Alle afleveringen
1.740 afleveringen, van nieuw naar oud
-
Andrew Sheets: Is the Fed Done Raising Rates?
25 augustus 2023 · 3 min
As the Fed meets this weekend for their annual summit at Jackson Hole, investors are most focused on whether rate hikes will continue and the state of the neutral interest rate. Lees meer
----- Transcript -----
Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Corporate Credit Research at Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, August 25th at 2 p.m. in London.
The eyes of the market will be on Wyoming this weekend, where the Federal Reserve is holding its annual summit at Jackson Hole. While many topics will be discussed, investors are particularly focused on two: is the Fed done raising interest rates? And is the so-called neutral rate of interest higher than initially thought?
The Federal Reserve has been raising interest rates at the fastest pace in 40 years to try to get rates to a level where economic activity starts to slow, easing inflationary pressure. But the level of interest rate that achieves this is genuinely uncertain, even to the experts at the Fed. We believe that they'll feel increasingly comfortable that rates have now hit this level. And in turn, Morgan Stanley's economists do not expect further rate hikes in this cycle. A few things drive our thinking.
First, those inflationary pressures are easing. Two key measures of underlying inflation, core PCE and core CPI, slowed sharply in the most recent reading. Leading indicators for car prices and rental costs, which have been big drivers of high inflation last year, now point in the opposite direction. Bank loan growth is slowing and the torrid pace of U.S. job growth is also moderating, two other signs that interest rates are already restrictive.
Historically, the Fed being done raising interest rates has been supportive for markets. But the relationship with high grade bonds is especially notable. Since 1984, there have been …
-
Special: Access & Opportunity Podcast
24 augustus 2023 · 3 min
Inspiring change through informed and inclusive innovation. On Access & Opportunity, host Carla Harris, Senior Client Advisor at Morgan Stanley, explores the lived experiences of the people who face systemic inequities and sits down with founders, investors, developers, activists, and educators who are building a more equitable future today. Lees meer
-
Michael Zezas: What to Expect from Presidential Debates
23 augustus 2023 · 2 min
As debate season begins among Republican presidential candidates, can investors hope to glean market insights for 2025 and beyond? Lees meer
----- Transcript -----
Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income and Thematic Research for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the impact of presidential debates on markets. It's Wednesday, August 23rd at 10 a.m. in New York.
Several candidates seeking the Republican Party's nomination for president take the stage in the debate tonight. Coverage of the event in traditional and financial media has escalated in anticipation of the debate. And while it's a good idea for voters looking to understand the candidates better and make an informed choice to tune in to the debate, for those tuning in looking for something that might guide their perception of how the 2024 election might impact financial markets, our guidance is this: lower your expectations.
This debate, the first among many, is likely to tell us a lot less about who the nominee will be than traditional polls. Those polls show former President Trump with solid support that surpasses his main rivals. And while, of course, there's plenty of time for that to change, debates this early in the process haven't historically been reliable indicators of changes in support that may follow. This may be even more true this time around, since President Trump is not attending this debate. And so it will be more difficult to get a read as to which candidates might be better suited than others to make a more persuasive argument to Republican voters than the former president.
Additionally, debates this early in the process generally tell us little about potential policy changes that could result from any one of these candidates ultimately being elected in 2024. Stock and corporate bond investors, in theory, might be very interested in what these candidates have to say about a variety of …
-
Special Encore: Vishy Tirupattur: Corporate Credit Risks Remain
23 augustus 2023 · 4 min
Original Release on August, 1st 2023: While the U.S. economy appears on track to avoid a recession, investors should still consider the implications of an upcoming wave of maturities in corporate credit. Lees meer
----- Transcript -----
Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist. Along with my colleagues bringing you a variety of perspectives, I will be talking about potential risk to the economy. It's Tuesday, August 1st at 10 a.m. in New York.
Another FOMC meeting came and went. To nobody's surprise the Fed hiked the target Fed funds rate by 25 basis points. Beyond the hike, the July FOMC statement had nearly no changes. While data on inflation and jobs are moving in the right direction, the Fed remains far from its 2% inflation goal. That said, Fed Chair Powell stressed that the Fed is closer to its destination, that monetary policies is in restrictive territory and is likely to stay there for some time. Broadly, the outcome of the market was in line with our economists expectation that the federal funds rate has peaked, will remain unchanged for an extended period, and the first 25 basis point cut will be delivered in March 2024.
Powell sounded more confident in a soft landing, citing the gradual adjustment in the labor market and noting that despite 525 basis point policy tightening, the unemployment rate remains at the same level it was pre-COVID. The fact that the Fed has been able to bring inflation down without a meaningful rise in unemployment, he described as quote unquote "blessing". He noted that the Fed staff are no longer forecasting a recession, given the resilience in the economy.
This specter of soft landing, meaning a recession is not imminent, is something our economists have been calling for some time. This has now become more broadly accepted across market participants, albeit somewhat reluctantly. The obvious question, therefore, is what are the risks ahead and what are the paths for su…
-
Special Encore: Global Autos: Are China’s Electric Vehicles Reshaping the Market?
21 augustus 2023 · 10 min
Original Release on July, 27th 2023: With higher quality and lower costs, China’s electric vehicles could lead a shift in the global auto industry. Lees meer
----- Transcript -----
Adam Jonas: Welcome to Thoughts on the Market. I'm Adam Jonas, Head of Morgan Stanley's Global Autos and Share Mobility Team.
Tim Hsaio: And Tim Hsaio Greater China Auto Analyst.
Adam Jonas: And on this special episode of Thoughts on the Market, we're going to discuss how China Electric vehicles are reshaping the global auto market. It's Thursday, July 27th at 8 a.m. in New York.
Tim Hsaio: And 8 p.m in Hong Kong.
Adam Jonas: For decades, global autos have been dominated by established, developed market brands with little focus on electric vehicles or EVs, particularly for the mass market. As things stand today, affordable EVs are few and far between, and this undersupply presents a major global challenge. At Morgan Stanley Equity Research, we think the auto industry will undergo a major reshuffling in the next decade as affordable EVs from emerging markets capture significant global market share. Tim, you believe China made EVs will be at the center of this upcoming shakeup of the global auto industry, are we at an inflection point and how did we get here?
Tim Hsaio: Thanks, Adam. Yeah, we are definitely at a very critical inflection point at the moment. Firstly, since last year, as you may notice that China has outsized Germany car export and soon surpassed Japan in the first half of this year as the world's largest auto exporter. So now we believe China made EVs infiltrating the West, challenging their global peers, backed by not just cheaper prices but the improving variety and quality. And separately, we believe that affordability remains the key mitigating factors to global EV adoption, as Rastan brands have been slow to advance their EV strategy for their mass market. A lack of affordable models actually challenged global adoption, but we believe that that creates a great opportunity…
-
Andrew Sheets: The Positive Side of Higher Rates
18 augustus 2023 · 4 min
Bond yields have seen a surprising increase as a result of real interest rates, which could mean both good and bad news for other asset types. Lees meer
----- Transcript -----
Welcome to Thoughts on the Market. I'm Andrew Sheets, a Senior Fixed Income Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, August 18th at 2 p.m. in London.
August is a month in financial markets that is often all or nothing. Sometimes it's quiet, a self-reinforcing state where investors desire to recharge and enjoy the nicer weather means fewer deals and lower activity, reinforcing the desire to enjoy the nicer weather.
But there's a flip side. The fact that so many investors' are away in August can also amplify market moves, especially if worries mount, and we see that in the historical data. August has seen the largest average rise in stock market volatility of any month, if we go back to 2010, where it's seen higher volatility in 10 out of the last 14 years. So far, this August is off to another volatile start.
The culprits are plenty. Equity markets have been having a great run based almost entirely on expanding valuations, an unusual occurrence, as Lisa Shalett, the CIO of Morgan Stanley Wealth Management and I discussed on this program last week. Data in China has been weaker than expected and across the U.S., Europe and Japan, bond yields have been rising significantly.
The bond move is especially notable given how it's been happening. Yields aren't rising because of inflation, as last week's U.S. consumer price inflation reading was a little better than expected, and longer run expectations of U.S. inflation are actually lower on the month. The market also has increased its expectation of further rate hikes from the Federal Reserve or the ECB, although it has added another expected hike for the Bank of England.
Rather, the…
-
Chetan Ahya: Can China Avoid a Lost Decade?
17 augustus 2023 · 4 min
Although China’s economy faces challenges in terms of debt, demographics and deflation, the right policy approach could ward off a debt deflation loop. Lees meer
----- Transcript -----
Welcome to Thoughts on the Market. I'm Chetan Ahya, Morgan Stanley's Chief Asia Economist. Along with my colleagues, bringing you a variety of perspectives, today I'll be discussing the journey ahead for China as it faces the triple challenge of debt, demographics and deflation. It's Thursday, August 17, at 9 a.m. in Hong Kong.
Before we get into China, I want to take you back to the oft-told tale from the 1990s when Japan experienced what we now refer to as the ‘Lost Decade.’ During this period, the combination of economic stagnation and price deflation transformed a bustling economy in the 1980s, into an economy that grew at a little more than 1% annually over a decade.
Fast forward to today, where China is confronted with the triple challenge of debt, demographics and deflation, what we are calling the 3Ds. As a result, many investors are now concerned that China will be stuck in a debt deflation loop, just like Japan was in the 1990s.
But is China better placed to manage these headwinds even though the risks of falling into debt deflation loop remain high? We think at the starting point, the answer is yes, but with a few historical lessons that I'll get into in a moment.
For context, China compares better with the Japan of the 1990s in the following four aspects. First, asset prices in China have not run up as much. Second, per capita incomes are still lower in China, implying a higher potential growth runway. Third, unlike Japan, China has not experienced a big currency appreciation shock.
And finally, perhaps the most crucial difference is policy setting. Back in the 90s, the Bank of Japan kept real interest rates higher than real GDP growth between 1991 and 1995. But in contrast to Japan, China's real rates are below real GDP growth currently.
