Special Encore: Health Care for Longer, Healthier Lives

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

26 Joulu 202412min

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

24 Joulu 202410min

Our Global Head of Fixed Income and Thematic Research joins our U.S. Public Policy Strategist to give investors their policy expectations for President-elect Trump’s second term, including the potential market and economic consequences of those policies if enacted.----- Transcript ----- Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's global head of fixed income and thematic research.Ariana Salvatore: And I'm Ariana Salvatore, U.S. public policy strategist.Michael: And on this episode of Thoughts on the Market, we'll talk about potential policy paths the second Trump administration might pursue.It's Monday, December 23rd at 10am in New York.The U.S. presidential election is behind us and we're well into the holiday season, but we're still focusing closely on what U.S. policy might look like in 2025. Ariana, what have we learned in the past couple of weeks regarding Trump's policy plans for next year?Ariana: So the variables or policy items that we're watching are still the same ones that we were tracking over the past year or so. That's tariffs, taxes, immigration and deregulation. But to your point, the election is now obviously behind us, and we do have some incremental information that's helped us construct a base case across these variables. For example, President elect Trump has made some key personnel appointments that we think are going to play a big role in exactly how these policies are carried out. His pick for Treasury Secretary, Scott Besant, is a good example that gives us conviction in a more gradual, incrementalist approach to tariffs. Translating that principle across all the policy variables, as well as the extremely thin majority the Republicans have in the House of Representatives, has helped us form the foundation of our base case, which we call “fast decisions, slow implementation.”In short, we think that means you should expect major policy changes will be announced quickly, think first quarter of next year, but achieved more slowly. That, in our view, enables more benign macro conditions to persist into 2025, but does create some more uncertainty, both positive and negative, into 2026. We think that lag is attributable to a variety of logistical, legal, and political constraints, and does vary depending on the policy area and executive authorities. For example, we think Trump might have an easier time unilaterally modifying tariff rates, but other constraints outside of timing might limit implementation nonetheless.So, Michael, taking this a step beyond just the policy paths, how should investors be thinking about the potential market and economic consequences of our base case? Aside from the specific policy changes, how do you think about our base case in terms of broader market themes?Michael: I think the key takeaway here is that the policy path we're describing puts pressure on economic growth, but on a lag. So most of these effects are for later in 2025 or into 2026 per economist expectations. So I think the key takeaway here is that the policy path we're describing exerts pressure on economic growth, albeit on a lag. So in our economist expectations later in 2025 and into 2026. So what that means is as we go into 2025, there's still a pretty good growth backdrop to support risk assets and equities in particular. It's also a pretty good backdrop for bonds because as we get closer to 2026, our bond strategist expectation is that markets will start to reflect expectations of growth pressure. And they'll probably be less concerned about what's a debate right now, which is the size of U.S. deficits. There's been this expectation that policies extending tax cuts would really grow the deficit substantially in the way that might put downward pressure on bond prices.However, we think when investors take a closer look, they'll see that extending current tax cuts, which is our expectations, basically, they'll be able to extend current tax cuts with a few sweeteners on top, that's mostly an extension of current policy, as opposed to some of the headlines in the news talking about major deficit expansion, that's an expansion relative to if Congress did nothing and just let tax cuts expire. So the year over year difference in deficits is perhaps not as big as some of the headlines would suggest. So that's a good backdrop for bonds and a pretty good backdrop for equities and risk assets, at least to start the year.Ariana: But of course, there's a lot of uncertainty embedded in these policy paths. Can you talk through how we're thinking about potential risks to our base case, or maybe some key signposts that could indicate that other scenarios are becoming plausible?Michael: So if there are policies that shift that growth downside sooner, so instead of it manifesting in 2026, it manifests sooner in 2025, that's the type of thing that might make us less constructive on risk assets and equities. So if we got indications, for example, that tariffs were going to be implemented more quickly and to a greater degree, for example, announcements happening quickly, but also showing implementation is happening very quickly, that's the type of thing that might skew risk assets in a more negative direction. Similarly, if Congress were to pledge to appropriate more powers to the executive branch on tariff authority, not necessarily something we think they could get done, but that could be an indication that there could be more powerful tariff potential relative to what the executive branch currently has.On the more positive side, if Congress indicates that it wants to move much faster and bigger on tax cuts and the executive branch were to flag that tariffs are going to be implemented later or suggest that there's more negotiating room with trade partners to avoid tariffs, then that might be the type of sequencing of policy that enables the market to focus more on the good aspects of policy, the helpful aspects to corporate earnings, to individual consumption, and to GDP growth that might just make for an all around more conducive environment to risk assets.So there's a lot to keep an eye on between now and inauguration day. In the meantime, enjoy your holiday. Ariana, thanks for taking the time to talk.Ariana: Great speaking with you, Mike.Michael: And as a reminder, if you enjoy Thoughts on the Market, please take a moment to rate and review us wherever you listen, and share our thoughts on the market with a friend or colleague today.

