2024 US Elections: Inflation’s Possible Paths

Our Global Head of Fixed Income and Thematic Research Michael Zezas and Chief Asia Economist Chetan Ahya discuss how the upcoming US elections might impact economic policies in Asia.----- Transcript -----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Global Head of Fixed Income and Thematic Research.Chetan Ahya: And I'm Chetan Ahya, Morgan Stanley's Chief Asia Economist.Michael Zezas: Today, we'll talk about what the US election means for Asia's economy.It's Wednesday, October 9th at 10am in New York.Chetan, we're less than a month now from the US election, and when I think about what it means for Asia, perhaps the most immediate and direct impact would be via tariffs.Now, our colleagues have already addressed some of this on the podcast, but I'm eager to hear your thoughts. And in the case of a Trump win and a significant tariff increase on China, how big of an impact do you think this policy would have on China's economy, and what particular areas of the economy might be most affected?Chetan Ahya: Well, Mike, I think firstly the tariff numbers being floated, i.e. that if it is 60 per cent, it would mean an increase in tariff of about 35 percentage points over an existing number, which is at 25 per cent. So, the amount of tariffs that we're talking about this time are larger than what we saw in 2018-19. And in terms of implications, of course, it will depend upon exactly what is the magnitude of tariff that is being imposed, but we definitely think there will be a significant downside to China's growth; and we expect an increase in deflationary pressures.Just to give you a bit of perspective of what happened in 2018-19, tariff resulted into China's growth slowing by a full percentage point from 6.9 per cent to 5.9 per cent; and at the same time, we saw that there was downward pressure on China's inflation dynamic. And the timing of tariffs this time does not seem to be great. China is going through an existing challenge of debt deflation loop. And we've seen that China's GDP deflator, which is a broader measure of prices, has been in deflation already for about seven quarters now. And so, in this context, tariffs will further add to its deflationary pressures and make that macro situation much more complicated.Michael Zezas: Got it. And so, how do you think China might respond if it becomes the target of higher tariffs?Chetan Ahya: So, we think China's policy makers could take up three sets of measures to mitigate the impact of tariffs.Number one, there will be, of course, depreciation in its exchange rate, which will be offsetting some part of the tariff increase effect. And so, for example, the weighted average tariff increase was about 18 percentage points during 2018-19, and the RMB depreciation was about 11 per cent. So, there was a significant offset of that tariff increase by currency depreciation.Number two, China could continue to take its effort to rewire trade flows and supply chain. So, for example, in 2018-19, we've seen a significant rewiring of exports from China to the US via Vietnam and Mexico, and we think this time that could be expanded to some more economies.And number three, China also resorted to focusing on new markets, i.e. some of the other emerging markets other than US. And at the same time, they focused on introducing new export products; like in the last cycle, they focused on solar panels, lithium batteries, EVs, and old generation chips. So, in effect, they will try to expand their market base from US into other emerging markets. And at the same time, they will be focusing on new products to ensure that their market share in global goods exports is maintained.So, Mike, we've been discussing the potential impact of a Trump win. But how would a Harris White House shape trade policy, vis-à-vis China and rest of Asia?Michael Zezas: Yeah, I think a Harris White House would represent a lot of continuity with the Biden White House's approach toward Asia and China, specifically when it comes to trade. That is to say, there's a lot of support for continued use and expansion of non-tariff barriers – things like export controls, and inbound and outbound investment restrictions. And there's less interest in using higher tariffs than what we already have as a tool.So, you can expect that. And I think you could also expect there to be kind of a broader reach out to develop economic relationships with Pan Asia as a means of enabling some of the transition that multinational companies would need to rewire their supply chains.But if we take as a given that that might be Harris's approach to trade policy, Chetan, what's your outlook for Asia if she wins in November?Chetan Ahya: Well, if Harris wins, that would eliminate the key risk to region's outlook in form of significant tariff implementation. And in this case, we expect status quo to our Asia forecast. And we would maintain our constructive outlook for the large economies in the region. And within the group, we think India and Japan are best positioned from a structural standpoint. While China, we were concerned about the debt deflation loop, but with the recent set of policy measures, we think that the risks are now more balanced as far as China macro-outlook is concerned.Michael Zezas: Got it. Well, Chetan, thanks for taking the time to talk. This is obviously a very important topic as we get closer to the US election.Chetan Ahya: Great speaking with you, Mike.Michael Zezas: And as a reminder, if you enjoy Thoughts on the Market, please take a moment to rate and review us wherever you listen; and share Thoughts on the Market with a friend or colleague today.