To explain, historically, when econ…
-
Michael Zezas: The Risks of a U.S. Government Shutdown
16 augustus 2023 · 3 min
Although Congress has avoided previous shutdowns with last-minute resolutions, investors shouldn’t get complacent in assuming the same outcome again in the fall. Lees meer
----- Transcript -----
Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income and Thematic Research for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about what investors need to know about the risk of the U.S. government shutdown. It's Wednesday, August 16th at 10 a.m. in New York.
Congress is in recess until September. When they return, they'll have just a few weeks to pass several funding bills in order to avoid a government shutdown. And while it certainly seems like dramatic deadlines and last minute resolutions are all too common in D.C. these days, investors shouldn't get complacent on this one.
Let's start with why investors should take seriously the risk of a government shutdown, which happens when Congress fails to authorize spending to keep most government functions open. When that happens, there are both direct economic impacts, such as government workers and contractors not getting paid on time and indirect impacts, such as the economic activity of those workers and contractors being crimped given that they're going without pay. In the 2019 shutdown, for example, 800,000 government workers were affected by this disruption. Our economists estimate that for every week the government is shut down, we should expect a 0.05% point reduction in GDP, with that impact compounding and increasing over time. While that's not a huge number, in the context of an already softening economic growth and profit outlook for stocks, it doesn't help.
So if a shutdown presents economic downside, why is that even a possibility? Here's four reasons why. First, Congress faces several challenging negotiations in September, which elevates the complexity of the legislative process ahead of the shutdown deadline. Second, there are disagreem…
-
Jonathan Garner: A Bullish Turn for India
15 augustus 2023 · 5 min
With the rupee appreciating, manufacturing and services in a consistent rally and demographic trends on an upswing, India may be better poised for a long-term boom than other markets in Asia. Lees meer
----- Transcript -----
Welcome to Thoughts on the Market. I'm Jonathan Garner, Chief Asia and Emerging Market Equity Strategist at Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, today I'll be talking about why India is now our preferred market in Asian equities. It's Tuesday, August 15th at 8am in Singapore.
Before we dive into the details of some important changes in view that we've recently published, let's take a step back and set the scene for today's changes in a broader thematic context.
Firstly, a reminder that we think we began a new bull market in Asia and EM last October. And from the trough in late October, the MSCI Emerging Markets Index is up around 25%. So the changes we're making are about identifying leadership at the market level as we transition towards a midcycle environment. Secondly, we continue to prefer Japan within our coverage, which remains Morgan Stanley's top pick in global equities but is a developed market.
In terms of the changes that we've made on the downgrades side, for Taiwan, it has led the way off the bottom, rising almost 40% since last October. It's a market dominated by technology and export earnings, where the structural trend in return on equity has been positive in recent years as those firms have succeeded globally. Our upgrade last October was a simple cyclical story of distressed valuations at a time of depressed sentiment about underlying demand trends in semiconductors. The situation is very different today. Valuations are back to mid-cycle levels, and while demand remains weak in key areas such as smartphones and conventional cloud, a path to recovery is becoming more evident. Moreover, as has been the case in many prior cycles, a new end use category AI service is generating significant e…
-
Mike Wilson: Fiscal Policy Continues to Drive U.S. Economic and Market Performance
14 augustus 2023 · 4 min
While the Fed fights generationally high inflation, the U.S. economy continues to grow, supported by high levels of spending. This has affected both the bond and equity markets. Lees meer
----- Transcript -----
Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, August 14, at 11 a.m. in New York. So let's get after it.
At the trough of the pandemic recession in April 2020, we first introduced our thesis that the health care emergency would usher in a new era of fiscal policy. The result would be higher inflation than monetary policy was able to attain on its own over the prior decade. In the first phase of this new policy regime, we referred to it as helicopter money, as described by Milton Friedman in the early 1970s and then highlighted by Ben Bernanke after the tech bubble as a policy that could always be employed to avoid a deflationary bust. Handing out checks to people is a fairly radical policy, however, the COVID pandemic was the perfect emergency to try it.
The policy shift worked so well to keep the economy afloat during the lockdowns that the government decided to double down on the strategy by doing an additional $3 trillion of direct fiscal spending in the first quarter of 2021. This excessive fiscal policy is why money supply growth increased to a record level at 25% year-over-year in early 2021, and why we finally got the inflation central banks had been trying so hard to achieve post the great financial crisis. After the financial crisis, the velocity of money collapsed, while the Fed's balance sheet ballooned to levels never seen before. The reason we didn't get inflation in that initial episode of quantitative easing is because the money created remained trapped in bank reserves rather than in a real economy where it could drive e…
-
U.S. Equities: Valuations Still Matter
12 augustus 2023 · 10 min
While the Fed navigates a soft landing for the U.S. economy and stock valuations remain high, how can investors navigate the risks and rewards of a surprisingly strong equity market? Lisa Shalett is Morgan Stanley Wealth Management’s Chief Investment Officer. She is not a member of Morgan Stanley Research. Lees meer
----- Transcript -----
Andrew Sheets: Welcome to Thoughts in the Market. I'm Andrew Sheets, Fixed Income Strategist at Morgan Stanley
.
Lisa Shalett: And I'm Lisa Shalett, Chief Investment Officer for Morgan Stanley Wealth Management.
Andrew Sheets: And today on the podcast, we'll be discussing what's been happening year to date in markets and what might lie ahead. It's Friday, August 11th at 1 p.m. in London.
Lisa Shalett: And it's 8am here in New York City.
Andrew Sheets: So, Lisa, it's great to have you here. I think it's safe to say that as a strategy group, we at Morgan Stanley have been cautious on this year. But I also think this is a pretty remarkable year. As you look back at your experience with investing, can you kind of help put 2023 in context of just how unusual and maybe surprising this year has been?
Lisa Shalett: You know, I think one of the the key attributes of 2023 is, quite frankly, not only the extraordinarily low odds that history would put on the United States Federal Reserve being able to, quote unquote, thread the needle and deliver what appears to be an economic soft landing where the vast and most rapid increase in rates alongside quantitative tightening has exacted essentially no toll on the unemployment rate in the United States or, quite frankly, average economic vigor. United States GDP in the second quarter of this year looked to accelerate from the first quarter and came in at a real rate of 2.4%, which most folks would probably describe as average to slightly above average in terms of the long run real growth of the US economy over the last decade. So, you know, in many ways this was such a low odds event just from the j…
-
Pharmaceuticals: The Investment Opportunity in Obesity Treatment
10 augustus 2023 · 7 min
A recent landmark study around weight-loss medicine could spark near-term growth opportunities in pharmaceuticals. Lees meer
----- Transcript -----
Mark Purcell: Welcome to Thoughts on the Market. I'm Mark Purcell, Head of Morgan Stanley's European Pharmaceuticals Team.
Terence Flynn: And I'm Terence Flynn, Head of the U.S. Biopharma Team.
Mark Purcell: And on this special episode of Thoughts on the Market, we'll give you an update on the global obesity challenge. It's Thursday, the 10th of August, and it's 1 p.m. in London.
Terence Flynn: And 8 a.m. in New York.
Terence Flynn: Now, a year ago, we came on the show to discuss our views on the global obesity challenge, and the problem has since received significant media attention. We believe that the narrative around obesity has indeed changed, with a more empathetic media tone, exponential social media growth and increased recognition across health care professionals and policymakers. Mark, what exactly happened over the last year?
Mark Purcell: Well, Terence I mean the uptake of obesity medicines in the US has been much stronger than we anticipated. In fact, obesity drug demand has outstripped supply, as you said, driven by social media activity, but also a rapid expansion in reimbursement. When we look back, about 12 million individuals suffering with obesity were covered by insurance and employee opt-ins for the first generation of these appetite suppressing medicines. For newer, higher efficacy GLP-1 medicines, about 40 million lives are covered, and that is more than the estimated number of individuals living with diabetes in the US, which is projected to be about 37 million.
Terence Flynn: Great. Thanks, Mark. Now the greater focus on weight management has spilled over into an increasingly weight centric approach to treating diabetes. What changes are you seeing and how are they impacting the industry?
Mark Purcell: Terence you're absolutely right. Look, for many years, treatment guidelines for diabetes focuse…
-
Michael Zezas: The Impact of New Investment Limitations in China
9 augustus 2023 · 2 min
Forthcoming U.S. restrictions on some tech investments in China may present new opportunities as companies adapt to these constraints. Lees meer
----- Transcript -----
Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income and Thematic Research for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about developments in the US-China economic relationship. It's Wednesday, August 9th at 10 a.m. in New York.
News this week broke that the U.S. government is close to finalizing rules that would limit U.S. investment into China related to cutting edge tech sectors, such as quantum computing and artificial intelligence. The long awaited move, which we've discussed many times on this podcast, is yet another sign that the rewiring of the global economic system continues, transitioning from one of globalization to that of a multipolar world.
But when news breaks like this, it's helpful to remember that the headlines can sound worse than the reality. Yes, it's likely that the global economy, and therefore markets, would be better off if the U.S. and China could find a way to deepen their economic ties, but the fraying of those ties need not be a substantial negative either. And these new outbound investment restrictions are a great example of that point.
The proposed rule will, reportedly, restrict investment in companies who derive more than half their revenue from the sensitive technologies in question. Effectively, that means the U.S. will mostly be concerned with U.S. investors not funding development of new technology through startups. It could potentially leave the door open for more traditional forms of U.S. investment into China, namely through working with larger companies on market access and supply chain solutions.
So while many companies are still likely to seek diversification away from China for their supply chains, they still have the ability to do this over time, as opposed to an abrupt decou…
-
Social Investing: The Future of Sustainability
8 augustus 2023 · 10 min
The profound demographic changes underway in countries around the world will require innovative, socially focused solutions in sectors including health care, finance and infrastructure. Lees meer
----- Transcript -----
Stephen Byrd: Welcome to Thoughts on the Market. I'm Stephen Bryd, Morgan Stanley's Global Head of Sustainability Research.
Mike Canfield: And I'm Mike Camfield, Head of EMEA Sustainability Research.