23 Joulu 20246min

Our Head of Corporate Credit Research lists realistic scenarios for why credit could outperform expectations in 2025, despite some risks posed by policy changes from the incoming administration.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, head of Corporate Credit Research at Morgan Stanley. Today I’ll be discussing realistic scenarios where things could be better than we expect.It's Friday December 20th at 2pm in London.Credit is an asset class that always faces more limited upside, and the low starting point for spreads as we enter 2025 further limits potential gains. Nevertheless, there are still a number of ways where this market could do better than expected, with spreads tighter than expected, into next year.An obvious place to start is U.S. policy. Morgan Stanley’s public policy strategy team thinks the incoming administration will be a story of “fast announcement, slow implementation”, with the growth and inflation impact of tariffs and immigration falling more in 2026 (rather than say earlier). And so if one looks at Morgan Stanley’s forecasts, our growth numbers for 2025 are good, our 2026 numbers are weaker.The bull case could be that we see more talk but less ultimate action. Scenarios where tariffs are more of a negotiating tool than a sustained policy would likely mean less change to the current (credit friendly) status quo, and also increase the likelihood that the Federal Reserve will be able to lower interest rates even as growth holds up. Rate cuts with good growth is a rare occurrence, but when you do get it, it can be extremely good. If one thinks of the mid-1990s, another time where we had this combination, credit spreads were even tighter than current levels. Another path to the bull case is better funding conditions in the market. Some loosening of bank capital requirements or stronger demand for collateralized loan obligations could both flow through to tighter spreads for the assets that these fund, especially things like leveraged loans. If we think back to periods where credit spreads were tighter than today, easier funding was often a part of the story.Now, a more aggressive phase of corporate activity could be a risk to credit, but M&A can also be a positive event, especially on a name by name basis. If merger and acquisition activity becomes a story of, say, larger companies buying smaller ones, that could mean that weaker, high yield credits get absorbed by larger, stronger, investment grade balance sheets. And so for those high yield bonds or loans, this can be an outstanding outcome. Another way things could be better than expected for credit is that growth in Europe and China is better than expected. In speaking with investors over the last few weeks, I think it's safe to say that expectations for both regions are pretty low. And so if things are better than these low expectations, spreads, especially in Europe, which are not as tight as those in the U.S., could go tighter.But the most powerful form of the credit bull case might be the simplest. Morgan Stanley expects the Federal Reserve, the Bank of England, and the European Central Bank to all lower interest rates much more than markets expect next year, even as, for the most part, growth in 2025 holds up. Due in a large part to those expected rate cuts, we also think the yields fall more than expected. If that's right, credit could quietly have an outstanding year for total return, which is boosted as yields fall. Indeed, on our forecast, U.S. investment grade credit, a relatively sleepy asset class, would see a total return of roughly 10%, higher than our expected total return for the mighty S&P 500. Not all credit investors care about total return. But for those that do, that outcome could feel very bullish. 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.

