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

As the infrastructure needs for artificial intelligence soar, so does the need for financing. Our Chief Fixed Income Strategist talks about the role credit markets can play in providing capital to power the 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, today I'll be talking about the role of credit markets in the artificial intelligence (AI) revolution. It's Thursday, June 27th at 1 pm in New York. Technology diffusion driven by artificial intelligence has been a defining theme for investors over the last few years. Recent developments in generative AI, or GenAI powered by large language models, have the potential to bring transformational changes across the economy. Today, I want to talk about the role of credit markets in this AI revolution. The infrastructure requirements of AI – semi fabs, data centers and the energy resources to power the Gen AI models – are enormous. Our analysts estimate that GenAI power demand will rise rapidly, reaching 224 Trillion Watt hours by 2027 in their base case which is roughly close to Spain's total 2022 power consumption. So, it goes without saying that AI infrastructure will need substantial capex. Early on, much of the AI capex has been funded by a combination of venture capital and retained earnings from cash-rich technology companies; in other words funded by equity capital. As the focus shifts from early innovators and enablers of AI to adopters of AI, these needs are bound to grow and will require more efficient forms of capital. We think that credit markets in various forms – unsecured, secured, securitized and asset-backed – will have a major role to play in this transformation. So far, debt financing has played a relatively small part in funding technology companies, especially AI beneficiaries. The sector has significant capacity to add debt without a material deterioration in their credit metrics. This capacity is also complemented by an investor base with a significant dry powder to absorb incremental issuance, thereby avoiding a demand-supply mismatch. Of course, the story is not that simple. Cash-rich companies may not have a compelling need to access credit markets if the equity market continues to reward redirection of these free cash flows. But then the path of the interest rate markets will also matter, as monetary policy eases, the cost of debt becomes incrementally even more attractive. It’s clearly early innings, but credit markets holistically should play a bigger role as the cycle matures. In addition, as the capex cycle broadens out from enablers to adopters, we note that most sectors are nearly not as cash-rich as the technology sectors. For example, the median cash to debt ratio for the technology sector is over 50 percent, but then for the remaining sectors, it is just 15 percent. So as capital needs driven by these infrastructure needs increase, we expect the reliance on credit markets also to increase. In some ways, this has already begun to happen. The first data center asset backed security was issued in 2018. The market has now grown to over 20 billion outstanding and it is poised for a rapid growth. The bottom line is simply this: As AI driven technology diffusion takes center stage, credit markets, broadly defined, will likely play a growing role. As always, there will be winners and there will be losers. But AI as a theme for credit investors is here to stay. Thanks for listening. If you enjoy the podcast, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

27 Juni 20244min

Our Global Chief Economist explains why markets are concerned about uncertainty around the French and US elections, and how their outcomes may affect each economy’s debt load.---- Transcript -----Seth Carpenter: 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 elections, and what they might mean for fiscal sustainability.It's Wednesday, June 26th at 10am in New York.Elections have unexpectedly become a key risk in an otherwise positive growth narrative for France this year. And there are a wide range of possible outcomes for the next government.Fiscal sustainability is one key market narrative we have been flagging. And in France, the fiscal position is expected to deteriorate. Our strategists note that the 10-year OAT boon spreads have widened more than 20 basis points. And in their view, further discounts on OATs are likely due to the deficit trajectories in the different political scenarios and heightened political and economic uncertainty.In recent work we've done on developed market government sustainability, we flagged that across DMs, even if fiscal deficits remain steady, interest expense on the debt will continue to rise, pushing up the debt to GDP ratios. Larger deficits would necessarily exacerbate the situation. Austerity is necessary to stabilize or lower the debt to GDP ratios.For France in particular, the maturity profile and forward rates had meant there could be relatively more time for the repricing to happen; but the market reaction to the election has meant higher yields, effectively pulling forward that repricing. Relative to our analysis in the first quarter of 2024, the debt surfacing costs are already higher.The election results have now led to expectations of higher deficits, implying faster rising debt to GDP ratios as well. This combination of higher rates and higher deficits is self-reinforcing. The market will pay close attention to specific policy proposals -- and the coalitions that result from the election.For the US elections, debt sustainability has so far been lower on the list of topics that clients bring up. The elections are expected to be close. In a recent joint note with our US public policy colleagues, we noted four basic scenarios: a Republican sweep; a Democratic sweep; or divided governments with either a Republican or a Democratic president.Our public policy colleagues see very different outcomes across a 10-year time horizon for the deficit, ranging from an increase of [$]1.6 trillion under the Republican sweep scenario to an increase of about $600 billion in the Democratic sweep scenario, and the split government scenario is somewhere in between.Of course, fiscal policy is not the only consideration for debt sustainability. Tariffs could generate some higher revenues, but the adverse hit to GDP means that the denominator of the debt to GDP ratio will fall and push the ratio higher.Our policy colleagues have also flagged a big range of possible immigration policy outcomes. The current positive supply shock to the labor force has allowed for faster GDP growth and consequently, higher revenues. Under the strictest immigration policies, the so-called break-even monthly payrolls flow could fall from a baseline now of just over 200,000 per month to as low as 45,000 per month.Such an outcome would imply lower revenues and lower GDP, meaning both the numerator and the denominator of the debt to GDP ratio would be pushing upward.Thanks for listening. And if you enjoy this podcast, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