9 Okt 20245min

The rhetoric around the US elections is heating up, and tariffs have become a central theme – to rally for or against. In Part II of our roundtable discussion, our chief economists break down national and global implications of this policy lever.----- Transcript -----Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist.On this special episode of the podcast, we're going to continue our third roundtable discussion with Morgan Stanley's economists from around the world as we enter the fourth quarter of 2024.It's Tuesday, October 8th at 10am in New York.Jens Eisenschmidt: And 3pm in London.Seth Carpenter: All right, so yesterday we covered topics about central banks, inflation, reflation, deflation, China's stimulus policies – a whole set of things. But today I really want to focus on the upcoming US elections and some of the possible implications around the world.As of this recording, the race between Vice President Harris and former President Trump is essentially in a dead heat and it has left policymakers and market participants with few clear signals about what policy is going to be going forward.One key policy lever is tariffs; and so Diego, I’m going to come to you. What has the US team said about tariffs and what it might mean for the economy?Diego Anzoategui: Yes, I think the three key policy levers to consider are tariffs, as you mentioned Seth, immigration policy, and fiscal policy. Tariffs, in particular, are basically a presidential authority, so the outcome of the election is going to be very important there.Fiscal policy will depend not only on the White House, but also on the Congress, which most polls suggest that it will be split between the two parties. So, we don't expect much there. And immigration policy is tricky because if you take a look at the data, immigration flows have been decreasing. And the key question here is whether the new policy is going to affect that already decreasing pathSeth Carpenter: For tariffs, I know that we've published -- that there's both a boost to inflation that can come, but also a hit to economic growth. And that boost to inflation likely comes first.The logic is tariffs are taxes, and so they should be seen as a tax on consumption spending -- but also, on domestic CapEx spending and domestic manufacturing because a lot of the imports that are under tariff are either capital goods or intermediate goods that go into manufacturing here in the US.Diego Anzoategui: Yeah, that's right. Of course, the details will matter a lot. So, suffice it to say, there's a lot of uncertainty.Seth Carpenter: Okay, that's fair. Chetan, let me come back to you on this. This topic is particularly important for China's economy since the Trump campaign has pledged tariffs of up to 60 per cent on China, and then 10 per cent globally -- something that our public policy team believes could be a driver of a broader decoupling.You've written a lot about tariffs, tariff structure, what it means for China, the deflationary path. Could you just elaborate a little bit for us?Chetan Ahya: Yeah, absolutely. I think the timing of this tariff, if they do come up in November or sometime in 2025, couldn't have been coming at a worse time for China. As we've been discussing, China has already been going through this challenge of deflation, and tariffs essentially will mean additional deflationary pressures on China.So that is one source of impact that we would be watching. The other would be what is the impact on global corporate confidence and China's corporate confidence. That can have additional negative impact in form of slowdown in investment. And one other thing to keep in mind is that in 2018-2019, China could respond, in terms of fiscal and monetary easing and offset some of the downside that came from tariffs. But in this cycle, considering the state of the property market, it would be very difficult for China to reflate that property market demand and offset the downside from tariff.So essentially, we think the tariffs, if they come in this time, could be far more challenging for China, particularly for deflation management.Seth Carpenter: Of course, tariffs are global and the Trump campaign has talked about not just tariffs on China. So, Jens, let me come to you. Maybe there are some implications here for Europe as well.During former President Trump's administration, there were targeted tariffs that, met challenges of the WTO and retaliatory tariffs on American exports to Europe. Looking back on what happened in 2018 and 2019, what do you think could be ahead in the event that former President Trump wins the election again?Jens Eisenschmidt: So, the episode in 2018 could be actually a template, even though it's probably limited in scopes because tariffs were much more limited that were applied back then. We've talked about around 1 per cent of total American-EU imports that back then were targeted; while now we are really talking about, at least in terms of proposals, everything.So first to notice that when back then the impact was limited, it will be a little bit bigger now simply because more is targeted. And we think it could be around 30 basis points, shaping around 30 basis points, of European GDP.Again, that's a very crude measure that depends on many things in particular on also the retaliation. And here for instance, we think EU would, of course, like last time, file a complaint with the World Trade Organization, you know, as a basis for then following negotiations around these tariffs.Then, the EU would, of course, be looking into what type of tariffs it could put in terms of retaliation on US products entering the EU. And here we would observe first that a lot of that is actually oil, and it's unlikely that you would want to put tariffs on oil -- or more broadly energy goods. So also, natural gas.Then that means we would look for the next product categories. But here, I think it's not so clear; no single product category stands out. But what stands out is that the US has a surplus in services exports to the EU. And here the EU could, in theory at least, come up with a strategy to retaliate through services regulation. Again, that would need to be seen, once we see these tariffs being implemented. But that certainly would be a road for the EU to take.Seth Carpenter: Thanks Jens. It makes a lot of sense. And gentlemen, I want to thank you all for a terrific discussion today.And thanks to our listeners. If you like Thoughts on the Market, please leave us a review wherever you listen to podcasts and share Thoughts on the Market with a friend or a colleague today.

