Who’s Disrupting — and Funding — the AI Boom

Even with the possibility of a fourth-quarter slowdown in consumer spending, positive data across the board suggests the U.S. economy is still on track for a soft landing.----- Transcripts -----Ellen Zentner: Welcome to Thoughts on the Market. I'm Ellen Zentner, Morgan Stanley's Chief U.S. Economist. Sarah Wolfe: And I'm Sarah Wolfe, also on Morgan Stanley's U.S. Economics Team. Sarah Wolfe: And today on the podcast, we'll be discussing our updated U.S. economic outlook for the final quarter of 2023. It's Thursday, September 21, at 10 a.m. in New York. Sarah Wolfe: Ellen, since early 2022, you and our team have had a conviction that the U.S. economy would slow without a crash and experienced a soft landing. We maintained that view in our mid-year outlook four months ago, but we've recently revised it with an expectation for even stronger growth in the U.S.. Can you highlight some of the main drivers behind our team's more upbeat outlook? Ellen Zentner: Yes, so I think for me, the most exciting thing about the upward revisions we've made to GDP is that there's a real manufacturing renaissance going on in the U.S. and according to our equity analysts, it is durable and organic. So it's not just being driven by fiscal policy around the CHIPS Act and the IRA, but this is de-risking of supply chains, it's happening across semiconductors, our industrials teams have noted it, our construction teams and our LATAM teams around what's going on in terms of on-shoring, nearshoring with Mexico being the biggest beneficiary. So I think that's a really exciting development that is durable and then the consumer has been more resilient than expected. And I know that, Sara, you've been writing about Taylor Swift effect, Beyoncé effect, Barbenheime, you know, and it's just added to a very robust consumer this year than we had initially expected. Sarah Wolfe: Ellen, and what about inflation? What role does inflation continue to play at this point? Is the disinflationary process still underway and what are our expectations for the rest of this year and next? Ellen Zentner: Yes, So I think the disinflationary process has actually played out faster than expected. Well, let me say it's coming in line with our forecast, but much faster than, say, the Fed had expected. And we do expect that to continue. I think some of the concerns have been that the economy has been so strong this year and so would that interrupt that disinflationary process? And we don't think that's the case. The upward revisions that we've taken to GDP that reflect things like the manufacturing renaissance also come with stronger productivity, and they're not necessarily inflationary. But Sara, since your focus is on the U.S. consumer, let me turn it to you and ask you about oil prices. So oil prices have rallied here, you've spent a good deal of time looking at the impact that rising prices might have on real consumer spending, so how do you go about analyzing that? Sarah Wolfe: You're correct. Energy prices do impact consumer spending and in particular, when the price jumps are driven by supply side factor. So supply coming offline, that acts like a tax on households and we see a decline in real spending. We in particular see real spending impacted in the durable goods sector and in autos in particular. We have seen quite a rally recently in oil prices. It's definitely not to the extent of what we saw last year, but what we're going to be watching is how sustained the rally in oil prices are. The higher prices stay for longer, the more it impacts real consumer spending. Ellen Zentner: So retail sales have been strong, when are they going to be slowing? I mean we're going into the fourth quarter here, all on the consumer it looks like it's been stronger than expected. And I know this is sort of a maybe too broad of a question, but are consumers still in good health? Sarah Wolfe: As you mentioned earlier, consumer spending has been more resilient than expected. In part, it's been due to the fact that we've seen a full rebound in discretionary services spending, but it was not paired with a one for one payback in discretionary goods, which we've seen in the retail sales report, have held up better. And so while the consumer remains fairly healthy, we do expect to still see that pretty notable spending slowdown in the fourth quarter and part of that is being driven by the fundamentals. We have a cooling labor market, a rising savings rate, higher debt service obligations. But then as you also mentioned earlier, we had the roll off of some of these one off lifts like Barbenheimer, Beyoncé and Taylor Swift. Ellen Zentner: So why doesn't the consumer just fall off a cliff then? Sarah Wolfe: Because part of our big call for the soft landing is that the labor market is going to be relatively resilient. We do have jobs slowing, but we do not have a substantial rise in the unemployment rate because we think this labor hoarding thesis is going to help support the labor market. So at the end of the day, while there's pressure mounting on consumer wallets, if they have a job, they will continue to spend, though at a slower pace. Ellen Zentner: All right. So if labor income and healthy job growth is the key to consumer spending, you know, what are we telling investors about the UAW strike? Because that really muddies the picture for how strong the labor market is. Sarah Wolfe: The UAW strike is definitely worth watching, there's 146,000 union workers that work for the big three. At this point, the impacts should be fairly contained, we only have 13,000 workers on strike at three different plants. However, if we see a large-scale strike of all the union workers, that lasts for some time, I mean that's definitely going to take a hit to the labor market. It would be a one off hit because when the strikers come back, you see them re-added to payrolls. But it definitely will be a more sustained hit to economic activity and motor vehicle production. It's very hard to make up all the production that is lost when workers are on strike. So we're definitely watching this very closely and it's definitely a risk factor to economic growth in the fourth quarter. Ellen, I'm turning it back to you, with all these various factors in play has anything changed in our Fed path? Ellen Zentner: No, it hasn't. In fact, as the data comes in and what we're looking for ahead, it tells me even more so that the Fed is done here. So they're sitting on a federal funds rate of 5.25% to 5.50%, and there are a lot of pitfalls possibly ahead with the incoming data. So you have GDP benchmark revisions, which will be significant by our estimate, that are released on September 28th, so later this month. Two days later, government shutdown possible. You talked about the UAW strike that's gonna, again, muddy the picture for job gains. And so there's a lot on the horizon here. You know, in the environment of inflation falling and question mark around how much policy lags still have to come through, I think it's just a recipe for the Fed to go ahead and hold rates steady and so we think that they're done here. All right. So we'll leave it there. Sarah, thanks for taking the time to talk. Sarah Wolfe: As always, great speaking with you, Ellen. Ellen Zentner: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review on Apple Podcasts and share the podcast with a friend or colleague today.

