Original Release Date August 8, 2024: Our Head of Europe Sustainability Research discusses how rising longevity is revolutionizing our fundamental approach from reactive to proactive treatment.

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Welcome to Thoughts on the Market. I’m Mike Canfield, Morgan Stanley’s European Head of Sustainability Research. Along with my colleagues, we’re bringing you a variety of perspectives; and today we’re focusing on a topic that affects everyone – how much does poor health cost us? And how are ageing populations and longer life expectancy driving a fundamental shift in healthcare? 

It’s Thursday, August the 8th, at 4pm in London.   

As populations age across the developed world, health systems need to help people live both longer and healthier. The current system is typically built around to focus on acute conditions and it’s more reactive; so it introduces clinical care or drugs to respond to a condition after it’s already arisen, rather than keeping people healthy in the first instance. So increasingly, with the burden of chronic disease becoming by far the greatest health and economic challenge we face, we need to change the structure of the healthcare system. 

Essentially, the key question is how much is poor health amongst the ageing population really costing society? To get a true sense of that, we need to keep in mind that workers over 50 already earn one out of every three dollars across the G20 regions. By 2035, they're projected to generate nearly 40 per cent of all household income. So with that in mind, preventable conditions amongst those people aged 50-64 at the moment, are already costing G20 economies over $1 trillion annually in productivity loss. And there’s one more key number: 19 per cent. That's how much age-diverse workforces can raise GDP per capita over the next thirty years, according to estimates from the Organization for Economic Co-operation and Development, or OECD. So clearly, keeping workers healthier for longer underpins a more productive, more efficient, and a profitable global economy. So it’s clear that [if] the current healthcare system were to shift from sick from care to prevention, the global gains would be substantial.

The BioPharma sector is already contributing some targeted novel treatments in areas like smart chemotherapy and in CRISPR – which is a technology that allows for selective DNA modification. While we can credit BioPharma and MedTech for really powerful innovations in diagnostics, in AI deployment for areas like data science and material science, and in sophisticated telemedicine – all these breakthroughs together give a more personalized, targeted health system; which is a big step in the right direction, but honestly they alone can’t solve this much broader longevity challenge we face. 

Focus on health and prevention, ultimately, could address those underlying causes of ill-health, so that problems don’t arise even in the first instance. Governments around the world are obviously realizing the value of preventive care over sick care. And as a strategy, disease prevention fundamentally aims to promote wellness across the board, whether that’s in things like mental state, nutrition or even in things like sleep and stress. While it might be easy to kind of conflate that with wellness trends – things like green smoothies or meditation – the underlying benefits of boosting health at the cellular level have much broader and deeper implications. Things like Type 2 diabetes and heart disease, supporting better health across populations can significantly reduce the incidence of a wide range of chronic conditions. It can lower the burden on health systems overall, and actually increase healthy lifespan at the end of the day. 

BioPharma advances are significant, but addressing longevity will require a much broader alignment across a myriad of elements; everything really from the food system to sanitation to training healthcare professionals. And of course, all of that will require consistent policy support. Regulators and policymakers are paying very close attention to their ageing population – and so are we. We’ll continue to bring you updates on this topic, which is so important to all of us.

Thanks for listening. If you enjoy the show, please do leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

As the US Federal Reserve mulls a forthcoming interest rate cut, our Head of Corporate Credit Research and Global Chief Economist discuss how it is balancing inflationary risks with risks to growth.

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Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley.

Seth Carpenter: And I'm Seth Carpenter, Morgan Stanley’s Global Chief Economist.

Andrew Sheets: And today on the podcast, we'll be discussing the Federal Reserve, whether its policy is behind the curve and what's next.

It's Thursday, August 29th at 2pm in London.

Seth Carpenter: And it's 9am in New York.

Andrew Sheets: Seth, it's always great to talk to you. But that's especially true right now. The Federal Reserve has been front and center in the markets debate over the last month; and I think investors have honestly really gone back and forth about whether interest rates are in line or out of line with the economy. And I was hoping to cover a few big questions about Fed policy that have been coming up with our clients and how you think the Fed thinks about them.

And I think this timing is also great because the Federal Reserve has recently had a major policy conference in Jackson Hole, Wyoming where you often see the Fed talking about some of its longer-term views and we can get your latest takeaways from that.

Seth Carpenter: Yeah, that sounds great, Andrew. Clearly these are some of the key topics in markets right now.

Andrew Sheets: Perfect. So, let's dive right into it. I think one of the debates investors have been having -- one of the uncertainties -- is that the Fed has been describing the risk to their outlook as balanced between the risk to growth and risk to inflation. And yet, I think for investors, the view over the last month or two is these risks aren't balanced; that inflation seems well under control and is coming down rapidly. And yet growth looks kind of weak and might be more of a risk going forward.

So why do you think the Fed has had this framing? And do you think this framing is still correct in the aftermath of Jackson Hole?

Seth Carpenter: My personal view is that what we got out of Jackson hole was not a watershed moment. It was not a change in view. It was an evolution, a continuation in how the Fed's been thinking about things. But let me unpack a few things here.