8 Okt 20246min

Morgan Stanley’s chief economists take stock of a resilient global economy that has weathered a recent period of market volatility, in Part I of our two-part roundtable.----- Transcript -----Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist. And on this special episode of the podcast, we'll hold our third roundtable discussion focusing on Morgan Stanley's global economic outlook as we enter the final quarter of 2024.I am joined today by our economics team from three regions.Chetan Ahya: I’m Chetan Ahya, Chief Asia Economist.Jens Eisenschmidt: I’m Jens Eisenschmidt, Chief Europe Economist.Diego Anzoategui: I’m Diego Anzoategui from the US Economics team.It's Monday, October 7th at 10 am in New York.Jens Eisenschmidt: And 3 pm in London.Seth Carpenter: I have to say, a lot has happened since the last time we held this roundtable. To say the very least, we've had volatility in financial markets. But on balance, I kind of have to say the global economy has more or less performed the way we expected.The US economy is cruising towards a soft landing. The labor market maybe is a touch softer than we expected, but consumer spending has remained resilient. In Asia, Japan's reflation story is largely intact, while China is still confronting that debt deflation cycle that we've talked about. And in Europe, the tepid growth we had envisioned -- well, it's continuing. Inflation is falling, but the ECB seems to be accelerating its rate cuts. So, let's get into the details.Diego, I'm going to start with you and the US. The Fed cut interest rates in September for the first time this cycle, and they cut by 50 basis points instead of the 25 basis points that some people -- including us -- were expecting. So, the big question for you is, where does the Fed go from here?Diego Anzoategui: So, we are looking for a string of 25 basis point cuts from the Fed as long as labor markets hold up. Inflation has come down notably and we expect a normalization of interest rates ahead. But, of course, we might be wrong again. Labor markets might cool too much, and in that case, one or two additional 50 basis point cuts might happen again.Seth Carpenter: So, either the Fed glides into the soft landing or they pick up the pace and they cut faster.So, Jens, let me turn to you and pivot to Europe. You recently changed your forecast for the ECB, and you're now looking for a rate cut in October. And that's following two cuts already that the ECB has done. So, what prompted your change? Is it like what Diego said about a softer outcome prompting a faster pace of cuts. What's likely to happen next for the ECB?Jens Eisenschmidt: That's right. We changed our ECB call. And to understand why we have to go back to September. So already at the September meeting the ECB president, Lagarde, made clear in the press conference that the bank was a little bit less concerned about structurally high services inflation that is forecast to be persistently high still for some time to come -- mainly because there was more conviction that wages would come down eventually.And so, they could really focus a little bit more, give a bit more attention to the growth side of things. Just as a reminder, the Fed has a dual mandate. So, it's growth and inflation. The ECB only has inflation. So basically, if the ECB wants to act on growth, it needs to be sure that inflation is under control. And then since September what happened is that literally every single indicator, leading indicator, for inflation was negative. We had lower oil prices, we had a stronger euro, and of course, also weaker activity in terms of the PMIs pointing to a cooling of the ongoing recovery.So, all of that led us to revise our inflation forecast, and that means that ECB will very likely already be a target mid next year. That should lead to an acceleration of the rate cut cycle. And then it's only a question, will it be already in October or in December? And here comes the September inflation print in, which was softer in particular on the core or on the services component than expected. And we think that has tilted the balance; or will tilt the balance in favor of an October rate cut.So, what we see now is October, December, January, March -- 25 basis points rate cuts by the ECB leading to a rate of 250. Then this being close to neutral, they will slow down again, quarterly rate cut pace. So, June, September, December, 25 basis points each -- leading to a final rate end of next year at 175.Seth Carpenter: Okay, got it. So, inflation has come down in most developed market economies. Central banks are starting to cut. For the Fed, there's an open question about how much strength the labor market still has and whether or not they need to do 50 basis points or 25.But I have to say, Chetan -- and I'm going to come to you because -- in Asia, we saw a lot of market turmoil in August, and that was partly prompted by the rate hike of the BoJ. So, here's a developed market economy central bank that's not cutting. In fact, they're starting to raise interest rates. So, what happened there? And what do you think happens with the BoJ going forward?Chetan Ahya: Well, Seth, in our base case, we do expect BoJ to hike by another 25 basis points in January next year. And as regards to your question on what happened in terms of the volatility that we saw in the month of August? Essentially, as the BoJ took up its first rate hike, there was a lot of concern that BoJ will go in a consecutive manner, taking up successive rate hikes. But at the end of the day, what we saw was, BoJ realizing that there is a clear endogeneity between financial conditions and their reaction function. And as that communication was clearly laid out, we saw markets calming down. And now going forward, what we think BoJ will be watching will be the data on inflation and wages.We think they would be waiting to see what happens to the inflation data in the month of November and October, i.e., whether there is a clear, rise in services inflation, which has been running at around 1.3 per cent. And they would want to see that wage pass through to services inflation is continuing.And then secondly, they will want to see what is happening to the wage expectations from the workers in the next round of spring wage negotiations. The demand from workers will be clear by the end of this year, so sometime in December. And therefore, we think BoJ will look at that information and then take up a rate hike in the month of January next year.Seth Carpenter: Okay, so if I step back for a second, even if there are a few parts of the puzzle that still need to fall into place, it sounds to me like you're saying the Japan reflation story is still intact. Is that fair?Chetan Ahya: That's right. We think that, you know, the comment from the prime minister that came out a few days back; he's very clear that he wants to see a situation where Japan gets rid of deflation. So, we think that the policymakers are fully lined up to ensure that the reflation story remains intact.Seth Carpenter: That's super helpful and it just absolutely contrasts with what we've been saying about China, where they have sort of the opposite story. There's been a debt deflation cycle that you and the Chinese team have really been highlighting for a long time now, talking about the challenges for policy.We did get some news out of Beijing in terms of policy stimulus. Could you and break down for us what happened there and whether or not you think that's enough to really shift China's trajectory away from this debt deflation cycle?Chetan Ahya: Yes, Seth, so essentially, we got three things from Chinese policy makers. Number one, they took up big monetary policy easing. Number two, they announced a package to support the equity markets. And number three, they announced some measures to support the property market.Now we think that these measures are a positive and particularly the property market measures will be helpful. But in terms of real impediment for China's reflation story, we think that the key need of the hour is to take up aggressive fiscal easing to boost consumption. Monetary policy easing is helpful, but it's not really the key impediment to the reflation path.Seth Carpenter: All right, so if I wanted to see the glass as half full, I would say, look at this! Beijing policymakers have turned the corners. They're acknowledging that there's some policy impetus that needs to be put into place. But if I wanted to see the glass as half empty, I could take away from what you just said, that there just needs to be more, maybe fiscal stimulus to directly promote household spending.Is that that fair?Chetan Ahya: That's absolutely right. What's happening in China is that there has been a big structural adjustment in the property sector because now the total population is declining. And so therefore there is a big demand hole that is being left by the weakness in housing sector.Ideally, what they should be doing, as I was mentioning earlier, [is] that they should be taking a big fiscal easing to support consumption spending. But so far what we've been seeing is that they've been trying to fill that demand hole with more supply in form of investment in manufacturing and infrastructure sector.And unfortunately, that's been actually making the deflation challenge more complex. So going forward, we think that, you know, we should be watching out what they do in terms of fiscal stimulus. There was a comment in the Politburo statement that they will take up fiscal easing. We suspect that the timing of that fiscal policy announcement could be by end of this month alongside National People's Congress meeting. And so, what will be the size of fiscal stimulus will be important to watch as well.Currently, we think it could be one to two trillion RMB. But in our work that we did in terms of what is the scale of fiscal stimulus that is needed to boost consumption, we estimate that it should be somewhere around a 10 trillion RMB spread over two years.Seth Carpenter: Got it. Thanks, Chetan. Super helpful.Gentlemen, I have to say, we might have to stop here for the day. But tomorrow, I want to get [to] another topic, which is to say, the upcoming US election. It's got huge implications for the macroeconomy in the US and around the world. And I think we’re going to have to touch on it. But for now, we'll end the conversation here.And thank you, the listeners, for listening. If you enjoy this show, please leave us a review wherever you listen to the podcast and share Thoughts on the Market with a friend or colleague today.