21 Syys 20236min

A potential debt-deflation cycle in China could spell opportunity for U.S. Treasuries and Asia corporate bonds outside of China.----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income and Thematic research for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the impact of China's economy on fixed income markets. It's Wednesday, September 20th, at 10 a.m. in New York. We spend a lot of time on this podcast talking about the market ramifications of the evolving US-China relationship, and understandably so, as they are the world's biggest economies. But today, I want to focus more on the evolving economy inside of China and how it has implications for global fixed income markets. A few weeks ago on Thoughts on the Market, my colleague Morgan Stanley's Global Chief Economist Seth Carpenter, detailed how our Asia economics team is increasingly calling attention to what they term China's 3D challenge of debt, demographics and deflation. In short, there's a risk that servicing high levels of debt in China's economy could strain its weak demographic profile and dampen demand in the economy, all leading to a debt deflation cycle. While such an adverse outcome currently is in our economists base case, there's been material slowing in China's economic growth. So in either case, China, at least for the moment, is a weaker consumer on the global stage, meaning they may effectively export disinflation to developed market countries. And while our economists flag this weakness may not translate to substantial disinflation pressures, they also note directionally it may help already cooling inflation in places like the United States. Understandably, our team in fixed income research across the globe is focused on many potential impacts from the spillover effects of China's 3D challenge. But there's two that stand out to me as most relevant to investors. First, for investors in U.S. Treasury bonds, this disinflation pressure, even if modest, could help push yields lower in line with our preference for owning bonds over equities. That disinflation pressure could add to other more meaningful pressures in the U.S. in the fourth quarter, as student loan repayments start in the absence of major entertainment events that were a one time shot to consumption this past summer. Second, if you're an investor in corporate bonds, our Asia corporate credit team sees opportunities to diversify away from China Credit, which has been struggling to deliver solid risk adjusted returns and remains concentrated in the property sector, with our team seeing opportunities in Japan, Australia and New Zealand in particular. Credit markets in these countries not only provide geographical diversification but also diversification into sectors like financials and materials. This is a developing story that's sure to impact the global outlook for the foreseeable future, and you can be sure we'll keep you updated on how it will influence markets. Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague, or leave us a review on Apple Podcasts. It helps more people find the show.

