The End of the U.S. Dollar’s Bull Run?

As market turmoil continues, our global economists give their view on the ramifications of the Trump administration’s tariffs, and how central banks across key regions might react.Read more insights from Morgan Stanley. ---- Transcript -----Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's, Global Chief Economist, and today we're going to be talking tariffs and what they mean for the global economy.It's Monday, April 7th at 10am in New York.Jens Eisenschmidt: It's 4pm in Frankfurt. Chetan Ahya: And it's 10pm in Hong Kong. Seth Carpenter: And so, I'm here with our global economists from around the world: Mike Gapen, Chief U.S. Economist, Chetan Ahya, our Chief Asia Economist, and Jens Eisenschmidt, our Chief Europe Economist. So, let's jump into it. Let me go around first and ask each of you, what is the top question that you are getting from investors around the world?Chetan?Chetan Ahya: Tariffs.Seth Carpenter: Jens?Jens Eisenschmidt: Tariffs.Seth Carpenter: Mike?Michael Gapen: Tariffs.Seth Carpenter: All right. Well, that seems clear. Before we get into the likely effects of the tariffs, maybe each of you could just sketch for me where you were before tariffs were announced. Chetan, let me start with you. What was your outlook for the Chinese economy before the latest round of tariff announcements?Chetan Ahya: Well Seth, working with our U.S. public policy team, we were already assuming a 15-percentage point increase on tariffs on imports from China. And China also was going through some domestic challenges in terms of high levels of debt, excess capacities, and deflation. And so, combining both the factors, we were assuming China's growth will slow on Q4 by Q4 basis last year – from 5.4 percent to close to 4 percent this year.Jens, what about Europe? Before these broad-based tariffs, how were you thinking about the European economy?Jens Eisenschmidt: We had penciled in a slight recovery, not really getting us much beyond 1 percent. Backdrop here, still rising real wages. We had some tariffs in here, on steel, aluminum; in cars, much again a bit more of a beefed-up version if you want, of the 18 tariffs – but not much more than that. And then, of course, we had the German fiscal expansion that helped our outlook to sustain this positive growth rates into 2026.Seth Carpenter: Mike, for you. You also had thought that there were going to be some tariffs at some point before this last round of tariffs. Maybe you can tell us what you had in mind before last week's announcements.Michael Gapen: Yeah, Seth. We had a lot of tariffs on China. The effective rate rising to say 35 to 40 percent. But as Jens just mentioned, outside of that, we had some on steel and aluminum, and autos with Europe, but not much beyond that. So, an effective tariff rate for the U.S. that reached maybe 8 to 9 percent.We thought that would gradually weigh on the economy. We had growth at around 1.5 percent this year and 1 percent next year. And the disinflation process stopping – meaning inflation finishes the year at around 2.8 core PCE, roughly where it is now. So, a gradual slowdown from tariff implementation.Seth Carpenter: Alright, so a little bit built in. You knew there was going to be something, but boy, I guess I have to say, judging from market reactions, the world was surprised at the magnitude of things. So, what's changed in your mind? It seems like tariffs have got to push down the outlook for growth and up the out outlook for inflation. Is that about right? And can you sketch for us how this new news is going to affect the outlook?Michael Gapen: Sure. So instead of effective tariff rates of 8 to 9 percent, we're looking at effective tariff rates, maybe as high as 22 percent.Seth Carpenter: Oh, that's a lot.Michael Gapen: Yeah. So more than twice what we were expecting. Obviously, some of that may get negotiated down. Seth Carpenter: And would you say that's the highest tariff rate we've seen in a while?Michael Gapen: At least a century. If we were to a 1.5 percent on growth before, it's pretty easy to revise that down, maybe even a full percentage point, right?So you’re, it's a tax on consumption and a tariff rate that high is going to pull down consumer spending. It's also going to lead to even much higher inflation than we were expecting. So rather than 2.8 for core PCE year-on-year, I wouldn't be surprised if we get something even in the high threes or perhaps even low fours.So, it pushes the economy, we would say, at least closer to a recession. If not, you're getting closer to the proverbial coin toss because there are the potential for a lot of indirect effects on business confidence. Do they spend less and hire less? And obviously we're seeing asset markets melt down. I think it's fair to describe it that way. And you could have negative wealth effects on the upper income consumers. So, the direct effects get you very modest growth a little bit above zero. It's the indirect effects that we're worried about.Seth Carpenter: Wow, that's quite a statement. So, a substantial slowdown for the U.S. Flirting with no growth. And then given all the uncertainty, the possibility that the U.S. actually goes into recession, a real possibility there. That feels like a big call.Jens, if the U.S. could be on the verge of recession with uncertainty and all of that, what are you thinking about Europe now? You had talked about Europe before the tariffs growing around 1 percent. That's not that far away from zero. So, what are you thinking about the outlook for Europe once we layer in these additional tariffs? And I guess every bit is important. Do you see retaliatory tariffs coming from the European Union?Jens Eisenschmidt: No, I think there are at least three parts here. I totally agree with that framing. So, first of all, we have the tariffs and then we have some estimates what they might mean, which, just suppose what we have heard last week sticks, would get us already in some countries into recessionary territory; and for the aggregate Euro area, not that far from it. So, we think effects could range between 60 and 120 basis points of less growth. Now that to some