----Welcome to Thoughts on the Market. I’m Kathleen Oh, Morgan Stanley’s Chief Korea and Taiwan Economist. Today I’ll discuss what’s needed to overcome Korea’s aging population crisis.It’s Tuesday, Oct 15th, at 4 PM in Hong Kong. South Korea faces some of the world's most challenging demographics and will officially become a super-aged society next year – that’s more than 20 percent of the population 65 or older. The implications of this are so significant that the Korean government recently declared a national emergency, and we don’t think this is overstating the case. Korea’s low fertility rate is the primary culprit. In 2023 it plummeted to the lowest level globally and currently sits at 0.72. For reference, the total fertility rate of 2.1 children per woman is what’s necessary to maintain a stable population in general. By next year, Korea’s population will start declining and is projected to shrink by a third over the next 40 years as the working population halves. At this pace, the Bank of Korea forecasts that Korea’s potential growth could enter negative territory by 2040, down from 2 per cent in [20]24-25. So why does Korea have such a record-low fertility rate? In the short term, there are two key drivers: First, the declining number of marriages during the pandemic drove a rapid drop in births; having children out of wedlock is taboo in Korea. Once weddings resumed in 2022, Korea saw a slight but insufficient rebound in births. Second, housing prices have gone up 80 per cent in the past decade, which has discouraged young couples from having families. Families with first children feeling extra financial burdens to have [a] second child. Beyond the short term, structural factors have also played a role. After a compressed period of rapid economic growth, Koreans feel uncertain about the employment conditions and housing outlook. Tackling the low fertility rate has been on Korean policymakers’ agenda for the past 20 years. The government has invested more than $320 billion into solving the demographic challenge. And while these efforts have certainly raised awareness, they have yet to overcome the crisis. And why? Because Korea has not addressed the root causes of the problem -- income uncertainty, high childcare and education costs. It’s clear what’s needed here are structural reforms and Korea is clearly taking important steps towards overcoming the issue by tackling the fundamental problems now. Policymakers are working to reshape the pension system for the first time in 15 years. They are focusing on measures around improving work-life balance, reducing the gender wage gap, and increasing support for working parents. They are also considering lowering barriers to immigration, which could help alleviate talent shortages. They are also working on reducing the cost of private education. And finally, the government is also focused on improving the country’s capital market infrastructure. They are aiming to attract foreign investment, as well as to help households secure [a] source of asset accumulation, and lower borrowing costs for domestic players. Of course, it’s impossible to quickly reverse the downtrend and positive change will require multiple years - even decades. Korea’s government has set a medium-term goal of returning the fertility rate to 1.0 by 2030, which would delay working population decline by five years. And if the fertility rate reaches 2.1, that would delay the decline in the workforce by 20 years. Conversely, if Korea’s fertility rate remains at the current rate of 0.72, the population will halve by 2065 and the economy will start contracting in 2040, a worst-case scenario that the government is determined to avoid.Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

A slump in tech stocks may explain the market rotation – but it’s the earnings season that investors need to watch, says CIO and Chief US Equity Strategist Mike Wilson.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief US Equity Strategist. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about the recent rotation toward more cyclical parts of the equity market.It's Monday, Oct 14th at 11:30am in New York.So let’s get after it.Last Monday, we upgraded cyclicals relative to defensives after taking profits in our defensive  overweight two weeks prior. These calls come on the back of September's strong jobs report and our economists' expectation for the Fed to still cut interest rates into next year. The resilient labor report effectively reverses the softness we saw in labor markets over the summer which had re-introduced hard landing risks into the markets, driving big outperformance in bonds and defensive stocks. In short, it was a good time to lock in profits after an historically good run. Indeed, cyclical stocks have delivered better performance with these improved macro data.  Importantly, the rates market is confirming this move. Oftentimes, the rates market tends to hold  onto growth risks longer than the equity market. Thus, the recent move higher in yields following resilient data suggests the bond market pricing is shedding some of its growth concerns, and giving us more confidence in our cyclicals upgrade. Furthermore, our cyclical overweights at the sector level in Industrials, Financials and Energy are all exhibiting a positive correlation to rates. Conversely, defensives are exhibiting a negative correlation to yields. In other words, good macro data is still good for many large cap cyclical stocks, while it's bad for defensives. Thus, further stabilization in the economic surprise index should continue to  support quality cyclicals' relative performance even if it comes amid higher yields.Meanwhile, positioning in cyclicals remains light amongst our institutional client base. This is  particularly true for Financials. In our view, this creates opportunity in a sector that we upgraded to overweight last week. This upgrade was based on rebounding capital markets activity, a better loan growth environment in 2025, an acceleration in buybacks post Basel Endgame re-proposal, and attractive relative valuation. Finally, we also factored in the notion that several large cap bank stocks had de-risked in mid-September with lowered guidance ahead of earnings season. Initial results from earnings season last week indicate that large cap banks are clearing that lowered hurdle. On the other side of the coin, positioning in defensives and quality growth remains extended. This is consistent with our conversations with clients who generally remain positioned for a soft macro growth regime.Given the significant influence of the Magnificent 7 stocks on the overall direction of the S&P 500, investors remain focused on how this group of stocks will trade into year-end. It's notable this cohort has underperformed since the second quarter earnings season, and relative performance just took another leg lower.  The breadth among this group has been somewhat narrow with only one of the seven making new highs since the summer in both absolute and relative terms. In our view, this may be one of the reasons for the better performance in other areas of the market and is a potential driver of further broadening into cyclicals. Of course, if the market reverts back to these stocks, it’s a risk to our  cyclical upgrade.Earnings season will be an important factor in terms of these rotations. The fundamental reason for the underperformance of the Magnificent 7 could simply be the deceleration in earnings growth from the very strong pace last year. If this underperformance continues, it could provide further fuel for the quality cyclicals to continue to do better as we expect. Conversely, if earnings revisions show relative strength for the Mag 7, these stocks will likely outperform once again and market leadership may narrow—like it did during [the] second quarter and all of 2023.Thanks for listening. If you enjoy the podcast, leave us a review wherever you listen, and share Thoughts on the Market with a friend or colleague today.

