European Markets React to Upcoming U.S. Election

Our Freight Transportation & Airlines Analyst discusses the key takeaways from his mid-year corporate travel survey, which includes a number of positive trends for the second half of 2024.----- 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 my expectations for corporate travel in the second half of this year. It’s Thursday, July 11th, at 10am in New York. More and more business travelers are packing their bags and taking a flight for business meetings. In fact, our corporate travel survey suggests that a record 50 percent of respondents marked their travel itineraries as returning to pre-COVID levels. As well, corporate travel budgets are expected to be up five to seven percent year-over-year in 2024, and about six percent in 2025. This means significantly more flights, hotels and car bookings for corporate travel.Interestingly, this is the first survey since 2021 that larger enterprises were more optimistic on corporate travel demand compared to smaller enterprises.The shift to virtual meetings over the next two years will likely be stable. Companies continue to predict that 12-13 percent of travel volume will be replaced by virtual meetings in 2024 and 2025. Looking ahead, respondents expect this level to hold through 2025, supporting some level of permanent shift we think.For US airlines specifically, we have started to see more signs of life within the corporate space. Several US airlines are pointing to noticeable improvement in the first quarter after fairly stagnant volumes at the end of 2023. We also saw a reversal from prior surveys with larger corporations recovering faster than smaller enterprises, which had initially led the post-COVID recovery.This positive trend in airline demand is supportive of our attractive view on US aerospace, as well. Even though global air traffic has already reached pre-COVID-19 levels, it is still about 32 percent below where the trendline would have been if COVID-19 had not happened, which leaves more room for growth.For business aviation, private jet use should remain strong and stable as a large majority of survey participants are not planning to change their business jet travel. Higher interest rates and a potentially slowing economy could lead to a potential slowdown in business jet demand, but this hasn’t happened so far as there continues to be limited excess capacity in the industry as well as continued strong demand for aircraft.Our colleagues in Europe note that although near-term indicators are positive, 40 percent of European respondents now do not expect corporate travel volumes to return to 2019 levels. This is concerning for the longer-term prospects of European corporate demand growth, which appears to be weaker than US growth.Whether you're flying private jets or commercial, or choosing to keep your team meetings virtual, we'll continue to monitor corporate travel trends, and let you know of any updates to those flight manifests. 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.

