2024 US Elections: Inflation’s Possible Paths

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

16 Apr 20244min

The math of ‘bond-equity correlation' is complicated. Our head of Corporate Credit Research breaks it down, along with the impact of bond rates on other asset classes.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about why the same factors can have different outcomes for interest rates and credit spreads.It's Friday, April 12th at 2pm in London. Most of 2024 remains to be written. But so far, the financial story has been a tale of two surprises. First, the US Economy continues to be much stronger and hotter than expected, with growth and job creation exceeding initial estimates. Then second, due in part to that strong economy, interest rates have risen materially, with the yield on the US 10-year government bond about half-a-percent higher since early January. More specifically, market attention over the last week has refocused on whether these higher interest rates are a problem for other markets. In math terms, this is the great debate around bond-equity or bond-spread correlation, the extent to which assets move with bond yields, and a really important variable when it comes to thinking about overall portfolio diversification. But this somewhat abstract mathematical idea of correlation can also be simplified. The factors that are driving yields higher might look very different for other asset classes, such as credit. That could argue for a different correlation. Let’s think about how.Consider first why yields have been rising. Economic data has been good, with strong job growth and rising Purchasing Manager Indices or PMIs, conditions that are usually tough for government bonds. Supply has been heavy, with the issuance of Treasuries up substantially relative to last year. The so-called carry on government bonds is bad as the yield on government bond yields is generally lower, much lower, than the yield on cash. And the time-of-year is unhelpful: since 1990, April has been the worst month of the year for government bonds.But take all those same things thought the eyes of a different asset class, such as credit, and they look – well – different. Good economic data should be good for credit; historically, low-but-rising PMIs, as we’ve been seeing recently, is the most credit-friendly regime. Corporate bond supply hasn’t risen nearly as much as the supply for government bonds. The carry for credit is positive, thanks to still-steep credit curves. And the time of year looks very different: over that same period since 1990, April has been the best month of the year for corporate credit – as well as broader stock markets.Government bonds are currently being buffeted by multiple headwinds. Hot economic data, heavy supply, poor yields relative to cash, and unhelpful seasonality. The good news? Well, Morgan Stanley’s interest rate strategists expect these headwinds to be temporary, and still forecast lower yields by year-end. But for other asset classes, including credit, it’s also important to note that that same data, supply, carry and seasonality debate – fundamentally look very different in other asset classes.We think that means that Credit spreads can stay at historically tight levels in April and beyond, even as government bond yields have risen.Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts, or wherever you listen, and leave us a review. We’d love to hear from you.

12 Apr 20243min

With global temperatures rising and an increasing urgency to speed progress on the energy transition, our Head of Sustainability Equity Research examines the key materials needed—and the risks of disruption from US-China trade tensions.----- Transcript -----Welcome to Thoughts on the Market. I’m Laura Sanchez, Head of Sustainability Equity Research in the Americas. Along with my colleagues bringing you a variety of perspectives, today I’ll discuss a highly topical issue: the impact of US-China trade tensions on the energy transition. It is Thursday, April 11, at 12 pm in New York.Last week, you may have heard my colleagues discuss the geopolitics at play around US-China trade tensions and the energy transition. Today I’m going to elaborate on that discussion, spearheaded by my team, with a deeper dive into the materials and minerals at risk and exactly what is at stake for several industries in the US.When we talk about clean technologies such as electric vehicles, energy storage and solar, it is important to note that minerals such as rare earths, graphite, and lithium — just to name a few — are crucial to their performance. At present, China is a dominant producer of many of those key minerals, whether at the mining level – which is the case with gallium, rare earths and natural graphite; at the refining level – the case for cobalt and lithium; or at the downstream level – that is, the final product, such as batteries and EVs.If trade tensions between the US and China rise, we believe China could implement new or incremental export bans on some of these minerals that are key for western nations’ energy transition as well as for their broad economic and national security.So, we have analyzed over 10 materials and found that the highest risks of disruption exist for rare earths and related equipment, as well as for graphite, gallium, and cobalt. Some minerals have already seen certain export bans but given the lack of diversification across the value chain, we actually see the potential for incremental restrictions.So, this led us to ask our research analysts: how should investors view rising trade tensions in the context of clean technologies’ penetration, specifically?While electric vehicles appear most at risk, we see the largest negative impacts for the clean technology sector as well as for large-scale renewable energy developers. This has to do with China dominating around 70 per cent of the battery supply chain and still having strong indirect ties in the solar supply chain. But there are important nuances to consider for renewable energy developers, such as their ability to pass the higher costs to customers, whether this higher cost could hurt the economics of projects and therefore demand, and the unequal impacts between large and small players – where large, tier 1 developers could actually gain share in the market as they have proven to navigate better through supply chain bottlenecks in the past.On the Autos side, slower EV adoption would naturally impact sentiment on EV-tilted stocks; but as our sector analyst highlights, this could also mean lighter losses near term, as well as market share preservation for the largest EV players in the market. US Metals & Mining stocks would likely see positive moves as further trade tensions incentivize onshoring of mining and increase demand for US-made equipment.Given strong bipartisan support in the US for a more hawkish approach to China, our policy experts believe that the US presidential election is unlikely to lead to easing trade restrictions. Nonetheless, in terms of the energy transition theme, a Republican win could create volatility for trade and corporate confidence, while a Democrat administration would be more sensitive to the balance between protectionism and achieving global climate goals.Thanks for listening. If you enjoy the show, please leave us a review wherever you listen to podcasts and share Thoughts on the Market with a friend or colleague today.