Our Head of Corporate Credit Research and Global Chief Economist explain why they’re watching the consumer savings rate, tariffs and capital expenditures.----- Transcript -----Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley.Seth Carpenter: And I'm Seth Carpenter, Morgan Stanley's Global Chief Economist.Andrew Sheets: And today on this special episode of the podcast, we'll be discussing what could cause our optimistic view on the economy and credit to go wrong.Andrew Sheets: It’s Friday, Oct 11th at 4pm in London.Seth Carpenter: And as it turns out, I'm in London with Andrew.Andrew Sheets: So, Seth you and your global economics team have been pretty optimistic on the economy this year. And have been firmly in the soft-landing camp. And I think we’ve seen some oscillation in the market's view around the economy over the course of the year, but more recently, we've started to see some better data and increasing confidence in that view.So, this is actually maybe the perfect opportunity to talk about – well, what could go wrong? And so, what are some of the factors that worry you most that could derail the story?Seth Carpenter: We have been pretty constructive all along the whole hiking cycle. In fact, we've been calling for a soft- landing. And if anything, where we were wrong with our forecast so far is that things have turned out even better than we dare hoped. But it's worth remembering part of the soft-landing call for us, especially for the US is that coming out of COVID; the economy rebounded employment rebounded, but not proportionally. And so, for a long time, up until basically now, US firms had been operating shorthanded. And so, we were pretty optimistic that even if there was something that caused a slowdown, you were not going to see a wave of layoffs. And that's usually what contributes to a recession. A slowdown, then people get laid off, laid off people spend less, the economy slows down more, and it snowballs.So, I have to say, there is gotta be just a little bit more risk because businesses basically backfilled most of their vacancies. And so, if we do get a big slowdown for some reason, maybe there's more risk than there was, say, a year ago. So, what could that something be is a real question. I think the first one is just -- there's just uncertainty.And maybe, just maybe, the restraint that monetary policy has imparted -- takes a little bit longer than we realized. It's a little bit bigger than we realized, and things are slowing down. We just haven't seen the full force of it, and we just slowed down a lot more.Not a whole lot I can do about that. I feel pretty good. Spending data is good. The last jobs report was good. So, I see that as a risk that just hangs over my head, like the sword of Damocles, at all times.Andrew Sheets: And, Seth, another thing I want to talk to you about is this analysis of the economy that we do with the data that's available. And yet we recently got some pretty major revisions to the US economic picture that have changed, you know, kind of our basic understanding of what the savings rate was, you know, what some of these indicators are.How have those revisions changed what you think the picture is?Seth Carpenter: So those benchmark revisions were important. But I will say it's not as though it was just a wholesale change in what we thought we understood. Instead, the key change that happened is we had information on GDP -- gross domestic product -- which comes from a lot of spending data. There's another bit of data that's gross domestic income that in some idealized economic model version of the world, those two things are the same -- but they had been really different. And the measured income had been much lower than the measured gross domestic product, the spending data. And so, it looked like the saving rate was very, very low.But it also raised a bit of a red flag, because if the savings rate is, is really low, and all of a sudden households go back to saving the normal amount, that necessarily means they'd slow their spending a lot, and that's what causes a downturn.So, it didn't change our view, baseline view, about where the economy was, but it helped resolve a sniggling, intellectual tension in the back of the head, and it did take away at least one of the downside risks, i.e. that the savings rate was overdone, and consumers might have to pull back.But I have to say, Andrew, another thing that could go wrong, could come from policy decisions that we don't know the answer to just yet. Let you in on a little secret. Don't tell anybody I told you this; but later this year, in fact, next month, there's an election in the United States.Andrew Sheets: Oh my goodness.Seth Carpenter: One of the policies that we have tried to model is tariffs. Tariffs are a tax. And so, the normal way I think a lot of people think about what tariffs might do is if you put a tax on consumer goods coming into the country, it could make them more expensive, could make people buy less, and so you'd get a little bit less activity, a little bit higher prices.In addition to consumer goods, though, we also import a lot of intermediate goods for production, so physical goods that are used in manufacturing in the United States to produce a final output. And so, if you're putting a tax on that, you'll get less manufacturing in the United States.We also import capital goods. So, things that go into business CapEx spending in the United States. And if you put a tax on that, well, businesses will do less investment spending. So, there's a disruption to actual US production, not just US consumption that goes on. And we actually think that could be material. And we've tried to model some of the policy proposals that are out there. 60 per cent tariff on China, 10 per cent tariff on the rest of the world.None of these answers are going to be exact, none of these are going to be precise, but you get something on the order of an extra nine-tenths of a percentage point of inflation, so a pretty big reversion in inflation. But maybe closing in on one and a half percentage points of a drag on GDP – if they were all implemented at the same time in full force.So that's another place where I think we could be wrong. It could be a big hit to the economy; but that's one place where there's just lots of uncertainty, so we have to flag it as a risk to our clients. But it's not in our baseline view.Seth Carpenter: But I have to say, you've been forcing me to question my optimism, which is entirely unfair. You, sir, have been pretty bullish on the credit market. Credit spreads are, dare I say it, really tight by historical standards.And yet, that doesn't cause you to want to call for mortgage spreads to widen appreciably. It doesn't call for you to want to go really short on credit. Why are you so optimistic? Isn't there really only one direction to go?Andrew Sheets: So, there are kind of a few factors the way that we're thinking about that. So, one is we do think that the fundamental backdrop, the economic forecast that you and your team have laid out are better than average for credit -- are almost kind of ideal for what a credit investor would like.Credit likes moderation. We're forecasting a lot of moderation. And, also kind of the supply and demand dynamics of the market. What we call the technicals are better than average. There's a lot of demand for bonds. And companies, while they're getting a little bit more optimistic, and a little bit more aggressive, they're not borrowing in the kind of hand over fist type of way that usually causes more problems. And so, you should have richer than average valuations. Now, in terms of, I think, what disrupts that story, it could be, well, what if the technicals or the fundamentals are no longer good? And, you know, I think you've highlighted some scenarios where the economic forecasts could change. And if those forecasts do change, we're probably going to need to think about changing our view. And that's also true bottom up. I think if we started to see Corporates get a lot more optimistic, a lot more aggressive. You know, hubris is often the enemy of the bond investor, the credit investor. I don't think we're there yet, but I think if we started to see that, that could present a larger problem. And both, you know, fundamentally it causes companies to take on more debt, but also kind of technically, because it means a lot more supply relative to demand.Seth Carpenter: I see. I see. But I wonder, you said, if our outlook, sort of, doesn't materialize, that's a clear path to a worse outcome for your market. And I think that makes sense.But the market hasn't always agreed with us. If we think back not that long ago to August, the market had real turmoil going on because we got a very weak Non Farm Payrolls print in the United States. And people started asking again. ‘Are you sure, Seth? Doesn't this mean we're heading for a recession?’ And asset markets responded. What happened to credit markets then, and what does it tell you about how credit markets might evolve going forward, even if, at the end of the day, we're still right?Andrew Sheets: Well, so I think there have been some good indications that there were parts of the market where maybe investors were pretty vulnerably positioned. Where there was more leverage, more kind of aggressiveness in how investors were leaning, and the fact that credit, yes, credit weakened, but it didn't weaken nearly as much -- I think does suggest that investors are going to this market eyes wide open. They're aware that spreads are tight. So, I think that's important.The other I think really fundamental tension that I think credit investors are dealing with -- but also I think equity investors are -- is there are certain indicators that suggest a recession is more likely than normal. Things like the yield curve being inverted or purchasing manager indices, these PMIs being below 50.But that also doesn't mean that a recession is assured by any means. And so, I do think what can challenge the market is a starting point where people see indicators that they think mean a recession is more likely, some set of weak data that would seem to confirm that thesis, and a feeling that, well, the writing's on the wall.But I think it's also meant, and I think we've seen this since September, that this is a real, in very simple terms, kind of good is good market. You know, I got asked a lot in the aftermath of some of the September numbers, internally at Morgan Stanley, 'Is it, is it too good? Was the jobs number too good for credit?'And, and my view is, because I think the market is so firmly shifted to ‘we're worried about growth,’ that it's going to take a lot more good data for that fear to really recede in the market to worry about something else.Seth Carpenter: Yeah, it's funny. Some people just won't take yes for an answer. Alright, let me, let me end up with one more question for you.So when we think about the cycle, I hear as I'm sure you do from lots of clients -- aren't we, late cycle, aren't things coming to an end? Have we ever seen a cycle before where the Fed hiked this much and it didn't end in tears? And the answer is actually yes. And so, I have often been pointing people to the 1990s.1994, there was a pretty substantial rate hiking cycle that doesn't look that different from what we just lived through. The Fed stopped hiking, held out at the peak for a while, and then the economy wobbled a little bit. It did slow down, and they cut rates. And some of the wobbles, for a while at least, looked pretty serious. The Fed, as it turns out, only cut 75 basis points and then held rates steady. The economy stabilized and we had another half decade of expansion.So, I'm not saying history is going to repeat itself exactly. But I think it should be, at least from my perspective, a good example for people to have another cycle to look at where things might turn out well with the soft landing.Looking back to that period, what happened in credit markets?Andrew Sheets: So, that mid-90s soft-landing was in the modern history of credit -- call it the last 40 years -- the tightest credit spreads have ever been. That was in 1997. And they were still kind of materially tighter from today's levels.So we do have historical evidence that it can mean the market can trade tighter than here. It's also really fascinating because the 1990s were kind of two bull markets. There was a first stage that, that stage you were suggesting where, you know, the Fed started cutting; but the market wasn't really sure if it was going to stick that landing, if the economy was going to be okay. And so, you saw this period where, as the data did turn out to be okay, credit went tighter, equities went up, the two markets moved in the same direction.But then it shifted. Then, as the cycle had been extending for a while, kind of optimism returned, and even too much optimism maybe returned, and so from '97, mid-97 onwards, equities kept going up, the stock market kept rallying, credit spreads went wider, expected volatility went higher. And so, you saw that relationship diverge.And so, I do think that if we do get the '90s, if we're that lucky, and hopefully we do get that sort of scenario, it was good in a lot of ways. But I think we need to be on the watch for those two stages. We still think we're in stage one. We still think they're that stage that's more benign, but eventually benign conditions can lead to more aggressiveness.Seth Carpenter: I think that's really fair. So, we started off talking about optimism and I would like to keep it that you pointed out that the '90s required a bit of good luck and I would wholeheartedly agree with that.So, I still remain constructive, but I don't remain naive. I think there are ways for things to go wrong. And there is a ton of uncertainty ahead, so it might be a rocky ride. It's always great to get to talk to you, Andrew.Andrew Sheets: Great to talk to you as well, Seth.And thanks for listening. If you enjoy the show, leave us a review wherever you listen, and share Thoughts on the Market with a friend or colleague today.

Mike Canfield, Morgan Stanley’s Head of Europe Sustainability Research, discusses why ensuring safe and responsible artificial intelligence is essential to the AI revolution.----- Transcript -----Mike Canfield: Welcome to Thoughts on the Market. I'm Mike Canfield, Morgan Stanley's Europe, Middle East and Africa Head of Sustainability Research.Today I'll discuss a critical issue on a hot topic: How safe is AI?It's Thursday 10th of October at 2pm in London.AI is transforming the way that we live, work, and connect. It's really got the potential at every level and aspect of society, from personal decisions to global security. But as these systems become ever more integrated into our critical functions – whether that's healthcare, transportation, finance, or even defense – we do need to develop and deploy safe AI that keeps pace with the velocity of technological advances.Market leaders, academic think tanks, NGOs, industry bodies, intergovernmental organizations have all attempted to codify what safe or responsible AI should look like. But at the most fundamental level, the guidelines and standards we've seen so far share a number of clear similarities. Typically, they focus on fostering innovation in practical terms, as well as supporting economic prosperity – but also asserting the need for AI systems to respect fundamental human rights and values and to demonstrate trustworthiness.So where are we now in terms of regulations around the world?The EU's AI Act leads the way with its detailed risk-based approach. It really focuses on transparency as well as risks to people and fundamental rights. In the USA, while there's no comprehensive federal regulation or legislation, there are some federal laws that offer some sector specific guidance on AI applications. Things like the National Defense Authorization Act of 2019 and the National AI Initiative Act of 2020. Alongside those, President Biden's published an executive order on AI, promoting safety, responsible innovation, and supporting Americans and their rights, including things like privacy. In Asia Pacific, meanwhile, countries are working to establish their own guidelines on consumer protection, privacy, and transparency and accountability.In general, it’s very clear that policymakers and regulators increasingly expect AI systems developers to adopt what we'd call the socio-technical approach, focused on the interaction between people and technology. Having examined numerous existing regulations and foundational standards from around the world, we think a successful policymaking approach requires the combination of four core conceptual pillars.We've called them STEP. That's Safety, Transparency, and Ethics and Privacy. With these core considerations, AI can take a step – pun intended – in the right direction. Within safety, the focus is on reliability of systems, avoiding harm to people and society, and preventing misuse or subversion. Transparency includes a component of explainability and accountability; so, systems allowing for future feedback and audits of outcomes. Ethically, the avoidance of bias, preventing discrimination, inclusion, and the respect for the rule of law are key components. Then finally, privacy considerations include elements like data protection, safeguards during operation, and allowing users consent in data used for training.Of course, policymakers contend with a variety of challenges in developing AI regulations. Issues like bias, like discrimination, implementing guardrails without stifling innovation, the sheer speed at which AI is evolving, legal responsibility, and much more beyond. At its most basic, though, arguably the most critical challenge of regulating AI systems is that the logic behind outcomes is often unknown, even to the creators of AI models, because these systems are intrinsically designed to learn.Ultimately, ensuring safety and responsibility in the use of AI is an essential step before we can really tap into ways AI could positively impact society. Some of these exciting opportunities include things like improving education outcomes, smart electric grid management, enhanced medical diagnostics, precision agriculture, and biodiversity monitoring and protection efforts. AI clearly has enormous potential to accelerate drug development, to advance material science research, to boost manufacturing efficiency, improve weather forecasting, and even deliver better natural disaster predictions.In many ways, we need guardrails around AI to maximize its potential growth.Thanks for listening. If you enjoy the show, please do leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Our Global Head of Fixed Income and Thematic Research Michael Zezas and Chief Asia Economist Chetan Ahya discuss how the upcoming US elections might impact economic policies in Asia.----- Transcript -----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Global Head of Fixed Income and Thematic Research.Chetan Ahya: And I'm Chetan Ahya, Morgan Stanley's Chief Asia Economist.Michael Zezas: Today, we'll talk about what the US election means for Asia's economy.It's Wednesday, October 9th at 10am in New York.Chetan, we're less than a month now from the US election, and when I think about what it means for Asia, perhaps the most immediate and direct impact would be via tariffs.Now, our colleagues have already addressed some of this on the podcast, but I'm eager to hear your thoughts. And in the case of a Trump win and a significant tariff increase on China, how big of an impact do you think this policy would have on China's economy, and what particular areas of the economy might be most affected?Chetan Ahya: Well, Mike, I think firstly the tariff numbers being floated, i.e. that if it is 60 per cent, it would mean an increase in tariff of about 35 percentage points over an existing number, which is at 25 per cent. So, the amount of tariffs that we're talking about this time are larger than what we saw in 2018-19. And in terms of implications, of course, it will depend upon exactly what is the magnitude of tariff that is being imposed, but we definitely think there will be a significant downside to China's growth; and we expect an increase in deflationary pressures.Just to give you a bit of perspective of what happened in 2018-19, tariff resulted into China's growth slowing by a full percentage point from 6.9 per cent to 5.9 per cent; and at the same time, we saw that there was downward pressure on China's inflation dynamic. And the timing of tariffs this time does not seem to be great. China is going through an existing challenge of debt deflation loop. And we've seen that China's GDP deflator, which is a broader measure of prices, has been in deflation already for about seven quarters now. And so, in this context, tariffs will further add to its deflationary pressures and make that macro situation much more complicated.Michael Zezas: Got it. And so, how do you think China might respond if it becomes the target of higher tariffs?Chetan Ahya: So, we think China's policy makers could take up three sets of measures to mitigate the impact of tariffs.Number one, there will be, of course, depreciation in its exchange rate, which will be offsetting some part of the tariff increase effect. And so, for example, the weighted average tariff increase was about 18 percentage points during 2018-19, and the RMB depreciation was about 11 per cent. So, there was a significant offset of that tariff increase by currency depreciation.Number two, China could continue to take its effort to rewire trade flows and supply chain. So, for example, in 2018-19, we've seen a significant rewiring of exports from China to the US via Vietnam and Mexico, and we think this time that could be expanded to some more economies.And number three, China also resorted to focusing on new markets, i.e. some of the other emerging markets other than US. And at the same time, they focused on introducing new export products; like in the last cycle, they focused on solar panels, lithium batteries, EVs, and old generation chips. So, in effect, they will try to expand their market base from US into other emerging markets. And at the same time, they will be focusing on new products to ensure that their market share in global goods exports is maintained.So, Mike, we've been discussing the potential impact of a Trump win. But how would a Harris White House shape trade policy, vis-à-vis China and rest of Asia?Michael Zezas: Yeah, I think a Harris White House would represent a lot of continuity with the Biden White House's approach toward Asia and China, specifically when it comes to trade. That is to say, there's a lot of support for continued use and expansion of non-tariff barriers – things like export controls, and inbound and outbound investment restrictions. And there's less interest in using higher tariffs than what we already have as a tool.So, you can expect that. And I think you could also expect there to be kind of a broader reach out to develop economic relationships with Pan Asia as a means of enabling some of the transition that multinational companies would need to rewire their supply chains.But if we take as a given that that might be Harris's approach to trade policy, Chetan, what's your outlook for Asia if she wins in November?Chetan Ahya: Well, if Harris wins, that would eliminate the key risk to region's outlook in form of significant tariff implementation. And in this case, we expect status quo to our Asia forecast. And we would maintain our constructive outlook for the large economies in the region. And within the group, we think India and Japan are best positioned from a structural standpoint. While China, we were concerned about the debt deflation loop, but with the recent set of policy measures, we think that the risks are now more balanced as far as China macro-outlook is concerned.Michael Zezas: Got it. Well, Chetan, thanks for taking the time to talk. This is obviously a very important topic as we get closer to the US election.Chetan Ahya: Great speaking with you, Mike.Michael Zezas: And as a reminder, if you enjoy Thoughts on the Market, please take a moment to rate and review us wherever you listen; and share Thoughts on the Market with a friend or colleague today.