20 Syys 20232min

A number of U.S. industries rely heavily on critical minerals that must be imported from other countries. Policymakers and business leaders are calling for investment and reshoring to manage that risk. U.S. Public Policy Research Team member Ariana Salvatore and Head of the Metals and Mining Team in North America Carlos De Alba discuss.----- Transcript -----Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore from our U.S. Public Policy Research Team. Carlos De Alba: And I am Carlos De Alba, Head of the Metals and Mining Team in North America. Ariana Salvatore: On this special episode of the podcast, we'll discuss what we see as an inflection point for the U.S. metals and mining industry. It's Tuesday, September 19th, at 10 a.m. in New York. Ariana Salvatore: Since 1990, the U.S. has seen a significant increase in both the variety of imported minerals and the level of dependance on these imports. As of right now, U.S. reliance on imported critical minerals has reached a 30 year high, and simultaneously, investment in the industry is near its lowest point in decades. But as we're seeing the world transition to a multipolar model where supply chains are more regional than global, it's becoming ever more obvious that the U.S. needs to turn to reshoring in order to satisfy its growing need for these critical minerals. So, Carlos, before we get too deep in the weeds, let's start off with something simple. Can you define critical minerals for our audience? Carlos De Alba: Yeah. So the Energy Act of 2020 defined critical minerals as those which are essential to the economy and the national security of the United States. They also have a supply chain that is vulnerable to disruption and serve an essential function in the manufacturing of a product, the absence of which would have significant consequences for the economic and national security of the country. The Act also specified that critical minerals do not include fuel minerals, water, ice or snow, or common varieties of sand, gravel, stone and clay. The U.S. Geological Survey, or USGS, is a government agency in charge of creating the official list of critical minerals that are meet that criteria that I just mentioned. Ariana Salvatore: So given the importance of these critical minerals, what are some of the factors that led to this prolonged underinvestment in the metals and mining industry? And who have been the major exporters of critical minerals to the U.S. over the last three decades? Carlos De Alba: It is quite a complex issue, but the bottom line is that the US has scaled back its mineral extraction, processing and refining capabilities since the 1950s, because of environmental concerns and economic considerations like higher labor costs and lower economies of scale. As mining activities decline in the U.S., the country has increasingly relied on imports from China, Brazil, Mexico, South Africa, Indonesia, Canada and Australia, among others. Ariana Salvatore: So it's obvious that China is clearly in a powerful position to influence the global mineral markets. It's the first one on the list that you just mentioned. What is China to doing right now with respect to its exports of minerals and what is your outlook when you're thinking about the future? Carlos De Alba: Well, over the last 4 to 5 decades, China gradually took over the industry by heavily investing in exploration, mineral extraction, and more importantly, refining and processing capabilities. China's dominance over the world minerals processing supply chains has created, as you would expect, geopolitical and economic uncertainties can cause supply disruptions to crucial end markets such as green technologies and national security. A recent example of export curbs took place in July of this year, when China imposed export restrictions on two chipmaking minerals, gallium and uranium, citing national security concerns. The move was widely interpreted as a retaliation against the US and its allies for having imposed restrictions that caught China's access to Chipmaking technologies. Now this move by China was particularly relevant because the country produces over 80% of the world's gallium supply and 60% of germanium, and it is the primary supplier to the US representing more than 50% of these two minerals imports to the United States. But since we're on this topic Ariana, how are the US policymakers trying to help the strengthening of domestic supply chains? Ariana Salvatore: Right. So most things that involve building up the domestic sphere in order to kind of build resiliency or counter China's influence are quite popular bipartisan priorities. So we're seeing policymakers on both sides of the aisle indicating support for reshoring the critical mineral supply chain. That's mainly accomplished through legislation that targets things like tax incentives, or subsidies for corporates. On the regulatory front, it really comes down to easing the permitting process, which can be quite backlogged and delay the project pipeline. For some more context on that point, permitting on average takes about 7 to 10 years in the U.S. without taking into account the time spent on litigation, compared to about 2 to 3 years in other countries. So relaxing the permitting process, we think, is one key way that lawmakers can try to accelerate this reshoring of critical minerals in an increasingly insecure geopolitical world. Carlos De Alba: Now, the mining sector obviously has implications from an environmental point of view, and some of the aspects of the mining industry are at odds with sustainability business goals. So what would a significant increase in mining activity in the US will look like from a sustainability perspective? Ariana Salvatore: So this is really just a question of opposing factors. We do think that there are some clear benefits from a sustainability perspective when it comes to onshoring. For example, you have better oversight and reduced risks relating to human and labor rights violations, a reduction in global greenhouse gas emissions, assuming the extraction process here in the U.S. is held to higher ESG standards, and shortened transportation or supply chain routes. However, there's also a flipside which contains some obvious ESG concerns. First, you've seen the mining industry in the past be associated with human rights concerns, specifically related to impacts to local communities and of course, the hard to ignore implications of mining on nature and biodiversity. So at the end of the day, as I said, it's really a question of where that net effect is, and we think it's more in the positive column specifically because of that better oversight around the ESG pillars that is facilitated by onshoreing. But putting that to the side for a second, Carlos, when all is said and done, assuming the U.S. is actually able to do this, does it even have enough of its own mineral supplies in order to satisfy all its needs domestically? Carlos De Alba: Well, that's an interesting point, because in 24 of 50 minerals deemed critical by the USGS, the US either report less than 1% of the total global reserves or lack sufficient reserve data, which highlights the need for more comprehensive exploration and mining efforts. In the case of some battery making minerals like cobalt, nickel or vanadium, the US holds an average reserve level of only .5% of total global reserves. Now, on the positive side, the US ranks ninth in copper reserves, accounting for about 5% of total global reserves, and the country ranks sixth in rare earths reserves. Ariana, if we consider yet another relevant aspect for the discussion, what about the workforce? How is the US government addressing labor shortages in the mining industry? Ariana Salvatore: When it comes to the sector there's definitely a shortage of skilled workers in particular, which is being tackled I'd say through two distinct avenues. First of all, you have corporates which are trying to change the public perception of mining, and they're doing that primarily by elevating their operating standards and focusing on reducing possible environmental impacts. And then to your point, the you just mentioned, you also have the government doing its part by launching workforce initiatives. Those are basically programs that are set up to incentivize higher education institutions to develop critical minerals education programs and research and training efforts. Those are funneled through legislation like the CHIPS and Science Act, which was signed into law late last year. A popular saying within the mining industry is, 'if you can't grow it, you mine it'. Given that mining is a critical source of raw materials which touch upon nearly every supply chain, Carlos, can you sketch out some of the broader industrial and economic implications of a potential mining boom? Carlos De Alba: You're absolutely right. The development of a new domestic mine supply and the required processing capabilities will influence multiple industries here in the US. Beyond obviously, miners and exploration companies, a potential mining boom in the country will generate significant demand for equipment and machinery manufacturers, as well as engineering and environmental firms. It would also foster a more rapid and secure development of supply chains that rely heavily on minerals like batteries and electric vehicles companies. Ariana Salvatore: Carlos, thanks for taking the time to talk. Carlos De Alba: Thank you, it was great speaking with you Ariana. Ariana Salvatore: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review on Apple Podcasts, and share the podcast with a friend or colleague today.