20 Joulu 20244min

Our Global Head of Macro Strategy joins our Chief U.S. Economist to discuss the Fed’s recent rate cut and why persistent inflation is likely to slow the pace of future cuts.----- Transcript -----Matthew Hornbach: Welcome to Thoughts on the Market. I'm Matthew Hornbach, Global Head of Macro Strategy.Michael Gapen: And I'm Michael Gapen, Morgan Stanley's Chief U.S. Economist.Matthew: Today, we're going to talk about the Federal Open Market Committee meeting and the path for rates from here.It's Thursday, December 19th at 10a.m. in New York.The FOMC meeting concluded yesterday with the Federal Reserve cutting rates by a quarter of a percentage point, marking the third rate cut for the year. This move by the Fed was just as the consensus had anticipated. However, in its meeting yesterday, the Fed indicated that 2025 rate cuts would happen at a slower pace than investors were expecting. So Mike, what are committee members projecting in terms of upcoming rate cuts in 2025 and 2026?Michael: Yeah, Matt, the Fed dialed back its expectations for policy rate easing in both 2025 and 2026. They now only look for two rate cuts of 50 basis points worth of cuts in 2025, which would bring the funds rate to 3.9% and then only another 50 basis points in 2026, bringing the policy rate to 3.4%. So a major dialing back in their expectations of rate cuts over the next two years.Matthew: What are the factors that are driving what now appears to be a slightly less dovish view of the policy rate?Michael: Chair Powell mentioned, I think, two things that were really important. One, he said that many committee members saw recent firmness in inflation as a surprise. And so I think some FOMC members extrapolated that strength in inflation going forward and therefore thought fewer rate cuts were appropriate. But Chair Powell also said other FOMC members incorporated expectations about potential changes in policy, which we inferred to mean changes about tariffs, immigration policy, maybe additional fiscal spending. And so whether they bake that in as explicit assumptions or just saw it as risks to the outlook, I think that these were the two main factors. So either just momentum in inflation or views on policy rate changes, which could lead to greater inflation going forward.Matthew: So Mike, what were your expectations going into this meeting and how did yesterday's outcome change Morgan Stanley's outlook for Federal Reserve policy next year and the year thereafter?Michael: We are a little more comfortable with inflation than the Fed appears to be. So we previously thought the Fed would be cutting rates three times next year and doing all of that in the first half of the year. But we have to listen to what they're thinking and it appears that the bar for rate cuts is higher. In other words, they may need more evidence to reduce policy rates. One month of inflation isn't going to do it, for example. So what we did is we took one rate cut out of the forecast for 2025. We now only look for two rate cuts in 2025, one in March and one in June.As we look into 2026, we do think the effect of higher tariffs and restrictions on immigration policy will slow the economy more, so we continue to look for more rate cuts in 2026 than the Fed is projecting but obviously 2026 is a long way away. So in short, Matt, we dialed back our assumptions for policy rate easing to take into account what the Fed appears to be saying about a higher bar for comfort on inflation before they ease again.So Matt, if I can actually turn it back to you: how, if at all, did yesterday's meeting, and what Chair Powell said, change some of your key forecasts?Matthew: So we came into this meeting advocating for a neutral stance in the bond market. We had seen a market pricing that ended up being more in line with the outcome of the meetings. We didn't expect yields to fall dramatically in the wake of this meeting, and we didn't expect yields to rise dramatically in the wake of this meeting. But what we ended up seeing in the marketplace was higher yields as a result of a policy projection that I think surprised investors somewhat and now the market is pricing an outlook that is somewhat similar to how the Fed is forecasting or projecting their policy rate into the future.In terms of our treasury yield forecasts, we didn’t see anything in that meeting that changes the outlook for treasury markets all that much. As you said, Mike, that in 2026, we're expecting much lower policy rates. And that ultimately is going to weigh on treasury yields as we make our way through the course of 2025. When we forecast market rates or prices, we have to think about where we are going to be in the future and how we're going to be thinking about the future from then. And so when we think about where our treasury yield's going to be at the end of 2025, we need to try to invoke the views of investors at the end of 2025, which of course are going to be looking out into 2026.So when we consider the rate policy path that you're projecting at the moment and the factors that are driving that rate policy projection - a slower growth, for example, a bit more moderate inflation - we do think that investors will be looking towards investing in the government bond market as we make our way through next year, because 2026 should be even more supportive of government bond markets than perhaps the economy and Fed policy might be in 2025.So that's how we think about the interest rate marketplace. We continue to project a 10 year treasury yield of just about three and a half percent at the end of 2025 that does seem a ways away from where we are today, with the 10 year treasury yield closer to four and a half percent, but a year is a long time. And that's plenty of time, we think, for yields to move lower gradually as policy does as well. On the foreign exchange side. The dollar we are projecting to soften next year, and this would be in line with our view for lower treasury yields. For the time being, the dollar reacted in a very positive way to the FOMC meeting this week but we think in 2025, you will see some softening in the dollar. And that primarily occurs against the Australian dollar, the Euro, as well as the Yen. We are projecting the dollar/yen exchange rate to end next year just below 140, which is going to be quite a move from current levels, but we do think that a year is plenty of time to see the dollar depreciate and that again links up very nicely with our forecast for lower treasury yields.Mike, with that said, one more question for you, if you would: where do things stand with inflation now? And how does this latest FOMC signal, how does it relate to inflation expectations for the year ahead?Michael: So right now, inflation has been a little bit stronger than we and I think the Fed had anticipated, and that's coming from two sources. One, hurricane-related effects on car prices. So the need to replace a lot of cars has pushed new and used car prices higher. We think that's a temporary story that's likely to reverse in the coming months. The more longer term concern has been around housing related inflation, or what we would call shelter inflation. The good news in that is in November, it took a marked step lower. So I do think it tells us that that component, which has been holding up inflation, will continue to move down. But as we look ahead to your point about inflation expectations, the real concern here is about potential shifts in policy, maybe the implementation of tariffs, the restriction of immigration.We as economists would normally say those should have level effects or one-off effects on inflation. And normally I'd have a high confidence in that statement. But we just came out of a very prolonged period of higher than normal inflation, so I think the concern is repetitive, one-off shocks to inflation, lead inflation expectations to move higher. Now, we don't think that will happen. Our outlook is for rate cuts, but this is the concern. So we think inflation moves lower. But we're certainly watching the behavior of inflation expectations to see if our forecast is misguided.Matthew: Well, great Mike. Thanks so much for taking the time to talk.Mike: Great speaking with you, Matt.Matthew: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.