extent, incorporates retaliation. And so, the question is how much retaliation we might expect here. This is a key question we get from clients. I'd say we get something; that seems, sure.At the same time, it seems that Europe weighs a response that is taking into account all the constraints that are in the equation. After all the U.S. is an ally also in security concerns. You don't wanna necessarily endanger that good relationship. So that will for sure play a role. And then the U.S. has a services surplus with Europe, so it's also likely to be a response in the space of services regulation, which is not necessarily inflationary on the European side, and not necessarily growth impacting so much.But, you know, be it as it may. This is going to be down from here, for sure. And then the other thing just mentioned by Michael, I mean there is clearly a read across from a slower U.S. growth environment that will also not help growth in the Euro area. So, all being told it could very well mean, if we get the U.S. close to recession, that the Euro area is flirting with recession too.Seth Carpenter: Got it. Chetan Ahya: Seth, can I interrupt you on this one? I just wanted to add the perspective on retaliatory tariffs from China. What we had actually originally billed was that China would take up a retaliatory response, which would be less than be less than proportionate, just like the last time. But considering that China has actually, mashed U.S. reciprocal tariffs, it makes us feel that it's very unlikely that a deal will be done anytime soon.Seth Carpenter: Okay. So then how would you revise your view for what's going on with China?Chetan Ahya: Yeah, so as I mentioned earlier, we had already built in some downside but with these reciprocal tariffs, we see another 50 to 100 [basis points] downside to China's growth, depending upon how strong is the policy stimulus.Seth Carpenter: So, at some point, I suspect we're going to start having a discussion about what it really means to have a global recession, and markets are going to start to look to central banks.So, Mike, let me turn to you. Jay Powell spoke recently. He repeated that he is in no hurry to cut interest rates. Can you talk to me about the challenges that the Fed is facing right now?Michael Gapen: The Fed is faced with this problem where tariffs mean it's missing on both sides of its mandate, where inflation is rising and there's downside risk to the economy.So how do you respond to that?Really what Powell said is it's going to be tough for us to look through this rise in inflation and pre-emptively ease. So, for the moment they're on hold and they're just going to evaluate how the economy responds. If there's no recession, it likely means the Fed's on hold for a very long time. If we get negative job growth, if you will, or job cuts, then the Fed may be moving to ease policy. But right now, Powell doesn't know which one of those is going to materialize first.Seth Carpenter: Alright Mike. So, I understand what you're saying. Inflation going higher, growth going lower. Really awkward position for the Fed, and I think central banks around the world really have to weigh the two sides of these sorts of things, which one’s going to dominate…Jens Eisenschmidt: Exactly. Seth, may I jump in here because I think that's a perfect segue to the ECB; which I was thinking a lot about that – just recently coming back from the U.S. – how different the position really is here. So, the ECB currently is on the way to neutral, at least as we have always thought as a good way of framing their way. Inflation is falling to target. Now with all the risks that we have mentioned, there's a clear risk we see. Inflation going below 2 percent, already by mid this year – if oil prices were to stay as low as they are and with the euro appreciation that we have seen.The tariffs scare in terms of the inflationary impact from tariffs, that's much less clear. Now, whether that's really something to worry about simply because what you typically see with these tariffs – it's actually a depreciation of the exchange rate, which we haven't seen. So, we think there is a clear risk, downside risk to our path; at least that we have an anticipation. A quicker rate cutting cycle by the ECB. And potentially if the growth outlook that we have just outlined all these risks really materializes, or threatens is more likely to materialize, then the cuts could also be deeper.Seth Carpenter: That's super tricky as well though, because they're going to have to deal with all the same uncertainty. I will say this brings up to me the Bank of Japan because it was the one major central bank that was going the opposite direction before all of this. They were hiking while the other central banks were cutting.So, Chetan, let me turn to you. Do you think the Bank of Japan's gonna be able to follow through on the additional rate hike that you all had already had in your forecast?Chetan Ahya: Yes Seth. I think Bank of Japan will have a difficult time. Japan is exposed to direct effect of 24 percent reciprocal tariffs. It will see downside from global trade slowdown, which will weigh on its exports and yen appreciation will weigh on its inflation outlook. Hence, unless if U.S. removes tariffs very quickly in the near term, we see the risk that BOJ will pause instead of hiking as we had assumed in our earlier base case.Seth Carpenter: Well, this is a good place to stop. Let me see if I can summarize the conversations we've had so far. Before this latest round of tariffs had been announced, we had thought there'd be some tariffs, and we had looked for a bit of slowdown in the U.S. and in Europe and in China – the three major economies in the world. But these new rounds of tariffs have added a lot to that slowdown pushing the, the global economy right up to the edge of recession. And what that means as well is for central banks, they're left in at least something of a bind. The Bank of Japan though, the one major central bank that had been hiking, boy, there's a really good chance that that rate hike gets derailed.Seth Carpenter: Well, thank you 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 a colleague today.