The rhetoric around the US elections is heating up, and tariffs have become a central theme – to rally for or against. In Part II of our roundtable discussion, our chief economists break down national and global implications of this policy lever.----- Transcript -----Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist.On this special episode of the podcast, we're going to continue our third roundtable discussion with Morgan Stanley's economists from around the world as we enter the fourth quarter of 2024.It's Tuesday, October 8th at 10am in New York.Jens Eisenschmidt: And 3pm in London.Seth Carpenter: All right, so yesterday we covered topics about central banks, inflation, reflation, deflation, China's stimulus policies – a whole set of things. But today I really want to focus on the upcoming US elections and some of the possible implications around the world.As of this recording, the race between Vice President Harris and former President Trump is essentially in a dead heat and it has left policymakers and market participants with few clear signals about what policy is going to be going forward.One key policy lever is tariffs; and so Diego, I’m going to come to you. What has the US team said about tariffs and what it might mean for the economy?Diego Anzoategui: Yes, I think the three key policy levers to consider are tariffs, as you mentioned Seth, immigration policy, and fiscal policy. Tariffs, in particular, are basically a presidential authority, so the outcome of the election is going to be very important there.Fiscal policy will depend not only on the White House, but also on the Congress, which most polls suggest that it will be split between the two parties. So, we don't expect much there. And immigration policy is tricky because if you take a look at the data, immigration flows have been decreasing. And the key question here is whether the new policy is going to affect that already decreasing pathSeth Carpenter: For tariffs, I know that we've published -- that there's both a boost to inflation that can come, but also a hit to economic growth. And that boost to inflation likely comes first.The logic is tariffs are taxes, and so they should be seen as a tax on consumption spending -- but also, on domestic CapEx spending and domestic manufacturing because a lot of the imports that are under tariff are either capital goods or intermediate goods that go into manufacturing here in the US.Diego Anzoategui: Yeah, that's right. Of course, the details will matter a lot. So, suffice it to say, there's a lot of uncertainty.Seth Carpenter: Okay, that's fair. Chetan, let me come back to you on this. This topic is particularly important for China's economy since the Trump campaign has pledged tariffs of up to 60 per cent on China, and then 10 per cent globally -- something that our public policy team believes could be a driver of a broader decoupling.You've written a lot about tariffs, tariff structure, what it means for China, the deflationary path. Could you just elaborate a little bit for us?Chetan Ahya: Yeah, absolutely. I think the timing of this tariff, if they do come up in November or sometime in 2025, couldn't have been coming at a worse time for China. As we've been discussing, China has already been going through this challenge of deflation, and tariffs essentially will mean additional deflationary pressures on China.So that is one source of impact that we would be watching. The other would be what is the impact on global corporate confidence and China's corporate confidence. That can have additional negative impact in form of slowdown in investment. And one other thing to keep in mind is that in 2018-2019, China could respond, in terms of fiscal and monetary easing and offset some of the downside that came from tariffs. But in this cycle, considering the state of the property market, it would be very difficult for China to reflate that property market demand and offset the downside from tariff.So essentially, we think the tariffs, if they come in this time, could be far more challenging for China, particularly for deflation management.Seth Carpenter: Of course, tariffs are global and the Trump campaign has talked about not just tariffs on China. So, Jens, let me come to you. Maybe there are some implications here for Europe as well.During former President Trump's administration, there were targeted tariffs that, met challenges of the WTO and retaliatory tariffs on American exports to Europe. Looking back on what happened in 2018 and 2019, what do you think could be ahead in the event that former President Trump wins the election again?Jens Eisenschmidt: So, the episode in 2018 could be actually a template, even though it's probably limited in scopes because tariffs were much more limited that were applied back then. We've talked about around 1 per cent of total American-EU imports that back then were targeted; while now we are really talking about, at least in terms of proposals, everything.So first to notice that when back then the impact was limited, it will be a little bit bigger now simply because more is targeted. And we think it could be around 30 basis points, shaping around 30 basis points, of European GDP.Again, that's a very crude measure that depends on many things in particular on also the retaliation. And here for instance, we think EU would, of course, like last time, file a complaint with the World Trade Organization, you know, as a basis for then following negotiations around these tariffs.Then, the EU would, of course, be looking into what type of tariffs it could put in terms of retaliation on US products entering the EU. And here we would observe first that a lot of that is actually oil, and it's unlikely that you would want to put tariffs on oil -- or more broadly energy goods. So also, natural gas.Then that means we would look for the next product categories. But here, I think it's not so clear; no single product category stands out. But what stands out is that the US has a surplus in services exports to the EU. And here the EU could, in theory at least, come up with a strategy to retaliate through services regulation. Again, that would need to be seen, once we see these tariffs being implemented. But that certainly would be a road for the EU to take.Seth Carpenter: Thanks Jens. It makes a lot of sense. And gentlemen, I want to thank you all for a terrific discussion today.And thanks to our listeners. If you like Thoughts on the Market, please leave us a review wherever you listen to podcasts and share Thoughts on the Market with a friend or a colleague today.

Morgan Stanley’s chief economists take stock of a resilient global economy that has weathered a recent period of market volatility, in Part I of our two-part roundtable.----- Transcript -----Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist. And on this special episode of the podcast, we'll hold our third roundtable discussion focusing on Morgan Stanley's global economic outlook as we enter the final quarter of 2024.I am joined today by our economics team from three regions.Chetan Ahya: I’m Chetan Ahya, Chief Asia Economist.Jens Eisenschmidt: I’m Jens Eisenschmidt, Chief Europe Economist.Diego Anzoategui: I’m Diego Anzoategui from the US Economics team.It's Monday, October 7th at 10 am in New York.Jens Eisenschmidt: And 3 pm in London.Seth Carpenter: I have to say, a lot has happened since the last time we held this roundtable. To say the very least, we've had volatility in financial markets. But on balance, I kind of have to say the global economy has more or less performed the way we expected.The US economy is cruising towards a soft landing. The labor market maybe is a touch softer than we expected, but consumer spending has remained resilient. In Asia, Japan's reflation story is largely intact, while China is still confronting that debt deflation cycle that we've talked about. And in Europe, the tepid growth we had envisioned -- well, it's continuing. Inflation is falling, but the ECB seems to be accelerating its rate cuts. So, let's get into the details.Diego, I'm going to start with you and the US. The Fed cut interest rates in September for the first time this cycle, and they cut by 50 basis points instead of the 25 basis points that some people -- including us -- were expecting. So, the big question for you is, where does the Fed go from here?Diego Anzoategui: So, we are looking for a string of 25 basis point cuts from the Fed as long as labor markets hold up. Inflation has come down notably and we expect a normalization of interest rates ahead. But, of course, we might be wrong again. Labor markets might cool too much, and in that case, one or two additional 50 basis point cuts might happen again.Seth Carpenter: So, either the Fed glides into the soft landing or they pick up the pace and they cut faster.So, Jens, let me turn to you and pivot to Europe. You recently changed your forecast for the ECB, and you're now looking for a rate cut in October. And that's following two cuts already that the ECB has done. So, what prompted your change? Is it like what Diego said about a softer outcome prompting a faster pace of cuts. What's likely to happen next for the ECB?Jens Eisenschmidt: That's right. We changed our ECB call. And to understand why we have to go back to September. So already at the September meeting the ECB president, Lagarde, made clear in the press conference that the bank was a little bit less concerned about structurally high services inflation that is forecast to be persistently high still for some time to come -- mainly because there was more conviction that wages would come down eventually.And so, they could really focus a little bit more, give a bit more attention to the growth side of things. Just as a reminder, the Fed has a dual mandate. So, it's growth and inflation. The ECB only has inflation. So basically, if the ECB wants to act on growth, it needs to be sure that inflation is under control. And then since September what happened is that literally every single indicator, leading indicator, for inflation was negative. We had lower oil prices, we had a stronger euro, and of course, also weaker activity in terms of the PMIs pointing to a cooling of the ongoing recovery.So, all of that led us to revise our inflation forecast, and that means that ECB will very likely already be a target mid next year. That should lead to an acceleration of the rate cut cycle. And then it's only a question, will it be already in October or in December? And here comes the September inflation print in, which was softer in particular on the core or on the services component than expected. And we think that has tilted the balance; or will tilt the balance in favor of an October rate cut.So, what we see now is October, December, January, March -- 25 basis points rate cuts by the ECB leading to a rate of 250. Then this being close to neutral, they will slow down again, quarterly rate cut pace. So, June, September, December, 25 basis points each -- leading to a final rate end of next year at 175.Seth Carpenter: Okay, got it. So, inflation has come down in most developed market economies. Central banks are starting to cut. For the Fed, there's an open question about how much strength the labor market still has and whether or not they need to do 50 basis points or 25.But I have to say, Chetan -- and I'm going to come to you because -- in Asia, we saw a lot of market turmoil in August, and that was partly prompted by the rate hike of the BoJ. So, here's a developed market economy central bank that's not cutting. In fact, they're starting to raise interest rates. So, what happened there? And what do you think happens with the BoJ going forward?Chetan Ahya: Well, Seth, in our base case, we do expect BoJ to hike by another 25 basis points in January next year. And as regards to your question on what happened in terms of the volatility that we saw in the month of August? Essentially, as the BoJ took up its first rate hike, there was a lot of concern that BoJ will go in a consecutive manner, taking up successive rate hikes. But at the end of the day, what we saw was, BoJ realizing that there is a clear endogeneity between financial conditions and their reaction function. And as that communication was clearly laid out, we saw markets calming down. And now going forward, what we think BoJ will be watching will be the data on inflation and wages.We think they would be waiting to see what happens to the inflation data in the month of November and October, i.e., whether there is a clear, rise in services inflation, which has been running at around 1.3 per cent. And they would want to see that wage pass through to services inflation is continuing.And then secondly, they will want to see what is happening to the wage expectations from the workers in the next round of spring wage negotiations. The demand from workers will be clear by the end of this year, so sometime in December. And therefore, we think BoJ will look at that information and then take up a rate hike in the month of January next year.Seth Carpenter: Okay, so if I step back for a second, even if there are a few parts of the puzzle that still need to fall into place, it sounds to me like you're saying the Japan reflation story is still intact. Is that fair?Chetan Ahya: That's right. We think that, you know, the comment from the prime minister that came out a few days back; he's very clear that he wants to see a situation where Japan gets rid of deflation. So, we think that the policymakers are fully lined up to ensure that the reflation story remains intact.Seth Carpenter: That's super helpful and it just absolutely contrasts with what we've been saying about China, where they have sort of the opposite story. There's been a debt deflation cycle that you and the Chinese team have really been highlighting for a long time now, talking about the challenges for policy.We did get some news out of Beijing in terms of policy stimulus. Could you and break down for us what happened there and whether or not you think that's enough to really shift China's trajectory away from this debt deflation cycle?Chetan Ahya: Yes, Seth, so essentially, we got three things from Chinese policy makers. Number one, they took up big monetary policy easing. Number two, they announced a package to support the equity markets. And number three, they announced some measures to support the property market.Now we think that these measures are a positive and particularly the property market measures will be helpful. But in terms of real impediment for China's reflation story, we think that the key need of the hour is to take up aggressive fiscal easing to boost consumption. Monetary policy easing is helpful, but it's not really the key impediment to the reflation path.Seth Carpenter: All right, so if I wanted to see the glass as half full, I would say, look at this! Beijing policymakers have turned the corners. They're acknowledging that there's some policy impetus that needs to be put into place. But if I wanted to see the glass as half empty, I could take away from what you just said, that there just needs to be more, maybe fiscal stimulus to directly promote household spending.Is that that fair?Chetan Ahya: That's absolutely right. What's happening in China is that there has been a big structural adjustment in the property sector because now the total population is declining. And so therefore there is a big demand hole that is being left by the weakness in housing sector.Ideally, what they should be doing, as I was mentioning earlier, [is] that they should be taking a big fiscal easing to support consumption spending. But so far what we've been seeing is that they've been trying to fill that demand hole with more supply in form of investment in manufacturing and infrastructure sector.And unfortunately, that's been actually making the deflation challenge more complex. So going forward, we think that, you know, we should be watching out what they do in terms of fiscal stimulus. There was a comment in the Politburo statement that they will take up fiscal easing. We suspect that the timing of that fiscal policy announcement could be by end of this month alongside National People's Congress meeting. And so, what will be the size of fiscal stimulus will be important to watch as well.Currently, we think it could be one to two trillion RMB. But in our work that we did in terms of what is the scale of fiscal stimulus that is needed to boost consumption, we estimate that it should be somewhere around a 10 trillion RMB spread over two years.Seth Carpenter: Got it. Thanks, Chetan. Super helpful.Gentlemen, I have to say, we might have to stop here for the day. But tomorrow, I want to get [to] another topic, which is to say, the upcoming US election. It's got huge implications for the macroeconomy in the US and around the world. And I think we’re going to have to touch on it. But for now, we'll end the conversation here.And thank you, the listeners, for listening. If you enjoy this show, please leave us a review wherever you listen to the podcast and share Thoughts on the Market with a friend or colleague today.