19 Syys 20238min

While the ECB followed headline inflation with raised policy rates yet again last week, the Fed meeting this week may be more focused on core inflation and a hiking pause.----- Transcript -----Welcome to Thoughts on the Market. I'm Seth Carpenter, Global Chief Economist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, today I'll be talking about the debate around oil price effects on inflation and growth, and what it means for central banks. It's Monday, September 18th at 10 a.m. in New York. Last week, the European Central Bank raised its policy rate again. We had expected them to leave rates unchanged, but President Lagarde reiterated that inflation is too high and that the Governing Council is committed to returning inflation to target. She specifically referenced oil among rising commodity prices that pose an upside risk to inflation. From the summer lows of around $70 per barrel, the price of Brent oil has risen to over $93 a barrel. How much should oil prices figure in to the macro debate? In previous research our economics team has tried to quantify the pass through of oil prices to inflation and different economies. Our takeaway is that for developed market economies, the pass through from oil prices to even headline inflation tends to be modest on average. In the quarter, following a 10% increase in oil prices, headline inflation rises about 20 basis points on average. For the euro area in particular, we have estimated that an increase like we have seen of $20 a barrel should result in about a 50 basis point increase in headline inflation. For core inflation the pass through tends to be less, about 35 basis points. Especially given the starting point though, such a rise is not negligible, but the effect should fade over time. Either the price of oil will retreat or over the next year the base effects will fall out. But energy prices can also affect spending. Recent research from the Fed estimates the effects of oil prices on consumption and GDP across countries. They estimate that a 10% increase in oil prices depresses consumption spending in the euro area by about 23 basis points. What's the mechanism through which oil price shocks affect consumption? Consumer demand for energy tends to be somewhat inelastic. That is, it's harder to substitute away from buying energy than other categories of spending. So back to the ECB, we had not expected them to hike rates, but we did think it was a close call. Core inflation had started to come down, and when it became clear that core services inflation that peaked and was drifting lower against a backdrop of signs pointing to a weaker euro area economy, we revised our call to no hike. So from our perspective, the ECB has increased the risk of hiking perhaps too much based on headline inflation. The ECB statement last week noted that inflation "is still expected to remain high for too long", but because it seems that they are now done hiking, the debate is going to turn to the duration of this so-called "higher for longer" with the policy rate. With the effects of inflation passing over time, but the drag of GDP showing up over the next few quarters, we get more comfortable expecting rate cuts there as early as June next year. The Fed is meeting this week and the last US CPI print showed headline inflation boosted by higher gasoline prices. Sound familiar? Well, our colleagues in the U.S. team have stressed that the Fed will likely look through the non core inflation. And, as in Europe, the increases in oil prices should lower purchasing power for consumers in the near term, further limiting economic activity and that is part of the objective of higher policy rates right now. With the Fed's focus on core rather than headline inflation, the last data print gives more reason to think the Fed is done hiking. Taking the last CPI print and combining it with last week's data from the Producer Price Index, you can infer a monthly rate of 0.14% for core PCE inflation in August. When the Federal Open Market Committee revisits its June economic projections, they will essentially be forced to revise down their forecasts for core inflation for this year. Thanks for listening and if you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