26 Juni 20243min

Our CIO and Chief US Equity Strategist explains how to make sense of the equity market’s narrow performance, and why stock picking takes on greater importance for investors.----- 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 the narrowness in breadth and why that supports our preference for high quality and defensive stocks.It's Tuesday, June 25th at 11:30am in New York.So let’s get after it. I am fond of the saying that the economy is not the stock market, and the stock market is not the economy. Often, a strong economy is not good for stocks, while a soft one can lead to higher equity prices. This latter case is the classic late cycle period in which we find ourselves. More specifically, when the economy is slowing from previous tightening by the Federal Reserve, the equity market starts to get excited about the Fed reversing course, and it looks forward to loosening policy and valuations rise in anticipation. With price/earnings multiples and other valuation metrics now in the top decile, the question is when will valuations matter and begin to fall faster than earnings growth and lead to a meaningful correction?At the stock level, this is already happening as illustrated by the weakest breadth since 1965. In other words, most stocks are seeing valuations fall more than earnings are rising. This is exactly why stock picking has become so important for equity investors to outperform the S&P 500. While this creates a great long and short opportunity, the list of longs has become harder to find and why the momentum in a few stocks continues unabated. This also syncs with our view for the past year that large cap quality is likely to continue to outperform until something material changes in the macro environment. I see three potential candidates to change this seemingly very stable and benign outcome for equity markets.First, inflation and growth reaccelerate in a way that forces the Fed to reconsider rate hikes. Right now, that does not appear likely and why there is virtually no risk of such an outcome priced into either bond or stock markets. Such an outcome would likely lead to a broadening out of the equity rally to areas that have lagged persistently over the past 2 years—areas like small caps, lower quality consumer cyclicals, regional banks and transports. The S&P 500 would likely trade poorly under this scenario as higher rates would potentially weigh on valuations for the big winners. Second, the liquidity picture deteriorates and money flows out of equities. A key risk in this regard relates to the funding of the extraordinary government deficit. A good way to monitor this risk is the term premium in the bond market which remains near zero. Should this change and the term premium rise like last fall, the decline in equities would likely be broad with few stocks doing well. This does not appear to be a concern at the moment given the liquidity provisions still in place.The third possible risk is a growth scare that is substantial enough to turn bad economic data into bad news for equity multiples across the board. This is the most likely risk to upset the apple cart in our view. Under this outcome, large cap quality should continue to do ok on a relative basis, but defensives are likely to do better. The economic growth surprises have been trending lower all year. So far, the S&P 500 has taken these weaker data in stride assuming bad economic data is still good for large cap quality stocks as the market looks forward to rate cuts from the Fed. Meanwhile, weaker indices and stocks have broken down with many now down on the year. The bottom line is that the ongoing policy mix of heavy fiscal spending and tight interest rate policy is crowding out many companies and consumers in a waythat is unsustainable in our view. Investors have correctly recognized this outcome by bidding up the few stocks of the companies that are doing well in this environment. Until the bond market pushes back via higher term premium or growth slows down in a more meaningful way, we expect this narrow market performance to persist. As such, we continue to recommend a barbell of large cap quality growth with defensives while fading cyclicals and avoiding the temptation to play for a true broadening out until the macro regime makes a meaningful shift.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.