11 Apr 20244min

Our Chief Fixed Income Strategist surveys the latest big swings in the oil market, which could lead to opportunities in equities and credit around the energy sector.----- 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 the implications of recent strong moves in oil markets.It's Tuesday, April 9th at 3pm in New York.A lot is going on in the commodity markets, particularly in the oil market. Oil prices have made a powerful move. What is driving these moves? And how should investors think about this in the context of adjacent markets in equities and credit?Morgan Stanley's Global Commodity Strategist and Head of European Energy Research, Martijn Rats, raised crude oil price forecast for the third quarter to $94 per barrel. The rally in recent weeks is a result of positive fundamental news and rising geopolitical tensions.On the fundamental side, we've had better than expected demand from China and steeper than forecast fall in US production. Further, oil prices have also found support from growing potential for supply uncertainty in the Middle East. Martijn thinks that the last few dollars of rally in oil prices should be interpreted as a premium for rising geopolitical risks. The revision to the third quarter forecast should therefore be seen to reflect these growing geopolitical risks.Our US equity strategists, led by Mike Wilson, have recently upgraded the energy sector. The underlying rationale behind the upgrade is that the energy sector relative performance has really lagged crude oil prices; and unlike many other sectors within the US stock world, valuation in energy stocks is very compelling.Furthermore, the relative earnings revisions in energy stocks are beginning to inflect higher and the sector is actually exhibiting best breadth of any sector across the US equity spectrum. Higher oil prices are also important for credit markets. To quote Brian Gibbons, Morgan Stanley's Head of Energy Credit Research, for credit bonds of oil focused players, flat production levels and strong commodity prices should support free cash flow generation, which in turn should go to both shareholder returns and debt reduction.In summary, there is a lot going on in the energy markets. Oil prices have still some room to move higher in the short term. We find opportunities both in equity and credit markets to express our constructive view on oil prices.Thanks for listening. If you enjoyed the show, please leave us a review on Apple Podcasts or wherever you listen to this podcast. And share Thoughts on the Market with a friend or colleague today.