Stephen Byrd: On this special episode of the podcast, we'll discuss the social factors within the environmental, social and governance framework, or ESG, as a source of compelling opportunities for investors. It's Tuesday, August 8th, at 10 a.m. in New York.
Mike Canfield: And 3 p.m. in London.
Stephen Byrd: At Morgan Stanley Research. We believe that investing in social impact is critical to addressing some of the most pressing challenges facing our world today, such as inequality, poverty, lack of access to health care and education, and the repercussions of climate change. Traditional methods like philanthropy and government aid are a piece of the puzzle, but alone they can't address with the breadth and scale of these issues. So, Mike, looking back over the last couple of decades, investors have sometimes struggled with the social component of ESG investing. Some of the main challenges have been around data availability, the potential for social washing and the capacity to influence systemic change. How are market views on social investing changing right now, and what's driving this shift?
Mike Canfield: It has historically been quite easy for investors to dismiss social, it's too subjective, too hard to measure, overly qualitative, and perhaps not even material in moving share prices. Increasingly, we do find investors recognize the vast and intractable social problems we face, whether that's structural shifts in workforces with countries like Korea, Japan and large parts of Europe projecting working age population decline by double digit percentage in…
-
U.S Housing: U.S Housing Market Remains Tight for Buyers
7 augustus 2023 · 6 min
The residential housing market continues to face limited inventory, low affordability and high mortgage rates, but the worst may have passed. Lees meer
----- Transcript -----
Michelle Weaver: Welcome to Thoughts on the Market. I'm Michelle Weaver from the Morgan Stanley U.S. Equity Strategy Team.
Jim Egan: And I'm Jim Egan, Co-Head of U.S. Securities Products Research.
Michelle Weaver: On this special episode of the podcast, we'll discuss the state of the housing market. It's Monday, August 7th at 10 a.m. in New York.
Michelle Weaver: We recently did a deep dive into the global housing market and found that cyclical housing headwinds are significant but approaching a peak globally. And there are a few important things to keep in mind when thinking about this housing cycle. First is that higher interest rates and high home prices have kept affordability low. Second, housing is undersupplied in most economies. And third, there is a big gap between new and existing mortgages. Jim, can you start by talking us through how the structure of U.S. mortgages are different from what's common in other parts of the world?
Jim Egan: Absolutely. So the structure of various mortgage markets has important implications for the pass through of monetary policy changes. And average mortgage terms vary significantly across the globe, from roughly 70% adjustable rate in Australia on one end to nearly all 30 year fixed rate mortgages here in the United States. Though we would say the duration has generally lengthened post the great financial crisis for most economies. Longer duration mortgages lower the sensitivity of housing markets to the policy rate, both in terms of timing and cyclicality. But for the U.S., that 30 year fixed rate, fully amortizing mortgage that's freely repayable at any point in time with no penalty to the borrower, that's a unique feature for our mortgage market. And it's something that's made possible by the fact that roughly 2/3 of that $13 trillion mortgage market is…
-
Andrew Sheets: Why Are Rates Up and Stocks Down?
4 augustus 2023 · 3 min
Moves by the Bank of Japan, the downgrade of the U.S. credit rating and new economic data may all have contributed to a spike in bond yields and fall in stock prices. Lees meer
----- Transcript -----
Welcome to Thoughts in the Market. I'm Andrew Sheets, Fixed Income Strategist for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, August 4th at 2 p.m. in London.
After a placid July, August has opened with a bout of volatility. In one sense, this isn't unusual. July is historically one of the best months of the year for global equity performance, August and September are two of the worst.
But the way markets have weakened has been more striking. Long term bond yields rose sharply this week, with the U.S. 30 year bond yield rising 27 basis points over the course of the last five days. Long term rates in the UK and Germany also rose sharply. Equity markets fell.
Those facts are clear and indisputable. But why interest rates rose so much, and whether they're responsible for equity weakness? That, ladies and gentlemen of the jury, is a lot less clear.
Indeed, there's more than one driver of last week's events. Maybe it's the Bank of Japan, which late last week raised the effective cap on Japanese government bond yields, which went on to rise sharply over the course of this week. Maybe it's the Fitch rating agency, which on Tuesday downgraded the credit rating of the United States by one notch to AA+. And maybe it's the US economic data, which has been quite strong, something that usually corresponds to higher rates.
There's also the way that yields have risen. While long term U.S. interest rates rose sharply, shorter two year yields barely budged over the last week and in the UK and Germany, those two year yields actually fell. The large move higher in U.S. rates has also occurred while the market's actually lowered its assumpt…
-
Ron Kamdem: ‘Bifurcation’ in Global Office Real Estate Markets
3 augustus 2023 · 4 min
While rate hikes and work from home are depressing office real estate in the U.S., the market is vast globally, and there are clear differences across regions and asset types, ranging from occupancy to design to financing. Lees meer
----- Transcript -----
Welcome to Thoughts on the Market. I'm Ron Kamdem, Head of Morgan Stanley's U.S. Real Estate Investment Trust and Commercial Real Estate Research. Today, I'll be talking about our outlook for the future of the global office real estate market. It's Thursday, August 3rd at 10 a.m. in New York.
There is more than 6 billion square feet of office space across the globe with value of more than 4 trillion U.S. dollars. Within this vast market, there are clear differences across the regions, ranging from occupancy to design to financing.
In the U.S., office real estate fundamentals this cycle appear worse than they were during the great financial crisis of 2008 in terms of occupancy, subleasing activity and office utilization. In fact, overall, U.S. office utilization seems to be stalling at 20 to 55% compared to other regional markets in the 60 to 80% range. This trend will likely remain in place as key U.S. tenants are looking to reduce office space by about 10% over the next three years. Work from home and hybrid arrangements are the biggest drivers, particularly with business services and technology focused firms on the West Coast. In addition, sharp rate hikes and regional bank weakness have driven up loan-to-value ratios in the U.S. versus global peers.
Looking at other countries, Australia and Mexico may be having similar problems as far as work from home is concerned, but average loan-to-value ratios are much lower, which lenders typically consider a good sign. Mainland China is unique among our coverage markets for having declining rates. Hong Kong seems to be the most undervalued and closer to bottoming, and we prefer it over Singapore, Japan and Australia. In Latin America, we remain on the sidelines. Despite the i…
-
Michael Zezas: How Will the U.S. Credit Downgrade Affect Markets?
3 augustus 2023 · 3 min
The recent downgrade to Fitch's U.S. credit rating should have less of an impact on demand for bonds than the ongoing trajectory of inflation. Lees meer
----- Transcript -----
Welcome to the Thoughts on the Market. I'm Michael Zezas, Global head of Fixed Income and Thematic Research for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the impact of the U.S. downgrade to bond markets. It's Wednesday, August 2nd at 11 a.m. in New York.
Yesterday, one of the three main rating agencies, Fitch, downgraded the U.S's credit rating to AA+ from AAA. The U.S. now only has one AAA rating left. Fitch attributed the change to the US's growing debt burden and a, quote, "erosion of governance", unquote, specifically referring to debt ceiling standoffs over the past decade as a cause for concern. The tone of this language may understandably elicit concern from investors, but practically speaking, does it actually matter? In our view, in the short term, probably not.
First off, the downgrade doesn't communicate anything investors didn't already know about the level and trajectory of U.S. debt and deficits. Second, it doesn't tell us anything forward looking about arguably the biggest factor influencing whether or not investors want to own bonds at their current prices, inflation. Third, a ratings downgrade doesn't appear to trigger any structural change in bond demand.
Unpacking that last point a bit more, let's look at the main holders of U.S. Treasuries, the Fed, banks, overseas holders and households. The Fed is under no obligation to adjust Treasury holdings based on credit ratings. It's a similar situation for banks whose incentive to own treasuries is based on risk weightings determined by U.S. regulators, we view as very unlikely to adjust regulations to align with a ratings opinion they likely don't agree with.
Overseas holders typically own treasuries because they have U.S. dollars from doing business with U.S. customers, a…
-
Vishy Tirupattur: Corporate Credit Risks Remain
1 augustus 2023 · 3 min
While the U.S. economy appears on track to avoid a recession, investors should still consider the implications of an upcoming wave of maturities in corporate credit. Lees meer
----- Transcript -----
Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist. Along with my colleagues bringing you a variety of perspectives, I will be talking about potential risk to the economy. It's Tuesday, August 1st at 10 a.m. in New York.
Another FOMC meeting came and went. To nobody's surprise the Fed hiked the target Fed funds rate by 25 basis points. Beyond the hike, the July FOMC statement had nearly no changes. While data on inflation and jobs are moving in the right direction, the Fed remains far from its 2% inflation goal. That said, Fed Chair Powell stressed that the Fed is closer to its destination, that monetary policies is in restrictive territory and is likely to stay there for some time. Broadly, the outcome of the market was in line with our economists expectation that the federal funds rate has peaked, will remain unchanged for an extended period, and the first 25 basis point cut will be delivered in March 2024.
Powell sounded more confident in a soft landing, citing the gradual adjustment in the labor market and noting that despite 525 basis point policy tightening, the unemployment rate remains at the same level it was pre-COVID. The fact that the Fed has been able to bring inflation down without a meaningful rise in unemployment, he described as quote unquote "blessing". He noted that the Fed staff are no longer forecasting a recession, given the resilience in the economy.
This specter of soft landing, meaning a recession is not imminent, is something our economists have been calling for some time. This has now become more broadly accepted across market participants, albeit somewhat reluctantly. The obvious question, therefore, is what are the risks ahead and what are the paths for such risks to materialize?
One such pot…
-
Mike Wilson: A New Cyclical Upturn?
31 juli 2023 · 4 min
With uncertainty around the effects of new central bank policy, investors should be on the lookout for sales growth, cost cutting and sectors that might be turning a corner on performance. Lees meer
----- Transcript -----
Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, July 31st, 11 a.m. in New York. So let's get after it.