First, markets tend to look at recent data and try to look forward, try to look around the corner, try to extrapolate what's going on. You know as well as I do that just a couple weeks ago, everyone in markets was wondering are we already in recession or not -- and now that view has come back. The Fed, in contrast, tends to be a bit more inertial in their thinking. Their thoughts evolve more slowly, they wait to collect more data before they have a view. So, part of the difference in mindset between the Fed and markets is that difference in frequency with which updates are made.

I'd say the other point that's critical here is the starting point. So, the two risks: risks to inflation, risks to growth. We remember the inflation data we're getting in Q1. That surprised us, surprised the market, and it surprised the Fed to the upside. And the question really did have to come into the Fed's mind -- have we hit a patch where inflation is just stubbornly sticky to the upside, and it's going to take a lot more cost to bring that inflation down. So those risks were clearly much bigger in the Fed’s mind than what was going on with growth.

Because coming out of last year and for the first half of this year, not only would the Fed have said that the US economy is doing just fine; they would have said growth is actually too fast to be consistent with the long run, potential growth of the US economy. Or reaching their 2 per cent inflation target on a sustained basis. So, as we got through this year, inflation data got better and better and better, and that risk diminished.

Now, as you pointed out, the risk on growth started to rise a little bit. We went from clearly growing too fast by some metrics to now some questions -- are we softened so much that we're now in the sweet spot? Or is there a risk that we're slowing too much and going into recession?

But that's the sense in which there's balance. We went from far higher risks on inflation. Those have come down to, you know, much more nuanced risks on inflation and some rising risk from a really strong starting point on growth.

Andrew Sheets: So, Seth, that kind of leads to my second question that we've been getting from investors, which is, you know, some form of the following. Even if these risks between inflation and growth are balanced, isn't Fed policy very restrictive? The Fed funds rate is still relatively high, relative to where the Fed thinks the rate will average over the long run. How do you think the Fed thinks about the restrictiveness of current policy? And how does that relate to what you expect going forward?

Seth Carpenter: So first, and we've heard this from some of the Fed speakers, there's a range of views on how restrictive policy is. But I think all of them would say policy is at least to some degree restrictive right now. Some thinking it's very restrictive. Some thinking only modestly.

But when they talk about the restrictiveness of policy in the context of the balance of these risks, they're thinking about the risks -- not just where we are right now and where policy is right now; but given how they're thinking about the evolution of policy over the next year or two. And remember, they all think they're going to be cutting rates this year and all through next year.

Then the question is, over that time horizon with policy easing, do we think the risks are still balanced? And I think that's the sense in which they're using the balance of risks. And so, they do think policy is restrictive.

They would also say that if policy weren't restrictive, [there would] probably be higher risks to inflation because that's part of what's bringing inflation out of the system is the restrictive stance of policy. But as they ease policy over time, that is part of what is balancing the risks between the two.

Andrew Sheets: And that actually leads nicely to the third question that we've been getting a lot of, which is again related to investor concerns -- that maybe policy is moving out of line with the economy. And that's some form of the following: that by even just staying on hold, by not doing anything, keeping the Fed funds rate constant, as inflation comes down, that rate becomes higher relative to inflation. The real policy rate rises. And so that represents more restrictive monetary policy at the very moment, when some of the growth data seems to be decelerating, which would seem to be suboptimal.

So, do you think that's the Fed's intention? Do you think that's a fair framing of kind of the real policy rate and that it's getting more restrictive? And again, how do you think the Fed is thinking about those dynamics as they unfold?

Seth Carpenter: I do think that's an important framing to think -- not just about the nominal level of interest rates; you know where the policy rate is itself, but that inflation adjusted rate. As you said, the real rate matters a lot. And inside the Fed as an institution there, that's basically how most of the people there think about it as well. And further, I would say that very framing you put out about -- as inflation falls, will policy become more restrictive if no adjustment is made? We've heard over the past couple of years, Federal Reserve policymakers make exactly that same framing.

So, it's clearly a relevant question. It's clearly on point right now. My view though, as an economist, is that what's more important than realized inflation, what prices have done over the past 12 months. What really matters is inflation expectations, right? Because if what we're trying to think about is -- how are businesses thinking about their cost of capital relative to the revenues are going to get in the future; it's not about what policy, it's not about what inflation did in the past. It's what they expect in the future.

And I have to say, from my perspective, inflation expectations have already fallen. So, all of this passive tightening that you're describing, it's already baked in. It's already part of why, in my view, you know, the economy is starting to slow down. So, it's a relevant question; but I'm personally less convinced that the fall in inflation we've seen over the past couple of months is really doing that much to tighten the stance of policy.

Andrew Sheets: So, Seth, you know, bringing this all together, both your answers to these questions that are at the forefront of investors' minds, what we heard at the Jackson Hole Policy Conference and what we've heard from the latest FOMC minutes -- what does Morgan Stanley Economics think the Fed's policy path going forward is going to be?

Seth Carpenter: Yeah. So, you know, it's funny. I always have to separate in my brain what I think should happen with policy -- and that used to be my job. But now we're talking about what I think will happen with policy. And our view is the Fed's about to start cutting interest rates.