7 Okt 202410min

Following the US Federal Reserve’s September rate cut, labor data may have more impact on markets than further cuts. Andrew Sheets, Head of Corporate Credit Research, explains why.----- Transcript -----Andrew Sheets: 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 discuss why what the Fed does next might not matter all that much. It’s Friday, October 4th, at 2 pm in London. Over recent months the Federal Reserve has been at the center of the global market debate. After keeping policy rates unchanged at the end of July, a decision the markets initially cheered, a string of weak data in early August drove concerns that Fed policy was behind schedule. The Fed then responded with a larger-than-expected half-percent interest rate cut in September. And so, given these swings, a common question for investors is, understandably: What will the Fed do next? But what if the Fed’s next move doesn’t matter all that much? Monetary policy is both powerful and weak. Powerful, because interest rates impact so many decisions across the economy, from buying a home, to financing equipment, to acquiring a competitor. And it’s also weak, because how interest rates impact these decisions can have a long and variable lag. It can be six to twelve months before the full impact of an interest rate cut is felt in the economy. And so that half percentage point cut by the Fed last month might not be fully felt in the US economy until June of 2025. That lag is one reason why the Fed’s next move may matter less. The second reason is what we think the market is worried about. We think a lot of the market’s volatility over the last two months has been driven by concerns that the US economy, particularly the labor market, is weakening right now. If interest rates are too high and the labor market is weakening, then cutting more rapidly in the coming months might not make a difference. Because of that lag, the help from lower rates simply wouldn’t arrive in time.Meanwhile, there’s also a view that interest rates might need to fall quite a long ways to have the sort of impact that would be needed if the economy is really slowing down rapidly: by the Fed’s own Summary of Economic Projections (SEP), the policy rate that neither helps or hinders the economy could still be about 2 per cent lower than the current rate – even after that half a percentage point cut in September. Interest rates are well above what could be neutral. In short, if the data weaken materially over the coming months, more Fed cuts may not necessarily help in time. And if the data remain solid, Fed policy will have lots of time to adjust. It’s the data, not the Fed’s next action, that are most important at the moment. We also see support for this idea in history. It’s notable that some of the most aggressive US interest rate-cutting cycles – 2001, 2008, February of 2020 – overlapped with weak equity and credit markets. And it was smaller rate cutting cycles – in 1995-96, 1998 or 2019 – that overlapped with much better markets. And that makes sense; if one assumes that it’s the data rather than exactly how much the Fed is cutting rates that matter most to the market. All of this especially feels topical today. Today’s better than expected report on the US jobs market should support the case that Fed policy is on schedule, and larger adjustments aren’t needed. It’s good news. 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 Okt 20243min