Following the US Federal Reserve’s September rate cut, labor data may have more impact on markets than further cuts. Andrew Sheets, Head of Corporate Credit Research, explains why.----- Transcript -----Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, head of Corporate Credit Research at Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, today I'll discuss why what the Fed does next might not matter all that much. It’s Friday, October 4th, at 2 pm in London. Over recent months the Federal Reserve has been at the center of the global market debate. After keeping policy rates unchanged at the end of July, a decision the markets initially cheered, a string of weak data in early August drove concerns that Fed policy was behind schedule. The Fed then responded with a larger-than-expected half-percent interest rate cut in September. And so, given these swings, a common question for investors is, understandably: What will the Fed do next? But what if the Fed’s next move doesn’t matter all that much? Monetary policy is both powerful and weak. Powerful, because interest rates impact so many decisions across the economy, from buying a home, to financing equipment, to acquiring a competitor. And it’s also weak, because how interest rates impact these decisions can have a long and variable lag. It can be six to twelve months before the full impact of an interest rate cut is felt in the economy. And so that half percentage point cut by the Fed last month might not be fully felt in the US economy until June of 2025. That lag is one reason why the Fed’s next move may matter less. The second reason is what we think the market is worried about. We think a lot of the market’s volatility over the last two months has been driven by concerns that the US economy, particularly the labor market, is weakening right now. If interest rates are too high and the labor market is weakening, then cutting more rapidly in the coming months might not make a difference. Because of that lag, the help from lower rates simply wouldn’t arrive in time.Meanwhile, there’s also a view that interest rates might need to fall quite a long ways to have the sort of impact that would be needed if the economy is really slowing down rapidly: by the Fed’s own Summary of Economic Projections (SEP), the policy rate that neither helps or hinders the economy could still be about 2 per cent lower than the current rate – even after that half a percentage point cut in September. Interest rates are well above what could be neutral. In short, if the data weaken materially over the coming months, more Fed cuts may not necessarily help in time. And if the data remain solid, Fed policy will have lots of time to adjust. It’s the data, not the Fed’s next action, that are most important at the moment. We also see support for this idea in history. It’s notable that some of the most aggressive US interest rate-cutting cycles – 2001, 2008, February of 2020 – overlapped with weak equity and credit markets. And it was smaller rate cutting cycles – in 1995-96, 1998 or 2019 – that overlapped with much better markets. And that makes sense; if one assumes that it’s the data rather than exactly how much the Fed is cutting rates that matter most to the market. All of this especially feels topical today. Today’s better than expected report on the US jobs market should support the case that Fed policy is on schedule, and larger adjustments aren’t needed. It’s good news. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Our Chief China Economist Robin Xing and Chief China Equity Strategist Laura Wang discuss how markets have responded to rate cuts and commitments to government spending, and what they could mean over the long term.----- Transcript -----Laura Wang: Welcome to Thoughts on the Market. I'm Laura Wang, Morgan Stanley's Chief China Equity Strategist. Robin Xing: And I'm Robin Xing, Morgan Stanley's Chief China Economist.Laura Wang: All eyes have been on China this past week, and today we'll discuss why recent news from China's policymakers have commanded the attention of global markets.It's Thursday, October the 3rd, at 4pm in Hong Kong.So, Robin, China has been wrestling with the triple macro challenge of debt deflation and demographics -- what we call the three Ds -- for some time now. Last week, China's central bank, PBOC, announced a stimulus package that exceeded market expectations. And then later in the week, top China Communist Party officials, known as the Politburo, focused their monthly meeting on economics, which is not their usual practice.This meeting was a positive surprise to both us and the market. Let's start with the PBOCs easing package. For listeners who haven't been following China's economy closely, what's our current view on China's economy and can you walk us through the policy measures that the central bank introduced?Robin Xing: China's economy has been struggling lately and that's pushed the Beijing to pivot approach. Over the last 18 months, they have tried smaller, reactive measures. But now, they are doing something much bigger. On September 24, the People's Bank of China, PBOC, made a bold move, cutting interest rates and introducing new tools to support the stock market.Now, these cuts might sound small, just 20 basis points, but they are pretty rare in China. They also cut the reserve requirement ratio, which is a fancy way of saying banks can lend more money by 50 basis points. And for the first time, the central bank gave forward guidance, signaling even more cuts could come by year end.On top of that, the PBOC launched two big programs, a 500 billion yuan fund to help investors buy stocks, and a 300 billion yuan program to help companies buy back their own shares. These moves gave a much-needed boost to both the markets and consumer confidence.Laura Wang: And how about the Politburo meeting that came on the heels of the PBOC announcement? What exactly did it focus on?Robin Xing: The Politburo meeting was a rather critical moment. Normally, they don't even talk about the economy in September. But this year was different. It really signaled how urgent things have become.They made it clear they are ready to spend more. The government is pledging to increase public spending because other parts of the economy, like corporates and consumers, are holding back. There is also a big focus on the housing market, which has been in decline since 2021. They are promising to stop that slide, and it's the strongest commitment we have seen so far.Laura Wang: So, given everything we've seen from the PBOC and the Politburo, do you think this is a ‘whatever it takes moment’ to address the macro challenges facing China's economy?Robin Xing: Not quite, but it's close. We are seeing the start of what's going to be a bumpy recovery. The deflation problem, where prices are falling and people are not spending, is complicated.Beijing seems open to trying different approaches, but fixing the deeper issues -- like the struggling housing market and the local government debt -- it’s going to take a lot. In fact, we think China might need to spend about 1-1.5 trillion dollars over the next two years to really turn things around.Right now, the measures they have announced are smaller than that. That's because these are new policies. And they still need to build consensus and work out the details. So, while this isn't a ‘whatever it takes moment’ yet the mindset has definitely shifted in that direction.Laura Wang: In this case, what are the next steps you are monitoring for China's policymaker and how long will the various measures take to implement?Robin Xing: We expect to see a supplementary budget of 1-2 trillion yuan announced at the upcoming NPC Standing Committee meeting in late October. This budget should focus on boosting consumer spending, increasing social welfare, and helping local governments managing their debt. We will likely see more monetary easing too.As well as tweaks to the Housing Inventory Buy Back program. These steps should help the economy grow slightly faster, possibly hitting a 5 per cent quarter on quarter growth over the next two quarters, compared to the 3 per cent we have seen recently.Looking ahead, we will get more clues at the December Central Economic Work Conference. That's when we might see the first signs of plans to use central government funds to tackle housing and local government debt issues. The full details could come in March 2025. If things don't improve quickly, and especially if social unrest starts to rise, Beijing may have to act even more aggressively.We are keeping an eye on our social dynamics indicator, which tracks how people feel about jobs, welfare and income. If that dips further, it could push the government to ramp up stimulus measures.Laura, turning it over to you. How are stock markets reacting to all this policy signaling from China?Laura Wang: I would say to say that the market has responded very enthusiastically is an understatement. I'll give you some numbers.On the first day of the PBOC announcement, the Shanghai Composite Index, as well as the Hong Kong Market Hang Seng Index, were both up by more than 4 per cent in one single day. Then with the further boost from the surprise Politburo meeting -- by now, both the Shanghai Composite Index and the Hang Seng Index have already been up by more than 21 per cent in just one week's time.Robin Xing: Within the China stock market, which sectors and industries do you think will most benefit from the shift in policy?Laura Wang: There are a few ways to position to benefit from this major market condition change. We have a list of companies that we believe will directly benefit from the PBOC market stabilization funding, given the funding's low cost compared to these companies implied re-rating opportunity, just by tapping into the funding and enhancing their shareholder returns.For the potential reflationary fiscal efforts suggested by the Politburo meeting, as more details come out, I think sectors with good exposure to reflation, particularly the private consumption, will benefit the most -- given their still relatively low valuation, large market cap and high liquidity.Robin Xing: Finally, Laura, what are your expectations for the markets in China and outside of China for the next few weeks and months?Laura Wang: Clearly this rally so far is reflecting significant sentiment improvement and capitals that are willing to take a leap of faith and preposition for physical reflationary efforts ramp up. If the government can deliver these measures in a timely fashion, and more importantly, on top of that, communicate their commitment to winning this uphill battle against deflation, I think further valuation re-rating is quite possible for both the Asia market and the Hong Kong market by another 10 to 20 per cent.To go beyond that level, we need to see clear signs of a corporate earnings growth reacceleration, which would require incrementally more easing to come along in the next few months. We should also monitor the housing market inventory level very closely because any earlier completion of this inventory digestion could suggest less drag on demand investment.Obviously, there are still a lot of moving parts and it's still a very much evolving story from here. Robin, thanks for taking the time to talk.Robin Xing: Great speaking with you, Laura.Laura Wang: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.