The market believes that now. The Fed seems from their communication to believe that. We've got written down a path of 25 basis point reduction in the policy rate in September, in November, in December. So, a string of these going all the way through to the middle of next year to really ease the stance of policy, to get away from being extremely restrictive, to being at best only moderately restrictive -- to try to extend this cycle.

I will say though, that if we're wrong, and if the economy is a bit slower than we think, a 50 basis point cut has to be possible.

And so let me turn the tables on you, Andrew, because we're expecting that string of 25 basis point cuts, but the market is pricing in about 100 basis points of cuts this year with only three meetings left. So that has to imply at least one of those meetings having a 50 basis point cut somewhere.

So, is that a good thing? Would the market see a 50 basis point cut as the Fed catching up from being behind the curve? Or would the market worry that a bigger cut implies a greater recession risk that could spook risk assets?

Andrew Sheets: Yeah, Seth, I think that's a great question because it's also one where I think views across investors in the market genuinely diverge. So, you know, I'll give you our view and others might have a different take.

But I think what you have is a really interesting dynamic where kind of two things can be true. You know, on the one hand, I think if you talk to 50 investors and ask them, you know, would they rather for equities or credit have lower rates or higher rates, all else equal -- I think probably 50 would tell you they would rather have lower rates.

And yet I think if you look back at history, and you look at the periods where the Federal Reserve has been cutting rates the most and cutting most aggressively, those have been some of the worst environments for credit and equities in the modern era. Things like 2001, 2008, you know, kind of February of 2020. And I think the reason for that is that the economic backdrop -- while the Fed is cutting -- matters enormously for how the market interprets it.

And so, conditions where growth is weakening rapidly, and the Fed is cutting a lot to respond to that, are generally periods that the market does not like. Because they see the weaker data right now. They see the weakness that could affect earnings and credit quality immediately. And the help from those lower rates because policy works with lag may not arrive for six or nine or twelve months. It's a long time to wait for the cavalry.

And so, you know, the way that we think about that is that it's really, I think the growth environment that’s going to determine how markets view this rate cutting balance. And I think if we see better growth and somewhat fewer rate cuts, the base case that you and your team at Morgan Stanley Economics have -- which is a bit fewer cuts than the market, but growth holding up -- which we think is a very good combination for credit. A scenario where growth is weaker than expected and the Fed cuts more aggressively, I think history would suggest, that's more unfriendly and something we should be more worried about.

So, I do think the growth data remains extremely important here. I think that's what the market will focus most on and I think it's a very much good is good regime that I think is going to determine how the market views cuts. And fewer is fine as long as the data holds up.

Seth Carpenter: That make a lot of sense, and thanks for letting me turn the tables on you and ask questions. And for the listeners, thank you for listening. If you enjoy this show, leave us a review wherever you listen to podcast. And share Thoughts on the Market with a friend or a colleague today.

Our Head of Corporate Credit Research explains how corporate balance sheets have remained resilient post-COVID, and why that could continue in the face of a potential economic slowdown.

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Welcome to Thoughts on the Market. I'm Andrew Sheets, head of Corporate Credit Research at Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, today I'll discuss how corporate balance sheets are in a better place to handle a potential growth slowdown. 

It's Friday, August 16th at 2pm in London. 

Much of the volatility over the last several weeks has been centered around fears that excessively high interest rates from the Federal Reserve will now cause the US economy to slow too quickly. Morgan Stanley’s economists are more optimistic and believe that the data will hold up, leading the Fed to start a gradual rate cutting cycle in September, rather than a more radical course-correction. Against this backdrop, good economic data is good for markets and vice versa. 

But even though we remain optimistic at Morgan Stanley about a soft landing in the US economy, our economists still expect growth to slow. How prepared are corporate balance sheets for that slowing, and how worried should we be that this could lead to higher rates of default? 

A good place to start is thinking about how optimistic companies were heading into any slowdown of the economy. Overconfidence is often the enemy of credit investors, as rose-tinted glasses can lead companies to make too many unwise acquisitions or investments, funded with too much debt. 

Yet across a variety of metrics, this isn’t what we see. Despite some of the lowest interest rates in human history, the level of debt to cash-flow for US and European companies has been pretty stable over the last five years. Excess capital held by banks remains historically high. And Merger and Acquisition activity, another key measure of corporate confidence, remains well below the long run trend – even after a pick up this year, as my colleague Ariana Salvatore discussed on this program earlier in the week. 

So, despite the strong recovery in the US economy and the stock market over the last four years, many corporate boardrooms have remained cautious, a good thing when considering their financial risk. 

Where Corporate debt did increase, it was often in places that we think could withstand it. Large-cap Technology and Pharmaceuticals issuers have taken out more debt over the last several years, relative to history, but it's been a pretty modest amount from a pretty low historical starting point. The Utility sector has also taken on more debt recently, but the stable nature of its business may make this easier to handle. 

While companies across the ratings spectrum generally didn’t increase their leverage over the last several years, they did take advantage of refinancing the debt they already had at historically low rates. And this is important for thinking about the stress that higher interest rates could eventually produce. 

The average maturity in the US Investment Grade index is about 11 years, and that means that, for many companies, potentially less than one-tenth of their overall debt resets to the current interest rate every year. That means companies may still have many years of enjoying the low interest rates of the past, and that helps smooth the adjustment to higher interest rates in the future. 