11 Heinä 20243min

U.S., French and Indian elections may have a minimal effect on equity markets, particularly in the short term, according to our Global Head of Fixed Income and our Chief Global Cross Asset Strategist.----- Transcript -----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Global Head of Fixed Income and Thematic Research.Serena Tang: And I'm Serena Tang, chief Global Cross Asset Strategist,Michael Zezas: And on this episode of the podcast, we'll discuss what the elections in the US and Europe mean for global markets.It's Wednesday, July 9th at 10am in New York.As investors digest the results of the French election and anticipate the upcoming US presidential election, there's some key debates that are surfacing. And so I wanted to sit down with Serena to dig into these issues that are top of mind for investors.Serena, do you expect the upcoming US elections will impact markets in the run up to November?Serena Tang: Significantly, not likely -- because if we look at history, for stocks for example, in any election year, returns don't look significantly different from any other year.Serena Tang: My team ran some cross asset analysis on market behavior in and out of prior US elections using as much data as we have. And what has been very interesting is that whether a Democrat or Republican candidate eventually takes the White House, that doesn't change the trend of returns into an election.The form of the future elected government, whether it is divided or unified, that has also never really bothered stock markets before the vote. And you can see very, very similar patterns in bond yields, the dollar and gold. Now, what this means is that even if an investor has perfect foresight and know the results of the elections now, it won't necessarily give them an edge over the next few months.Serena Tang: Now, beyond the election is really when you see performance in various election outcome scenarios really diverge. So, whether the election was tight or not seemed to have led US rates to see very different levels of returns 12 months out from an election. Whether the outcome means a unified or divided government saw very large swings in gold prices.Now there are a lot of caveats. Every election is different. The economic conditions in every election is different. And as much as we talk about other historical periods, the truth is there aren't a lot of data points to work with. Data for S&P 500 going back to 1927 reaches the most far back among the major markets, but even then it only covers 23 presidential elections.So what I'm trying to say is there have been a lot of presidents, but there aren't a lot of precedents, at least for markets.Michael Zezas: The US election isn't the only election making headlines this year. For example, we just had an election in France that had a surprising result. How does the outcome there affect your outlook on the market?Serena Tang: It doesn't, in short. It doesn't change our bullish view on European equities at all. As you know, we have been constructive on that market since January and added significant exposure in our asset allocation then -- very much on the back of our European equity strategist Marina Zavolok coming out with an out of consensus bullish call for European stocks.Serena Tang: We like the market because of its cheap optionality and convexity. It has about 20 per cent revenue exposure to US but at much cheaper valuation. And it has about 20 per cent revenue exposure to EM, meaning should we get a growth surprise to the upside; you're geared to that but at much lower volatility than owning EM equities outright.Now, none of this has changed post French elections, and we also don't see significant increase in bearish tail risks. If you look at other markets like Euro IG corporate credit or the euro, those markets are suggesting risks in France are idiosyncratic, not systemic. So we maintain our overweight in European stocks.Serena Tang: Everything that I just said is also true for our bullish view on Indian equities, even after elections a month ago. Ridham Desai, head of India research, argued the election outcome there is likely to usher in more structural reforms and really reinforces our forecast of 20 per cent annual earnings growth over next five years, sustaining India's longest and strongest bull market ever. Bullish secular factors for Indian equities have not changed and therefore our bullish view on Indian equities have not changed.Michael Zezas: And elections have consequences for how countries interact with one another. And how their policies differ from one another. And one area of the markets that tend to be sensitive to this is the foreign exchange markets. So are there any impacts you're looking for around foreign currencies?Serena Tang: Yes, in particular, the dollar. But let me start with the euro first. Because I talked earlier about our bullish view on European equities; and in fact, in our asset allocation, we actually have a higher allocation to Europe versus US for stocks, bonds, and corporate credit bonds. The one European market we're more cautious on is the euro. And this actually has nothing to do with the French election results, per se -- because what matters now really is dollar strength. Now, part of this is a rates differential issue. Our US economics team are expecting the Fed to start cutting in September, while the ECB, of course, has already started easing policy. So yield differentials really favor the dollar here.But we also need to factor in the election, which seems to be the theme for today. Our FX [foreign exchange] strategy team thinks markets really need to start pricing in material likelihoods of dollar positive changes in US fiscal, foreign and trade policy as the election approaches. Meaning the dollar will continue its modest uptrend into the second half. And geopolitical uncertainty, of course, will also be dollar positive.Michael Zezas: So bottom line then. Elections clearly have consequences for markets but in the run-up to an election, there might not be a reliable pattern.Serena Tang: Exactly.Michael Zezas: Great. Well Serena, thanks for taking the time to talk.Serena Tang: Great speaking with you, Mike.Michael Zezas: And as a reminder, if you enjoy the podcast, please take a moment to rate and review us wherever you listen to podcasts and share Thoughts on the Market with a friend or colleague today.

