Will Falling Rates Mean Lower Home Prices?

Our Head of Corporate Credit Research analyzes the market response to President Trump’s tariff reversal and explains why rallies do not always indicate an improvement in the overall environment.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 the historic gains we saw this week in markets, and what they may or may not tell us. It's Friday April 11th at 2pm in London. Wednesday saw the S&P 500 gain 9.5 percent. It was the 10th best day for the U.S. equity market in the last century. Which raises a reasonable question: Is that a good thing? Do large one-day gains suggest further strength ahead – or something else? This is the type of Research question we love digging into. Pulling together the data, it’s pretty straightforward to sort through those other banner days in stock market history going back to 1925. And what they show is notable. I’m now going to read to you when those large gains occurred, in order of the gains themselves. The best day in market history, March 15th 1933, when stocks soared over 16 per cent? It happened during the Great Depression. The 2nd best day, Oct 30th 1929. During the Great Depression. The 3rd best day – Great Depression. The fourth best – the first trading day after Germany invaded Poland in 1939 and World War 2 began. The 5th best day – Great Depression. The 6th Best – October 2008, during the Financial Crisis. The 7th Best – also during the Financial Crisis. The 8th best. The Great Depression again. The 9th best – The Great Depression. And 10th best? Well, that was Wednesday. We are in interesting company, to say the least. Incidentally, we stop here in the interest of brevity; this is a podcast known for being sharp and to the point. But if we kept moving further down the list, the next best 20 days in history all happen during either COVID, the 1987 Crash, a Recession, or a Depression. So why would that be? Why, factually, have some of the best days in market history occurred during some of the very worst of possible backdrops. In some cases, it really was a sign of a buying opportunity. As terrible as the Great Depression was – and as the grandson of a South Dakota farmer I heard the tales – stocks were very cheap at this time, and there were some very large rallies in 1932, 1933, or even 1929. During COVID, the gains on March 24th of 2020, which were associated with major stimulus, represented the major market low. But it can also be the case that during difficult environments, investors are cautious. And they are ultimately right to be cautious. But because of that fear, any good news – any spark of hope – can cause an outsized reaction. But it also sometimes doesn't change that overall challenging picture. And then reverses. Those two large rallies that happened in October of 2008 during the Global Financial Crisis, well they both happened around hopes of government and central bank support. And that temporarily lifted the market – but it didn’t shift the overall picture. What does this mean for investors? On average, markets are roughly unchanged in the three months following some of these largest historical gains. But the range of what happens next is very wide. It is a sign, we think, that these are not normal times, and that the range of outcomes, unfortunately, has become larger. 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.