The lack of corporate confidence since COVID means that corporate balance sheets are generally in a better place if the economy potentially slows. But while this is helpful overall, it’s important to note that it doesn’t apply in all cases. We still see plenty of dispersion between winners and losers, driving divergence under the hood of the credit market. Even if balance sheets are stronger overall, there is plenty of opportunity to pick your spots. 

Thanks for listening. If you enjoy the show, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Our Global Chief Economist joins our Head of Fixed Income Research to review the most recent Consumer Price Index data, and they lay out potential outcomes in the upcoming U.S. elections that could impact the course of inflation’s trajectory.  

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Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Global Head of Fixed Income and Thematic Research.

Seth Carpenter: And I'm Seth Carpenter, Global Chief Economist.

Michael Zezas: And on this special episode of Thoughts on the Market, we'll be taking a look at how the 2024 elections could impact the outlook for inflation.

It's Wednesday, April 10th at 4pm in New York.

Seth, earlier this morning, the US Bureau of Labor Statistics released the Consumer Price Index (CPI) data for March, and it's probably an understatement to say it's been a much-anticipated report -- because it gives us some signal into both the pace of inflation and any potential fed rate cut path for 2024. I want to get into the longer-term picture around what the upcoming US election could mean for inflation. But first, I'd love your immediate take on this morning's data.

Seth Carpenter: Absolutely, Mike. This morning's CPI data were absolutely critical. You are right. Much anticipated by markets. Everyone looking for a read through from those data to what it means for the Fed. I think there's no two ways about it. The market saw the stronger than expected inflation data as reducing the likelihood that the Fed would start cutting rates in June.

June was our baseline for when the Fed would start cutting rates. And I think we are going to have to sharpen our pencils and ask just how much is this going to make the Fed want to wait? I think over time, however, we still see inflation drifting down over the course of this year and into next year, and so we still think the Fed will get a few rate hikes in.

But you wanted to talk longer term, you wanted to talk about elections. And when I think about how elections could affect inflation, it's usually through fiscal policy. Through choices by the President and the Congress to raise taxes or lower taxes, and by choices by the Congress and the President to increase or decrease spending.

So, when you think about this upcoming election, what are the main scenarios that you see for fiscal policy and an expansion, perhaps, of the deficit?

Michael Zezas: Yeah, I think it's important to understand first that the type of election outcome that historically has catalyzed a deficit expansion is one where one party gets complete control of both the White House and both chambers of Congress.

In 2025, what we think this would manifest in if the Democrats had won, is kind of a mix of tax extensions, as well as some spending items that they weren't able to complete during Biden's first term -- probably somewhat offset by some tax increases. On net, we think that would be incremental about $500 billion over 10 years, or maybe $40 [billion] to $50 billion in the first year.

If Republicans are in a position of control, then we think you're looking at an extension of most of the expiring corporate tax cuts -- expire at the end of 2025 -- that is up to somewhere around a trillion dollars spread over 10 years, or maybe a hundred to $150 billion in the first year.

Seth Carpenter: So, what I'm hearing you say is a wide range of possible outcomes, because you didn't even touch on what might happen if you've got a split government, so even smaller fiscal expansion.

So, when I take that range from a truly modest expansion, if at all, with a split government, to a slight expansion from the Democrats, a slightly bigger one from a Republican sweep, I'm hearing numbers that clearly directionally should lead to some inflationary pressures -- but I'm not really sure they're big enough to really start to move the needle in terms of inflationary outcomes.

And I guess the other part that we have to keep in mind is the election’s happening in November of this year. The new president, if there's a new president, the new Congress would take seats in the beginning of the year next year. And so, there's always a bit of a lag between when a new government takes control and when legislation gets passed; and then there's another lag between the legislation and the outcome on the economy.

And by the time we get to call it the end of 2025 or the beginning of 2026, I think we really will have seen a lot of dissipation of the inflation that we have now. So, it doesn't really sound like, at least from those baseline scenarios that we're talking about a huge impetus for inflation. Would you think that's fair?

Michael Zezas: I think that's fair. And then it sort of begs the question of, if not from fiscal policy, is there something we need to consider around monetary policy? And so around the Fed, Chair Powell's term ends in January of 2026 -- meaning potential for a new Fed chair, depending on the next US president.

So, Seth, what do you think the election could mean for monetary policy then?

Seth Carpenter: Yeah, that's a great question, Mike. And it's one that, as you know well, we tend to get from clients, which is why you and I jointly put out some research with other colleagues on just what scope is there for there to be a -- call it particularly accommodative Fed chair under that Republican sweep scenario.

I would say my take is -- not the biggest risk to worry about right now. There are two seats on the Federal Reserve Board that are going to come open for whoever wins the election as president to appoint. That's the chair, clearly very important. And then one of the members of the Board of Governors.

But it's critical to remember there's a whole committee. So, there are seven members of the Board of Governors plus five voting members, across the Federal Reserve Bank presidents. And to get a change in policy that is so big, that would have massive inflationary impacts, I really think you'd have to have the whole committee on board. And I just don't see that happening.

The Fed is set up institutionally to try to insulate from exactly that sort of, political influence. So, I don't think we would ever get a Fed that would simply rubber stamp any president's desire for monetary policy.