This past week was an extremely busy one for global central banks, with the Fed and European Central Bank raising interest rates again by 25 basis points, while leaving the door open to either more hikes or pausing indefinitely. They remain data dependent. However, the biggest change may have come from the Bank of Japan. More specifically, the Bank of Japan decided to get the ball rolling on ending its long standing policy of yield curve control, a policy under which it maintains a cap on interest rates across the curve. This is an important pivot in our view, as it signals the Bank of Japan's willingness to join the fight against inflation. In short, it's incrementally hawkish for global bond markets.
For U.S. equity investors, the main focus has been on the Fed getting closer to the end of its tightening campaign. The key question from investors is whether that means the Fed has orchestrated a soft landing or if a recession is unavoidable. While many investors remain skeptical of the soft landing outcome, equity markets have traded so well this year that these same investors have been swayed into thinking a soft landing is now the highest probability outcome. We believe equity markets are in a classic policy driven late cycle rally. Furthermore, the excitement over a Fed pause has been supported by very strong fiscal impulse and a still supportive global liquidity backdrop, even with central banks tightening. The latest exam…
-
Andrew Sheets: Unexpected Behavior in Markets
28 juli 2023 · 3 min
Chief Cross-Asset Strategist Andrew Sheets explains why it’s increasingly more favorable to be a lender than an asset owner. Lees meer
----- Transcript -----
Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, July 28th at 2 p.m. in London.
Markets have been stronger than we expected. Some of the story is straight forward, some of it is not. Indeed across asset classes, the capital structure increasingly looks upside down.
Our investment strategy has been based on the assumption that strong developed market growth was set to slow sharply as post-COVID stimulus waned and policy tightened at the fastest pace in 40 years. Sharp slowing, from an elevated base, has often rewarded more defensive investment positioning.
But our assumption about this growth backdrop has simply been wrong. Growth has been good, with the U.S. printing yet another set of better than expected economic data this week. 20 years from now, an investor looking back on the first half of 2023 might find nothing particularly out of place. The economic data was good and surprisingly so, stocks, especially more cyclical ones, outperform bonds.
Yet that straightforward story has happened alongside something more unusual. Across markets, we can observe a capital structure, that is how much investors are expected to earn as the owner of an asset, a company, an office building and so on, relative to being the lender to the asset. The lender should get a lower return since they're taking less risk, and over the last decade, very low borrowing rates have meant that that very much is the case.
But it's been shifting. To varying degrees, the capital structure now looks almost upside down, with high yields on debt relative to more junior exposure, or the yield on the underlying asset. …
-
Global Autos: Are China’s Electric Vehicles Reshaping the Market?
28 juli 2023 · 10 min
With higher quality and lower costs, China’s electric vehicles could lead a shift in the global auto industry. Lees meer
----- Transcript -----
Adam Jonas: Welcome to Thoughts on the Market. I'm Adam Jonas, Head of Morgan Stanley's Global Autos and Share Mobility Team.
Tim Hsaio: And Tim Hsaio Greater China Auto Analyst.
Adam Jonas: And on this special episode of Thoughts on the Market, we're going to discuss how China Electric vehicles are reshaping the global auto market. It's Thursday, July 27th at 8 a.m. in New York.
Tim Hsaio: And 8 p.m in Hong Kong.
Adam Jonas: For decades, global autos have been dominated by established, developed market brands with little focus on electric vehicles or EVs, particularly for the mass market. As things stand today, affordable EVs are few and far between, and this undersupply presents a major global challenge. At Morgan Stanley Equity Research, we think the auto industry will undergo a major reshuffling in the next decade as affordable EVs from emerging markets capture significant global market share. Tim, you believe China made EVs will be at the center of this upcoming shakeup of the global auto industry, are we at an inflection point and how did we get here?
Tim Hsaio: Thanks, Adam. Yeah, we are definitely at a very critical inflection point at the moment. Firstly, since last year, as you may notice that China has outsized Germany car export and soon surpassed Japan in the first half of this year as the world's largest auto exporter. So now we believe China made EVs infiltrating the West, challenging their global peers, backed by not just cheaper prices but the improving variety and quality. And separately, we believe that affordability remains the key mitigating factors to global EV adoption, as Rastan brands have been slow to advance their EV strategy for their mass market. A lack of affordable models actually challenged global adoption, but we believe that that creates a great opportunity to EV from China where a lot of affo…
-
Michael Zezas: Elections and Their Influence on Markets
26 juli 2023 · 3 min
Investors are questioning what new policy changes the 2024 election might bring, how the changes could affect markets and when they should start paying attention. Lees meer
----- Transcript -----
Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed-Income and Thematic Research for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about what investors need to know about the 2024 U.S. election. It's Wednesday, July 26th at 11 a.m. in New York.
As the press starts to focus more and more on the 2024 election, so have our clients leading many questions to come our way about who we think will be the next president and what we think they might do that could influence markets. As listeners of this podcast are surely aware, here at Morgan Stanley Research, we obviously care a great deal about elections and their consequences for markets. So then you might be surprised to know that our response so far to 2024 election questions has been, 'Nothing to see here, at least not yet'.
There's two reasons behind this thinking. First, there's no data out there that can tell us much about what the election outcome will be. Polls are, in our view, better predictive tools and they've recently gotten credit for, but polls taken today about presidential candidates over a year away from the election have no track record of predicting anything. The same is true for polls about who the challenging party's nominee will be. And modern U.S. electoral history is full of examples where party nomination frontrunners have either faded or won the nomination, so there's no pattern to rely on there. In short, if you're interested in knowing who will win the election, there's not much to do but watch and wait.
Second, the policy consequences of the election that might matter to markets could evolve greatly over the next 12 months in unpredictable ways. For example, in 2019, the 2020 election seemed set to be all about health care policy, a…
-
Mike Wilson: Expanding Valuations in Equity Markets
25 juli 2023 · 3 min
Rapidly declining inflation poses a challenge to revenue growth and earnings. So what should investors look out for to identify the winners from here? Lees meer
----- Transcript -----
Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues bringing a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Tuesday, July 25th at 10 a.m. in New York. So let's get after it.
As discussed in last week's podcast, this year's equity market has been all about expanding valuations. The primary drivers of this multiple expansion have been falling inflation and cost cutting rather than accelerating top line growth. Last October, we based our tactically bullish call on the view that inflation was peaking, along with back end interest rates and the US dollar. While the 30% move in equity multiples on the back of this theme has gone much further and persisted longer than we anticipated, we don't feel the urge to turn bullish now. Missing the upside this year was unfortunate, however, compounding with another bad call can lead to permanent loss.
While falling inflation supports the expectations for a Fed pivot on monetary policy, it also poses a risk to nominal revenue growth and earnings. To remind listeners of a key component to our earnings thesis, we believe inflation is now falling even faster than the consensus expects, especially the inflation experienced by companies. With price being the main factor keeping sales growth above zero for many companies this year, it would be a material headwind if that pricing were to roll over. This is precisely what we think is starting to happen for many businesses, especially in the goods portion of the economy.
Last year's earnings disappointment in communication services, consumer discretionary and technology were significant, but largely a function of over-investment and elevated cost structures rat…
-
Erik Woodring: India’s Smartphone Market Poised to Take Off
24 juli 2023 · 4 min
India’s smartphone market could triple in size over the next decade, putting it behind only the U.S. and China. Lees meer
----- Transcript -----
Welcome to Thoughts on the Market. I'm Erik Woodring, Morgan Stanley's U.S. Hardware Analyst. Along with my colleagues bringing you a variety of perspectives, today, I'll discuss our outlook for the India smartphone market. It's Monday, July 24th at 10 a.m. in New York.
We're making a bold call for India's smartphone market. We believe it will triple in size over the next decade to $90 billion and account for 15% of global smartphone shipments by 2032, up from just 6% today. That implies that India alone will drive 100% of global smartphone shipment growth over the next decade.
India has the largest worldwide population, but smartphone penetration is significantly lower versus the rest of the world. For the last two decades, investors have been intrigued by the vast growth potential of the India smartphone market. But so far, investor expectations have not played out, as smartphone penetration in India has failed to surpass 40% versus the global average of 60%. And growth in the India smartphone market has been overwhelmingly driven by low end devices, with razor thin margins for original equipment manufacturers or OEMs. In fact, the smartphone TAM or total addressable market is just 25% the size of China, despite a similarly sized population.
But we think the next decade will be different - it will be India's decade. Besides forecasting annual GDP growth of 6.5% for the next decade, our India Strategy and Economics colleagues believe that over the next decade, domestic consumption in India will more than double - driven by a number of important factors, including widespread economic reforms.
These efforts are expected to bring meaningful demographic change, with income per capita expected to double, and the number of high income households expected to quintuple over the next decade. Alongside nearly 100% electrification of th…
-
Japan: A New Era for Japanese Equities
21 juli 2023 · 6 min
With positive GDP growth and increasing revenues, Japan equities are becoming a preferred market globally. Lees meer
----- Transcript -----
Chetan Ahya: Welcome to Thoughts on the Market. I'm Chetan Ahya, Morgan Stanley's Chief Asia Economist.
Daniel Blake: And I'm Daniel Blake, Asia and Emerging Markets Equity Strategist.
Chetan Ahya: Over the last two days in this special three part series on Japan, we discussed a constructive outlook for Japan's economy and the various structural reforms it's undergoing. Today in this final episode focused on Japan, we'll talk about the key investment implications of these macro trends. It's Friday, July 21st at 9 a.m. in Hong Kong and Singapore.
Chetan Ahya: Dan, you've been highlighting Japanese equities as our most preferred asset within the region and globally. Your bullish view is based on three powerful drivers of outperformance coming together, namely macro, micro and multipolar world. Starting with the macro, our economists expect an uplift in nominal GDP growth trend, how does this benefit Japanese equities?