7 Huhti 202511min

As markets continue reacting to the Trump administration’s tariffs, Michael Zezas, our Global Head of Fixed Income Research and Public Policy Strategy, lists the expected impacts for investors across equity sectors and asset classes.Read more insights from Morgan Stanley. ---- Transcript -----Welcome to Thoughts on the Market. I’m Michael Zezas, Morgan Stanley’s Global Head of Fixed Income Research and Public Policy Strategy. Today we’ll be talking about the market impacts of the recently announced tariff increases.It’s Friday, April 4th, at 1pm in New York.This week, as planned, President Trump unveiled tariff increases. These reciprocal tariffs were hiked with the stated goal of reducing the U.S.’s goods trade deficit with other countries. We’ve long anticipated that higher tariffs on a broad range of imports would be a fixture of U.S. policy in a second Trump term. And that whatever you thought of the goals tariffs were driving towards, their enactment would come at an economic cost along the way. That cost is what helped drive our team’s preference for fixed income over more economically-sensitive equities. But this week’s announcement underscored that we actually underestimated the speed and severity of implementation. Following this week’s reciprocal tariff announcement, tariffs on imports from China are approaching 60 per cent, a level we didn’t anticipate would be reached until 2026. And while we expected a number of product-specific tariffs would be levied, we did not anticipate the broad-based import tariffs announced this week. All totaled, the U.S. effective tariff rate is now around 22 per cent, having started the year at 3 per cent. So what’s next? Our colleagues across Morgan Stanley Research have detailed their expected impacts across equity sectors and asset classes and here are some key takeaways to keep in mind. First, we do think there’s a possibility that negotiation will lower some of these tariffs, particularly for traditional U.S. allies like Japan and Europe, giving some relief to markets and the economic outlook. However, successful negotiation may not arrive quickly, as it's not yet clear what the U.S. would deem sufficient concessions from its trading partners. Lower tariff levels and higher asset purchases might be part of the mix, but we’re still in discovery mode on this. And even if tariff reductions succeed, it's still likely that tariff levels would be meaningfully higher than previously anticipated. So for investors, we think that means there’s more room to go for markets to price in a weaker U.S. growth outlook. In U.S. equities, for example, our strategists argue that first-order impacts of higher tariffs may be mostly priced at this point, but second-order effects – such as knock-on effects of further hits to consumer and corporate confidence – could push the S&P 500 below the 5000 level. In credit markets, weakness has been, and may continue to be, more acute in key sectors where tariff costs are substantial; and may not be able to pass on to price, such as the consumer retail sector. These are companies whose costs are driven by overseas imports. So what happens from here? Are there positive catalysts to watch for? It's going to depend on market valuations. If we get to a point where a recession is more clearly in the price, then U.S. policy catalysts might help the stock market. That could include negotiations that result in smaller tariff increases than those just announced or a fiscal policy response, such as bigger than anticipated tax cuts. 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.