9 Apr 20242min

Our Global Chief Economist explains why the rapid hikes, pause and pivot of the current interest rate cycle are reminiscent of the 1990s.----- Transcript -----Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about the current interest rate cycle and the parallels we can draw from the 1990s.It's Monday, April 8th, at 10am in New York.Last year, we reiterated the view that the 1990s remain a useful cycle to consider for understanding the current cycle. Our European equity strategy colleagues shared our view, and they've used that episode to inform their ‘out of consensus, bullish initiation on European equities’ in January. No two cycles are identical, but as we move closer to a Fed cut, we reassess the key aspects of that comparison.We had previously argued that the current interest rate cycle and the mid 90s cycle differ from the intervening cycles because the goal now is to bring inflation down, rather than preventing it from rising. Of course, inflation was already falling when the 1994 cycle started, in part, because of the recession in 1991.This cycle -- because much of the inflation was driven by COVID-related shocks, like supply chains for consumer goods and shifts in housing for shelter inflation -- inflation started falling rapidly from its peak before the first hike could have possibly had any effect. In recent months, our economic growth forecasts have been regularly revised upward, even as we have largely hit our expected path for inflation.A labor supply shock appears to be a contributing factor that accounts for some of that forecast deviation, although fiscal policy likely contributed to the real side's strength as well. Supply shocks to the labor market are an interesting point of comparison for the two cycles. In the 1990s, labor force growth was still benefiting from this multi-decade rise in labor force participation among females. The aggregate labor force participation rate did not reach its peak until 2000.Now, as we've noted in several publications, the surge in immigration is providing a similar supply side boost, at least for a couple of years. But the key lesson for me for the policy cycle is that monetary policy is not on a pre-set, predetermined course merely rising, peaking and then falling. Cycles can be nuanced. In 1994, the Fed hiked the funds rate to 6 per cent, paused at that peak and then cut 75 basis points over 1995 and 1996. After that, the next policy move was actually a hike, not a cut.Currently, we think the Fed starts cutting rates in June; and for now, we expect that cutting to continue into next year. But as our US team has noted, the supply side revisions mean that the path for policy next year is just highly uncertain and subject to review. From 1994 to 1996, job gains trended down, much like they have over the past two years.That slowing was reflective of a broader slowing in the economy that prompted the Fed to stop hiking and partially reverse course. So, should we expect the same now, only a very partial reversal? Well, it's too soon to tell, and as we've argued, the faster labor supply growth expands both aggregate demand and aggregate supply -- so a somewhat tighter policy stance could be appropriate.In 1996, inflation stopped falling, and subsequently rose into 1997, and it was that development that supported the Fed's decision to maintain their somewhat restrictive policy. But we can't forget, afterward, inflation resumed its downward trajectory, with core PCE inflation eventually falling below 1.5 per cent, suggesting that that need to stop cutting and resume hiking, well, probably needs to be re-examined.So, no two cycles match, and the comparison may break down. To date, the rapid hikes, pause and pivot, along with a seeming soft landing, keeps that comparison alive. The labor supply shock parallel is notable, but it also points to what might be, just might be, another possible parallel.In the late 1990s, there was a rise in labor productivity, and we've written here many times about the potential contributions that AI might bring to labor productivity in coming years.Thanks for listening. If you enjoy the show, please leave us a review wherever you listen to podcasts and share Thoughts on the Market with a friend or colleague today.

8 Apr 20244min

Oil demand has been higher than expected so far in 2024. Our Global Commodities Strategist explains what could drive oil to $95 per barrel by summer.----- Transcript -----Welcome to Thoughts on the Market. I’m Martijn Rats, Morgan Stanley’s Global Commodities Strategist. Along with my colleagues bringing you a variety of perspectives, today I’ll discuss recent developments in the oil market. It is Friday, April the 5th at 4 PM in London. At the start of the year, the outlook for the oil market looked somewhat unexciting. With the recovery from COVID largely behind us, growth in oil demand was slowing down. At the same time, supply from countries outside of OPEC (Organization for Petroleum Exporting Countries) had been growing strongly and we expected that this would continue in 2024. In fact, at the start of the year it looked likely that growth in non-OPEC supply would meet, or even exceed, all growth in global demand. When that occurs, room in the oil market for OPEC oil is static at best, which in turn means OPEC needs to keep restraining production to keep the balance in the market. Even if it does that, it results in a decline in market share and a build-up of spare capacity. History has often warned against such periods.Still, by early February, the oil market started to look tighter than initially expected. Demand started to surprise positively – partly in jet fuel, as aviation was stronger than expected; partly in bunker fuel as the Suez Canal issues meant that ships needed to take longer routes; and partly in oil as petrochemical feedstock, as the global expansion of steam cracker capacity continues. At the same time, production in several non-OPEC countries had a weak start of the year, particularly in the United States where exceptionally cold weather in the middle of January caused widespread freeze offs at oil wells, putting stronger demand and weaker supply together, and the inventory builds that we expected in the early part of the year did not materialise. By mid-February, we could argue that the oil market looked balanced this year, rather than modestly oversupplied; and by early March, we were able to forecast that oil market fundamentals were strong enough to drive Brent crude oil to $90 a barrel over the summer.Since then, Brent has honed in on that $90 mark quicker than expected. Over the last week or so, the oil market has shown a powerful rally that has the hallmarks of simply tightening fundamentals but also with some geopolitical risk premium creeping back into the price. For now, our base-case forecast for the summer is still for Brent to trade around $90 per barrel as that is where we currently see fundamental support. However, the oil market typically enjoys a powerful seasonal demand tailwind over the summer. And that still lies ahead. And, geopolitical risk is still elevated, for which oil can be a useful diversifier. With those factors, our $95 bull case can also come into play.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.