10 Heinä 20246min

Record-high prices remain a key concern for buyers in the U.S. housing market. Our Co-Heads of Securitized Product Research dig into the data, explaining why they still believe a deceleration in home price growth will come.----- Transcript -----Jay Bacow: Welcome to Thoughts on the Market. I'm Jay Bacow, co-head of Securitized Products Research at Morgan Stanley.James Egan: And I'm Jim Egan, the other co-head of Securitized Products Research at Morgan Stanley. It's Tuesday, July 9th, at 1pm in New York. Jay Bacow: Jim, housing headlines just keep coming. Home prices are at record highs. What does that mean? How should we be thinking about that? James Egan: So, that has been a fun headline, and according to several measures of home prices, we are at record highs. But, let's put that into context. We've actually set a new record high for home prices every month for the past ten months. In fact, prior to a 12-month hiatus from July of ’22 to June of ’23, home prices had actually hit a new record high every month for 68 consecutive months. Jay Bacow: Alright, so if we're just talking about levels, it's important. But given that I'm a physicist by training, so are rates of change; and for that matter, changes to the rate of change, or acceleration, if you will. If there's something different about the current record of US home prices that is worth discussing, that would be interesting. James Egan: We think there is. Actually two months ago, home prices set a new record high. But it was also the first time in ten months that the pace of year-over-year home price appreciation did not accelerate. This month the pace of appreciation actually started to decelerate. As listeners of this podcast might remember, we've been calling for the pace of year-over-year home price appreciation to slow from above 6.5 per cent to just two percent by December. We are still above six percent today, but this could be the beginning of that deceleration. Jay Bacow: Right. And if there's going to be deceleration, Newton would say there needs to be some force that causes it. And my understanding is you thought that that force that causes it would be sale inventories increasing. Has that been the case? James Egan: Indeed, it has been actually. Total for sale inventory has increased for six consecutive months. And the pace of that growth is accelerating. Now, we do want to highlight that overall supply remains very tight. That part of the housing narrative hasn't changed. If we take a step back and look at the whole market, total months of supply are at just 4.5 per cent. Anything below six is really considered a seller's market there. On the other hand, this is the highest level that the market has experienced since the first half of 2020, which is another argument in our minds for the pace of home price appreciation to decelerate. But once we remove these pandemic era lows, four and a half months is close to the lowest level of the past 30 plus years. Jay Bacow: Alright, now sticking on the level context. Home prices weren't just the only thing that set a record level these days. Pending home sales just set a new record low in May. James Egan: Right, that's also the case. Now, we do want to put the record into context here. The pending home sales index that we're referring to only goes back to 2001. But over that 23 plus years, the May print was the lowest number that we've seen. Jay Bacow: Alright, so given all of that, how are you thinking about demand for housing amidst increasing supply? James Egan: Right. So this is a pretty important question. When it comes to demand at these levels, affordability remains very challenged. One of the primary questions for the US housing market moving forward is going to be the interplay between the absolute level of affordability and the direction and rate of change. Now, we are far from being able to declare a winner here. Sales volumes have increased off of 12 year lows from the fourth quarter of 2023; but at the same time, there are several demand indicators that are having trouble achieving liftoff, if you will. Pending home sales, for instance. They're not falling as fast as they have been, over the past two plus years; but they're also having a hard time achieving some sort of escape velocity as they continue to fall on a year-over year-basis. Mortgage applications for purchase -- another one of our leading indicators -- they're experiencing a similar dynamic. The first half of 2024 has been a noticeable second derivative improvement versus 2023, but that improvement has slowed and applications are still falling on a year-over-year basis. Now, part of this is going to be a function of mortgage rates going forward. Jay, what are we thinking there? Jay Bacow: Now, the biggest driver of mortgage rates is going to be the level of treasury rates. And our rate strategists are forecasting treasury rates to fall over the end of this year and into the middle of next year. If that happens, we would expect mortgage rates to get towards 6.25 to 6.5 per cent by next summer -- clearly materially lower than they are right now. But once again, the biggest driver of this is treasury rates. Not what's going on with the mortgage market. James Egan: And we continue to expect with that decrease affordability to improve, and that to drive year-over-year growth and sales in the second half of 2024 versus 2023. But it doesn't have to be a straight line to that outcome. And how are you thinking Jay, from a mortgage market perspective about sales volumes? Jay Bacow: So, the mortgage market is in a pretty interesting spot because there's almost two sides of it. There's the existing mortgage market, which is mostly made up of homeowners that have very low mortgage rates, and thus the coupon to the investor is relatively low; and they're trading at a discount. If turnover is low, then those bonds are outstanding for longer, which is bad for those investors. But, if that turnover is low, that means the supply to the market in the new higher coupon mortgages is relatively low, which is good for those investors in the new higher coupon mortgages. In effect, if turnover is lower, it's good for higher coupon mortgages, not so good for lower coupon mortgages. James Egan: And that's why all of this is so critical. If I were to, to summarize, we're paying attention to increasing inventory volumes in the housing market. We're paying attention to some of these demand statistics that are coming in a little softer than at least consensus estimates expected them to. We do think that home price growth is going to decelerate as a result. We also think it will remain positive. There continues to be very little overall supply in the US housing market. Jay, it was nice speaking with you. Jay Bacow: Jim, nice talking physics in the housing market with you. James Egan: Thanks for listening. And if you enjoyed this podcast, please leave us a review wherever you listen, and share Thoughts on the Market with a friend or colleague today.