Michael Zezas: I think that makes a lot of sense. And then clients tend to ask about two other concerns; with particularly concerns with the Republican sweep scenario, which would be the impact of potentially higher trade tariffs and restrictions on immigration. What's your read here in terms of whether or not either of these are reliable in terms of their impact on inflation?

Seth Carpenter: Yeah, super topical. And I would say at the very least, we have some experience now with tariff policy. And what did we see during the last episode where there was the trade war with China? I think it's very natural to assume that higher tariffs mean that the cost of imported goods are going to be higher, which would lead to higher inflation; and to some extent that was true, but it was a much smaller, much more muted effect than I think you might otherwise assume given numbers like 25 per cent tariffs or has been kicked around a few times, maybe 60 per cent tariffs. And the reason for that change is a few things.

One, not all of the goods being brought in under tariffs are final consumer goods where the price would just go straight through to something like the CPI. A lot of them were intermediate goods. And so, what we saw in the last round of tariffs was some disruption to US manufacturing, disruption to production in the United States because the cost of production went up.

And so, it was as much a supply shock as it was anything else. For those final consumer goods, you could see some pass through; but remember, there's also the offset through the exchange rate, that matters a lot. And, consumers, they have a willingness to pay, or maybe a willingness not to pay, and so, sellers aren't always able to pass through the full cost of the tariffs. And so, as a result, I think the net effect there is some modestly higher inflation, but really, it's important to keep in mind that hit to economic activity that, over time, could actually go in the opposite direction and be disinflationary.

Immigration, very different story, and it has been very much in the news recently. And we have seen a huge surge in immigration last year. We expect it to continue this year. And we think it's contributing to the faster run rate that we've seen in the economy without continued inflationary pressure. So, I think it's a natural question to ask -- if immigration was restricted, would we see labor shortages? Would that drive up inflation? And the answer is maybe.

However, a few things are really critical. One, the Fed is still in restrictive territory now, and they're only going to start to lower rates if and when we see inflation come down. So the starting point will matter a lot. And second, when we did our projections, we took a lot of input from where the CBO's estimates are, and they've already been assuming that immigration flows really start to normalize a bit in 2025 and a lot more in 2026. Back to run rates that are more like pre-COVID rates. And so, against that backdrop, I think a change in immigration policy might be less inflationary because we'd already be in a situation where those flows were coming down.

But that's a good time for me to turn things around, Mike, and throw it right back to you. So, you've been thinking about the elections. You run thematic research here. I've heard you say to clients more than once that there is some scope, but limited scope for macro markets to think about the outcome from the election, but lots of scope from a micro perspective. So, if we were thinking about the effect of the election on equity markets, on individual sectors, what would be your early read on where we should be focusing most?

Michael Zezas: So we've long been saying that the reliable market impacts from this election, at least this far out, appear to be more micro than macro. And so, for example, in a Republican sweep scenario, we feel pretty confident that there would be a heavier skew towards extending corporate tax cut provisions that are expiring at the end of 2025.

And if you look at who benefits fundamentally from those extensions, it tends to be companies that do more business domestically in the US and tend to be a bit smaller. Sectors that tend to come in the scope include industrials and telecom; and in terms of size of company, it tends to skew more towards small caps.

Seth Carpenter: So, I can see that, Mike, but let me make it even more provocative because a question I have got from clients recently is the Inflation Reduction Act (IRA), which in lots of ways is helping to spur spending on infrastructure, is helping to spur spending on green energy transition. What's the chance that that gets repealed if the outcome, if the election goes to Trump?

Michael Zezas: We see the prospects for the IRA to get repealed is quite limited, even in a Republican sweep scenario. The challenge for folks who might not want to see the law exist anymore is that many of the benefits of this law have already been committed; and the geographic area where they've been committed overlays with many of the districts represented by Republicans, who would have to vote for its repeal. And so, they might be voting against the interests of their districts to do that. So, we think this policy is a lot stickier than people perceive. The campaign rhetoric will probably be, pretty elevated around the idea of repealing it; but ultimately, we think most of the money behind the IRA will be quite durable. And this is something that should accrue positively to the clean tech sector in particular.

Seth Carpenter: Got it. Well, Mike, as always, I love being able to take time and talk to you.

Michael Zezas: Seth, likewise, thanks for taking the time to talk. And as a reminder, if you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple podcast app. It helps more people find the show.

Local and state governments across the U.S. are eagerly watching whether a new round of stimulus will help them address budget shortfalls. Will Congress deliver?

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While excessive inflation can be disruptive, such as in the 1970’s, a deflationary mindset can often be more destructive—and difficult to reverse. What current inflation trends mean for investors.

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Our Chief Fixed Income Strategist surveys the latest big swings in the oil market, which could lead to opportunities in equities and credit around the energy sector.

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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 implications of recent strong moves in oil markets.

It's Tuesday, April 9th at 3pm in New York.

A lot is going on in the commodity markets, particularly in the oil market. Oil prices have made a powerful move. What is driving these moves? And how should investors think about this in the context of adjacent markets in equities and credit?