11 Apr 4min

Our analysts Vishy Tirupattur and Martin Tobias explain how the announcement of new tariffs and the subsequent pause in their implementation affected the bond market.Read more insights from Morgan Stanley. ---- Transcript -----Vishy Tirupattur: Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's, Chief Fixed Income Strategist.Martin Tobias: And I'm Martin Tobias, from the U.S. Interest Rate Strategy Team.Vishy Tirupattur: Yesterday the U.S. stock market shot up quite dramatically after President Trump paused most tariffs for 90 days. But before that, there were some stresses in the funding markets. So today we will dig into what those stresses were, and what transpired, and what investors can expect going forward.It's Thursday, April 10th at 11:30am in New York.President Trump's Liberation Day tariff announcements led to a steep sell off in the global stock markets. Marty, before we dig into that, can you give us some Funding Markets 101? We hear a lot about terms like SOFR, effective fed funds rate, the spread between the two. What are these things and why should we care about this?Martin Tobias: For starters, SOFR is the secured overnight financing rate, and the effective fed funds rate – EFFR – are both at the heart of funding markets.Let's start with what our listeners are most likely familiar with – the effective fed funds rate. It's the main policy rate of the Federal Reserve. It's calculated as a volume weighted median of overnight unsecured loans in the Fed funds market. But volume in the Fed funds market has only averaged [$]95 billion per day over the past year.SOFR is the most important reference rate for market participants. It's a broad measure of the cost to borrow cash overnight, collateralized by Treasury securities. It's calculated as a volume weighted median that covers three segments of the repo market. Now SOFR volumes have averaged 2.2 trillion per day over the past year.Vishy Tirupattur: So, what you're telling me, Marty, is that the, the difference between these two rates really reflects how much liquidity stress is there, or the expectations of the uncertainty of funding uncertainty that exists in the market. Is that fair?Martin Tobias: That's correct. And to do this, investors look at futures contracts on fed funds and SOFR.Now fed funds futures reflect market expectations for the Fed's policy rate, SOFR futures reflect market expectations for the Fed policy rate, and market expectations for funding conditions. So, the difference or basis between the two contracts, isolates market expectations for funding conditions.Vishy Tirupattur: So, this basis that you just described. What is the normal sense of this? Where [or] how many basis points is the typical basis? Is it positive? Is it negative?Martin Tobias: In a normal environment over the past three years when reserves were in Abundancy, the three-month SOFR Fed funds Futures basis was positive 2 basis points. This reflected SOFR to set 2 basis points below fed funds on average over the next three months.Vishy Tirupattur: So, what happened earlier this week is – SOFR was setting above effective hedge advance rate, implying…Martin Tobias: Implying tighter funding conditions.Vishy Tirupattur: So, Marty, what actually changed yesterday? How bad did it get and why did it get so bad?Martin Tobias: So, three months SOR Fed funds tightened all the way to -4 basis points. And we think this was a reflection of investors’ increased demand for cash; whether it was lending more securities outright in repo to raise cash, or selling securities outright, or even not lending excess cash in repo. This caused dealer balance sheets [to] become more congested and contributed to higher SOFR rates.Vishy Tirupattur: So, let's give some context to our listeners. So, this is clearly not the first time we've experienced stress in the funding markets. So, in previous episodes – how far did it get and gimme some context.Martin Tobias: Funding conditions did indeed tighten this week, but the environment was far from true funding stress like in 2019 and certain periods in 2020. Now, in 2019 when funding markets seized, and the Fed had to intervene and inject liquidity, three months SOFR fed funds basis averaged -9 basis points. And that compares to -4 basis points during the peak macro uncertainty this week.Vishy Tirupattur: So, Marty, what is your assessment of the state of the funding markets right now?Martin Tobias: Right. Funding conditions have tightened, but I think the environment is far from true funding stress. Thus far, the repricing has occurred because of a higher floor for funding rates and not a scarcity of reserves in the banking system.Vishy Tirupattur: So, to summarize, so the funding stress has been quite a bit earlier this week. Not as bad as the worst conditions we saw say in 2019 or during the peak COVID periods in 2020. but still pretty bad. And relative to how bad it got, today we are slightly better than what we were two days ago. Is that a fair description?Martin Tobias: Yes. That's good. Now, Vishy, what is your view on why the longer end of the bond market sold off.Vishy Tirupattur: So longer end bond markets, as you know, Marty, while safe from a credit risk perspective, do have interest rate sensitivity. So, the longer the bonds, the greater the interest rate sensitivity. So, in periods of uncertainty, such as the ones we are in now, investors prefer to be in ultra short-term funds or cash – to minimize that interest rate sensitivity of their portfolios. So, what we saw happening in some sense, we can call it dash for cash.I think we both agree that this demand for safety will persist, and we will continue to see inflows into money market funds, which you covered in your research. So, your insights Marty will be very helpful to clients as we navigate these choppy waters going forward.Thanks a lot, Marty, for joining this webcast today.Martin Tobias: Great speaking with you, Vishy,Vishy Tirupattur: And 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.DisclaimerVishy Tirupattur: Yesterday all my troubles were so far away. I believe in yesterday.

10 Apr 6min

Earlier today, President Trump announced a pause on reciprocal tariffs for 90 days. Our Global Head of Fixed Income Research and Public Policy Strategy Michael Zezas looks at the fallout.----- 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 – possible outcomes of President Trump's sudden pause on reciprocal tariffs.It’s Wednesday, April 9th, at 10pm in New York. We’d actually planned a different episode for release today where my colleague Global Chief Economist Seth Carpenter and I laid out developments in the market thus far and looked at different sets of potential outcomes. Needless to say, all of that changed after President Trump announced a 90-day pause on most tariffs that were set to rise. And so, we needed to update our thinking.It's been a truly unprecedented week for financial markets. The volatility started on April 2, with President Trump’s announcement that new, reciprocal tariffs would take effect on April 9. When added to already announced tariffs, and later adding even more tariffs in for China, it all added up to a promise by the US to raise its average tariffs to levels not seen in 100 years. Understandably, equity markets sold off in a volatile fashion, reflecting investor concerns that the US was committed to retrenching from global trade – inviting recession and an economic future with less potential growth. The bond market also showed signs of considerable strain. Instead of yields falling to reflect growth concerns, they started rising and market liquidity weakened. The exact rationale is still hard to pin down, but needless to say the combined equity and bond market behavior was not a healthy situation.Then, a reprieve. President Trump announced he would delay the implementation of most new tariffs by 90 days to allow negotiations to progress. And though he would keep China tariffs at levels over 100 per cent, the announcement was enough to boost equity markets, with S&P gaining around 9 per cent on the day.So, what does it all mean? We’re still sorting it out for ourselves, but here’s some initial takeaways and questions we think will be important to answer in the coming days.First, there's still plenty of lingering uncertainties to deal with, and so investors can’t put US policy risk behind them. Will this 90 day reprieve hold? Or just delay inevitable tariff escalation? And even if the reprieve holds, do markets still need to price in slower economic growth and higher recession risk? After all, US tariff levels are still considerably higher than they were a week ago. And the experience of this market selloff and rapid shifts in economic policy may have impacted consumer and business confidence. In my travels this week I spent considerable time with corporate leaders who were struggling to figure out how to make strategic decisions amidst this uncertainty. So we’ll need to watch measures of confidence carefully in the coming weeks. One signal amidst the noise is about China, specifically that the US’ desire to improve supply chain security and reduce goods trade deficit would make for difficult negotiation with China and, ultimately, higher tariffs that would stay on for longer relative to other countries. That appears to be playing out here, albeit faster and more severely than we anticipated. So even if tariff relief is durable for the rest of the world, the trade relationship with China should be strained. And that will continue to weigh on markets, where costs to rewire supply chains around this situation could weigh on key sectors like tech hardware and consumer goods. 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.