4 Huhti 20253min

Our Thematics and Public Policy analysts Michelle Weaver and Ariana Salvatore discuss the top five strategies for companies to mitigate the effects of U.S. tariffs. Read more insights from Morgan Stanley.

3 Huhti 202512min

Our analysts Paul Walsh, Mike Wilson and Marina Zavolock debate the relative merits of U.S. and European stocks in this very dynamic market moment.Read more insights from Morgan Stanley.

2 Huhti 202510min

Our analysts Arunima Sinha, Heather Berger and James Egan discuss the resilience of U.S. consumer spending, credit use and homeownership in light of the Trump administration’s policies.Read more insights from Morgan Stanley.

2 Huhti 20259min

Policy questions and growth risks are likely to persist in the aftermath of the Trump administration’s upcoming tariffs. Our CIO and Chief U.S. Equity Strategist Mike Wilson outlines how to seek investments that might mitigate the fallout.Read more insights from Morgan Stanley. ----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist. Today on the podcast – our views on tariffs and the implications for equity markets. It's Monday, March 31st at 11:30am in New York. So let’s get after it. Over the past few weeks, tariffs have moved front and center for equity investors. While the reciprocal tariff announcement expected on April 2nd should offer some incremental clarity on tariff rates and countries or products in scope, we view it as a maximalist starting point ahead of bilateral negotiations as opposed to a clearing event. This means policy uncertainty and growth risks are likely to persist for at least several more months, even if it marks a short-term low for sentiment and stock prices. In the baseline for April 2nd, our policy strategists see the administration focusing on a continued ramp higher in the tariff rate on China – while product-specific tariffs on Europe, Mexico and Canada could see some de-escalation based on the USMCA signed during Trump’s first term. Additional tariffs on multiple Asia economies and products are also possible. Timing is another consideration. The administration has said it plans to announce some tariffs for implementation on April 2nd, while others are to be implemented later, signaling a path for negotiations. However, this is a low conviction view given the amount of latitude the President has on this issue. We don't think this baseline scenario prevents upside progress at the index level – as an "off ramp" for Mexico and Canada would help to counter some of the risk from moderately higher China tariffs. Furthermore, product level tariffs on the EU and certain Asia economies, like Vietnam, are likely to be more impactful on a sector basis. Having said that, the S&P 500 upside is likely capped at 5800-5900 in the near term – even if we get a less onerous than expected announcement. Such an outcome would likely bring no immediate additional increase in the tariff rate on China; more modest or targeted tariffs on EU products than our base case; an extended USMCA exemption for Mexico and Canada; and very narrow tariffs on other Asia economies. No matter what the outcome is on Wednesday, we think new highs for the S&P 500 are out of the question in the first half of the year; unless there is a clear reacceleration in earnings revisions breadth, something we believe is very unlikely until the third or fourth quarter.Conversely, to get a sustained break of the low end of our first half range, we would need to see a more severe April 2nd tariff outcome than our base case and a meaningful deterioration in the hard economic data, especially labor markets. This is perhaps the outcome the market was starting to price on Friday and this morning. Looking at the stock level, companies that can mitigate the risk of tariffs are likely to outperform. Key strategies here include the ability to raise price, currency hedging, redirecting products to markets without tariffs, inventory stockpiling and diversifying supply chains geographically. All these strategies involve trade-offs or costs, but those companies that can do it effectively should see better performance. In short, it’s typically companies with scale and strong negotiating power with its suppliers and customers. This all leads us back to large cap quality as the key factor to focus on when picking stocks. At the sector level, Capital Goods is well positioned given its stronger pricing power; while consumer discretionary goods appears to be in the weakest position. Bottom line, stay up the quality and size curve with a bias toward companies with good mitigation strategies. And see our research for more details. 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.