Our Chief China Economist Robin Xing and Chief China Equity Strategist Laura Wang discuss how markets have responded to rate cuts and commitments to government spending, and what they could mean over the long term.----- Transcript -----Laura Wang: Welcome to Thoughts on the Market. I'm Laura Wang, Morgan Stanley's Chief China Equity Strategist. Robin Xing: And I'm Robin Xing, Morgan Stanley's Chief China Economist.Laura Wang: All eyes have been on China this past week, and today we'll discuss why recent news from China's policymakers have commanded the attention of global markets.It's Thursday, October the 3rd, at 4pm in Hong Kong.So, Robin, China has been wrestling with the triple macro challenge of debt deflation and demographics -- what we call the three Ds -- for some time now. Last week, China's central bank, PBOC, announced a stimulus package that exceeded market expectations. And then later in the week, top China Communist Party officials, known as the Politburo, focused their monthly meeting on economics, which is not their usual practice.This meeting was a positive surprise to both us and the market. Let's start with the PBOCs easing package. For listeners who haven't been following China's economy closely, what's our current view on China's economy and can you walk us through the policy measures that the central bank introduced?Robin Xing: China's economy has been struggling lately and that's pushed the Beijing to pivot approach. Over the last 18 months, they have tried smaller, reactive measures. But now, they are doing something much bigger. On September 24, the People's Bank of China, PBOC, made a bold move, cutting interest rates and introducing new tools to support the stock market.Now, these cuts might sound small, just 20 basis points, but they are pretty rare in China. They also cut the reserve requirement ratio, which is a fancy way of saying banks can lend more money by 50 basis points. And for the first time, the central bank gave forward guidance, signaling even more cuts could come by year end.On top of that, the PBOC launched two big programs, a 500 billion yuan fund to help investors buy stocks, and a 300 billion yuan program to help companies buy back their own shares. These moves gave a much-needed boost to both the markets and consumer confidence.Laura Wang: And how about the Politburo meeting that came on the heels of the PBOC announcement? What exactly did it focus on?Robin Xing: The Politburo meeting was a rather critical moment. Normally, they don't even talk about the economy in September. But this year was different. It really signaled how urgent things have become.They made it clear they are ready to spend more. The government is pledging to increase public spending because other parts of the economy, like corporates and consumers, are holding back. There is also a big focus on the housing market, which has been in decline since 2021. They are promising to stop that slide, and it's the strongest commitment we have seen so far.Laura Wang: So, given everything we've seen from the PBOC and the Politburo, do you think this is a ‘whatever it takes moment’ to address the macro challenges facing China's economy?Robin Xing: Not quite, but it's close. We are seeing the start of what's going to be a bumpy recovery. The deflation problem, where prices are falling and people are not spending, is complicated.Beijing seems open to trying different approaches, but fixing the deeper issues -- like the struggling housing market and the local government debt -- it’s going to take a lot. In fact, we think China might need to spend about 1-1.5 trillion dollars over the next two years to really turn things around.Right now, the measures they have announced are smaller than that. That's because these are new policies. And they still need to build consensus and work out the details. So, while this isn't a ‘whatever it takes moment’ yet the mindset has definitely shifted in that direction.Laura Wang: In this case, what are the next steps you are monitoring for China's policymaker and how long will the various measures take to implement?Robin Xing: We expect to see a supplementary budget of 1-2 trillion yuan announced at the upcoming NPC Standing Committee meeting in late October. This budget should focus on boosting consumer spending, increasing social welfare, and helping local governments managing their debt. We will likely see more monetary easing too.As well as tweaks to the Housing Inventory Buy Back program. These steps should help the economy grow slightly faster, possibly hitting a 5 per cent quarter on quarter growth over the next two quarters, compared to the 3 per cent we have seen recently.Looking ahead, we will get more clues at the December Central Economic Work Conference. That's when we might see the first signs of plans to use central government funds to tackle housing and local government debt issues. The full details could come in March 2025. If things don't improve quickly, and especially if social unrest starts to rise, Beijing may have to act even more aggressively.We are keeping an eye on our social dynamics indicator, which tracks how people feel about jobs, welfare and income. If that dips further, it could push the government to ramp up stimulus measures.Laura, turning it over to you. How are stock markets reacting to all this policy signaling from China?Laura Wang: I would say to say that the market has responded very enthusiastically is an understatement. I'll give you some numbers.On the first day of the PBOC announcement, the Shanghai Composite Index, as well as the Hong Kong Market Hang Seng Index, were both up by more than 4 per cent in one single day. Then with the further boost from the surprise Politburo meeting -- by now, both the Shanghai Composite Index and the Hang Seng Index have already been up by more than 21 per cent in just one week's time.Robin Xing: Within the China stock market, which sectors and industries do you think will most benefit from the shift in policy?Laura Wang: There are a few ways to position to benefit from this major market condition change. We have a list of companies that we believe will directly benefit from the PBOC market stabilization funding, given the funding's low cost compared to these companies implied re-rating opportunity, just by tapping into the funding and enhancing their shareholder returns.For the potential reflationary fiscal efforts suggested by the Politburo meeting, as more details come out, I think sectors with good exposure to reflation, particularly the private consumption, will benefit the most -- given their still relatively low valuation, large market cap and high liquidity.Robin Xing: Finally, Laura, what are your expectations for the markets in China and outside of China for the next few weeks and months?Laura Wang: Clearly this rally so far is reflecting significant sentiment improvement and capitals that are willing to take a leap of faith and preposition for physical reflationary efforts ramp up. If the government can deliver these measures in a timely fashion, and more importantly, on top of that, communicate their commitment to winning this uphill battle against deflation, I think further valuation re-rating is quite possible for both the Asia market and the Hong Kong market by another 10 to 20 per cent.To go beyond that level, we need to see clear signs of a corporate earnings growth reacceleration, which would require incrementally more easing to come along in the next few months. We should also monitor the housing market inventory level very closely because any earlier completion of this inventory digestion could suggest less drag on demand investment.Obviously, there are still a lot of moving parts and it's still a very much evolving story from here. Robin, thanks for taking the time to talk.Robin Xing: Great speaking with you, Laura.Laura Wang: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.