Morgan Stanley's Global Commodity Strategist and Head of European Energy Research, Martijn Rats, raised crude oil price forecast for the third quarter to $94 per barrel. The rally in recent weeks is a result of positive fundamental news and rising geopolitical tensions.

On the fundamental side, we've had better than expected demand from China and steeper than forecast fall in US production. Further, oil prices have also found support from growing potential for supply uncertainty in the Middle East. Martijn thinks that the last few dollars of rally in oil prices should be interpreted as a premium for rising geopolitical risks. The revision to the third quarter forecast should therefore be seen to reflect these growing geopolitical risks.

Our US equity strategists, led by Mike Wilson, have recently upgraded the energy sector. The underlying rationale behind the upgrade is that the energy sector relative performance has really lagged crude oil prices; and unlike many other sectors within the US stock world, valuation in energy stocks is very compelling.

Furthermore, the relative earnings revisions in energy stocks are beginning to inflect higher and the sector is actually exhibiting best breadth of any sector across the US equity spectrum. Higher oil prices are also important for credit markets. To quote Brian Gibbons, Morgan Stanley's Head of Energy Credit Research, for credit bonds of oil focused players, flat production levels and strong commodity prices should support free cash flow generation, which in turn should go to both shareholder returns and debt reduction.

In summary, there is a lot going on in the energy markets. Oil prices have still some room to move higher in the short term. We find opportunities both in equity and credit markets to express our constructive view on oil prices.

Thanks for listening. If you enjoyed the show, please leave us a review on Apple Podcasts or wherever you listen to this podcast. And share Thoughts on the Market with a friend or colleague today.

Europe’s response to the coronavirus pandemic—both in managing the outbreak and in policy response—has been strong. Here’s what it means for asset classes in the region.

How should investors think about the recovery as the U.S. balances reopening with concerns over a second wave of coronavirus infections?

How should investors view a world where there may be room for more than one norm when it comes the balance of power among economies and commerce?

Many investors are still looking at the current recession as an anomaly rather than as the end of a cycle. Chief Investment Officer Mike Wilson explains the implications.

While the macro events of the last few months are certainly extreme by the standards of history, the current business cycle may be more normal than is appreciated.

Two common doubts about another round of fiscal stimulus center on the politics of passage and election year strategy. Here’s why Congress could agree on a package.

Equity markets became a bit frothy during early June as optimism over a recovery took hold. So while a correction may be afoot, it isn’t atypical for a young bull market.

The proposed €750 billion European Recovery Fund could represent more than just a recovery from COVID-19. It may also signal a new era of political and economic unity.

Policymakers and voters may care about deficits, but reducing current spending may not be a priority over other issues—and right now that may be a plus for the economy.

Over the last decade, global investors have been lukewarm toward European assets, but three encouraging developments may be set to change that investing narrative.

Our Global Chief Economist explains why the rapid hikes, pause and pivot of the current interest rate cycle are reminiscent of the 1990s.

----- Transcript -----

Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about the current interest rate cycle and the parallels we can draw from the 1990s.

It's Monday, April 8th, at 10am in New York.

Last year, we reiterated the view that the 1990s remain a useful cycle to consider for understanding the current cycle. Our European equity strategy colleagues shared our view, and they've used that episode to inform their ‘out of consensus, bullish initiation on European equities’ in January. No two cycles are identical, but as we move closer to a Fed cut, we reassess the key aspects of that comparison.

We had previously argued that the current interest rate cycle and the mid 90s cycle differ from the intervening cycles because the goal now is to bring inflation down, rather than preventing it from rising. Of course, inflation was already falling when the 1994 cycle started, in part, because of the recession in 1991.

This cycle -- because much of the inflation was driven by COVID-related shocks, like supply chains for consumer goods and shifts in housing for shelter inflation -- inflation started falling rapidly from its peak before the first hike could have possibly had any effect. In recent months, our economic growth forecasts have been regularly revised upward, even as we have largely hit our expected path for inflation.

A labor supply shock appears to be a contributing factor that accounts for some of that forecast deviation, although fiscal policy likely contributed to the real side's strength as well. Supply shocks to the labor market are an interesting point of comparison for the two cycles. In the 1990s, labor force growth was still benefiting from this multi-decade rise in labor force participation among females. The aggregate labor force participation rate did not reach its peak until 2000.

Now, as we've noted in several publications, the surge in immigration is providing a similar supply side boost, at least for a couple of years. But the key lesson for me for the policy cycle is that monetary policy is not on a pre-set, predetermined course merely rising, peaking and then falling. Cycles can be nuanced. In 1994, the Fed hiked the funds rate to 6 per cent, paused at that peak and then cut 75 basis points over 1995 and 1996. After that, the next policy move was actually a hike, not a cut.

Currently, we think the Fed starts cutting rates in June; and for now, we expect that cutting to continue into next year. But as our US team has noted, the supply side revisions mean that the path for policy next year is just highly uncertain and subject to review. From 1994 to 1996, job gains trended down, much like they have over the past two years.

That slowing was reflective of a broader slowing in the economy that prompted the Fed to stop hiking and partially reverse course. So, should we expect the same now, only a very partial reversal? Well, it's too soon to tell, and as we've argued, the faster labor supply growth expands both aggregate demand and aggregate supply -- so a somewhat tighter policy stance could be appropriate.