25 Juni 20244min

Halfway through a historic year for elections around the world, Morgan Stanley’s chief economists assess the impact of recent results on the global economy, and weigh potential effects from key elections to come.----- Transcript -----Seth Carpenter: Welcome to Thoughts on the Market, and welcome back to the second part of a special two-part episode of the podcast. We've been covering Morgan Stanley's global economic outlook as we look into the third quarter of 2024. In the first part, we covered the twin themes of inflation in central banks. In this part, we're going to look at elections, with my colleagues Ellen Zentner, our Chief US Economist, Jens Eisenschmidt, our Chief Europe Economist, and Chetan Ahya, who is our Chief Asia Economist.It's Monday, June 24th at 10 am in New York.It is astounding if we look around the world just how many elections there have already been this year and how many more there are going to be. We will get to the US, but before we do, Chetan, in Asia, India is one of the most important economies; and in India they recently had elections. Can you just let our listeners know basically what happened and what do you think are the implications for that election for the Indian economy?Chetan Ahya: Yeah Seth. So Definitely there was a big change in India in terms of the political outcome. So the ruling party did not get the full majority and they have had to form a government under a coalition structure. There is a question though, as a result of that, whether the policy shift will happen in India and the government will go back to redistribution instead of focusing on boosting investment and jobs. Well, we think that, you know, there is no change. There is policy continuity. We think that this government is very much aligned in thinking that they want to keep inflation in check and current account deficit in check, i.e. macro stability should be in control. And they still believe that job creation is the way to ensure that the general masses and the bottom 20 per cent see the benefit and then vote for them back again.So, for us, we are not changing our view that this is India's decade. We are still maintaining our growth forecast that India will be achieving 6.5 per cent until 2030, and at the same time as India continues to build this growth rates on a high base, India will be at $8 trillion by 2032. Back to you, Seth.Seth Carpenter: Thanks, Chetan. super interesting. And EM elections have had a lot of surprises. We had South Africa. We had a surprise -- in terms of the margin in the opposite direction of what you said for India -- when it comes to the case of Mexico, where Scheinbaum won, but the majority was even bigger than I think most people were expected.But there are other elections that had some big surprises. Jens, let me come to you. In Europe, we had the European elections, and there were some big surprises there, to say the very least. First, can you just walk us through, what do the European level elections mean, in terms of our outlook? And then, part of the fallout from those surprises was that President Macron in France called for snap elections. What do you think we need to take away from that fact?Jens Eisenschmidt: We have had a look at the manifestos, what is known so far from those that are competing for government in France, say, and I think one of our key takeaways is that might be more fiscal spending. And of course, short run this might get you more growth. But of course, the question is always, what's the price for us to pay? There might be higher interest rates and that in the longer term may be detrimental. So, I think overall we have to wait until we see really and observe the full election outcome.Now, more generally, we had the European elections and we get a lot of questions by clients -- what the implications are here. Now, if you, sort of just look again from very high up, far away, then we see that the coalition that has last time, voted and elected, Ursula von der Leyen, the currently sitting, President of the European Commission. That coalition still stands or commands a majority in the European Parliament post the elections. Just that that majority, of course, is a little bit smaller than before.It's very likely that von der Leyen will have to reach out to either the Greens that were not in the past part of her coalition, voting for her; or the bloc around the Italian Prime Minister Meloni. The implication of it is that we have to see which side the reach out is for – for the consequences for the commission priorities. But I would say from today's perspective, and again giving that there is some logic of averaging here, it's very unlikely to be dramatic