19 Joulu 20249min

Of all of the potential policy changes from the incoming U.S. presidential administration, deregulation could have the most significant impact on markets. Our Chief Fixed Income Strategist explains what’s coming.----- Transcript -----Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist. Today I'll be discussing the policy changes that we have the highest conviction in terms of their market impact.It's Wednesday, December 18th at 10 a.m. in New York.As our regular readers are aware, Morgan Stanley strategists and economists around the globe came together to formulate our outlook for 2025 across the wide range of markets and economies we cover. A key aspect of this year's outlook is the potential for policy changes ahead from the incoming administration. The substance, severity, and sequencing of policies will matter and will have an important bearing on how markets perform over the course of 2025. We would put the potential range of policy changes into four broad categories: Tariffs and Trade Policy; Immigration Controls; Tax Cuts and Fiscal Policy; and finally, Deregulation. In terms of sequencing, our central case is for tariffs to go first and tax cuts to be last. As our public policy team sees it, the incoming administration will see fast announcements but a slow implementation of policy, especially in terms of tariffs and immigration. Slower implementation will mean that the changes will also be slow and the impacts on the economy and markets likely to be a lot more gradual.That said, it is in the area of deregulation that we expect to see the highest impact on markets, even though precise measurement of these impacts in terms of macroeconomic indicators such as growth and inflation is hard to come through. So with deregulation, we expect an environment in support of bank activity. As our bank equity analysts have noted, banks in their coverage area currently are sitting on record levels of excess capital: 177 billion of excess capital and a weighted average CET1 ratio of 12.8 percent, which is 140 basis points higher than pre-COVID levels of 11.4 percent.If Basel III Endgame is re proposed in a more capital neutral manner, we expect U.S. banks will begin deploying their excess capital into lending, supporting clients in trading and underwriting, increasing their securities purchases, as well as increasing buybacks and dividends. Changes to the existing Basel III Endgame proposal will also make U.S. banks more competitive globally.We also believe all global banks with significant capital markets businesses will benefit from the return of the M&A. Another by-product of Basel III Endgame being reproposed in a capital neutral way pertains to what banks do in their securities portfolios. In the last few years, in anticipation of higher capital requirements, U.S. banks have not been very active in deploying their capital in securities purchases, particularly Asian CMBS and CLO AAAs. With the deregulation focus, we expect that banks will revert to buying the assets that they have stayed away from, in particular, Asian CMBS and CLO AAAs.The return of bank demand for CLO AAAs will have a bearing on the underlying broadly syndicated loan market and even more broadly on credit formation and sponsor activity, which will be supportive of a stronger return of M&A than our credit strategists have been expecting. So in fixed income, if you pardon the pun, we are really banking on the impact of deregulation, which supports our view on the range of relative value opportunities and spread products, especially in securitized products.Thanks for listening. If you enjoyed the show, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague.