5 Apr 20243min

Experts from our research team discuss how tensions with China could limit US access to essential technologies and minerals.----- Transcript -----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income and Thematic Research.Ariana Salvatore: And I'm Ariana Salvatore from the US Public Policy Research Team.Michael Zezas: And on this episode of the podcast, we'll discuss how tensions in the US-China economic relationship could impact US attempts to transition to clean energy.It's Thursday, April 4th at 10am in New York.Ariana, in past episodes, I've talked about governments around the world really pushing for a transition to clean energy, putting resources into moving away from fossil fuels and moving towards more environmentally friendly alternatives. But this transition won't be easy. And I wanted to discuss with you one challenge in the US that perhaps isn't fully appreciated. This is the tension between US climate goals and the goal of reducing economic links with China. So, let's start there.What's our outlook for tensions in the near term?Ariana Salvatore: So, first off, to your point, the world needs over two times the current annual supply of several key minerals to meet global climate pledges by 2030. However, China is a dominant player in upstream, midstream, and downstream activities related to many of the required minerals.So, obviously, as you mentioned, trade tensions play a major role in the US ability to acquire those materials. We think friction between the US and China has been relatively controlled in recent years; but we also think there are a couple factors that could possibly change that on the horizon.First, China's over-invested in excess manufacturing capacity at a time when domestic demand is weak, driving the release of extra supply to the rest of the world at very low prices. That, of course, impacts the ability of non-Chinese players to compete. And second, obviously a large focus of ours is the US election cycle, which in general tends to bring out the hawk in both Democrats and Republicans alike when it comes to China policy.Michael Zezas: Right. So, all of that is to say there's a real possibility that these tensions could escalate again. What might that look like from a policy perspective?Ariana Salvatore: Well, as we established before, both parties are clearly interested in policies that would build barriers protecting technologies critical to US economic and national security. These could manifest through things like additional tariffs, as well as incremental non-tariff barriers, or restrictions on Chinese goods via export controls.Now, importantly, this could in turn cause China to act, as it has done in the recent past, by implementing export bans on minerals or related technology -- key to advancing President Biden's climate agenda, and over which China has a global dominant position.Specifically on the mineral front. China dominates 98 per cent of global production of gallium, more than 90 per cent of the global refined natural graphite market, and more than 80 per cent of the global refined markets of both rare earths and lithium. So, we've noted that those minerals are at the highest risk of disruption from potential escalation intentions.But Michael, from a market's perspective, are there any sectors that stand out as potential beneficiaries from this dynamic?Michael Zezas: So, our research colleagues have flagged that traditional US autos would see mostly positive implications from this outcome as EV penetration would likely stagnate further in the event of higher trade tensions. Similarly, US metals and mining stocks would likely benefit on the back of increased support from the government for US production, as well as increased demand for locally sourced materials.On the flip side, Ariana, any clear risks that our analysts are watching for?Ariana Salvatore: Yeah, so a clear impact here would be in the clean tech sector, which faces the greatest risk of supply chain disruption in an environment with increasing trade barriers in the alternative energy space. And that's mainly a function of the severe dependencies that exist on China for battery hardware. Our analysts also flagged US large scale renewable energy developers for potential downside impacts in this scenario -- again, specifically due to their exposure to battery and solar panel supply chains, most of which stems from China domiciled industries.Michael Zezas: Makes sense and clearly another reason we’ll have to keep tracking the US-China dynamic for investors. Ariana, thanks for taking the time to talk.Ariana Salvatore: Great speaking with you Mike.Michael Zezas: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen to the show and share the podcast with a friend or colleague today.

4 Apr 20244min