changes that we are going to see at the European level.Seth Carpenter: Staying on, on your side of the Atlantic, of course the UK is going to have elections as well. And notably on July 4th, the anniversary of the US independence from Great Britain. I love that timing. What's the story with the UK elections and are they going to change at all, your team's outlook for what goes on in the UK?Jens Eisenschmidt: So on current polls, they were remarkably stable. There seems to be a change in government in the making, say. The Tories, the Conservative Party in the UK, it's very likely to have to give away power to a new labor government. That's essentially what polls currently suggest.Now, we've had a look at both manifestos, and there are differences here and there. Typically, you would think, there's a bit more fiscal spending coming out of one government and the other. But, you know, if you really sort of compare notes and if you also see the constraints that both contenders -- conservative or labor -- would have to work with, it's hard to see a material difference, at least for the growth outlook, from their policies.Again, it's early days. We will have to see what exactly then will be implemented after July 4th. But from today's perspective, it's hardly a game changer.Seth Carpenter: Okay, great, thanks. I want to bring it back to this side of the Atlantic, back to the United States. Ellen, Morgan Stanley Research put out a big piece last week about the US election scenarios. Can you just run us through the key points there, because I will say, everyone around the world looks at the US election and has to take some notice.Ellen Zentner: Ah yes. I love elections. I thought you'd never ask. So, in the US it's not just about Biden versus Trump. The outcome for the Congress matters critically for fiscal outcomes as well. So, broadly for deficits, we see a rank ordering of a Republican sweep leading to the biggest deficit expansion. Then a smaller deficit with a split government because there will not be unity to get things done. And then the smallest deficit comes with a Dem sweep because we do think that tax increases could be meaningful.Seth Carpenter: Okay, whoa. Let me stop you there because it sounds like if we've got this rank ordering of how much the deficit expands, can we just take that and then translate it into a forecast for economic growth? So bigger deficit, more fiscal boost; smaller deficit, less fiscal boost; smallest deficit, sort of weakest growth. Is that the way we should think about this fiscal plan translates into projections of growth?Ellen Zentner: Okay, I wish it were that easy and I know you're asking that because it would definitely poke me a bit. So, there are other policies that are going to matter. So tariffs, for example, and they're likely to differ substantially. So, you know, former President Trump has talked about 60 per cent tariffs on Chinese imports and 10 per cent tariffs broadly on global imports. And there are specifics that are hard to forecast now. Some of the broader plans might require congressional action; but what we learned from 2018 is that there is some inflationary impulse. But you can have a meaningful adverse hit to the economy from tariffs, and then that tends to have a pull on inflation thereafter. So, you can't just take the fiscal deficit, as a direction for growth.And as I noted earlier, immigration has been a key part of the macro story in the US for the past year. I promised I would come back to that. You know, you've got, wildly different scenarios for immigration, depending on the congressional makeup and depending on who's president, as well. So, if I just take you to the most extreme example. So if you could see, immigration scenario under former president Trump, where he's talked about shutting down the border, and also deporting unauthorized immigrants that are already here. You know, you could damage the potential growth rate of the economy that would be slower.To put it into numbers, the extreme version we published would result in a break even for non-farm payrolls going to 45, 000 from our current estimate of around 250, 000. So that would be a big shift. And I think immigration, rather than just the size of the deficit, is probably going to be one of the bigger things to watch out of the election.Seth Carpenter: So as the saying goes, elections have consequences, not just in the United States, but around the world.All right. Ellen, Chetan, Jens, thank you so much for joining today. And to our listeners, thank you for listening.If you enjoy the show, please leave a review wherever you listen to podcasts and share Thoughts on the Market with a friend or colleague today.