Thousands of U.S. dockworkers have gone on strike along the East Coast and Gulf Coast. Our Global Head of Fixed Income and Thematic Research Michael Zezas joins U.S. economist Diego Anzoategui to discuss the potential consequences of a drawn-out work stoppage.----- Transcript -----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income and Thematic Research for Morgan Stanley.Diego Anzoategui: And I'm Diego Anzoategui from the US Economics team.Michael Zezas: And today, we'll be talking about the implications of this week's US dockworker strike on the US economy.It's Wednesday, October 2nd, at 11am in New York.Diego, as most of our listeners likely know, yesterday roughly 45,000 US dockworkers went on strike for the first time in perhaps decades at 36 US ports from Maine to Texas. And so, I wanted to get your initial read on the situation because we're obviously getting a lot of questions from clients concerned about what this could mean for growth and inflation.Diego Anzoategui: Yeah, of course, there's a lot of uncertainty about this situation because we don't know how long the strike is going to last. But the strike can in principle hit economic growth and boost inflation -- but only if it is long lasting, right. Local producers and retailers, they typically have inventories of final and intermediate goods, so the disruption needs to be long enough so that those inventories go down to critical levels in order to see a meaningful macroeconomic impact.But if the strike is long enough, we might see an important impact on economic activity and inflation. If we look at trade flows data, roughly 30 per cent of all goods imports and exports are handled by the East and Gulf ports.Michael Zezas: So then let's drill down on that a bit. If the strike continues long enough and inventories decline, what are the shocks to economic growth that you're considering?Diego Anzoategui: Yeah, I would think that there are two main channels through which the strike might hit economic activity. The first one is a hit to local production because of disruptions in the supply of capital goods and intermediate goods used for domestic production. We not only use the ports to bring final goods, but also intermediate and capital goods like machinery, basic metals, plastic, to name a few.And the second channel is directly through exports. The East Coast and Gulf ports channel 84 per cent of exports by water. Industries producing energy, chemicals, machinery, cars, might be affected by these bottlenecks.Michael Zezas: Right, so fewer potential imports of goods, and fewer potential productive capacity as a consequence. Does that have an impact on inflation from your perspective?Diego Anzoategui: Yes, it can have an impact on inflation. Again, assuming that the strike is long lasting, right? I would expect acceleration in goods prices, in particular key inputs coming from the Eastern Gulf ports. And these are cars, electronics, clothes, furniture and apparel. All these categories roughly represent 13 per cent of the core PCE basket, the price index.Also, you know, a meaningful share of food and beverages imports come through water. So, I would also expect an impact there in those prices. And in terms of what prices might react faster, I think the main candidate is food and beverages -- and especially perishable food that typically have lower inventory to sales ratios.And if we start seeing an increase in those prices, I think that would be a good early signal that the disruptions are starting to bite.Michael Zezas: That makes sense. And last question, what about the impact to the US workforce? What would be the impact, if any, on payroll data and unemployment data, reflecting workforce impact -- the types of data that investors really pay close attention to.Diego Anzoategui: Yeah. So, we will likely see an impact on nonfarm payrolls, NFP, and the unemployment rate if the strike is long lasting. But even if there are not important disruptions, the strike itself can mechanically affect October's nonfarm payrolls print. They want to be released in November. Remember that strikers don't get paid, and they are not on the payroll; so they are not be[ing] counted by the establishment survey.But a necessary condition to see this downward bias in the NFP reading is that the strike needs to continue next week, that is the second week of October, right. But know that The Fed tends to look through these short run fluctuations in NFP due to strikes -- because any drag we see in the October sprint will likely be followed by payback in November if the strike is short lived.Michael Zezas: Got it. That makes a lot of sense. Diego, thanks for making the time to talk with us as this unfolds. Let's hope for a quick resolution here.Diego Anzoategui: Thanks, Michael. Great speaking with you.Michael Zezas: And thanks for listening. If you enjoy Thoughts on the Market, please be sure to rate and review us on the Apple Podcasts app. It helps more people find the show. 

Our US public policy and global economics experts discuss how an escalation of US tariffs could have major domestic and international economic implications.----- Transcript -----Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Morgan Stanley's US Public Policy Strategist. Arunima Sinha: And I’m Arunima Sinha, from the Global Economics team. Ariana Salvatore: Today we're talking tariffs, a major policy issue at stake in the US presidential election. We'll dig into the domestic and international implications of these proposed policies. It's Tuesday, October 1st at 10am in New York. In a little over four weeks, Americans will be going to the polls. And as we've noted on this podcast, it's still a close race between the two presidential candidates. Former president Donald Trump's main pitch to voters has to do with the economy. And tariffs and tax cuts are central to many of his campaign speeches. Arunima Sinha: You're right, Ariana. In fact, I would say that tariffs have been the key theme he keeps on coming back to. You've recently written a note about why we should take the Republicans proposed policies on tariffs seriously. What's your broad outlook in a Trump win scenario? Ariana Salvatore: Well, first and foremost, I think it's important to note that the President has quite a bit of discretion when it comes to trade policy. That's why we recommend that investors should take seriously a number of these proposals. Many of the authorities are already in place and could be easily leveraged if Trump were to win in November and follow through on those campaign promises. He did it with China in 2018 to 2019, leveraging Section 301 Authority, and many of that could be done easily if he were to win again.Arunima Sinha: And could you just walk us through some of the specifics of Trump's tariff proposals? What are the options at the President's disposal? Ariana Salvatore: Sure. So, he's floated a number of tariff proposals -- whether it be 10 per cent tariffs across the board on all of our imports, 60 per cent specifically on China or targeted tariffs on certain goods coming from partners like Mexico, for example. Targeted tariffs are likely the easiest place to start, especially if we see an incrementalist approach like we saw during the first Trump term over the course of 2018 to 2019. Arunima Sinha: And how quickly would these tariffs be implemented if Trump were to win? Ariana Salvatore: The answer to that really depends on the type of authorities being leveraged here. There are a few different procedures associated with each of the tariffs that I mentioned just now. For example, if the president is using Section 301 authorities, that usually requires a period of investigation by the USTR -- or the US Trade Representative --before the formal recommendation for tariffs.However, given that many of these authorities are already in place, to the extent that the former president wants to levy tariffs on China, for example, it can be done pretty seamlessly. Conversely, if you were to ask his cabinet to initiate a new tariff investigation, depending on the authority used, that could take anywhere from weeks to months. Section 232 investigations have a maximum timeline of 270 days. There's also a chance that he uses something called IEEPA, the International Emergency Economic Powers Act, to justify quicker tariff imposition, though the legality of that authority hasn't been fully tested yet. Back in 2019, when Trump said he would use IEEPA to impose 5 per cent tariffs on all Mexican imports, he called off those plans before the tariffs actually came into effect. Arunima Sinha: And could you give us a little more specific[s] about which countries would be impacted in this potential next round of tariffs -- and to what extent? Ariana Salvatore: Yeah, in our analysis, which you'll get into in a moment, we focus on the potential for a 10 per cent across the board tariff that I mentioned, in conjunction with the 60 per cent tariff on Chinese goods. Obviously, when you map that to who our largest trading partners are, it's clear that Mexico and China would be impacted most directly, followed by Canada and the EU.Specifically on the EU, we have those section 232 steel and aluminum tariffs coming up for review in early 2025, and the US-MCA or the agreement that replaced NAFTA is set for review later in 2026. So, we see plenty of trade catalysts on the horizon. We also see an underappreciated risk of tariffs on Mexico using precedent from Trump's first term, especially if immigration continues to be such a politically salient issue for voters. Given all of this, it seems that tariffs will create a lot of friction in global trade. What's your outlook, Arunima? Arunima Sinha: Well, Arianna, we do expect a hit to growth, and a near term rise in inflation in the US. In the EU, our economists also expect a negative impact on growth. And in other economies, there are several considerations. How would tariffs impact the ongoing supply chain diversification? The extent of foreign exchange moves? Are bilateral negotiations being pursued by the other countries? And so on.Ariana Salvatore: So, a natural follow up question here is not only the impact to the countries that would be affected by US tariffs, but how they might respond. What do you see happening there? Arunima Sinha: In the note, we talked with our China economists, and they expect that if the US were to impose 60 per cent tariffs on Chinese goods, Beijing may impose retaliatory tariffs and some non-tariff measures like it did back in 2018-19. But they don't expect meaningful sanctions or restrictions on US enterprises that are already well embedded in China's supply chain. On the policy side, Beijing would likely resort less to Chinese currency depreciation but focus more on supply chain diversifications to mitigate the tariff shock this time round. Our economists think that the risk of more entrenched deflationary pressures from potential tariff disruptions may increase the urgency for Beijing to shift its policy framework towards economic rebalancing to consumption.In Europe, our economists expect that targeted tariffs will be met with challenges at the WTO and retaliatory tariffs on American exports to Europe, following the pattern from 2018-19, along with bilateral trade negotiations. In Mexico, our economists think that there could be a response with tariffs on agricultural products, mainly corn and soybeans.Ariana Salvatore: So, bringing it back to the US, what do you see the macro impact from tariffs being in terms of economic growth or inflation? Arunima Sinha: We did a fairly extensive analysis where we both looked at the aggregate impacts on the US as well as sectoral impacts that we'll get into. We think that a pretty reasonable estimate of the effect of both a 60 per cent tariff on China and a 10 per cent blanket tariff on the rest of the world is an increase of 0.9 per cent in the headline PCE prices that takes into effect over 2025, and a decline of 1.4 percentage points in real GDP growth that plays out over a longer period going into 2026. Ariana Salvatore: So, your team is expecting two more Fed cuts this year and four by the first half of 2025. Thinking about how tariffs might play into that dynamic, do you see them influencing Fed policy at all? Arunima Sinha: Well, under the tariff scenario, we think that it's possible that the Fed decides to delay cuts first and then speed up the pace of easing. So, in theory, the effect of a tariff shock is really just a level shift in prices. And in other words, it's a transitory boost to inflation that should fade over time.Because it's a temporary shock. The Fed can, in principle look through it as long as inflation expectations remain anchored. And this is what we saw in the FOMC minutes from the 2018 meetings. In a scenario of increased tariffs, we think that the uncertainty about the length of the inflationary push may slow down the pace of cuts in the first half of 2025. And then once GDP deceleration becomes more pronounced, the Fed might then cut faster in the second half of [20]25 to avoid that big, outsized deceleration and economic activity.Ariana Salvatore: And what about second order effects on things like business investment or employment? We talked about agriculture as a potential target for retaliatory tariffs, but what other US sectors and industries would be most affected by these type of plans? Arunima Sinha: That's something that we have leaned in on, and we do expect some important second round effects. So, if you have lower economic activity, that would lower employment, that lowers income, that lowers consumption further -- so that standard multiplier effect. So overall, in that scenario, with the 60 per cent tariffs on China, 10 per cent on the rest of the world that are imposed fully and swiftly, we model that real consumption would decline by 3 per cent, business investment would fall by 3.1 per cent, and monthly job gains would fall by between 50- and 70, 000. At the sectoral level, this combination of tariffs have potential to increase average tariffs to the 25 to 35 per cent range for almost 50 per cent of the NAICS industries in the United States when first put into place. And we expect the biggest impacts on computers and electronics, apparel, and the furniture sectors; but this does not take into account any potential exclusion lists that might be put into place. Ariana Salvatore: Finally, what does all this boil down to in terms of a direct impact to the US consumer wallet? Arunima Sinha: So, the impact of higher tariffs on consumer spending would depend on many factors, and one of the most important ones is the price elasticity of demand. So how willing would consumers be to take on those higher prices from tariffs, or do we see a pullback in real demand? What we think will happen is that higher prices could reduce real consumption by as much as 2. 5 per cent. The impact on goods consumption is much more meaningful because imported goods are directly affected by tariffs, and we would expect to see a drag on real goods consumption of 5 per cent. But then you have lower labor income and higher production costs and services prices that is also going to bring down services consumption by 1.3 per cent.Ariana Salvatore: So, it's important to keep in mind here that US tariff policy would undoubtedly have far reaching consequences. That means it's something that we're going to continue to follow very closely. Arunima, thanks so much for taking the time to talk.Arunima Sinha: Great speaking with you, Ariana. Thank you, Ariana Salvatore: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.  