18 Syys 20234min

With more companies using artificial intelligence to enhance their travel websites, AI could become the industry norm.----- Transcript -----Ed Stanley: Welcome to Thoughts on the Market. I'm Ed Stanley, Head of Thematic Research in Europe. And along with my colleagues bringing you a variety of perspectives, today we'll be taking deep dive into the ways A.I can revolutionize the travel and booking experience. It's Friday, September the 15th at 3 p.m. in London. Ed Stanley: A.I and the company's most advantaged and likely disrupted have been the hot topic of 2023 for equity markets so far. However, the long term impacts and downstream winners and challenged companies remain fairly ambiguous for some sectors, and travel, hotels, OTAs certainly sit in that more hotly debated camp. We also have on the line our US gaming, lodging and leisure analyst Stephen Grambling with Brian Nowak, US head of Internet research. So Brian, if we could start with you to set the scene a little bit. Investors have been wondering about disrupting online travel for years. What does the hotel booking experience of the future look like, do you think? And what does that mean for travel agencies? And then, Stephen, if you want to follow up with your thoughts on the booking evolution and how that looks. So, Brian, first, please. Brian Nowak: Yeah, artificial intelligence, I think, is going to really change the overall online travel experience. I think it's going to become a lot more conversational, interactive, personalized and visual, and probably even video based in nature. You know, I think that right now you think about the travel research process where you might be looking for a hotel in Miami the week of the holidays in December that will sleep four people that has access to a beach and a golf course. That experience, the search for that right now is pretty low quality and requires a lot of multiple searches and tabs and apps, and it takes a while. You know, with the way in which these large language models and applications on top of these large language models can search through unstructured data, I think that these online travel agencies and other emerging A.I travel apps are going to really leverage these capabilities and actually just make the entire travel research process much faster, more interactive and more comprehensive. The other thing I would say on the interactive point is I think we are going to move toward having A.I powered online travel agents. Where if I am looking for that one example of a place to stay in Miami the week of the holidays today, but there are no hotels that fit my criteria, two weeks from now and inventory becomes available I may have an A.I travel agent say, Brian, are you still looking to travel in December? Look at the inventory that popped up. So I would just expect the overall travel research and booking process to become much more conversational, efficient and just high quality for all users, which should drive conversion higher and pull a larger share of wallets from offline to online. I don't know, Stephen, how do you think about the potential impacts on the brands from that? Stephen Grambling: I think to set the stage there, the most sizable place consumers start their booking process has been historically by researching hotels across price, amenities, location, etc. From the brand's perspective, the key was how do you get a consumer to book with you direct, even if the research was done via another channel? And that is what bore out the stop clicking around campaigns that started in 2016. The brands all launched marketing to tell consumers to stop price comparison all over and leverage loyalty to get the cheapest rate plus certain benefits that they could only get if they booked direct. So what happened? In some ways, the jury is still out due to the pandemic. Where do we go from here? I think, as you described, A.I has the ability to perhaps magnify some of the unique aspects of these brand loyalty programs that were so important to that direct booking campaign, that they can harness both business and consumer travel data that tends to have higher frequency, even if they have lower breadth relative to the OTAs. And as we look right now at the current landscape, when you do these queries that Brian was describing, booking channels are still effectively leveraging whatever the output was from search engine optimization, SEO. And so I think that the opportunity there is if you can train these large language models, either from the consumer dictating it via their preferences, whether it's for loyalty, the amenities they want, the experience they want, or the brands can train them by using the data that they have that's differentiated across both business and leisure. That's where they have an opportunity to actually move a little bit up in the funnel. Ed Stanley: Perfect. And you touched on marketing there, you gave some great color on the booking process of the future. Where do you think A.I could have other impacts across the PNL for your names? Stephen Grambling: So we outlined five areas A.I can impact hotels. First is obviously personalization of content, whether that's the room food, amenities being offered via video or otherwise. Second is the marketing efficiencies as offers could be more targeted based on feedback. The third is enhanced engagement during and post trip, as you continually interact with these effectively personal assistants throughout the process, not just travel planning but engagement throughout. Fourth is automated customer service, essentially chatbots and virtual assistants. And the fifth is yield and revenue management, where hotels can maximize price and occupancy by better predicting demand patterns using various sources of data. And based on other industries' success in some of these areas, we think that they could add up to hundreds of millions of dollars in benefits to the branded hotel systems across various levels of the PNL. Ed Stanley: Perfect. And one of the other things you mentioned with loyalty programs, which are pretty important, you also want to use loyalty programs for your airline hotels. Can you tell us how these work from a consumer brand perspective and why they're so important? Stephen Grambling: A number of studies suggest both business and leisure customers pick loyalty programs primarily for the perceived points value. But this is then followed by personalized experience and partnerships, that's what the consumer values when they're picking a loyalty program. A.I has the opportunity to really differentiate beyond just points back or a coupon by leveraging, as I said, the unique data that they have across both that business travel and then leisure to drive again, tailored offers experiences. These loyalty programs importantly are essentially pools of funds across all the owners of hotels deployed by the brands. And so when they're investing in A.I, the same kind of thing will happen where they'll be spreading across all of their owners. At the same time, the brands can leverage partners such as credit card companies, in the past they've also done other travel partners, to subsidize these funds and drive even greater scale. And another thing is that they can also get some fees from these loyalty programs that they charge back to these partners. And currently that can represent over 10% of the EBITDA, these companies, as we think about co-brand credit card fees alone. Ed Stanley: Brian, you've done an AlphaWise survey or two maybe, what of the high level survey findings shown you on travel particularly? Brian Nowak: We are already seeing travel leisure research migrating over to these new platforms where, you know, something around 20% of people we think are already researching leisure travel and using those tools to research travel. So to me, it's interesting, it is an encouraging early signal for the tech companies that you are seeing this user behavior move from the traditional search products over to the next generation A.I power tools. Ed Stanley: Then just to round things off. From a topics order of preference perspective, after all the work you've done, the winners and the more challenge names you think they come out of this piece of work. Stephen Grambling: So we think about this across both the scale of the system and then their investment already in technology and we see in the cross-section there, probably the best position would be folks who have effectively already spent on a connected room. So they have the tech ability and they also have the scale. Folks who are smaller scale are just not going to have quite as much data to work with, and they're not going to have the same system size and system funds that they can invest in the technology behind it. Ed Stanley: Stephen, Brian, that's been really insightful. Thank you for taking the time to talk. Ed Stanley: And thanks for listening. If you enjoy Thoughts on the Market, please be sure to rate and review us on the Apple Podcast app. It helps more people find the show.