10 Apr 3min

Our CIO and Chief U.S. Equity Strategist explains why the new tariffs added momentum to a correction that was already underway, and what could ease the fallout in equity markets.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 I’ll be discussing equity market reactions to the tariffs and what to expect from here. It's Tuesday, April 8th at 11:30am in New York.So, let's get after it. From our perspective, last week's Liberation Day was more like the cherry on top for a market that had been dealing with multiple headwinds to growth all year, rather than the beginning. While the magnitude of the tariffs turned out to be worse than our public policy team's base line expectations, the price reaction appears capitulatory to us given that many stocks were already down 30 to 40 percent before the announcement on Wednesday. As discussed in last week’s podcast, our 5500 first half support level on the S&P 500 quickly gave way given this worse than expected outcome for tariffs. The price action since then has forced us to consider new technical support levels which could be as low as the 200-week moving average. And that would be 4700 on the S&P 500. I think it’s worth highlighting that cyclical stocks started underperforming in April of last year and are now down more than 40 percent relative to defensive stocks. In other words, markets have been telling us for almost a year that growth was going to slow, and since January, it's been telling us it's going to slow significantly. In fact, cyclicals have underperformed defensives to a degree only seen during a recession, not prior to them. This fits very nicely with our long-standing view that most of the private economy has been much weaker than the headline numbers suggest – thanks to unprecedented fiscal spending, AI capex and wealthy consumers spending their gains from asset prices. With the exceptional fourth quarter surge in U.S. fiscal spending likely to decline even without DOGE's efforts, global growth impulses will suffer too. Hence, foreign stocks are unlikely to provide much of a safe haven if the U.S. goes on a diet or detox from fiscal spending. Markets began to contemplate such an outcome with last week’s announcements. Therefore, I remain of the view we discussed two weeks ago that U.S. equities should trade better than foreign ones going forward. That is especially the case with China, Europe and Japan all which run big current account surpluses and are more vulnerable to weaker trade.Meanwhile, the headline numbers on employment and GDP have been flattered by government related jobs and the hiring of immigrants at below market wages. This is one reason the Fed has kept rates higher than many businesses and consumers need and why we remain in an economy of haves and have-nots. Our long standing thesis is that the government has been crowding out much of the economy since COVID, and arguably since the Great Financial Crisis. It's also why large cap quality has been such a consistent outperformer since the end of 2021 and why we have continued to have high conviction and our recommendation are overweight these factors despite short periods of outperformance by low quality cyclicals or small caps – like last fall when the Fed was cutting rates and we pivoted briefly to a more pro-cyclical recommendation. Bottom line, equity markets are discounting machines and they trade six months in advance of the headlines. With most stocks topping in December of last year and cyclicals’ relative performance peaking almost a year ago, this correction is well advanced, and this is not the time to be selling. However, it's fair to say that the tariff announcements last week have taken us to an area with greater tail risk that includes a recession or financial contagion that must be taken into consideration when thinking about levels and adding risk.I see three specific scenarios that could put in a durable floor more quickly:1. President Trump delays the effective date for the implementation of the additional tariffs beyond the initial 10 percent that went into effect this weekend2. The Fed offers support for markets, either explicitly or verbally3. A number of nations come to the table and negotiate on favorable terms to the United States.In short, get ready for another bumpy week and remember markets are looking much further ahead than today’s headline. I remain optimistic that the second half will be better than the first as these growth negative policies morph into growth positive ones via de-regulation, a better fiscal trajectory, lower interest rates and taxes and maybe even higher wages for the American consumer.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.

8 Apr 4min

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 Apr 11min

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 Apr 3min

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 Apr 12min

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 Apr 10min