9 Heinä 20246min

Inflation continues to be a key issue for voters in elections around the world. Our CIO and Chief US Equity strategist explains its potential influence on the upcoming US presidential election, and how investors may react to potential outcomes of this race.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief US Equity Strategist. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about the consequences of elections on policy and markets. It's Monday, July 8th at 2:30pm in New York. So let’s get after it. Several important elections around the world have taken place with important implications for policy and markets. Most notably, elections in India, Mexico, the UK and France have all garnered the attention of investors.While these elections are unique to each country, there does appear to be a growing focus on the issue of economic inequalities and immigration. While these inequalities have been building for decades, the COVID pandemic and policies implemented to deal with it have ushered in a higher focus on these disparities and a general level of uncertainty about the future on the part of many citizens.Of all the changes affecting the average person most adversely, inflation stands out as the most challenging. While the rate of change on inflation has been steadily falling since 2022, the price level of a number of goods and services remains challenging for many. Prices for basic items like food, shelter, healthcare, insurance and utilities are 30 to 50 per cent higher than they were pre-pandemic. Offsetting some of this increase has been the rise in home equity and financial asset prices, but this only helps those who are asset owners. Fixed rate mortgages have also been a notable positive offset to rising prices and interest rates. For many, there is a natural arbitrage between these pre-existing, historically low mortgage rates and money market rates. Once again, such an arbitrage is only available to those who have large piles of cash.In our view, these dynamics further the case that inflation is going to play a major role in this year's upcoming U.S. election much like it is having an impact globally. The recent US Presidential debate prompted inquiries from investors on what a potential Trump win or a potential Republican sweep could mean for markets. Based on initial market reactions and our conversations with clients, there is a consistent view that both growth and longer-term interest rates could move higher under this outcome. This has led to a greater appetite to rotate one’s equity portfolio toward value and cyclical stocks, which also worked leading into the 2016 election. Market expectations for fiscal expansion, reflation and less regulation under a Trump Presidency support such moves. However, we think there’s also a couple of important dynamics to consider. First, we would argue that the cycle is more mature today than it was in 2016 as evidenced by the two-and-a-half-year decline in the Conference Board Leading Economic Indicator and the nearly 2-year inversion of the yield curve. Given a later cycle environment is historically a backdrop where the market pays up for quality and liquidity, we advise staying up the quality curve and away from small cap cyclicals, which worked in 2016. In short, the state of the business cycle right now is more important than the election outcome. As such, we think investors should stay selective within cyclicals. Second, the market welcomed a reflationary playbook in 2016. Inflation was not a headwind to consumers in the way it is now, and the US economy was recovering from a global manufacturing recession, the recovery of which was aided by the prospects of a pro-fiscal/reflationary policy regime. Today, inflation is a notable headwind to consumers as discussed previously and fiscal sustainability dynamics remain top of mind for the bond market. Thanks for listening. If you enjoy the podcast, please leave us a review wherever you listen, and share Thoughts on the Market with a friend or colleague today.

8 Heinä 20244min

Original release date April 15, 2024: Markets are suggesting that spirits consumption will return to historical growth levels post-pandemic, but our Head of European Consumer Staples Research disagrees.----- Transcript -----Welcome to Thoughts on the Market. I’m Sarah Simon, Head of the European Consumer Staples team. Along with my colleagues bringing you a variety of perspectives, today I'll talk about a surprising trend in the global spirits market.It's Monday, April 15, at 2pm in London. We all remember vividly the COVID-19 period when we spent much more on goods than services, particularly on goods that could be delivered to our homes. Not surprisingly, spirits consumption experienced a super-cycle during the pandemic. But as the world returned to normal, the demand for spirits has dropped off. The market believes that after a period of normalization, the US spirits market will return to mid-single-digit growth in line with history; but we think that’s too optimistic.Changes in demographics and consumer behavior make it much more likely that the US market will grow only modestly from here. There are several key challenges to the volume of US alcohol consumption in the coming years. Sobriety and moderation of alcohol intake are two rising trends. In addition, there’s the increased use of GLP-1 anti-obesity drugs, which appear to quell users' appetite for alcoholic beverages. And finally, there’s stiffer regulation, including the lowering of alcohol limits for driving.A slew of recent survey data points to consumer intention to reduce alcohol intake. A February 2023 IWSR survey reported that 50 per cent of US drinkers are moderating their consumption. Meanwhile, a January 2024 NCSolutions survey reported that 41 per cent of respondents are trying to drink less, an increase of 7 percentage points from the prior year. And importantly, this intention was most concentrated among younger drinkers, with 61 per cent of Gen Z planning to drink less in 2024, up from 40 per cent in the prior year's survey. Meanwhile, 49 per cent of Millennials had a similar intention, up 26 per cent year on year.Why is all this happening? And why now? Perhaps the increasingly vocal commentary by public bodies linking alcohol to cancer is really hitting home. Last November, the World Health Organization stated that "the higher the amount of alcohol consumed, the higher the risk of developing cancer" but also that "half of all alcohol-attributable cancers in the WHO European Region are caused by ‘light’ and ‘moderate’ alcohol consumption. A recent Gallup survey of Americans indicated that young adults are particularly concerned that moderate drinking is unhealthy, with 52 per cent holding this view, up from 34 per cent five years ago. Another explanation for the increased prevalence of non-drinking among the youngest group of drinkers may be demographic makeup: the proportion of non-White 18- to 34-year-olds has nearly doubled over the past two decades.And equally, the cost of alcohol, which saw steep price increases in the last couple of years, seems to be a reason for increased moderation. Spending on alcohol stepped up materially over the COVID-19 period when there were more limited opportunities for spending. With life returning to normal post pandemic, consumers have other – more attractive or more pressing – opportunities for expenditure.Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us wherever you listen to podcasts. It helps more people to find the show.