In 1996, inflation stopped falling, and subsequently rose into 1997, and it was that development that supported the Fed's decision to maintain their somewhat restrictive policy. But we can't forget, afterward, inflation resumed its downward trajectory, with core PCE inflation eventually falling below 1.5 per cent, suggesting that that need to stop cutting and resume hiking, well, probably needs to be re-examined.

So, no two cycles match, and the comparison may break down. To date, the rapid hikes, pause and pivot, along with a seeming soft landing, keeps that comparison alive. The labor supply shock parallel is notable, but it also points to what might be, just might be, another possible parallel.

In the late 1990s, there was a rise in labor productivity, and we've written here many times about the potential contributions that AI might bring to labor productivity in coming years.

Thanks for listening. If you enjoy the show, please leave us a review wherever you listen to podcasts and share Thoughts on the Market with a friend or colleague today.

Depressed 10-year Treasury yields and a strong dollar have tempered the bullish outlook for U.S. equities. But a shift in both suggests a V-shape recovery could be more likely.

Why are markets climbing despite a pandemic and this week’s demonstrations across the U.S.? The answer may lie with how markets view progress.

Large cap biotech analyst Matthew Harrison talks with Chief Cross-Asset Strategist Andrew Sheets to discuss the latest timeline for a coronavirus vaccine, hurdles to success and possible market reactions.  

Although market volatility continues to decrease, the volatility of popular momentum strategies is increasing—which suggests a coming rotation to early cycle stocks.

Although the impact of the coronavirus on markets, economies and jobs is truly unprecedented, it doesn’t mean investing precedents don’t still apply.

As U.S. states cope with challenged finances due to the coronavirus, could some look to online gaming to fill budget gaps?

Although the coronavirus recession shares traits with the 2008 financial crisis and other recessions, the rate and sustainability of a recovery could be quite different this cycle.

Will pent-up demand from U.S. consumers help drive a recovery from the coronavirus recession? A special conversation with our Chief Investment Officer and Chief U.S. Economist.

Why would inflation rise since the current recession means an acute shortage of demand for goods and services? Chief Cross-Asset Strategist Andrew Sheets explains.

Congress is weighing another round of fiscal stimulus, possibly by July. But the dynamics of passage in an election year could mean a narrow window to take action.

Oil demand has been higher than expected so far in 2024. Our Global Commodities Strategist explains what could drive oil to $95 per barrel by summer.

----- Transcript -----

Welcome to Thoughts on the Market. I’m Martijn Rats, Morgan Stanley’s Global Commodities Strategist. Along with my colleagues bringing you a variety of perspectives, today I’ll discuss recent developments in the oil market. It is Friday, April the 5th at 4 PM in London. 

At the start of the year, the outlook for the oil market looked somewhat unexciting. With the recovery from COVID largely behind us, growth in oil demand was slowing down. At the same time, supply from countries outside of OPEC (Organization for Petroleum Exporting Countries) had been growing strongly and we expected that this would continue in 2024. In fact, at the start of the year it looked likely that growth in non-OPEC supply would meet, or even exceed, all growth in global demand. When that occurs, room in the oil market for OPEC oil is static at best, which in turn means OPEC needs to keep restraining production to keep the balance in the market. Even if it does that, it results in a decline in market share and a build-up of spare capacity. History has often warned against such periods.

Still, by early February, the oil market started to look tighter than initially expected. Demand started to surprise positively – partly in jet fuel, as aviation was stronger than expected; partly in bunker fuel as the Suez Canal issues meant that ships needed to take longer routes; and partly in oil as petrochemical feedstock, as the global expansion of steam cracker capacity continues. At the same time, production in several non-OPEC countries had a weak start of the year, particularly in the United States where exceptionally cold weather in the middle of January caused widespread freeze offs at oil wells, putting stronger demand and weaker supply together, and the inventory builds that we expected in the early part of the year did not materialise. 

By mid-February, we could argue that the oil market looked balanced this year, rather than modestly oversupplied; and by early March, we were able to forecast that oil market fundamentals were strong enough to drive Brent crude oil to $90 a barrel over the summer.

Since then, Brent has honed in on that $90 mark quicker than expected. Over the last week or so, the oil market has shown a powerful rally that has the hallmarks of simply tightening fundamentals but also with some geopolitical risk premium creeping back into the price. For now, our base-case forecast for the summer is still for Brent to trade around $90 per barrel as that is where we currently see fundamental support. 

However, the oil market typically enjoys a powerful seasonal demand tailwind over the summer. And that still lies ahead. And, geopolitical risk is still elevated, for which oil can be a useful diversifier. With those factors, our $95 bull case can also come into play.

Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Current stock market price patterns look surprisingly similar to 2009 and the global financial crisis. The big difference for investors may be the knock-on effect of low interest rates.

As markets have begun to price expectations for negative rates in Britain and the U.S., Chief Cross-Asset Strategist Andrew Sheets breaks down the potential impact on consumers, savers and economic growth.

What China’s rebound from COVID-19 can—and can’t—tell us about the path, speed and pitfalls of economic reopening for other countries. Chief China Economist Robin Xing and Chief Cross-Asset Strategist Andrew Sheets look at the data, lessons so far, and how the country has had to modify its crisis playbook.