18 Joulu 20243min

Our Global Chief Economist explains why a predictable end to 2024 for central banks may give way to a tempestuous 2025.----- Transcript -----Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist, and today I'll be talking about how the year end is wrapping up with, surprisingly, a fair amount of certainty about central banks.It's Tuesday, December 17th at 10 a. m. in New York.Unlike the rest of this past year, year end seems to have a lot more certainty about the last few central bank meetings. Perhaps it is just the calm before the storm, but for now, let's enjoy a benign central bank week ahead of the holidays. Last Thursday, the ECB cut interest rates 25 basis points, right in line with what we were thinking and what the market was thinking. Similarly, but I have to say, with a pretty different narrative, we expect the Fed to cut 25 basis points this week and the market seems to be all in there as well.The Bank of England, the Bank of Japan, well, we think they're closed accounts; that is to say, they're going to be on pause until the new year. Last week's 25 basis point cut by the ECB came amidst a debate as to whether or not the ECB should accelerate their pace of rate cuts. With most doubts about disinflation resolved, it’s downside growth risks that have gained prominence in the decision making process there. Restrictive monetary policy is starting to look less and less necessary and President Lagarde’s statement seems to reflect that the council's negotiated stance, that easing will continue until the ECB reaches neutral. The question is what happens next? In our view, the ECB will come to see there's a need to cut through neutral and get all the way down to 1%.In stark contrast, there's the Fed, where there are very few residual growth concerns, but there have been more and more questions about the pace of disinflation. The recent employment data, for example, clearly suggests that the recession risk is low. Some members on the committee have started to express concerns, however, that inflation data really have proven stickier and that maybe the disinflation process is stalled.From our perspective, last week's CPI data and all the other inflation data we just got really point to the next PCE print showing continued clear disinflation, leaving very little room for debate for the Fed to cut 25 basis points in December. And indeed, if it's as weak as we think it is, that provides extra fuel for a cut in January.That said, our baseline view of cuts in March and May are going to get challenged if future data releases show a reversal in this disinflationary trend, if it's from residual seasonality or maybe pass through from newly imposed tariffs, and Chair Powell's remarks at next week's press conference are really going to be critical to see if they really are becoming more cautious about cuts.Now, we don't expect the Bank of England or the Bank of Japan to move until next year. The recent currency weakness in Japan has raised the prospect of a rate hike as soon as this month, but we've kept the view that a January rate hike is much more likely. The timing would allow the Bank of Japan to get greater insight into the Shunto wage negotiations, and that gives them greater insight into future inflation. And recent communications from the Bank of Japan also aligns with our view and in particular, there is a scheduled speech by Deputy Governor Himino on January 14th, one week before the January 23rd and 24th meeting. All of that says the stars are lined up for a January rate hike. Market pricing over the past couple weeks have moved against a hike in December and towards our call for a hike in January.Now, the market's also pricing the next Bank of England cut to be next year rather than this year. We expect those cuts to come at alternating meetings. December on pause, a cut in February, and gradual rate cuts thereafter. Now, services inflation, the key focus of the Bank of England so far, has remained elevated through the end of the year, but we expect to see mounting evidence of labor market weakness, and as a result, wage growth deceleration, and that, we think, is what pushes the MPC towards more cuts. All of that said, the recent announcement of fiscal stimulus in the UK starts to raise some inflationary risks at the margin.All right, well, as the year comes to an end, it has been quite a year to say the least. Elections around the world, not least of which here in the United States, wildly swinging expectations for central banks, and a structural shift in Japan ending decades of nominal stagnation. And I have to say an early glimpse into 2025 suggests that the roller coaster is not over yet. But for now, let's take some respite because there should be limited drama from central banks this week. Happy holidays.Well, thanks for listening, and 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.