3 Okt 20248min

Thousands of U.S. dockworkers have gone on strike along the East Coast and Gulf Coast. Our Global Head of Fixed Income and Thematic Research Michael Zezas joins U.S. economist Diego Anzoategui to discuss the potential consequences of a drawn-out work stoppage.----- Transcript -----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income and Thematic Research for Morgan Stanley.Diego Anzoategui: And I'm Diego Anzoategui from the US Economics team.Michael Zezas: And today, we'll be talking about the implications of this week's US dockworker strike on the US economy.It's Wednesday, October 2nd, at 11am in New York.Diego, as most of our listeners likely know, yesterday roughly 45,000 US dockworkers went on strike for the first time in perhaps decades at 36 US ports from Maine to Texas. And so, I wanted to get your initial read on the situation because we're obviously getting a lot of questions from clients concerned about what this could mean for growth and inflation.Diego Anzoategui: Yeah, of course, there's a lot of uncertainty about this situation because we don't know how long the strike is going to last. But the strike can in principle hit economic growth and boost inflation -- but only if it is long lasting, right. Local producers and retailers, they typically have inventories of final and intermediate goods, so the disruption needs to be long enough so that those inventories go down to critical levels in order to see a meaningful macroeconomic impact.But if the strike is long enough, we might see an important impact on economic activity and inflation. If we look at trade flows data, roughly 30 per cent of all goods imports and exports are handled by the East and Gulf ports.Michael Zezas: So then let's drill down on that a bit. If the strike continues long enough and inventories decline, what are the shocks to economic growth that you're considering?Diego Anzoategui: Yeah, I would think that there are two main channels through which the strike might hit economic activity. The first one is a hit to local production because of disruptions in the supply of capital goods and intermediate goods used for domestic production. We not only use the ports to bring final goods, but also intermediate and capital goods like machinery, basic metals, plastic, to name a few.And the second channel is directly through exports. The East Coast and Gulf ports channel 84 per cent of exports by water. Industries producing energy, chemicals, machinery, cars, might be affected by these bottlenecks.Michael Zezas: Right, so fewer potential imports of goods, and fewer potential productive capacity as a consequence. Does that have an impact on inflation from your perspective?Diego Anzoategui: Yes, it can have an impact on inflation. Again, assuming that the strike is long lasting, right? I would expect acceleration in goods prices, in particular key inputs coming from the Eastern Gulf ports. And these are cars, electronics, clothes, furniture and apparel. All these categories roughly represent 13 per cent of the core PCE basket, the price index.Also, you know, a meaningful share of food and beverages imports come through water. So, I would also expect an impact there in those prices. And in terms of what prices might react faster, I think the main candidate is food and beverages -- and especially perishable food that typically have lower inventory to sales ratios.And if we start seeing an increase in those prices, I think that would be a good early signal that the disruptions are starting to bite.Michael Zezas: That makes sense. And last question, what about the impact to the US workforce? What would be the impact, if any, on payroll data and unemployment data, reflecting workforce impact -- the types of data that investors really pay close attention to.Diego Anzoategui: Yeah. So, we will likely see an impact on nonfarm payrolls, NFP, and the unemployment rate if the strike is long lasting. But even if there are not important disruptions, the strike itself can mechanically affect October's nonfarm payrolls print. They want to be released in November. Remember that strikers don't get paid, and they are not on the payroll; so they are not be[ing] counted by the establishment survey.But a necessary condition to see this downward bias in the NFP reading is that the strike needs to continue next week, that is the second week of October, right. But know that The Fed tends to look through these short run fluctuations in NFP due to strikes -- because any drag we see in the October sprint will likely be followed by payback in November if the strike is short lived.Michael Zezas: Got it. That makes a lot of sense. Diego, thanks for making the time to talk with us as this unfolds. Let's hope for a quick resolution here.Diego Anzoategui: Thanks, Michael. Great speaking with you.Michael Zezas: And thanks for listening. If you enjoy Thoughts on the Market, please be sure to rate and review us on the Apple Podcasts app. It helps more people find the show.