5 Heinä 20244min

Central banks play a crucial role in monetary policy and moderating the business cycle. Our Head of Corporate Credit Research explains why, despite their power, these financial institutions can’t quickly steer through choppy economic waters.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, head of Corporate Credit Research at Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about why credit may start to get more concerned that the Fed will make the same mistake it often does.It's Wednesday, July 3rd at 2pm in London.Central banks are among the most powerful actors in financial markets, and investors everywhere hang on their every word, and potential next move. If possible, that seemed even more true recently, as central banks first intervened aggressively in bond markets during the height of COVID, and then raised interest rates at the fastest pace in over 40 years. Indeed, you could even take this a step further: many investors you speak to will argue central banks are the most important force in markets. All else comes second. But this view of Fed supremacy over the market and economy has an important caveat. For all of their power, the Federal Reserve did not prevent the recession of 1990. It did not prevent the dotcom bust or recession of 2001. It did not prevent the Great Financial Crisis or Great Recession of 2007-2009. These periods have represented the vast majority of credit losses over the last 35 years. And so, for all of the power of central banks, these recessions, and their associated default cycles in credit, have kept happening. The reasons for this are varied and debatable. But the central issue is that the economy is a bit like a supertanker; it’s hard to turn quickly. You need to make adjustments well in advance, and often well before the signs of danger are clear. Currently, the Fed is still pressing the economic brakes. Interest rates from the Federal Reserve are well above so-called neutral; that is, where the Fed thinks interest rates neither boost, nor hold back, the economy. The justification for riding the break, so to speak, is that inflation earlier this year has still been higher than expected. But in the last two months, this inflation has rapidly cooled. Our economists think this trend will accelerate in the second half of the year, and ultimately allow the Fed to cut interest rates in September, November, and December. Still-high rates and cooling inflation isn’t a problem when the economic data is strong. But more recently, this data has cooled. If that weaker data continues, credit investors may worry that central banks are too focused on the high inflation that’s now behind us, and not focused enough on the potential slowing ahead. They’ll worry that once again, it may be too late to turn the proverbial economic ship. We’d stress that the risks of this scenario are still low; but late-reacting central banks have – historically, repeatedly – been credit’s biggest vulnerability. It makes it all the more important, that as we head into summer, that the data holds up. 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. And for those in the US, a very happy Fourth of July.