Daniel Blake: So we see this being another era for the Japanese market, having first exited deflation in 2013 with the initial Abenomics program, but now moving into positive nominal GDP growth from 2023 onwards. It's hugely important for companies who have been hemmed in with an inability to lift prices and hence they have been unable or unwilling to lift base wages or dividend levels. So this new pricing flexibility in top line growth supports the equity market in five key ways. First, we're going to see faster revenue growth. Second, we think this will mean wider operating profit margins given fixed cost leverage will now be working in favor of the bottom line. Third, financial sector earnings have been repressed by ongoing Bank of Japan policy, but a gradual process of normalization should help release the earnings power of Japanese financials. Fourth, domestic portfolios are highly risk averse and focused on cash a…
-
Japan: Finding Opportunity Across Sectors
21 juli 2023 · 8 min
As Japan anticipates shifts in structural policy and GDP growth, these are the industries within the market that are poised to benefit. Chief Asia Economist Chetan Ahya, Chief Japan Economist Takeshi Yamaguchi, and Japan Senior Advisor Robert Feldman discuss. Lees meer
----- Transcript -----
Chetan Ahya: Welcome to Thoughts on the Market. I'm Chetan Ahya, Morgan Stanley's Chief Asia Economist.
Takeshi Yamaguchi: I'm Takeshi Yamaguchi, Chief Japan Economist.
Robert Feldman: And I'm Robert Feldman, Japan Senior Advisor.
Chetan Ahya: Yesterday I discussed broad economic contours of Morgan Stanley's constructive view on Japan. Today, in the second installment of our special three part episode on Japan, we will dig deeper into the implications of the shift in Japan's nominal GDP path, the outlook for BOJ policy, as well as the outlook for structural reforms. It's Thursday, July 20th at 9 a.m. in Hong Kong.
Robert Feldman: And 10 a.m. in Tokyo.
Chetan Ahya: Yamaguchi-San, let's start here. The change in inflation dynamics that I covered on yesterday's episode could mean a momentous shift in Japan's nominal GDP path. Maybe you could start here with you walking us through some of the key implications of this shift.
Takeshi Yamaguchi: Yes, Japan's nominal GDP has been in a flat range for many years, since 1990's after the collapse of the asset bubble. But now it's finally getting out of the range, and we expect this trend of positive nominal GDP growth to continue over the medium term. I think there are mainly three implications from economists' viewpoints. First, we expect compensation of employees, that's the amount taken by workers, and corporate earnings to grow at the same time. Before it was like a zero sum game with almost no nominal GDP growth, but now we expect a bigger economic pie which should benefit both workers and companies. Japan's wage trend is already improving after strong spring wage negotiations this year. Second, we think that the revival of positive nom…
-
Chetan Ahya: A Bullish Outlook on Japan
19 juli 2023 · 3 min
The first of our three-part series on the Japanese economy dives into the three key factors that have triggered a recent surge in interest from investors. Lees meer
----- Transcript -----
Welcome to Thoughts on the Market. I'm Chetan Ahya, Morgan Stanley's Chief Asia Economist. Along with my colleagues bringing you a variety of perspectives, I'm kicking off a special three part episode on our outlook for Japan. Today I'll be discussing our view on the Japanese economy. It's Wednesday, July 19th at 9am in Hong Kong.
As you may have seen, Japan's economy and financial markets have attracted outsized investor interest this year. We at Morgan Stanley Research have had a constructive view on the macro and markets outlook for some time, based on three pillars: A decisive shift away from deflation, structural macro reforms coupled with the improved corporate governance on the macro front and return on equity for the corporate sector.
Let's start with the macro outlook. From my vantage point, the single most important factor that defines the Japan narrative is inflation. Between 1993 and 2012, the Japan economy was trapped in deflation, with headline inflation hovering around 0%. The pursuit of Abenomics from 2013 onwards brought about a transition from deflation to low-flation and inflation managed to move a tad bit higher to an average of 0.5% from 2013 to 2019. In this cycle, we are seeing yet another shift in which Japan is decisively exiting deflation. Indeed, we see Japan transitioning into moderate inflation territory, where inflation averages 1 to 1.5% over the medium term.
How is this inflation outcome achieved? Since the early 1990's, Japan has experienced monetary easing and fiscal easing, but the two have never really come together in a coordinated fashion, and in fact at times have neutralized each other. This started to change in 2013, when fiscal easing was combined with quantitative and qualitative monetary easing, which we think was critical to initial exit fro…
-
Sarah Wolfe: Student Loan Restart Draws Nearer
18 juli 2023 · 4 min
With the moratorium on federal student loans ending soon, discretionary spending is likely to go down and delinquency is likely to rise as consumers face the end of a three-year reprieve. Lees meer
----- Transcript -----
Welcome to Thoughts on the Market. I'm Sarah Wolfe from the U.S. Economics Team. Along with my colleagues, bringing you a variety of perspectives, today I'll be talking about the implications from the upcoming student loan restart. It's Tuesday, July 18th at 10 a.m. in New York.
The more than three year long moratorium on federal student loans is ending soon, expected to resume on October 1st, impacting nearly 27 million borrowers who have federal student loans in forbearance, totaling a trillion dollars or $41,000 per borrower on average.
We believe this will translate into a hit to disposable income and a moderate pullback in discretionary spending in the fourth quarter of this year and partially into the first quarter of 2024. Altogether, we estimate it could shave about ten basis points off of total year real PCE growth or seven basis points off GDP growth. But we think that this is likely an upper estimate for a few reasons. First of all, there's a 12 month grace period that will allow households to take the next year to start making payments without falling delinquent—so not everybody is going to start making payments in October—consumers can tap into their savings and there could be debt reprioritization.
There's going to be varying impact across different demographics. We find that those aged 25 to 34 are most likely to hold student debt, But borrowers age 35 and older hold the largest debt balance in dollar terms and as a share of disposable income. We also find, based on geography, that southern states, including Mississippi, Alabama, Georgia and South Carolina, have the highest average student loan balance as a share of per capita disposable income while states in the Northeast, like Massachusetts, Connecticut, New Jersey and New Hampshire ha…
-
Mike Wilson: Disinflation and Equities
17 juli 2023 · 4 min
While falling inflation is good news for many, equity investors may see volatility in earnings growth as pricing power fades. Lees meer
----- Transcript -----
Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, July 17th at 11 a.m. in New York. So let's get after it.
Last week was all about the downward surprise to the June inflation data. More specifically, both the consumer and producer price indices came in well below expectations and suggests the Fed is on its way to winning its hard fought battle to beat inflation back down to 2%. Both stocks and bonds celebrated the news as a likelihood for a soft landing and the economy increased. Our view is not so sanguine on stocks as the steeper fall in inflation supports our view for a much weaker than expected earnings growth.
Three years ago, at the trough of the pandemic recession, we were a lonely voice on the idea that inflation would surge higher due to excessive fiscal and monetary support. Furthermore, we suggested it would lead to a surge in earnings growth as companies discovered an ability to raise prices at will while the government subsidized labor costs. As we move to 2021, this over-earning broadens out as consumers spent their excess savings on everything from sporting goods to travel and leisure activities. By last summer, this boom in spending was so strong the Fed was forced to raise interest rates at a pace not seen in 40 years. With a lag in monetary policy close to 12 months, it should be no surprise that we are now seeing the headwinds on growth and inflation today.
Because markets are forward looking, they understand this dynamic perhaps better than the average investor. In fact, it is the primary reason we decided to get tactically bullish on U.S. stocks last October. At that ti…
-
Vishy Tirupattur: Are Bonds Primed for a Comeback?
14 juli 2023 · 3 min
With inflation slowly moving lower, government bonds are looking increasingly more attractive and may be primed for a comeback later this year. Lees meer
----- Transcript -----
Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist. Along with my colleagues bringing you a variety of perspectives, today, I'll be talking about the case for government bonds. It's Friday, July 14th at 11 a.m. in New York.
With the U.S. labor market remaining resilient, the prospects for bond markets would depend critically on the outlook for inflation. Our economists expect core inflation to continue to move lower, slowly but surely, shifting consumption patterns in which spending on services slows while goods consumption continues to contract, will weigh on core inflation.
Recent data have been supportive of this expectation. The June employment report we got last Friday, showed a slowing in the services sector earnings growth. Overall, average hourly earnings moved sideways and still are higher than the historical averages. But the average hourly earnings for the services sector decelerated again in June. Though two months do not establish a firm trend, the deceleration in service's average hourly earnings since April is good news for the inflation outlook. The Consumer Price Index and the producer price index data that we got this week also reflect this ongoing deceleration in inflation. On a year-over-year basis, headline inflation came down to 3% while core inflation came in at 4.8%, down from 5.3% in May. Core Producer Price Index also came in below consensus and is now running at 2.6% year-over-year, down from 2.8%.
This moderation in economic activity and inflation goes beyond what many Fed officials would consider their model expectations. Such a deceleration, even if associated with a soft landing, could see them adjusting their current hawkish stances.
Of course, in the best environment for government bonds, central banks are act…
-
Ravi Shanker: Decarbonizing Aviation
13 juli 2023 · 4 min
As airlines scramble to decrease their carbon footprint by 80% before 2050, can sustainable aviation fuel lead the charge? Lees meer
----- Transcript -----
Welcome to Thoughts on the Market. I'm Ravi Shanker, Morgan Stanley's freight transportation and airlines analyst. Along with my colleagues bringing you a variety of perspectives, today I'll discuss the path to decarbonization in aviation. It's Thursday, July 13th at 2 p.m. in New York.
The global aviation industry emits roughly 1 billion tons of CO2 per year - comparable to the emissions of Japan, the world's third largest economy, and aviation emissions are estimated to double or even triple between 2019 and 2050 in a business-as-usual scenario.
In order to reach net-zero emissions by 2050 and align with the goals of the Paris Agreement, the global aviation industry needs to reduce its CO2 absolute footprint by 13% by 2030, and 80% by 2050. We think the industry has three solutions for doing so. One, change its fleet mix towards more fuel efficient aircraft. Two, scale other modes of propulsion such as electric/hybrid engines and hydrogen. And three, change their jet fuel mix towards more sustainable aviation fuel.
Based on currently available technologies, we see the third option, sustainable aviation fuel or SAF, as the most realistic pathway for the airlines industry to meet its 2030 decarbonization goals. SAF is a biofuel used to power aircraft that has similar properties to conventional jet fuel, and can be dropped into today's aircraft and infrastructure. SAF is derived from non-fossil sources called feedstock, such as corn grain, oilseeds, algae, oils, fats and greases, forestry residues, and municipal solid waste streams. There are currently various certified SAF production procedures, all of which make fuel that performs at levels operationally equivalent to jet A1 fuel.