2 Okt 20245min

Our US public policy and global economics experts discuss how an escalation of US tariffs could have major domestic and international economic implications.----- Transcript -----Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Morgan Stanley's US Public Policy Strategist. Arunima Sinha: And I’m Arunima Sinha, from the Global Economics team. Ariana Salvatore: Today we're talking tariffs, a major policy issue at stake in the US presidential election. We'll dig into the domestic and international implications of these proposed policies. It's Tuesday, October 1st at 10am in New York. In a little over four weeks, Americans will be going to the polls. And as we've noted on this podcast, it's still a close race between the two presidential candidates. Former president Donald Trump's main pitch to voters has to do with the economy. And tariffs and tax cuts are central to many of his campaign speeches. Arunima Sinha: You're right, Ariana. In fact, I would say that tariffs have been the key theme he keeps on coming back to. You've recently written a note about why we should take the Republicans proposed policies on tariffs seriously. What's your broad outlook in a Trump win scenario? Ariana Salvatore: Well, first and foremost, I think it's important to note that the President has quite a bit of discretion when it comes to trade policy. That's why we recommend that investors should take seriously a number of these proposals. Many of the authorities are already in place and could be easily leveraged if Trump were to win in November and follow through on those campaign promises. He did it with China in 2018 to 2019, leveraging Section 301 Authority, and many of that could be done easily if he were to win again.Arunima Sinha: And could you just walk us through some of the specifics of Trump's tariff proposals? What are the options at the President's disposal? Ariana Salvatore: Sure. So, he's floated a number of tariff proposals -- whether it be 10 per cent tariffs across the board on all of our imports, 60 per cent specifically on China or targeted tariffs on certain goods coming from partners like Mexico, for example. Targeted tariffs are likely the easiest place to start, especially if we see an incrementalist approach like we saw during the first Trump term over the course of 2018 to 2019. Arunima Sinha: And how quickly would these tariffs be implemented if Trump were to win? Ariana Salvatore: The answer to that really depends on the type of authorities being leveraged here. There are a few different procedures associated with each of the tariffs that I mentioned just now. For example, if the president is using Section 301 authorities, that usually requires a period of investigation by the USTR -- or the US Trade Representative --before the formal recommendation for tariffs.However, given that many of these authorities are already in place, to the extent that the former president wants to levy tariffs on China, for example, it can be done pretty seamlessly. Conversely, if you were to ask his cabinet to initiate a new tariff investigation, depending on the authority used, that could take anywhere from weeks to months. Section 232 investigations have a maximum timeline of 270 days. There's also a chance that he uses something called IEEPA, the International Emergency Economic Powers Act, to justify quicker tariff imposition, though the legality of that authority hasn't been fully tested yet. Back in 2019, when Trump said he would use IEEPA to impose 5 per cent tariffs on all Mexican imports, he called off those plans before the tariffs actually came into effect. Arunima Sinha: And could you give us a little more specific[s] about which countries would be impacted in this potential next round of tariffs -- and to what extent? Ariana Salvatore: Yeah, in our analysis, which you'll get into in a moment, we focus on the potential for a 10 per cent across the board tariff that I mentioned, in conjunction with the 60 per cent tariff on Chinese goods. Obviously, when you map that to who our largest trading partners are, it's clear that Mexico and China would be impacted most directly, followed by Canada and the EU.Specifically on the EU, we have those section 232 steel and aluminum tariffs coming up for review in early 2025, and the US-MCA or the agreement that replaced NAFTA is set for review later in 2026. So, we see plenty of trade catalysts on the horizon. We also see an underappreciated risk of tariffs on Mexico using precedent from Trump's first term, especially if immigration continues to be such a politically salient issue for voters. Given all of this, it seems that tariffs will create a lot of friction in global trade. What's your outlook, Arunima? Arunima Sinha: Well, Arianna, we do expect a hit to growth, and a near term rise in inflation in the US. In the EU, our economists also expect a negative impact on growth. And in other economies, there are several considerations. How would tariffs impact the ongoing supply chain diversification? The extent of foreign exchange moves? Are bilateral negotiations being pursued by the other countries? And so on.Ariana Salvatore: So, a natural follow up question here is not only the impact to the countries that would be affected by US tariffs, but how they might respond. What do you see happening there? Arunima Sinha: In the note, we talked with our China economists, and they expect that if the US were to impose 60 per cent tariffs on Chinese goods, Beijing may impose retaliatory tariffs and some non-tariff measures like it did back in 2018-19. But they don't expect meaningful sanctions or restrictions on US enterprises that are already well embedded in China's supply chain. On the policy side, Beijing would likely resort less to Chinese currency depreciation but focus more on supply chain diversifications to mitigate the tariff shock this time round. Our economists think that the risk of more entrenched deflationary pressures from potential tariff disruptions may increase the urgency for Beijing to shift its policy framework towards economic rebalancing to consumption.In Europe, our economists expect that targeted tariffs will be met with challenges at the WTO and retaliatory tariffs on American exports to Europe, following the pattern from 2018-19, along with bilateral trade negotiations. In Mexico, our economists think that there could be a response with tariffs on agricultural products, mainly corn and soybeans.Ariana Salvatore: So, bringing it back to the US, what do you see the macro impact from tariffs being in terms of economic growth or inflation? Arunima Sinha: We did a fairly extensive analysis where we both looked at the aggregate impacts on the US as well as sectoral impacts that we'll get into. We think that a pretty reasonable estimate of the effect of both a 60 per cent tariff on China and a 10 per cent blanket tariff on the rest of the world is an increase of 0.9 per cent in the headline PCE prices that takes into effect over 2025, and a decline of 1.4 percentage points in real GDP growth that plays out over a longer period going into 2026. Ariana Salvatore: So, your team is expecting two more Fed cuts this year and four by the first half of 2025. Thinking about how tariffs might play into that dynamic, do you see them influencing Fed policy at all? Arunima Sinha: Well, under the tariff scenario, we think that it's possible that the Fed decides to delay cuts first and then speed up the pace of easing. So, in theory, the effect of a tariff shock is really just a level shift in prices. And in other words, it's a transitory boost to inflation that should fade over time.Because it's a temporary shock. The Fed can, in principle look through it as long as inflation expectations remain anchored. And this is what we saw in the FOMC minutes from the 2018 meetings. In a scenario of increased tariffs, we think that the uncertainty about the length of the inflationary push may slow down the pace of cuts in the first half of 2025. And then once GDP deceleration becomes more pronounced, the Fed might then cut faster in the second half of [20]25 to avoid that big, outsized deceleration and economic activity.Ariana Salvatore: And what about second order effects on things like business investment or employment? We talked about agriculture as a potential target for retaliatory tariffs, but what other US sectors and industries would be most affected by these type of plans? Arunima Sinha: That's something that we have leaned in on, and we do expect some important second round effects. So, if you have lower economic activity, that would lower employment, that lowers income, that lowers consumption further -- so that standard multiplier effect. So overall, in that scenario, with the 60 per cent tariffs on China, 10 per cent on the rest of the world that are imposed fully and swiftly, we model that real consumption would decline by 3 per cent, business investment would fall by 3.1 per cent, and monthly job gains would fall by between 50- and 70, 000. At the sectoral level, this combination of tariffs have potential to increase average tariffs to the 25 to 35 per cent range for almost 50 per cent of the NAICS industries in the United States when first put into place. And we expect the biggest impacts on computers and electronics, apparel, and the furniture sectors; but this does not take into account any potential exclusion lists that might be put into place. Ariana Salvatore: Finally, what does all this boil down to in terms of a direct impact to the US consumer wallet? Arunima Sinha: So, the impact of higher tariffs on consumer spending would depend on many factors, and one of the most important ones is the price elasticity of demand. So how willing would consumers be to take on those higher prices from tariffs, or do we see a pullback in real demand? What we think will happen is that higher prices could reduce real consumption by as much as 2. 5 per cent. The impact on goods consumption is much more meaningful because imported goods are directly affected by tariffs, and we would expect to see a drag on real goods consumption of 5 per cent. But then you have lower labor income and higher production costs and services prices that is also going to bring down services consumption by 1.3 per cent.Ariana Salvatore: So, it's important to keep in mind here that US tariff policy would undoubtedly have far reaching consequences. That means it's something that we're going to continue to follow very closely. Arunima, thanks so much for taking the time to talk.Arunima Sinha: Great speaking with you, Ariana. Thank you, Ariana Salvatore: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.