Our CIO and Chief US Equity Strategist Mike Wilson takes a closer look at the potential ramifications of the sharp central bank policy shifts in the U.S., Japan and China.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief US Equity Strategist. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about what to expect from the sharp pivot in global monetary and fiscal policy.  It's Monday, Sept 30th at 11:30am in New York. So let’s get after it. Over the past few months, Fed policy has taken on a more dovish turn. To be fair, bond markets have been telling the Fed that they are too tight and in many respects this pivot was simply the Fed getting more in line with market pricing. However, in addition to the 50 basis point cut from the Fed, budget deficits are providing heavy support; with August’s deficit nearly $90b higher than expected. Meanwhile, financial conditions continue to loosen and are now at some of the most stimulative levels seen over the past 25 years. Other central banks are also cutting interest rates and even the Bank of Japan, which recently raised rates for the first time in years, has backed off that stance – and indicated they are in no hurry to raise rates again. Finally, this past week the People’s Bank of China announced new programs specifically targeting equity and housing prices. After a muted response from markets and commentators, the Chinese government then followed up with an aggressive fiscal policy stimulus. Why now?  Like the US, China is highly indebted but it has entered full blown deflation with both credit and equity markets trading terribly for the past several years. There is an old adage that markets stop panicking when policy makers start panicking. On that score, it makes perfect sense why China equity and credit markets have responded the most favorably to the changes made last week. European equity markets were also stronger than the US given European economies and companies have greater exposure to China demand. On the other hand, Japan and India traded poorly which also makes sense in my view since they were the two largest beneficiaries of investor outflows from China over the past several years. Such trends are likely to continue in the near term.  For US equity investors, the real question is whether China’s pivot on policy will have a material impact on US growth. We think it’s fairly limited to areas like Industrial spending and Materials pricing and it’s unlikely to have any impact on US consumers or corporate investment demand. In fact, if commodities rally due to greater China demand, it may hurt US consumer spending. As usual, oil prices will be the most important commodity to watch in this regard. The good news is that oil prices were down last week due to an unrelated move by Saudi Arabia to no longer cap production in its efforts to get oil prices back to its $100 target. If prices reverse higher again and move toward $80/bbl due to either China stimulus or the escalation of tensions in the Middle East, it would be viewed as a net negative in my view for US equities.  As discussed last week the most important variables for the direction of US equities is the upcoming labor market data and third quarter earnings season. Weaker than expected data is likely to be viewed negatively by stocks at this point and good news will be taken positively. In other words, investors should not be hoping for worse news so the Fed can cut more aggressively. At this point, steady 25 basis point cuts for the next several quarters in the context of growth holding up is the best outcome for stocks broadly. Meanwhile individual stocks will likely trade as much on idiosyncratic earnings and company news rather than macro data in the absence of either a hard landing or a large growth acceleration; both of which look unlikely in the near term. In such a scenario, we think large cap quality growth is likely to perform the best while there could be some pockets of cyclical strength in companies that can benefit from greater China demand. The best areas for cyclical outperformance in that regard remain in the Industrial and materials sectors.  Thanks for listening. If you enjoy the podcast, leave us a review wherever you listen, and share Thoughts on the Market with a friend or colleague today. 

Credit likes moderation, and the Fed’s rate cut indicates its belief that the economy is heading for a soft landing. Our Chief Fixed Income Strategist warns that markets still need to keep an eye on incoming data.----- Transcript -----Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley’s Chief Fixed Income Strategist. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about the implications of the Fed’s 50 basis points interest rate cut for corporate credit markets. It's Friday, Sep 27th at 10 am in New York. For credit markets, understanding why the Fed is cutting is actually very critical. Unlike typical rate cutting cycles, these cuts are coming when the economic growth is still decelerating but not falling off the cliff. Typically, rate cuts have come in when the economy is already in a recession or approaching recession. Neither is the case this time. So the US expanded by 3 per cent in the second quarter; and the third quarter, it is tracking well over 2 per cent. So, these cuts do not aim to stimulate the economy but really to acknowledge that there’s been significant progress on inflation, and move the policy towards a much more normalized policy stance. In some way, this really reflects the Fed’s confidence in the inflation path. So that means, not cutting now would mean restraining the economy further through high real interest rates. So, this cut really reflects a growing faith by the Fed in achieving a soft landing. Also, the size of the cut, the 50 basis point cut as opposed to 25 basis points, shows the Fed’s willingness to go big in response to weaker data, especially in labor markets. So since the beginning of the year, we have been pretty constructive on spread products across the board, particularly corporate credit and securitized credit, even though valuations have been tightening. Our stance is based on the idea that credit fundamentals will stay reasonably healthy even if economic growth decelerates, as long as it doesn’t fall off the cliff. Further, we also believe that credit fundamentals will improve with rate cuts because stress in this cycle has mainly come from higher interest expenses weighing on both corporations and households. This is in stark contrast to other recent periods of stress in credit markets – such as 2008/09 when we had the financial crisis, 2015/16 we had the challenges in the energy sector and then 2020, of course, we faced COVID. So the best point of illustrating this would be through leveraged loans, which are floating-rate instruments. As the Fed started tightening in 2022, we saw increasing pressures on interest coverage ratios for leveraged loan borrowers. That led to a pick-up in downgrades and defaults in loans. As rate hikes ended, we started seeing stabilization of these coverage ratios, and the pace of downgrades and defaults slowed. And now, with rate cutting ahead of us and the dot plot implying 150 basis points more of cuts for the rest of this year and the next year to come, the pressure on interest coverage ratios are going to be easing, especially if the economy stays in soft landing mode. This suggests that while spreads are today tight, the fundamentals could even improve with rate cuts – that means the spreads could remain around these levels, or even tighten a bit further. After all, if you remember the mid-1990s, which was the the last time that the Fed achieved a soft landing, investment grade corporate credit spreads were about 30 basis points tighter relative to where we are today. That 'if' is a big if. If we are wrong on the soft landing thesis, our conviction about the spread products being valuable will prove to have been misplaced. Really the challenge with any landing is that we can’t be certain of the prospect until we actually land. Till then, we are really looking at incoming data and hypothesizing: are we heading into a soft or hard landing? So this means incoming data pose two-sided risks to the path ahead for credit spreads. If incoming data are weak – particularly employment data are weak – it is likely that faith in this soft landing construct will dim and spreads could widen. But if they are robust, we can see spreads tightening even further from the current tight levels. Thanks for listening. If you enjoy the podcast, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Our US Consumer Economist Sarah Wolfe lays out the impact of the Federal Reserve’s rate cut on labor market and consumers, including which goods could see a rise in spending over the next year.----- Transcript -----Welcome to Thoughts on the Market. I’m Sarah Wolfe, from the Morgan Stanley US Economics Team. Today, a look at what the Fed cut means for US consumers. It’s Thursday, September 26, at 2 PM in Slovenia. Earlier this week, you heard Mike Wilson and Seth Carpenter talk about the Fed cut and its impact on markets and central banks around the world. But what does it actually mean for US consumers and their wallets? Will it make it easier to pay off credit card debt and secure mortgages? We explore these questions in this episode. Looking back to last week, the FOMC cut rates by a larger chunk than many anticipated as risks from inflation have come down significantly while labor market risks have risen. Now, with inflation wrangled in, it’s time to start reducing the restrictiveness of policy to prevent a rise in the unemployment rate and a slump in economic growth. In fact, my colleague Mike Wilson believes the US labor data will be the most important factor driving US equities for the next three to six months. Despite potential risks, the current state of the U.S. labor market is still solid and that’s where the Fed wants it to stay. The health of the labor market, in my opinion, is best reflected in the health of consumer spending. If we look at this quarter, we’re tracking over 3 per cent growth in real consumption, which is a strong run rate for consumption by all measures. And if we look at how the whole year has been tracking, we’ve only seen a very modest slowdown in real consumer spending from 2.7 per cent last year to 2.5 per cent today. For a bit of perspective, if we go back to 2018 and 2019, when rates were much lower than they are today, and we had a tight labor market, consumption was running closer to 2 to 2.3 per cent. So we can definitively say, consumption is pretty solid today. What is most notable, however, is the slowdown in nominal consumption which takes into account unit growth and pricing. This has slowed much more notably this year from 5.6 per cent last year to 4.9 per cent today. It’s reflected by the significant progress we’ve seen in inflation this year across goods and services, despite solid unit growth – as reflected by stronger real consumer spending. Our US Economics team has been stressing that the fundamentals that drive consumption – which are labor income, wealth, and credit – would be cooler this year but still support healthy spending. When it comes to consumption, in my opinion, I think what matters most is labor income. A slowdown in job growth has stoked fears of slower consumer spending, but if you look at aggregate labor income growth and household wealth, across both equities and real estate, those factors remain solid. So, then we ask ourselves, what has driven more of the slowdown in consumer spending this past year?And with that, let’s go back to interest rates. Rates have been high, and credit conditions have been tight – undeniably restraining consumer spending. Elevated interest rates have pushed banks to pull back on lending and have curbed household demand for credit. As a result, if you look at consumer loan growth from banks, it’s fallen from about 12 per cent in 2022 to 7 per cent last year, and just 3 per cent in the first half of this year. Tight credit is dampening consumption. When interest rates are high, people buy less -- especially on credit. And this is a key principle of monetary policy and it's used to lower inflation. But it can have adverse effects. The brunt of the pain has been borne by the lowest-income households which rely heavily on revolving credit for basic spending needs and more easily max out on their credit limits and fall delinquent. As such, as the Fed begins to lower interest rates, the rates charged on consumer loan products have started to moderate. And with a lag, we expect credit conditions to ease up as well, allowing households across the income distribution to begin to access more credit. We should first see a rebound in durable goods spending – like home furnishing, electronics, appliances, and autos. And then that should all be further supported by more activity in the housing market.  While interest rates are on their way down, they are still relatively elevated, which means the rebound in consumption will take time. The good news, however, is that we do think we are moving through the bottom for durable goods consumption – with pricing for goods likely to stabilize next year and unit growth to pick back up.Thank you for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