Replacing conventional jet fuel with SAF can mitigate CO2 materially. The challenge, however, is that SAF accounts for less than 1% of t…
-
Michael Zezas: Looking to the Treasury Market
12 juli 2023 · 3 min
With a potential government shutdown looming in the fall, investors may want to keep an eye on the U.S. Treasury market to insulate themselves from risk. Lees meer
----- Transcript -----
Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income and Thematic Research for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the potential market impacts of a government shutdown. It's Wednesday, July 12th at 10 a.m. in New York.
Press reports warning of a potential government shutdown this fall have understandably led to some questions from clients this week. They're asking what, if any, market impact should they expect if the U.S. fails to appropriate spending for the next fiscal year starting October 1st. The concern, of course, is that markets may react negatively perceiving economic risk if the government without funding ceases certain operations. But some historical perspective is helpful here and leads us to categorize this as a risk worth monitoring but not panicking about.
First, while government shutdowns create a very real strain for parts of the economy, like government employees and contractors doing business with the government, our economists have pointed out that in the past, the aggregate impacts to the overall economy have tended to be modest and fleeting. A key reason why is that the norm has been that after shutdowns, the government typically appropriates back pay and resumes prior expected payments to vendors. So spending is simply deferred and made up in the future rather than completely foregone.
Not surprisingly, then, market impacts have tended to be inconsistent and fleeting. True, there have been episodes when stocks sold off heading into and during shutdowns and then rally back when shutdowns ended, but it's difficult to desegregate the shutdown as a market driver from other prevailing economic conditions and market valuations. Said more simply, if equity and or credit marke…
-
Shawn Kim: The Double-Edged Sword of AI Technologies
11 juli 2023 · 3 min
The market for artificial intelligence technologies could reach $275 billion by 2027, but not all companies will be able to generate revenue. Here’s what investors should watch. Lees meer
----- Transcript -----
Welcome to Thoughts on the Market. I'm Shawn Kim, Head of Morgan Stanley's Asia Technology Research Team. Along with my colleagues bringing you a variety of perspectives, today I'll discuss why A.I matters for investors and our outlook for the next 5 to 10 years in the evolution of A.I. It's Tuesday, July 11th, at 9 a.m. in New York.
In the span of just six months, open A.I has moved from being a niche IT research and development, to a key driver of what is set to become a $3 trillion IT spend by 2029. Despite this rapid progress, we're still in the early stages of A.I technologies. We believe today's machine learning stage of A.I adoption precedes a much larger future market when we reach the inference phase, which is where A.I would be able to make predictions based on novel data. And that, in turn, would eventually expand to an even bigger potential market in endpoint or edge A.I inference.
The A.I technology total addressable market or the TAM, which includes semiconductors, hardware and networking, is at $90 billion today and we estimate it will grow to 275 billion by 2027. That's more than half the size of the semiconductor market today.
This remarketable growth is actually led by semiconductors, where we see the A.I semiconductor market TAM tripling over the next three years from 43 billion to 125 billion, and signifying our growing the overall A.I market. Companies that we consider A.I leaders are generally showing high growth and returns, consensus shows a three year average EPS growth of 24%, which is more than twice the earnings growth of global stocks on average.
Our investment framework addresses three key criteria. One, which parts of the tech supply chain are the biggest beneficiaries of A.I, in terms of revenue exposure and how that exposure is g…
-
Mike Wilson: All Eyes on Earnings
10 juli 2023 · 4 min
As earnings season kicks off, market valuations continue to trend high based on major growth expectations. However, investors may want to keep an eye on liquidity. Lees meer
----- Transcript -----
Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, July 10th at 11 a.m. in New York. So let's get after it.
With year to date U.S. equity returns driven nearly 100% by higher valuations, the market either doesn't care about earnings or it expects a major reacceleration in growth both later this year and next. One might argue that the higher valuations are anticipating the end of the Fed's rate hiking campaign, even though the bond market doesn't seem to agree with that conclusion, given the recent rise in yields. In short, the price earnings ratio for the S&P 500 is up approximately 15%, and with interest rates up this year, the equity risk premium has collapsed by 100 basis points to its lowest level since the tech bubble era.
With second quarter earnings season beginning this week, 'better than feared' likely isn't going to cut it anymore. While earnings results so far this year remain right on track for the sharp earnings recession we forecast, we don't expect second quarter earnings to disappoint expectations in aggregate, given second quarter estimates have now been revised lower by 7.5% since the beginning of the year. Instead, we would point out that the consensus bottom-up second quarter EPS forecast for the S&P 500 is -7% year over year, hardly exciting. Furthermore, the consensus pushed out the trough earnings per share growth quarter from the first quarter to the second quarter over the last three months. We expect this trend to continue through the balance of the year, which would also be in line with our forecast. In other words, no big seco…
-
James Lord: The Dollar’s Resiliency
7 juli 2023 · 3 min
Though the debate around the global strength of the dollar in currency markets continues, the dollar’s current high yield in a world of weak global growth could help it appreciate Lees meer
----- Transcript -----
Welcome to Thoughts on the Market. I'm James Lord, Morgan Stanley's Head of Foreign Exchange and Emerging Market Strategy. Along with my colleagues bringing you a variety of perspectives, today, I'll be discussing the status of the U.S dollar within global foreign exchange or FX reserves. It's Friday, July 7th, 3 p.m. in London.
The debate about the dollar's status as the world's dominant currency usually resurfaces during every business cycle, and as our world increasingly transitions from globalized toward a multipolar model, this debate appears more relevant.
Indeed, some economic actors are already de-risking their currency reserves away from the dollar, promoting the use of local currencies as an alternative in international trade and trying to reduce the dollar's global role through other means.
Yet, this debate is usually a distraction from determining where the dollar is headed. In contrast to the popular narrative, we believe the dollar can appreciate, even if its use as a reserve currency or invoicing currency in international trade declines.
Let's first address the dollar's status as the world's dominant central bank reserve currency. The purpose of FX reserves is to bolster the external stability of an economy and enable central banks to act as lenders of last resort to those in demand of foreign currency. It's intuitive to think that reserve choices might therefore be correlated with the value of currencies themselves, yet relying on that intuition would not have served you well in recent history.
Case in point, while the dollar remains the world's dominant reserve currency, its share has dropped by around 20% over the last 20 years, most rapidly over the last ten. Nevertheless, over the last decade, the dollar has been one of the world's stronge…
-
Terence Flynn: AI Opportunities in Healthcare
6 juli 2023 · 3 min
Artificial intelligence could help biopharmaceutical companies reduce costs as well as improve their chances of developing successful new drugs. Lees meer
----- Transcript -----
Welcome to Thoughts on the Market. I'm Terence Flynn, Morgan Stanley's Head of U.S. BioPharma Research. Along with my colleagues bringing you a variety of perspectives, today, I'll focus on how artificial intelligence and machine learning can reshape the health care sector. It's Thursday, July 6th at 10 a.m. in New York.
As we've discussed on this podcast, Tech Diffusion is one of the big three themes we at Morgan Stanley Research are following this year. The other two being the Multipolar World and Decarbonization. As a quick reminder, by tech diffusion, we mean the process by which any transformative technology is adopted widely by consumers and industries.
When it comes to the healthcare sector, it's still early but we believe artificial intelligence and machine learning adoption is poised to accelerate significantly. The biopharma industry specifically is moving to unlock the potential of A.I across multiple areas, including drug discovery, clinical development, manufacturing and physician patient engagement.
We see two broad areas where A.I enabled investments in drug development could drive significant value in the biopharma space. One is direct cost savings, so think of improved R&D margins, for example. And two is increased probability of success of pipeline programs. Here we estimate that even small improvements in the probability of success could drive significant value.
Now, let me put some numbers around this. Over the past ten years, the FDA has granted 430 new drug approvals or about 43 per year. We estimate that every two and a half percentage point improvement in early stage development success rates could lead to an additional 30 new drug approvals over the course of ten years, or nearly a 10% boost. Assuming that each incremental approved drug generates over 600 million in pea…
-
Michael Zezas: Investing in New Geographies
5 juli 2023 · 3 min
With the U.S. possibly imposing tighter trade policies towards China, investors may want to look into diversifying their investments. Lees meer
----- Transcript -----
Welcome to the thoughts on the market. I'm Michael Zezas, Global Head of Fixed Income and Thematic Research for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the U.S., China relationship and its impact on markets. It's Wednesday, July 5th at noon in New York.
In recent weeks, the Biden administration has focused on the U.S. relationship with China. Treasury Secretary Yellen is headed to Beijing this week for meetings with senior officials in China, following on Secretary of State Blinken's recent visit. Whenever these diplomatic efforts pick up, investors tend to ask if it's a sign that there could be a softening or even a reversal in policy choices by the U.S. in recent years to create more rules and barriers to trade in certain higher tech industries. The interest is because these moves drove concern among many investors that multinational companies would have a harder time doing business in China in the future. But in our view, these policies are not going to reverse, but rather will likely become tighter.
Consider that the stated goal of these meetings was to open regular communication channels on economic and security issues. It's obviously important for countries to have regular communication to avoid misunderstandings spiraling into conflict. But this appears to be where the ambition for these meetings ends. There's no more talk of reaching comprehensive free trade agreements, for example.
Given that context, it makes sense that we're continuing to see news reports that the Biden administration is preparing fresh non-tariff barriers which would impact China. This includes further tightening export controls on semiconductors in an attempt by the U.S. to protect its technical advantage in an industry that's critical to both its economic and nati…
-
Special Encore: Asia’s Economy Outlook - Recovery Picking Up Steam
3 juli 2023 · 4 min
Original Release on June, 15th 2023: With more Asian economies on pace to join the recovery path set by China, confidence in economic outperformance versus the rest of the world is rising. Lees meer
----- Transcript -----
Welcome to Thoughts on the Market. I'm Chetan Ahya, Chief Asia Economist at Morgan Stanley. Along with my colleagues bringing your variety of perspectives, today I'll be discussing our mid-year outlook for Asia's economy. It's Thursday, June 15 at 9 a.m. in Hong Kong.