15 Syys 20238min

With the global demand of oil reaching a new high, the spillover in performance is changing the fortune for energy equities and oil markets.----- Transcript -----Welcome to Thoughts on the Market. I'm Martijn Rats, Morgan Stanley's Global Commodity Strategist. Along with my colleagues bringing you a variety of perspectives, Today I'll discuss the recent changes in oil markets and why recently we turned bullish on energy equities once again. It's Thursday, September 14th at 2 p.m. in London. Prices of both crude oil and refined product have risen substantially over the last two months. Brent crude oil is trading once again a little over $90 a barrel, up 20% since the middle of the year. Diesel prices have rallied even more, up 50% since the mid year point and recently surpassing the $1,000 per tonne mark again. After a fairly lackluster first half, this begs the question what has brought about this sudden change in fortune. For starters, oil demand is simply robust. In June, global oil demand reached 103 million barrels a day, a new all time high. But on top of that, the recent crude price rally has been supported by strong production cuts from OPEC, particularly Saudi Arabia. In April, Saudi Arabia still exported 7.4 million barrels per day of crude oil. By August, this had fallen to just 5.4 million barrels a day, that is an unusually sharp drop in a very short space time. On a 100 million barrel per day market, that may not look like much, but this is enough to drive the market into deficits, cause inventories to decline and prices to rise. What has given refined product prices, like diesel, a further boost has been tightness in the global refining system. Capacity closures during COVID, logistical difficulties in replacing Russian crude in European refineries and an unexpectedly large number of unplanned outages, partly because of a hot summer, have effectively curtailed refining capacity. Like last year, it has been all hands on deck in global refining this summer. Whether oil prices and refining margins will still rally a lot further is hard to know, but prices seem well underpinned at current levels. As long as Saudi Arabia and the rest of OPEC continue their current oil policy, the oil market is simply tight and the current cuts have all the hallmarks of lasting well into next year. On top, we think it will take some time before the current constraints in refining are resolved. Margins may decline somewhat from their current very elevated levels, but we would expect them to remain high by historical standards for some time to come. Then we would also argue that risks to natural gas prices in Europe are once again skewed higher. Prices have fallen substantially this year, and of course, they could fall somewhat further. However, if some tightness returns, they can rally a lot more, skewing that price outlook higher too. Putting this all together creates a favorable outlook for energy equities and that is where our true conviction lies. At the start of the year, we argued that earnings expectations for the energy sector were high and that market sentiment was already bullish and that valuations were stretched. After two years of rating the sector attractive, we downgraded our sector view back in January. However, pretty much all these factors have changed once again. Consensus earnings forecasts have fallen, but given our commodity outlook, we would now expect upgrades to consensus estimates to start coming through once again, making energy possibly the only sector for which this argument can be made. With strong free cash flow ahead, we expect robust dividend growth, strong share buybacks and declining net debt. Combining that with market sentiment that is no longer so buoyant for energy and valuations that have corrected quite a lot, we think energy is once again an attractive sector. Especially for those seeking high income and protection against inflation, against an uncertain geopolitical backdrop. Thanks for listening. If you enjoyed the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

14 Syys 20233min

Even though mortgage rates are up 100 points since the beginning of 2023, home prices are likely to stay flat or increase due to tight housing supply.