1 Okt 202410min

Our CIO and Chief US Equity Strategist Mike Wilson takes a closer look at the potential ramifications of the sharp central bank policy shifts in the U.S., Japan and China.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief US Equity Strategist. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about what to expect from the sharp pivot in global monetary and fiscal policy. It's Monday, Sept 30th at 11:30am in New York. So let’s get after it. Over the past few months, Fed policy has taken on a more dovish turn. To be fair, bond markets have been telling the Fed that they are too tight and in many respects this pivot was simply the Fed getting more in line with market pricing. However, in addition to the 50 basis point cut from the Fed, budget deficits are providing heavy support; with August’s deficit nearly $90b higher than expected. Meanwhile, financial conditions continue to loosen and are now at some of the most stimulative levels seen over the past 25 years. Other central banks are also cutting interest rates and even the Bank of Japan, which recently raised rates for the first time in years, has backed off that stance – and indicated they are in no hurry to raise rates again. Finally, this past week the People’s Bank of China announced new programs specifically targeting equity and housing prices. After a muted response from markets and commentators, the Chinese government then followed up with an aggressive fiscal policy stimulus. Why now? Like the US, China is highly indebted but it has entered full blown deflation with both credit and equity markets trading terribly for the past several years. There is an old adage that markets stop panicking when policy makers start panicking. On that score, it makes perfect sense why China equity and credit markets have responded the most favorably to the changes made last week. European equity markets were also stronger than the US given European economies and companies have greater exposure to China demand. On the other hand, Japan and India traded poorly which also makes sense in my view since they were the two largest beneficiaries of investor outflows from China over the past several years. Such trends are likely to continue in the near term. For US equity investors, the real question is whether China’s pivot on policy will have a material impact on US growth. We think it’s fairly limited to areas like Industrial spending and Materials pricing and it’s unlikely to have any impact on US consumers or corporate investment demand. In fact, if commodities rally due to greater China demand, it may hurt US consumer spending. As usual, oil prices will be the most important commodity to watch in this regard. The good news is that oil prices were down last week due to an unrelated move by Saudi Arabia to no longer cap production in its efforts to get oil prices back to its $100 target. If prices reverse higher again and move toward $80/bbl due to either China stimulus or the escalation of tensions in the Middle East, it would be viewed as a net negative in my view for US equities. As discussed last week the most important variables for the direction of US equities is the upcoming labor market data and third quarter earnings season. Weaker than expected data is likely to be viewed negatively by stocks at this point and good news will be taken positively. In other words, investors should not be hoping for worse news so the Fed can cut more aggressively. At this point, steady 25 basis point cuts for the next several quarters in the context of growth holding up is the best outcome for stocks broadly. Meanwhile individual stocks will likely trade as much on idiosyncratic earnings and company news rather than macro data in the absence of either a hard landing or a large growth acceleration; both of which look unlikely in the near term. In such a scenario, we think large cap quality growth is likely to perform the best while there could be some pockets of cyclical strength in companies that can benefit from greater China demand. The best areas for cyclical outperformance in that regard remain in the Industrial and materials sectors. 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.

30 Sep 20244min