Asia's recovery is for real. We believe its growth outperformance has just started. We expect a full fledged recovery to build up over the next two quarters across two dimensions. First, we think more economies in the region will join the recovery path. Second, the recovery will broaden from services consumption to goods consumption and in the next six months to capital investments, or CapEx. We see Asia's growth accelerating to 5.1% by fourth quarter of this year. There are three main reasons why we expect this growth outperformance for Asia.
First, Asia did not experience the interest rate shock that the U.S. and Europe did. Asian central banks did not have to take rates through restrictive territory because inflation in Asia has not been as intense. Plus, Asia's inflation has already declined and we expect 80% of region’s inflation will get back into central bank's comfort zone in the next 2 to 3 months.
The second reason is China. While China's consumption recovery is largely on track, we have seen downside in the last two months, in investment spending and the manufacturing sector. We believe policy easing is imminent as policymakers are keen on preventing a deterioration in labor market conditions and on minimizing social stability risks. Easing should help stabilize investment spending and broaden out the recovery in back half of 2023.
Beyond China, India, Indonesia and Japan will also contribute significantly to region's growth recovery.
India is benefiting from cyclical and str…
-
Special Encore: Mid-Year U.S. Consumer Outlook - Spending, Savings and Travel
30 juni 2023 · 8 min
Original Release on June, 6th 2023: Consumers in the U.S. are largely returning to pre-COVID spending levels, but new behaviors related to travel, credit availability and inflation have emerged. Lees meer
----- Transcript -----
Michelle Weaver: Welcome to Thoughts on the Market. I'm Michelle Weaver from the Morgan Stanley U.S. Equity Strategy Team.
Sarah Wolfe: And I'm Sarah Wolfe from the U.S. Economics Team.
Michelle Weaver: On this special episode of the podcast, we're taking a look at the state of the U.S. consumer as we approach the midyear mark. It's Tuesday, June 6th at 10 a.m. in New York.
Michelle Weaver: In order to talk about where the consumer is right now, let's take it back two and a half years. It's January 2021, and households are slowly emerging from their COVID hibernations, but we're still months away from the broad distribution of the vaccine. Consumers are allocating 5% more of their wallet share to goods than before COVID, driving record consumption of electronics, home furnishings, sporting goods and recreational vehicles. All the things you needed to make staying at home a little bit better. Our U.S. economists at Morgan Stanley made a high conviction call in early 2021 that vaccine distribution would flip the script and drive a surge in services spending and a payback in goods spending. Sara, to what extent has this reversion played out and where do you think the U.S. consumer is now?
Sarah Wolfe: The reversion is definitely played out, but there's been some big surprises. Basically, the spending pie has just been greater overall than expected, and that's thanks to unprecedented fiscal stimulus, excess savings and significant supply shortages. So we've not only seen a shift away from goods and toward services, but a much larger spending pie overall. The result has been a 13% surge in goods inflation over nearly three years, an acceleration in services inflation, and a return to pre-COVID spending habits that's much greater in real spending term…
-
U.S Housing: The Market Is Not a Monolith
29 juni 2023 · 6 min
A surprising increase in the sale of new homes doesn’t mean that overall demand for housing is on the rise. Find out what to expect for the rest of the year. Lees meer
----- Transcript -----
Jim Egan: Welcome to Thoughts on the Market. I'm Jim Egan, Co-Head of U.S. Securitized Products Research here at Morgan Stanley.
Jay Bacow: And I'm Jay Bacow, the other Co-Head of U.S. Securitized Products Research.
Jim Egan: And on this episode of the podcast, we'll be discussing the U.S. housing market. It's Thursday, June 29th at 11am in New York.
Jay Bacow: All right, Jim. We put out our mid-year outlook about a month ago, and since we put out that outlook, we've had a breadth of housing data and it feels like you can pick any portion of that housing data, sales, starts, home prices and it's telling a different story. Which one are we supposed to read?
Jim Egan: I think that's a really important point. The U.S. housing market right now is not a monolith, and there are different fundamental drivers going on with each of these characteristics, each of these statistics that are pushing them in different directions. Let's start with new home sales. I think that was the most positive, we could say the strongest print from the past month. The consensus expectation, just to put this in context, was a month over month decrease of 1.2%, instead, we got an increase of 12.2%. To put it succinctly, new home sales are basically the only game in town. Existing listings remain incredibly low. We've talked about affordability deterioration on this podcast. We've talked about the lock in effect, the fact that the effective mortgage rate for existing homeowners right now is over three points below the prevailing mortgage rate. That just means there's no inventory. If you want to buy a home right now, there's a much greater likelihood that it's a new home sale than at any point in the past 10 to 15 years. And new home sales were the only housing statistic in our mid-year forecast where we project…
-
Corporate Credit Outlook: Higher Interest Rates Challenge Lower-Quality Borrowers
28 juni 2023 · 3 min
How will corporate credit markets fare as the Fed keeps rates higher for longer? Look for wider spreads, further decompression and muted excess returns. Lees meer
----- Transcript -----
Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's Chief Fixed-Income Strategist. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the outlook for corporate credit markets. It's Wednesday, June 28th at 11 a.m. in New York.
Our economists are calling for one more 25 basis point rate hike in the upcoming Fed meeting in July and pause thereafter until the end of first quarter of next year. They're also calling for continued growth slowdown because of the policy tightening that we have seen over the last 15 months or so. A restrictive pause, which means rates staying higher for longer, and muted growth will weigh more on the performance of the corporate credit markets, especially as refinancing needs pick up. So our call is for wider spreads, further decompression and muted excess returns for corporate grade markets. Within credit we favor higher quality, which means investment grade credit over leveraged credit, both in bonds and in loans.
Let's dig into some details. Industrial grade credit looks attractive from a duration lens, and we expect 7% plus total returns over the next 12 months. From a spread perspective, our base case target, a 150 basis point, calls for modest widening. Although risks are skewed to the downside in the recession bear case scenario to 200 basis points. We think the banking space looks cheap versus the market, especially money center banks. We favor single A's or triple B's and shortening of portfolio duration. Our preference is to own the front end of the curve within the investment graded space.
Higher for longer puts more pressure on lower quality borrowers. While the macro outlook is not acutely challenging for credit, it progressively erodes debt affordability. For larger and higher quality borrowe…
-
Ed Stanley: Key Lessons as AI Goes Mainstream
27 juni 2023 · 5 min
With A.I. rapidly reaching the mass market, investors are pondering the risks and upsides to A.I. diffusion. History may provide some answers. Lees meer
----- Transcript -----
Welcome to Thoughts on the Market. I'm Ed Stanley, Morgan Stanley's Head of Thematic Research in Europe. And along with my colleagues, bringing you a variety of perspectives, today I'll be discussing ten key lessons from the last hundred years of tech diffusion. It's Tuesday, the 27th of June at 3 p.m. in London.
Tech diffusion is one of the three big themes we at Morgan Stanley Research are following in 2023. The other two being the multipolar world and decarbonization. And when we say ‘tech diffusion,’ which has become a term of art, we mean the process by which any transformational technology is adopted widely by consumers and industries. Think of the light bulb, the first power plant, the internet, and now, A.I..
Our recent analysis of the last hundred years of tech diffusion helps to shed light on ten critical questions around how, when and where stocks will be impacted from the development of A.I..
One of the most important issues to consider is how fast A.I. diffusion is happening and whether regulation can restrain this. Since its pivotal moment when it was released in November, the leading generative A.I. tools are on pace to do in one year what the internet took seven years to achieve in spilling over to the mass market, and electricity took around 20 years to do the same thing.
The next critical question to consider is whether we tend to see upside or downside happen first for industries being impacted. In examining 80 structural positive and negative adoption curves over the last 50 years, we find that downside disruption often occurs sooner and twice as quickly as upside disruption.
So how does the downside play out for stocks perceived to be by investors more at risk from these types of technology disruption? The market typically de-rates and waits. So valuations fall somewhere bet…
-
Emerging Markets: Climate Finance and Credit
26 juni 2023 · 8 min
While many countries are gearing up to combat climate change, financing these large projects may pose a challenge. Lees meer
----- Transcript -----
Simon Waever: Welcome to Thoughts on the Market. I'm Simon Waever, Morgan Stanley's Global Head of EM Sovereign Credit Strategy.
Carolyn Campbell: And I'm Carolyn Campbell, Head of Morgan Stanley's ESG Fixed-Income Research.
Simon Waever: On this special episode of the podcast, we'll discuss the credit impact of climate finance in emerging markets.
Carolyn Campbell: It's Monday, June 26, at 10 a.m. in New York.
Simon Waever: We believe that the ramp up in climate mitigation and adaptation financing from developed markets can be a key credit positive for emerging market countries, if executed correctly. The amounts of financing required in low and middle income countries to adapt to and mitigate the effects of climate change is likely to be over 1 trillion per year by 2030. Carolyn, let's start with that 1 trillion figure and the scale of the challenge. How are low and middle income countries positioned for climate change?
Carolyn Campbell: So when we think about climate change, there's two sides of the coin. There's climate change mitigation, which is everything that will slow or prevent the temperature from rising more than a degree and a half above pre-industrial levels, which is the goal of the Paris Agreement. And on the other side, we've got adaptation, which is financing projects that will build resiliency to physical risks, for example, or to help transform the economy away from dependency on industries that are likely to be harmed by climate change. So on the mitigation side, we've seen energy consumption in emerging markets steadily rise over the past couple of decades as their economies continue to develop and their populations grow often at faster rates than we see in developed countries. Now, while we've seen absolute levels of renewable energy usage tick up in these countries, on a proportional basis we're not…
-
Mid-Year U.S. Dollar Outlook: An Important Driver for Returns
23 juni 2023 · 3 min
This year, foreign exchange has been even harder than usual to predict. Even so, the outlook for the U.S. Dollar may prove to be a handy asset moving forward. Lees meer
----- Transcript -----
Welcome to Thoughts on the Market. I'm Dave Adams, Head of G10 Foreign Exchange Strategy at Morgan Stanley. And today I'll be talking about our outlook for the U.S. dollar and why it may prove an important driver of investor returns this year. It's Friday, June 23rd at 3 p.m. in London.