----- Transcript -----Jim Egan: Welcome to Thoughts on the Market. I'm Jim Egan, co-head of U.S. Securitized Products Research here at Morgan Stanley. Jay Bacow: And I'm Jay Bacow, the other Co-Head of U.S. Securities Products Research. Jim Egan: And on this episode of the podcast, we'll be discussing U.S. home prices. It's Wednesday, September 13th at 11 a.m. in New York. Jay Bacow: Jim, mortgage rates are up over 100 basis points since the beginning of the year, but I hear you were turning more optimistic on home prices. What gives? Jim Egan: Well, the first thing that I would say is that home price data is pretty lagged and that an increase in mortgage rates is not going to be felt immediately in the data. For instance, let's assume the last week of August ends up being the peak in mortgage rates for this cycle. When would you expect that rate to start showing up in actual purchase mortgages? Jay Bacow: So, if the peak in mortgage rates is the end of August, we will get data on people applying for the mortgage the following week from the Mortgage Bankers Association. But it takes about seven weeks right now to close a mortgage. If the peak was at the end of August, the mortgages are probably closing towards the end of October, almost at Halloween. But if it closes in October, Jim, when will we actually get that data? Jim Egan: Right. The home price data is even more lagged than that. The Case-Shiller prints that we forecast and that we've talked about on this podcast, those come out with a two month delay. So those October sales, we're not going to see until December. Again, for instance, the print we just got at the end of August, that was for home prices in June. Jay Bacow: So in other words, we haven't seen the full impact of this increase in rates yet on the housing market and the data that we can see. But when we do, what's the impact going to be on home prices? Jim Egan: Well, we think the immediate impact is going to be on a few other aspects of the housing market, and then those aspects are going to potentially impact home prices. The most straightforward level here is affordability, right? That's an equation that includes prices, mortgage rates, as well as incomes, and so we're talking about the mortgage rate component. Now, one thing that you and I have said on this podcast before, Jay, is that affordability in the U.S. housing market, it's still challenged, but at least so far this year it really hasn't been getting any worse. That's not the case anymore. Affordability is still very challenged and now it's started to get worse again. By our calculations, the monthly payment on the median priced home is up 18% over the past year, and that's the first time that deterioration has accelerated since October of 2022. Three month and six month changes in affordability have also resumed deteriorating after those were actually improving earlier this year. Jay Bacow: So if homes are getting less affordable, presumably home sales should fall? Jim Egan: We think that would be kind of the probable impact there and it is something that we're seeing. To be clear, affordability is not deteriorating anywhere near as rapidly as it did in 2022, and we don't expect the same sharp declines in home sales. But this really does give us further confidence in our L-shaped forecast, and if anything it could provide a little more pressure on existing home sales. But we're also seeing the impact on the supply side of the equation. Jay Bacow: But wasn't the supply side already incredibly low? For instance, our truly refinanceable index calculates what percent of the universe has at least 25 basis points of incentive to refinance. It's at less than 1% right now. The average outstanding mortgage rate for the agency market is 3.68%. Are we really expecting the supply to fall further? Jim Egan: So that wasn't part of our original forecast and we had been seeing existing inventories really start to climb off of recorded lows. For context, our data there goes back about 40 years, but that's taken an abrupt about face in recent months. The 13% year-over-year decrease in inventory that we just saw this past month, that's the sharpest drop since June 2021, with a contraction coming through both new and existing listings. As affordability has resumed its deterioration with this increase in mortgage rates, homebuilder confidence actually fell month over month for the first time this year. Now, tight supply should continue to provide support to home prices, even as affordability has become more challenged. Jay Bacow: And so what does that support for home prices end up looking like? Jim Egan: The short answer, we expect a return to year-over-year growth with the next print that we're going to get here at the end of September. Case-Shiller year-over-year has actually fallen for each of the past three months. We think that ends now. We have a forecast of plus 0.7% year-over-year with a print that's just about to come out and that would be a new record high. With home prices then surpassing their levels in June of 2022, at least for that index. Our base case forecast for year end has been 0% growth, with our bull case at plus 5%. The evolution of the inputs since particularly the supply point here continues to be tighter than what was already pretty tepid expectations on our part. That has us expecting HPA to finish the year between these two levels, that base case and that bull case level. Jay Bacow: All right, Jim, it's always great talking to you. Jim Egan: Great talking to you, too, Jay. Jay Bacow: And thank you for listening. If you enjoy Thoughts on the Market, please leave us a review on the Apple Podcast app and share the podcast with a friend or colleague today.