With the US presidential race being as closely contested as it is, Michael Zezas explains why patience may be a virtue for investors following Election Day. ----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Global Head of Fixed Income and Thematic Research. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about why investors should prepare to wait to get clarity on the US election result. It's Wednesday, September 25th at 10:30am in New York. As we all know, markets dislike uncertainty; and one of the biggest potential catalysts between now and the end of the year is the results of the US presidential election. So it’s important for investors to know that the timing of knowing the outcome may not be what you expect. On most U.S. presidential election days, the outcome is known within hours of polls closing in the evening. That’s because while all votes may not yet have been counted, enough have to make a reasonable projection about the winner. But that’s not what happened in 2020. Vote counts were tight across many states. A condition that was compounded by the slowness of counting mail in ballots, which was a style of voting more widely adopted during the pandemic. As a result, news networks didn’t make a formal outcome projection until about four days after election day.Rather than a reversion to the norm of quickly knowing the result for the 2024 election, we expect an outcome similar to 2020. It could be days before we reliably know a result.The same dynamics as 2020 are in play. Polls show a very close race. And while more voters are likely to show up in person this year, voting by mail is still expected to represent a substantial chunk of ballots cast this cycle. That’s because many states' rules automatically send mail-in ballots to those who voted by that method in the last election. And some recent news out of Georgia underscores the potential for a slower result. The state just adopted a rule requiring all its votes to be hand-counted.Now, this may not matter if either candidate has enough votes without Georgia to win the electoral college. But if Georgia is the deciding or tipping point state then a longer wait becomes possible. Per the 538 election forecast model, there’s about an 11 per cent chance that Georgia plays this role.So, bottom line, investors may have to be patient this November. It could take days, or weeks, to reliably project an election outcome, and therefore start seeing its market effects.Thanks for listening. If you enjoy the podcast, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

From stock price fluctuations to concerns about deflation, the reactions to the Fed rate cut have been varied. But we still need to keep an eye on labor data, says Mike Wilson, our CIO and Chief US Equity Strategist.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief US Equity Strategist. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about the Fed’s 50 basis point rate cut last week, and the impact on markets.It's Tuesday, Sept 24th at 11:30am in New York.So let’s get after it. As discussed last week, I thought that the best short-term case for equities was that the Fed could deliver a 50 basis point cut without prompting growth concerns. Chair Powell was able to thread the needle in this respect, and equities ultimately responded favorably. However, I also believe the labor data will be the most important factor in terms of how equities trade over the next three to six months. On that score, the next round of data will be forthcoming at the end of next week. In my view, that data will need to surprise on the upside to keep equity valuations at their currently elevated level. More specifically, the unemployment rate will need to decline and the payrolls above 140,000 with no negative revisions to prior months.  Meanwhile, I am also watching several other variables closely to determine the trajectory of growth. Earnings revision breadth, the best proxy for company guidance, continues to trend sideways for the overall S&P 500 and negatively for the Russell 2000 small cap index. Due to seasonal patterns, this variable is likely to face negative headwinds over the next month.Second, the ISM Purchasing Managers Index has yet to reaccelerate after almost two years of languishing. And finally, the Conference Board Leading Economic Indicator and Employment Trends remain in downward trends; this is typical of a later cycle environment.Bottom line, the Fed's larger than expected rate cut can buy more time for high quality stocks to remain expensive and even help lower quality cyclical stocks to find some support. The labor and other data now need to improve in order to justify these conditions though, through year end.It's also important to point out that the August budget deficit came in nearly $90 billion above forecasts, bringing the year-to-date deficit above $1.8 trillion. We think this fiscal policy has been positive for growth but has resulted in a crowding out within the private economy and financial markets. This is another reason why a recession is the worst-case scenario even though some argue a recession is better than high price levels or inflation for 80-90 per cent of Americans. A recession will undoubtedly bring debt deflation concerns to light, and once those begin, they are hard to reverse. The Fed understands this dynamic better than anyone as first illustrated in Ben Bernanke's famous speech in 2002 entitled “Deflation, Making Sure It Doesn’t Happen Here.” In that speech, he highlighted the tools the Fed could use to avoid deflation including coordinated monetary and fiscal policy.We note that gold continues to outperform most stocks including the high-quality S&P 500. Specifically, gold has rallied from just $300 at the time of Bernanke’s speech in 2002 to $2600 today. The purchasing power of US dollars has fallen much more than what conventional measures of inflation would suggest.As a result, gold, high-quality real estate, stocks and other inflation hedges have done very well. In fact, the newest fiat currency hedge, crypto, has done the best over the past decade. Meanwhile, lower quality cyclical assets like commodities, small cap stocks and commercial real estate have done poorly in both absolute and relative terms; and are losing serious value when adjusted for purchasing power.The bottom line, we expect this to continue in the short term until something happens to change investors' view about the sustainability of these policies. In order to reverse these trends, either organic growth in the private economy needs to reaccelerate and we’ll see a rotation back to the lower quality cyclical assets; or recession arrives, and we finish the cycle and reset all asset prices to levels from which a true broadening out can occur.Thanks for listening. If you enjoy the podcast, leave us a review wherever you listen, and share Thoughts on the Market with a friend or colleague today.

Our Global Chief Economist, Seth Carpenter, explains why, despite last week’s big Fed move, there’s still plenty of uncertainty in global markets and questions about how other central banks will respond. ----- Transcript -----Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist.Today, I'll be talking about the Fed meeting, where they cut rates for the first time in this cycle, and what it means for the economy around the world.It's Monday, September 23rd at 10am in New York.The Fed cut rates by 50 basis points; but we did not see a huge shift in its reaction function. Rather, the 50 basis points was to show a commitment to not falling behind the curve -- to use Chair Powell's words. From here, the most likely path, from my perspective, is a string of 25 basis point cuts. Powell has again demonstrated that the Fed can move gradually, or quickly, depending on perceptions of risk.But for now, judging from Powell, or other policy makers comments, the Fed still sees the economy as healthy in the labor market; as solid. But another payroll print of 100, 000 or softening in consumer spending, well, that would tip the balance. So, the market debate will continue to focus on the pace of rate cuts and the ultimate landing zone.Our baseline is a touch more front loaded than the dot plot would imply; with us expecting the funds rate to reach just below 3.5 per cent in the middle of next year, rather than the end of next year. The Fed's projections have declines in the target rate into 2026 and beyond, but I have to say the dispersion in the dots that they put up shows just how much consensus is yet to be built within the committee. And, as a result, the phrase data dependency, well, that's not a term that we want to drop from the lexicon anytime soon.The magnitudes of the changes differ, but a comparison that we have made often here is to the 1990s, and that cutting cycle eventually it paused as the economy stabilized and continued to grow. So, there are lots of options for where we go next.Globally, central banks will be adapting and reacting both to global financial conditions like this Fed rate cut, as well as their domestic outlook. Among emerging market economies, Brazil and Indonesia make for useful case studies. With an eye on defending its policy credibility and on market expectations, the central bank in Brazil hiked rates to 10-and-three-quarters per cent this week after a cutting cycle and then a long pause. A weaker currency is the external push, but strong domestic growth is the internal consideration and both of those imply some inflation risks.The Bank of Indonesia cut rates after a strong appreciation in the currency, which lowered the risk from inflations, and it really enabled them to change their footing.Now, for DM central banks, the 50 basis point cut really doesn't materially shift our expectations for what's going to happen. If we are right, and ultimately we get a string of 25 basis point cuts, there's little reason for other developed market central banks to really adjust what they're doing. In Europe, we're waiting for inflation data to confirm the slowdown after the softening of wages that we've seen. So, we have high conviction that there's a cut in September, and we expect another cut in December.Now, more cutting by the Fed might lead to a stronger Euro, which would reinforce that inflation trend, but I don't think it would be enough to really change the path and prompt more aggressive cutting from the ECB. After skipping a rate move in September, given all the question marks they still see about inflation in the UK, we think the Bank of England restarts their cuts in November.The split decision at this most recent meeting shows that the MPC is not making frequent adjustments to its plan based on small tweaks to the incoming data. And finally, for the Bank of Japan, we expect them to stay on hold until January. The meeting for the Bank of Japan was primarily about communication, and indeed, Governor Ueda's comments did not prompt the type of reaction that we saw at the July meeting. So, if we're right, and the Fed's path is mostly, like we think it will be, these other developed market central banks don't have to make big changes.So, the Fed didn't really fully recalibrate its outlook. Instead, what it did was signal a willingness, but just a willingness, to make large shifts; with no clear indication that the fundamental strategy has changed.The market implications seem like they could be clear. With the Fed easing, amid economic conditions that remain resilient, that should be positive for risk assets. But the Fed is also trying to prevent complacency, and I have to say, uncertainty is plentiful. If for no other reason, we've got an election coming up, and that makes forecasting what happens in 2025 very difficult.Thanks for listening. And if you enjoy this show, please leave us a review wherever you listen to podcasts and share Thoughts on the Market with a friend or colleague today.