17 Joulu 20244min

Our CIO and Chief U.S. Equity Strategist recaps how equity markets have fared in 2024, and why they might look more conservative early in the new year.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief US Equity Strategist. Today on the podcast I’ll be discussing how to position as we head into the new year.It's Monday, Dec 16th at 11:30am in New York. So let’s get after it.The big question for most investors trying to beat the S&P 500 is whether returns will continue to be dominated by the Magnificent 7 and a few other high quality large cap stocks or if we're going to will see a sustainable broadening out of performance to new areas. Truth be told, 2024 has been a year during which investors have oscillated between a view of broadening out or continued narrowing. This preference has coincided with the ever-changing macro view about growth and inflation and how the Fed would respond.To recount this past year, our original framework suggested investors would have to contend with markets reacting to these different macro-outcomes. More specifically, whether the economy would end up in a soft landing, a hard landing or a “no landing” outcome of accelerating growth and inflation. Getting this view right helped us navigate what kinds of stocks, sectors and factors would outperform during the year. The perfect portfolio this year would have been overweight broad cyclicals like energy, industrials and financials in the first quarter, followed by a Magnificent 7 tilt in early 2Q that got more defensive over the summer before shifting back toward high quality cyclicals in late third quarter. Lately, that cyclical tilt has included some lower quality stocks while the Magnificent 7 has had a big resurgence in the past few weeks. We attributed these shifts to the changing perceptions on the macro which have been more uncertain than normal.Going into next year, I think this pattern continues, and it currently makes sense to have a barbell of large cap high quality cyclicals and growth stocks even though small caps and the biggest losers of the prior year tend to outperform in January as portfolios rebalance. We remain up the quality curve because it appears the seasonal low quality cyclical small cap rally was pulled forward this year due to the decisive election outcome. In addition to the large hedges being removed, there was also a spike in many confidence surveys which further spilled into excitement about this small cap lower quality rotation.Therefore, it makes sense that the short-term euphoria that's now taking a break with the rotation back toward large cap quality mentioned earlier. The fundamental driver of this rotation is earnings. Both earnings revisions and the expected growth rate of earnings next year remain much better for higher quality stocks and sectors. Given the uncertainty around policy sequencing and implementation on tariffs, immigration and how much the Fed can cut rates next year, we suspect equity markets will tread a bit more conservatively in the first quarter than what we observed this fall.The biggest risks to the upside would be a more modest implementation of tariffs, a de-emphasis on deportations of working illegal immigrants and perhaps more aggressive de-regulation that is viewed as pro-growth. Other variables worth watching closely include how quickly and aggressively the new department of government efficiency acts with respect to shrinking the size of the Federal agencies. While I'm hopeful this new effort can prove the skeptics wrong, success may prove to be growth negative in the near term given how much the government has been driving overall GDP growth for the past few years. In my view, a true broadening out of the economy and the stock market is contingent on a smaller government both in terms of regulation and absolute size. In my view, this is the most exciting potential change for taxpayers, smaller businesses and markets overall. However, it is also likely to take several years to fully manifest.In the meantime, I wish you a happy holiday season and a healthy and prosperous New Year.Thanks for listening. If you enjoy the podcast, leave us a review wherever you listen, and share Thoughts on the Market with a friend or colleague today.

16 Joulu 20244min