13 Syys 20235min

Economic growth data from the summer has bolstered belief in a possible soft landing in the U.S., while China has experienced a faster-than-expected deterioration in the macro environment.----- Transcript -----Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist. Along with my colleagues bringing you a variety of perspectives, I'll be talking about our views on the markets as we head into the fall. It's Tuesday, September 12th at 10 a.m. in New York. As many of us head back to school, Morgan Stanley Global economics and strategy teams look back on how the economy and the markets have evolved over the summer and look ahead to what changing narratives mean for the economic outlook and asset markets. Our debate centered on two key issues. One, the outperformance of the U.S. economy and the underperformance of China economy. And two, the recent spike in government bond yields at the longer end of the curve. The U.S. economy has been outperforming our expectations and has led markets over the summer to push out the first expected cut into 2024. The concern is that a still hot economy means that the Fed can keep policy restrictive for longer. Acknowledging the strong incoming data, our economists have revised their 2023 growth expectations significantly higher for the U.S. from 0.4% to 1.7%, even as they maintain that the Fed is done hiking and will be on hold until first quarter of 2024. On the other hand, in China, the trajectory of economic growth has been different. Over the summer, data have been pointing to a faster than expected deterioration in the macro environment. We have seen successive and incremental property and infrastructure easing measures, but market confidence has not returned and debates around earnings, spillover effects on global growth and the impact on commodities are growing. Noting the macro and policy challenges since the mid-year outlook, our China economists have revised their 2023 growth expectations lower for China from 5.7% to 4.7% for 2023. And our emerging market equity strategists have moved to equal weight on China and revise down their MSCI Emerging Market Index target. What about our call to be long duration? Ten year Treasury yields have sold off by about 65 basis points since our mid-year outlook on better than expected U.S. growth data, among other factors. Can this continue? Our strategists make modest changes to their rates forecast, but still see a path for low yields, countering the market narrative of growth reacceleration or a higher treasury supply technical. Thus, we reaffirm our conviction to be long duration, despite the rates market moving away from us. Overall, our conviction on a U.S. soft landing has strengthened. But with monetary policy remaining restrictive, late cycle risks, growth, earnings and defaults remain. We maintain a defensive stance. We prefer bonds over equities and equal-weight stocks, overweight fixed income, underweight commodities, and equal weight cash. Combined with rich valuations, this makes us stay equal-weight equities, with a preference for rest of the world stocks over US stocks. In all, high carry and late cycle environment favor an overweight in fixed income. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

12 Syys 20233min