Our Chief Latin American Equity Strategist explains how potential changes in Mexico’s regulatory approach could have implications for the country’s equity markets.----- Transcript -----Welcome to Thoughts on the Market. I’m Nikolaj Lippmann, Morgan Stanley’s Chief Latin American Equity Strategist. Today I’ll talk about Mexico’s recent judicial reform and its potential impact on equities market.It’s Friday, September 20, at 10am in Mexico City.Mexico has made significant changes to its judicial system. After winning two-thirds majority in both houses – enough to allow for constitutional changes – Mexico policymakers have embarked on a robust reform agenda. Their first stop is a comprehensive reform of the judicial branch, which aims at replacing roughly 2,000 senior judges including the entire Supreme Court. New judges will no longer be appointed but will now be elected by popular vote. This is practically unprecedented in a global context, and while the executive branch might still try to filter future candidates, this new system will likely create a real risk to checks and balances on the judicial branch as well as to expertise and procedure. Additional reforms, including the elimination of independent regulatory bodies, would likely compound these risks. The judicial reform could have a material impact on Mexican equities. So much so, that we think Mexico goes from being an investor favorite to a ‘show me’ story where investors are less likely to give the market the benefit of the doubt. This is likely to result in a derailing or lower set of multiples being paid by investors in Mexican equities or higher risk premium required to invest. Essentially, the judicial reforms could add fiscal, labor and concession/regulatory risk for Mexican companies, even though Mexico has deep manufacturing ecosystems, and has been well-positioned from the transition to [a] multipolar world. Just to give you a sense. Mexico has already sailed past China in terms of manufacturing exports to the United States, and are now approaching the levels of the entire European Union in terms of manufacturing export to the US. These new reforms will raise significant investor concerns, so much so that we’ve downgraded Mexican equities to underweight, a second downgrade since June. Mexican equities have sold off roughly 20 per cent in the past three months, in dollar terms. And we think the judicial reform may contribute to further decline. All in, we see significantly greater potential for negative outcomes than positive outcomes going forward.Looking ahead, we see three key challenges for Mexico: First, the new judicial structure would raise concerns about the independence of the judicial branch. Second, the United States-Mexico-Canada Agreement, the USMCA, is up for review in 2026, and Mexico's judicial reform could mean a much deeper revision. Mexico has committed to maintaining independent regulatory bodies for a number of areas, such as telecom, electricity, in competition. The judicial reform could complicate this commitment. Electricity is a key challenge for Mexico, and it requires immediate investments. Our nearshoring investment thesis stands, but the electricity-related challenges are becoming more pronounced, and they won’t be helped by investor concerns around the judicial reform. So all in, some businesses will be at greater risk from these developments. We expect technology, digitalization, real estate companies to be at the least level of risk, or the lowest level of risk. Domestic concessions could be at more risk. We will continue to bring you relevant updates as Mexico reforms unfold. Thank you for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us wherever you listen. It helps more people find the show.

Investors came away from Morgan Stanley’s recent Industrials Conference with a more optimistic outlook than they expected, based on perspectives including freight transportation’s momentum and AI’s impact on the growth of data centers.----- Transcript -----Michelle Weaver: Welcome to Thoughts on the Market. I'm Michelle Weaver, Morgan Stanley Research's U.S. Thematic Strategist.Ravi Shanker: I'm Ravi Shanker, Morgan Stanley's Freight Transportation and Airlines Analyst.Chris Snyder: And I'm Chris Snyder, the U.S. Industrial Analyst.Michelle Weaver: Today, we'll talk about key themes for Morgan Stanley's recently concluded industrials conference in Laguna Beach.It's Thursday, September 19th at 10am in New York.Last week, we were all out in Laguna Beach at the industrials conference. There were about 500 different industrials investors, along with 156 corporates, which gave us a pretty comprehensive read on what's going on in the industrial sector.Investor sentiment around industrials was pretty poor heading into the conference, and the overall tone of management, though, seemed better than feared in presentations.Chris, your coverage includes companies with exposure to a wide range of end markets. What did you learn about the cycle from your discussions with company management?Chris Snyder: Yeah, I think you categorized it well: consistent, largely unchanged, but better than feared. Morgan Stanley did a poll ahead of the conference. And only 5 percent of investors thought that the conference would be bullish for industrial risk sentiment. Coming out of the conference, 60 percent of industrial investors are bullish on risk sentiment into the end of the year. So, I think it kind of shows that sentiment was in a very bad place and ‘better than feared’ is the right way to categorize it.We've generally been surprised at the lack of optimism around the industrial cycle in the market. The industrial economy has been in contraction for almost two years now, and it seems like we're on the verge of a rate cut cycle, which has historically been a tailwind for the cycle.You know, in our coverage, business is driven by a combination of investments and then production of goods; and the companies we’re seeing real bifurcation on that. On the investment side -- and that's things like data center, new manufacturing facilities with all the US reshoring momentum -- that business remains strong. And on the production side of the house, that business remains soft. And that's generally in line with our call. We prefer CapEx exposure, particularly those that are tied into energy efficiency.Michelle Weaver: Great. That's really positive to hear that the investment side is still doing well. Ravi, your freight coverage is very macro as well -- in that the freight companies move all the stuff that other companies are making. How does demand from shippers look? And what are freight companies saying about the cycle?Ravi Shanker: Yeah, from a freight transportation perspective, I guess, no news was good news out in Laguna; largely because we have already started to see an improvement in the freight cycle, at the end of 1Q going into 2Q. And I think the market was just waiting to see if that would sustain through 3Q. The data has been supportive so far, and the good news was most of the trucking companies did validate the fact that we have seen a continuation of seasonality from 2Q into 3Q.And looking forward, they're also anticipating a fairly decent peak season, probably the most robust peak season we have had in two or three years. And I use the word robust on a relative basis because it's not going to be the greatest peak season ever. But certainly, better than we've had the last couple of years. But that momentum should continue into 2025.So, nobody really was high fiving out there. But certainly, noted the fact that we are seeing a continued improvement in the cycle; and that momentum should continue into next year.Michelle Weaver: One of Morgan Stanley Research's three key themes for the year is technology, diffusion and AI; and this theme came up repeatedly throughout the conference.Chris, some of your companies have significant exposure to data centers, which have seen a huge boost in demand from AI. What does the growth opportunity look like for Multi's names with exposure to data centers?Chris Snyder: Yeah, data center is a growth opportunity for my industrials’ coverage. And they primarily are driven by the investment side. How much data centers are we building? And they sell a lot of the equipment that goes into the data centers. And what we're seeing now is that there's a huge focus on energy efficiency within the data center. You know, obviously it helps improve their cost profile, but also as there's growing concerns around load growth and electricity allotment.And what that's doing is it's driving demand towards the high end of the spectrum, which is where our big public companies compete. You know, they're the ones that are always spending R&D and innovating and driving energy efficiency for the customer. So, we think there's a mix up opportunity behind it.In terms of growth rates, you know, most of the companies are talking to about 15 percent kind of plus as the growth rate going forward or where they are exposed. And the conference brought, you know, really positive updates. There was no talk of slowdown. And generally, it sounds like momentum remains firm and growth will continue.Michelle, what were some of the other ways companies discussed AI or how they're leveraging the technology?Michelle Weaver: Yeah. So, when I think about how companies have been adopting AI so far, not just within industrials, but within the broader market, it's largely been about things that are plug and play solutions; something like taking a chat bot, putting that on your website, and then you don't need as many customer service representatives.So, when I'm at these kind of events, I always like to listen for more unique or differentiated ways of adopting AI. And I heard about a really interesting case from a company that holds about half of the global market for luxury seating. Processing leather is a super important part of manufacturing seats and has typically been really labor intensive and skilled labor at that. But this company is using AI to scan cow hides to determine what the optimal use for them is, and then inventory them.Before that, a worker had to individually mark the leather for imperfections and then determine how to cut around that. So, I thought that was a pretty interesting use of AI.But now I want to turn over to the consumer exposed pockets of industrials. Discretionary spending has been slowing as multiple years of high prices have been weighing on consumers. But overall, I thought the commentary around the consumer at the conference seemed pretty mixed, and we saw a big divide between the high-end and low-end consumers.Ravi, what did you hear from the airlines around travel demand?Ravi Shanker: Unlike the transportation side where what we heard was fairly consistent with expectations, I think things were much better than expected on the airline side largely because the airlines came out and validated the fact that demand continues to remain very robust -- pretty much across the board. But as you mentioned, definitely at the high end, the premium traveler continues to travel.International is rebounding post Olympics. Corporate is normalizing as well, and some of the low-cost carriers did mention that they were seeing some weakness on the low-end consumer side. Although it was unclear to them if that was actual demand weakness or a function of too much capacity in the marketplace.But they did come out and validate that demand continues to remain very robust; and with capacity continuing to come out of the marketplace and be more balanced with demand, you have seen pricing inflect positive for all the airlines for the first time in several quarters. So definitely, a pretty supportive backdrop for airline demand. And that is going to show up in airline numbers in the third and fourth quarters as well, we think.Michelle Weaver: As someone who's been in the airports a lot recently, I can definitely feel that demand has held up well. Chris, some of your companies also sell consumer products. What does consumer demand look like in your space?Chris Snyder: I would say stable, but at soft levels. And I think a lot of the tailwinds that Ravi is seeing on the service side of the house in airlines is actually coming at the expense of my companies who sell consumer goods. You know, if you look at the consumer wallet share, service mix has not gotten back to the levels that we saw in 2019 and we think that will remain a headwind for goods purchasing going forward.Michelle Weaver: Ravi, Chris, thank you for taking the time to talk.Ravi Shanker: Thanks so much for having me.Chris Snyder: Thank you.Michelle Weaver: And to our listeners, thanks for tuning in. If you enjoy the show, please leave us a review wherever you listen to podcasts and share Thoughts on the Market with a friend or colleague today.

While the electoral impact of last week’s US presidential debate is unclear, our Global Head of Fixed Income and Thematic Research offers two guiding principles to navigate the markets during the election cycle.----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Global Head of Fixed Income and Thematic Research. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about takeaways from the US presidential campaign debate. It's Wednesday, September 18th at 10:30am in New York. Last week, Vice President Harris and Former President Trump met in Philadelphia for debate. Investor interest was high, and understandably so. As our Chief Economist Seth Carpenter has previously highlighted in his research, visibility remains low when it comes to the outlook for the US in 2025. That’s because the election could put the country on policy paths that take economic growth in different directions. And of course, the last presidential debate in June led to President Biden’s withdrawal, changing the race dramatically. So, any election-related event that could provide new information about the probability of different outcomes and the resulting policies is worth watching. But, as investors well know from tracking data releases, earnings, Fedspeak, and more, potential catalysts often remain just that – potential. For the moment, we’re putting last week’s debate in that category. Take its impact on outcome probabilities. It could move polls, but perhaps not enough for investors to view one candidate as the clear favorite. For weeks, the polls have been signaling an extremely tight race, with only a small pool of undecided voters. While debates in past campaigns have modestly strengthened a candidate’s standing in the polls, in this race any lead would likely remain within the margin of error. On policy, again we don’t think the debate taught us anything new. Candidates typically use these widely watched events to influence voters’ perceptions. The details of policies and their impact tend to take a back seat to assertions of principles and critiques of their opponents. This is what we saw last week. So if the debate provided little new information about the impact of the election on markets, what guidance can we offer? Here again we repeat two of our guiding principles for this election cycle. First, between now and Election Day, expect the economic cycle to drive markets. The high level of uncertainty and the lack of precedent for market behavior in the run-up to past elections suggest sticking to the cross-asset playbook in our mid-year outlook. In general, we prefer bonds to equities. While our economists continue to expect the US to avoid a recession, growth is slowing. That bodes better for bonds, where yields may track lower as the Fed eases, as opposed to equities, where earnings may be challenged as growth slows. Second, lean into market moves that election outcomes could accelerate. For several months, Matt Hornbach and our interest rate strategy team have been calling for a steeper yield curve, driven by lower yields in shorter-maturity bonds. They have been guided by our economists’ steadfast view that the Fed would start cutting rates this year as inflation eases. We doubt that policies in Democratic win scenarios would change this trend, and a Republican win could accelerate it in the near term, as higher tariffs would imply pressure on growth and possibly further Fed dovishness. Pricing that path could steepen the yield curve further. And of course, there’s still several weeks before the election to get smart on the economic and market impacts of a range of election outcomes. We’ll keep you updated here. Thanks for listening. If you enjoy the podcast, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.