3 Heinä 20243min

Our Global Head of Fixed Income recaps the aftermath of the first U.S. presidential debate, and how markets may react if forthcoming poll data shows a meaningful shift in the race.----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Global Head of Fixed Income and Thematic Research. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about the US elections and its impact on markets.It's Tuesday, July 2nd at 10:30am in New York. For months, investors have been asking us when markets will start paying attention to the US presidential election. Well, we think that time arrived with last week’s Presidential debate. The media coverage that followed revealed that many Democratic party officials became concerned about President Biden’s ability to win the November election. This understandably led many to ask if the race for the White House had meaningfully changed; If it was no longer a close one – and if so, what would that mean for markets that might have to start pricing in the impacts of a Trump Presidency. On the first question: While we think it's too early to conclude that the race is no longer a close one, we expect some data in the next week or two that could clarify this. The few polls that have been released following the debate show that voters are increasingly concerned about Biden’s ability to win; but they also show a level of support for Biden similar to what he enjoyed before the debates. What we haven’t seen yet is a set of high-quality polls gauging swing state voter preferences. And even modest deterioration in Biden’s support there could meaningfully boost Trump’s prospects. That’s because, going into the debate, polls showed former President Trump with a small but consistent lead in national and key swing state polls. Nothing outside the polling margin of error. But it still suggested that for President Biden to improve his odds of winning, he’d be served well by having a strong debate performance that moved the polls more in his favor. It doesn’t appear that this has happened, and if polls show movement in the other direction for Biden, it would be fair to think of Trump as something of a favorite. But only for the time being. There’d still be time and catalysts for the race to change – including another scheduled debate in September. If we do end up with a race where Former President Trump is a more clear favorite, even if just for a short time, there could be reflections in the market. As we’ve previously discussed, a Trump win increases the chances of more of the expiring tax cuts being extended. The benefits of those cuts most clearly accrue to key sectors like energy and telecom, so there’s potential outperformance there. In fixed-income – a steeper US Treasury yield curve is an outcome our macro strategy team is particularly attuned to. That’s because a Trump presidency brings greater uncertainty about future fiscal policy, which could be reflected in relatively higher yields for longer maturity bonds. But it also increases the chances of policy choices that create near term pressure on economic growth that could push shorter maturity yields lower. This includes higher tariffs and tighter immigration policies. So bottom line, the markets are paying attention. And the race is sure to have many more twists and turns. We’ll keep you updated on how we’re navigating it. Thanks for listening. If you enjoy the podcast, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

2 Heinä 20243min

Rising rents and mortgage payments have been at the center of the inflation discussion. Our Global Chief Economist assesses whether monetary policy can effectively blunt those figures. ----- Transcript -----Seth Carpenter: 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 housing market, inflation, growth and monetary policy. It's Monday, July 1st, at 11am in New York. Housing is at the center of many macro debates from growth to inflation. And when you put those two together – monetary policy. House prices have continued to rise despite high interest rates, which gives the impression to some of stalled deflation and forces consumers at times to make some really difficult choices. And in some economies, there's a seeming lack of responsiveness of housing to higher interest rates. All of which tends to prompt questions about the efficacy of monetary policy. So where are we? We think monetary policy is still working through housing as it usually does, but supply shortages, or in some places just idiosyncratic factors like buildable lands or permitting, that's supported home prices. And as has been the case across several sectors in this business cycle, there really are some factors about housing that's just different in this cycle than in previous ones. For the U.S., a key part of the housing story has been the mortgage lock in for homeowners. Our strategists have noted that the gap between the current new mortgage rate and the average effective mortgage rate is at historical highs. And the share of 30 year fixed rate mortgages is at its highest in a decade. Consequently, the inventory of existing houses has remained low because homeowners who have those really low mortgages are reluctant to move unless they have to. The market has become thinner with less available supply; and then if we think more broadly for the economy, there's a risk of labor market frictions if that mortgage lock in also reduces labor mobility. Now, there will be a decline in mortgage rates if we get the modest easing cycle from the Fed that we expect. But that decline will be similarly modest so that gap in rates will not be fully closed even if it narrows. And so there might be some uplift to supply of housing, but it might not be huge. That decline in mortgage rates can also supply demand, so then we have to think about the net of this shift in demand and the shift in supply. And ultimately what we think is going to happen is that there'll be a moderation in home price appreciation, but not an outright decline in home prices.First, the choice of housing for a lot of households is do you buy or do you rent? If you've got high home prices and high mortgages, buying is much less affordable and so it pushes people into renting, which could push up rents. That phenomenon is partly responsible for the surge in rents that we've seen over the past few years. In the longer run, there should be a sort of arbitrage condition between home prices and rents. And while rising home prices can impinge the spending power for first time homebuyers, rising house prices can actually boost sentiment and consumption for existing homeowners. And that mortgage lock in that I talked about before? Well, that can actually support aggregate consumption to some degree because now there's predictability of cash flows and the monthly payment is pretty low. So what do we do when we take all of this together? The housing market might be telling us that monetary policy is working a bit less effectively than historically, but not that monetary policy is not working. Home price appreciation is moderating. Housing starts have slowed, as usual, following those big rate increases. But that slowing? It's actually been a bit inconsistent because mortgage lock has meant that new supply is the only supply. Existing home sales, by contrast, are just plain weak. They're about as weak as they were around the financial crisis. We do not think the housing market overall is at risk of collapse, but monetary policy is restraining activity in a very familiar way. Thanks for listening, and if you enjoy this podcast, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

1 Heinä 20244min