31 Maalis 20254min

As credit resilience weakens with a worsening fundamental backdrop, our Head of Corporate Credit Research Andrew Sheets suggests investors reconsider their portfolio quality.Read more insights from Morgan Stanley. ----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley. Today I’m going to talk about why we think near term improvement may be temporary, and thus an opportunity to improve credit quality. It's Friday March 28th at 2pm in London. In volatile markets, it is always hard to parse how much is emotion, and how much is real change. As you would have heard earlier this week from my colleague Mike Wilson, Morgan Stanley’s Chief U.S. Equity Strategist, we see a window for short-term relief in U.S. stock markets, as a number of indicators suggest that markets may have been oversold. But for credit, we think this relief will be temporary. Fundamentals around the medium-term story are on the wrong track, with both growth and inflation moving in the wrong direction. Credit investors should use this respite to improve portfolio quality. Taking a step back, our original thinking entering 2025 was that the future presented a much wider range of economic scenarios, not a great outcome for credit per se, and some real slowing of U.S. growth into 2026, again not a particularly attractive outcome. Yet we also thought it would take time for these risks to arrive. For the economy, it entered 2025 with some pretty decent momentum. We thought it would take time for any changes in policy to both materialize and change the real economic trajectory. Meanwhile, credit had several tailwinds, including attractive yields, strong demand and stable balance sheet metrics. And so we initially thought that credit would remain quite resilient, even if other asset classes showed more volatility. But our conviction in that resilience from credit is weakening as the fundamental backdrop is getting worse. Changes to U.S. policy have been more aggressive, and happened more quickly than we previously expected. And partly as a result, Morgan Stanley's forecasts for growth, inflation and policy rates are all moving in the wrong direction – with forecasts showing now weaker growth, higher inflation and fewer rate cuts from the Federal Reserve than we thought at the start of this year. And it’s not just us. The Federal Reserve's latest Summary of Economic Projections, recently released, show a similar expectation for lower growth and higher inflation relative to the Fed’s prior forecast path. In short, Morgan Stanley’s economic forecasts point to rising odds of a scenario we think is challenging: weaker growth, and yet a central bank that may be hesitant to cut rates to support the economy, given persistent inflation. The rising risks of a scenario of weaker growth, higher inflation and less help from central bank policy temper our enthusiasm to buy the so-called dip – and add exposure given some modest recent weakness. Our U.S. credit strategy team, led by Vishwas Patkar, thinks that U.S. investment grade spreads are only 'fair', given these changing conditions, while spreads for U.S. high yield and U.S. loans should actually now be modestly wider through year-end – given the rising risks. In short, credit investors should try to keep powder dry, resist the urge to buy the dip, and look to improve portfolio quality. 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.

28 Maalis 20253min

Our global economists Seth Carpenter and Rajeev Sibal discuss how global trade will need to realign in response to escalating U.S. tariff policy.Read more insights from Morgan Stanley.

27 Maalis 20259min