Foreign exchange has long been known as a hard asset class to predict, and this year has proven to be even harder than usual. Consensus trades left and right have missed the mark, and both disagreement and uncertainty are the highest we've seen in years.
So where do we go from here? We think the U.S. dollar is going to keep rallying, rising about 5% or so by the end of the year. Central bankers are likely to keep their feet on the brakes in order to tackle inflation. And in doing so, growth is likely to remain anemic, with risks skewed to the downside.
Against this backdrop, we think two key themes are going to emerge: demand for carry and demand for defense. Carry is attractive in a slow growth world and is likely to explain a lot more of investor returns if prices don't move very much. And defensiveness is an alluring quality in financial assets when optimism is low, uncertainty is high and risks abound.
It's pretty rare to find a financial asset that offers both of these qualities. Typically, insurance costs you money. But the good news is that the US dollar does. The dollar tends to be negatively correlated versus the equity market, meaning that when equities go down, the dollar goes up, and that relationship has only strengthened in recent years.
Meanwhile, U.S. rates are elevated versus the rest of the world thanks to Fed rate hikes. Dollar rates are roughly 2% higher than those in Europe and even 5% higher compared to those in Japan.
Foreign exchange is a relative game, and if investors ar…
-
Mid-Year U.S. Economic Outlook: Will the Fed Continue to Hike?
22 juni 2023 · 3 min
As the U.S. Economy still angles for a soft landing, the recent Federal Open Markets Committee meeting may have left more questions than answers. Lees meer
----- Transcript -----
Welcome to Thoughts on the Market. I'm Ellen Zentner, Morgan Stanley's Chief U.S. Economist. Along with my colleagues, bringing you a variety of perspectives, today I'll discuss the outcome of the June Federal Open Market Committee meeting and our outlook for the U.S. economy. It's Thursday, June 22nd at 10 a.m. in New York.
Hawks and doves entered the battlefield at the June FOMC meeting, wrangling over the extent to which further rate hikes might be needed and how forcefully to convey that. As expected, the FOMC held rates steady at 5.1% and maintained a tightening bias in the statement. But it's also important to note that the statement included an ever so slight change in language that made further rate hikes seem less certain. So in all, this suggests the Fed could raise rates later this year, although when thinking about the very next meeting we think the bar to hike in July is much higher than market pricing implies.
And the new summary of economic projections, which is made up of Federal Open Market Committee participants projections for things like GDP growth, the unemployment rate, inflation and the appropriate policy path, FOMC participants revised up the policy path for this year by a full 50 basis points. So that would imply two more 25 basis point rate hikes. They also lifted their growth projections for this year, they revised down the unemployment rate and they revised upward their core PCE inflation forecast. So all in all, that's a summary of economic projections that skewed very hawkish.
Now, we find the upward revision to core PCE most perplexing as incoming data on inflation had been in line with the Fed's forecasts, and especially as key measures of core services inflation have consecutively softened. Now in relation to our forecasts, we think this sets up core inflation t…
-
Mid-Year Global Oil Outlook: Neutral or Constructive?
21 juni 2023 · 4 min
While high oil prices at the end of last year drove down demand and freed up supply, this year many expect the market to tighten again. So why hasn’t it tightened yet? Lees meer
----- Transcript -----
Welcome to Thoughts on the Market. I'm Martijn Rats, Morgan Stanley's Global Commodity Strategist. Along with my colleagues, bringing you a variety of perspectives, today I'll discuss the outlook for the global oil market for the rest of 2023. It is Wednesday, June 21st at 3 p.m. in London.
Last year saw severe tightness in most commodity markets. Demand still benefited from the post-COVID recovery, and supply was disrupted by the war in Ukraine. In many markets, prices had to rise to a level where demand destruction occurred. In the oil markets, that led Brent crude oil to rise to $130 a barrel, gasoline to $180 and diesel $190 a barrel.
Those prices clearly did the trick. In response, the global economy slowed down and oil demand softened towards year end, resulting in a slight oversupply at market earlier this year.
In recent months, however, the main narrative in the oil market has been a one of re-tightening into the second half. The market was clearly in surplus in the first quarter, but was widely expected to tighten again by the second half due to a combination of China reopening, continued recovery in aviation and downside risk to supply from Russia. Those factors should see the market balance in the second quarter and reenter a meaningful deficit in the third and fourth quarter, driving prices higher.
In fact, that was also our expectation at the start orrf the year. However, if this was indeed to play out, we should see it by now. Given we are currently in June, the most actively traded Brent contract is the one for August delivery. North Sea oil delivered in August will typically arrive at a refinery around about September, with end products made from that crude oil such as gasoline, diesel and jet typically delivered to end customers by October. Therefore, th…
-
Mid-Year Macro Markets Outlook: Slow Growth and Sticky Inflation
21 juni 2023 · 3 min
While the U.S is moving towards a soft landing and Japan is seeing nominal growth, the European economy continues to face restrictive policy. Lees meer
----- Transcript -----
Welcome to Thoughts on the Market. I'm Matthew Hornbach, Morgan Stanley's Global Head of Macro Strategy. Along with my colleagues, bringing you a variety of perspectives, today, I'll talk about our mid-year outlook for macro markets. It's Tuesday, June 20th at 10 a.m. in New York.
As we look ahead at macro markets for the next 12 months, central banks are front and center again. Our economists see them finding peak rates mid-year, while growth slows and inflation remains sticky. They also see the U.S. moving towards a soft landing, while the Euro area economy continues to face more restrictive policy. The U.K. continues to muddle through, while Japan delivers a year of nominal growth.
Two global risk scenarios that our economists consider, a hard landing in the U.S. and then faster disinflation also in the U.S., should keep macro markets on the defensive. We think sovereign bond yields will end the year lower than in the first half, while the U.S. dollar will end the year stronger. We think macro markets already reflect the base case outlook for a soft landing and gradual adjustments in monetary policy. The view from our economists, which is mostly in the market price, aligns neatly with this consensus.
So what will move markets into year end? Price action should, of course, evolve as surprises to this consensus view unfold. As usual, uncertainties around the outlook for monetary policy are murky, raising risks that the outcome will surprise currently held consensus views.
One uncertainty involves the stance of monetary policy and the impact of the previous tightening that's been put in place. Have central banks tightened enough already to bring inflation back to target, in a suitable time frame? How long and variable are the lags of monetary policy today?
We think rates market volatility, curren…
-
Fixed Income: A Sweet Spot for Munis
16 juni 2023 · 5 min
With investors anticipating earnings surprises for US stocks, the outlook for municipal bonds is looking brighter. Lees meer
----- Transcript -----
Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income and Thematic Research for Morgan Stanley.
Mark Schmidt: And I'm Mark Schmidt, Head of Municipal Strategy.
Michael Zezas: And today, we'll be talking about the core of many investors' fixed income portfolios, municipal bonds. It's Friday, June 16th at 9am in New York.
Michael Zezas: As our equity strategists continue to highlight the risk of earnings surprises for U.S. stocks, the outlook for the bond market looks considerably better. A soft landing, so call it, slow growth and slowing inflation, would mean favorable total return prospects across fixed income. In fact, even as the Fed's been raising short term rates, longer term bond yields have been falling as investors anticipate both inflation and growth to decline. So, Mark, for the benefit of listeners, tell us why this is a sweet spot for munis.
Mark Schmidt: Thanks, Michael. Municipal bonds, high credit quality and tax exempt income are an opportunity for investors in high tax brackets right now. Credit quality for municipals can seem confusing, but we like to think of it in a pretty simple way. What's the outlook for tax collections? Income tax collections were mixed in April, but sales and property taxes continue to grow. Also, most state and local governments still have plenty of cash on reserve in case the economy performs worse than our economists expect. That cash comes from all the aid that the federal government provided, several hundred billion dollars, in fact, to municipal issuers in response to COVID. That's created a balance sheet buffer that can still support issuers today, even as growth slows. Now, even though credit quality remains pretty good, the good news is we don't think you need to take a lot of risks to enjoy the benefits of tax free income in your …
-
Asia’s Economy Outlook: Recovery Picking Up Steam
15 juni 2023 · 3 min
With more Asian economies on pace to join the recovery path set by China, confidence in economic outperformance versus the rest of the world is rising. Lees meer
----- Transcript -----
Welcome to Thoughts on the Market. I'm Chetan Ahya, Chief Asia Economist at Morgan Stanley. Along with my colleagues bringing your variety of perspectives, today I'll be discussing our mid-year outlook for Asia's economy. It's Thursday, June 15 at 9 a.m. in Hong Kong.
Asia's recovery is for real. We believe its growth outperformance has just started. We expect a full fledged recovery to build up over the next two quarters across two dimensions. First, we think more economies in the region will join the recovery path. Second, the recovery will broaden from services consumption to goods consumption and in the next six months to capital investments, or CapEx. We see Asia's growth accelerating to 5.1% by fourth quarter of this year. There are three main reasons why we expect this growth outperformance for Asia.
First, Asia did not experience the interest rate shock that the U.S. and Europe did. Asian central banks did not have to take rates through restrictive territory because inflation in Asia has not been as intense. Plus, Asia's inflation has already declined and we expect 80% of region’s inflation will get back into central bank's comfort zone in the next 2 to 3 months.
The second reason is China. While China's consumption recovery is largely on track, we have seen downside in the last two months, in investment spending and the manufacturing sector. We believe policy easing is imminent as policymakers are keen on preventing a deterioration in labor market conditions and on minimizing social stability risks. Easing should help stabilize investment spending and broaden out the recovery in back half of 2023.
Beyond China, India, Indonesia and Japan will also contribute significantly to region's growth recovery.
India is benefiting from cyclical and structural factors. Cyclically beating h…