Can the Phase One trade deal détente stand, or will the U.S. and China return to a cycle of escalating tariffs that may impact prospects of a rebound in economic growth? Michael Zezas, Head of Public Policy Research and Municipal Strategy, takes a closer look.

Amid investor speculation about the shape of a recovery, Chief Investment Officer Mike Wilson urges a standard recession playbook.

How should an investor evaluate the issue of high levels of government debt as nations battle the impact of the coronavirus? A deep dive into the debate.

How can we best coordinate policy to support a timely recovery and what lessons can we learn from the past? Chief Global Economist Chetan Ahya and Chief Cross Asset Strategist Andrew Sheets discuss the policy path back from the global economic crisis brought on by COVID-19.

The hole in U.S. state budgets caused by coronavirus-driven revenue shortfalls will likely affect more than just muni bond investors. Head of Public Policy Michael Zezas explains.

As the rally in U.S. equities takes a break, investors may want to position for "early cycle." And that means re-thinking portfolios just as downbeat economic and earnings data arrives.

Why did April’s stock market gains seem oddly disconnected from recent poor economic data? Chief Cross Asset Strategist Andrew Sheets has the answer.

Experts from our research team discuss how tensions with China could limit US access to essential technologies and minerals.

----- Transcript -----

Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income and Thematic Research.

Ariana Salvatore: And I'm Ariana Salvatore from the US Public Policy Research Team.

Michael Zezas: And on this episode of the podcast, we'll discuss how tensions in the US-China economic relationship could impact US attempts to transition to clean energy.

It's Thursday, April 4th at 10am in New York.

Ariana, in past episodes, I've talked about governments around the world really pushing for a transition to clean energy, putting resources into moving away from fossil fuels and moving towards more environmentally friendly alternatives. But this transition won't be easy. And I wanted to discuss with you one challenge in the US that perhaps isn't fully appreciated. This is the tension between US climate goals and the goal of reducing economic links with China. So, let's start there.

What's our outlook for tensions in the near term?

Ariana Salvatore: So, first off, to your point, the world needs over two times the current annual supply of several key minerals to meet global climate pledges by 2030. However, China is a dominant player in upstream, midstream, and downstream activities related to many of the required minerals.

So, obviously, as you mentioned, trade tensions play a major role in the US ability to acquire those materials. We think friction between the US and China has been relatively controlled in recent years; but we also think there are a couple factors that could possibly change that on the horizon.

First, China's over-invested in excess manufacturing capacity at a time when domestic demand is weak, driving the release of extra supply to the rest of the world at very low prices. That, of course, impacts the ability of non-Chinese players to compete. And second, obviously a large focus of ours is the US election cycle, which in general tends to bring out the hawk in both Democrats and Republicans alike when it comes to China policy.

Michael Zezas: Right. So, all of that is to say there's a real possibility that these tensions could escalate again. What might that look like from a policy perspective?

Ariana Salvatore: Well, as we established before, both parties are clearly interested in policies that would build barriers protecting technologies critical to US economic and national security. These could manifest through things like additional tariffs, as well as incremental non-tariff barriers, or restrictions on Chinese goods via export controls.

Now, importantly, this could in turn cause China to act, as it has done in the recent past, by implementing export bans on minerals or related technology -- key to advancing President Biden's climate agenda, and over which China has a global dominant position.

Specifically on the mineral front. China dominates 98 per cent of global production of gallium, more than 90 per cent of the global refined natural graphite market, and more than 80 per cent of the global refined markets of both rare earths and lithium. So, we've noted that those minerals are at the highest risk of disruption from potential escalation intentions.

But Michael, from a market's perspective, are there any sectors that stand out as potential beneficiaries from this dynamic?

Michael Zezas: So, our research colleagues have flagged that traditional US autos would see mostly positive implications from this outcome as EV penetration would likely stagnate further in the event of higher trade tensions. Similarly, US metals and mining stocks would likely benefit on the back of increased support from the government for US production, as well as increased demand for locally sourced materials.

On the flip side, Ariana, any clear risks that our analysts are watching for?

Ariana Salvatore: Yeah, so a clear impact here would be in the clean tech sector, which faces the greatest risk of supply chain disruption in an environment with increasing trade barriers in the alternative energy space. And that's mainly a function of the severe dependencies that exist on China for battery hardware. Our analysts also flagged US large scale renewable energy developers for potential downside impacts in this scenario -- again, specifically due to their exposure to battery and solar panel supply chains, most of which stems from China domiciled industries.

Michael Zezas: Makes sense and clearly another reason we’ll have to keep tracking the US-China dynamic for investors. Ariana, thanks for taking the time to talk.

Ariana Salvatore: Great speaking with you Mike.

Michael Zezas: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen to the show and share the podcast with a friend or colleague today.

Consensus on the dollar has been bearish for years, only to be proven wrong time after time. But Global Head of Macro Strategy Matthew Hornbach says the mechanics of supply and demand could change that outcome.

As Congress debates aid for state governments, for investors, the principal concern is that a lack of additional federal aid might further depress state spending and drag on economic growth.