24 Juni 20249min

Morgan Stanley’s chief economists examine the varied responses of global central banks to noisy inflation data in their quarterly roundtable discussion.----- Transcript -----Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's global chief economist. We have a special two-part episode of the podcast where we'll cover Morgan Stanley's global economic outlook as we look into the third quarter of 2024.It's Friday, June 21st at 10am in New York.Jens Eisenschmidt: And 4pm in Frankfurt.Chetan Ahya: And 10pm in Hong Kong.Seth Carpenter: Alright, so a lot's happened since our last economics roundtable on this podcast back in March and since we published our mid-year outlook in May. My travels have taken me to many corners of the globe, including Tokyo, Sao Paulo, Sydney, Washington D. C., Chicago.Two themes have dominated every one of my meetings. Inflation in central banks on the one hand, and then on the other hand, elections.In the first part of this special episode, I wanted to discuss these key topics with the leaders of Morgan Stanley Economics in key regions. Ellen Zentner is our Chief US Economist, Jens Eisenschmidt is our Chief Europe Economist, and Chetan Ahya is our Chief Asia Economist.Ellen, I'm going to start with you. You've also been traveling. You were in London recently, for example. In your conversations with folks, what are you explaining to people? Where do things stand now for the Fed and inflation in the US?Ellen Zentner: Thanks, Seth. So, we told people that the inflation boost that we saw in the first quarter was really noise, not signal, and it would be temporary; and certainly, the past three months of data have supported that view. But the Fed got spooked by that re-acceleration in inflation, and it was quite volatile. And so, they did shift their dot plot from a median of three cuts to a median of just one cut this year. Now, we're not moved by the dot plot. And Chair Powell told everyone to take the projections with a grain of salt. And we still see three cuts starting in September.Jens Eisenschmidt: If you don't mind me jumping in here, on this side of the Atlantic, inflation has also been noisy and the key driver behind repricing in rate expectations. The ECB delivered its cut in June as expected, but it didn't commit to much more than that. And we had, in fact, anticipated that cautious outcome simply because we have seen surprises to the upside in the April, and in particular in the May numbers. And here, again, the upside surprise was all in services inflation.If you look at inflation and compare between the US experience and euro area experience, what stands out at that on both sides of the Atlantic, services inflation appears to be the sticky part. So, the upside surprises in May in particular probably have left the feeling in the governing council that the process -- by which they got more and more confidence in their ability to forecast inflation developments and hence put more weight on their forecast and on their medium-term projections – that confidence and that ability has suffered a slight setback. Which means there is more focus now for the next month on current inflation and how it basically compares to their forecast.So, by implication, we think upside surprises or continued upside surprises relative to the ECB's path, which coincides in the short term with our path, will be a problem; will mean that the September rate cut is put into question.For now, our baseline is a cut in September and another one in December. So, two more this year. And another four next year.Seth Carpenter: Okay, I get it. So, from my perspective, then, listening to you, Jens, listening to Ellen, we're in similar areas; the timing of it a little bit different with the upside surprise to inflation, but downward trend in inflation in both places. ECB already cutting once. Fed set to start cutting in September, so it feels similar.Chetan, the Bank of Japan is going in exactly the opposite direction. So, our view on the reflation in Japan, from my conversations with clients, is now becoming more or less consensus. Can you just walk us through where things stand? What do you expect coming out of Japan for the rest of this year?Chetan Ahya: Thanks, Seth. So, Japan's reflation story is very much on track. We think a generational shift from low-flation to new equilibrium of sustainable moderate inflation is taking hold. And we see two key factors sustaining this story going forward. First is, we expect Japan's policymakers to continue to keep macro policies accommodative. And second, we think a virtuous cycle of higher prices and wages is underway.The strong spring wage negotiation results this year will mean wage growth will rise to 3 percent by third quarter and crucially the pass through of wages to prices is now much stronger than in the past -- and will keep inflation sustainably higher at 1.5 to 2 per cent. This is why we expect BOJ to hike by 15 basis points in July and then again in January of next year by 25 basis points, bringing policy rates to 0.5 per cent.We don't expect further rate hikes beyond that, as we don't see inflation overshooting the 2 percent target sustainably. We think Governor Ueda would want to keep monetary policy accommodative in order for reflation to become embedded. The main risk to our outlook is if inflation surprises to the downside. This could materialize if the wage to price pass through turns out to be weaker than our estimates.Seth Carpenter: All of that was a great place to start. Inflation, central banking, like I said before, literally every single meeting I've had with clients has had a start there. Equity clients want to know if interest rates are coming down. Rates clients want to know where interest rates are going and what's going on with inflation.But we can't forget about the overall economy: economic activity, economic growth. I will say, as a house, collectively for the whole globe, we've got a pretty benign outlook on growth, with global growth running about the same pace this year as last year. But that top level view masks some heterogeneity across the globe.And Chetan I'm going to come right back to you, staying with topics in Asia. Because as far as I can remember, every conversation about global economic activity has to have China as part of it. China's been a key part of the global story. What's our current thinking there in China? What's going on this year and into next year?Chetan Ahya: So, Seth, in China, cyclically improving exports trend has helped to stabilize growth, but the structural challenges are still persisting. The biggest structural challenge that China faces is deflation. The key source of deflationary pressure is the housing sector. While there is policy action being taken to address this issue, we are of the view that housing will still be a drag on aggregate demand. To contextualize, the inventory of new homes is around 20 million units, as compared to the sales of about 7 to 8 million units annually. Moreover, there is another 23 million units of existing home inventory.So, we think it would take multiple years for this huge inventory overhang tobe digested to a more reasonable level. And as downturn in the property sector is resulting in downward pressures on aggregate demand, policy makers are supporting growth by boosting supply.Consider the shifts in flow of credit. Over the past few years, new loans to property sector have declined by about $700 billion, but this has been more than offset by a rise of about $500 billion in new loans for industrial sector, i.e. manufacturing investment, and $200 billion loans for infrastructure. This supply -centric policy response has led to a buildup of excess capacities in a number of key manufacturing sectors, and that is keeping deflationary pressures alive for longer. Indeed, we continue to see the diversions of real GDP growth and normal GDP growth outcomes. While real GDP growth will stabilize at 4.8 per cent this year, normal GDP growth will still be somewhat subdued at 4.5 per cent.Seth Carpenter: Thanks, Chetan. That's super helpful.Jens, let's think about the euro area, where there had, been a lot of slower growth relative to the US. I will say, when I'm in Europe, I get that question, why is the US outperforming Europe? You know, I think, my read on it, and you should tell me if I'm right or not -- recent data suggests that things, in terms of growth at least have bottomed out in Europe and might be starting to look up. So, what are you thinking about the outlook for European growth for the rest of the year? Should we expect just a real bounce back in Europe or what's it going to look like?Jens Eisenschmidt: Indeed, growth has bottomed. In fact, we are emerging from a period of stagnation last year; and as expected in our NTIA Outlook in November we had outlined the script -- that based on a recovery in consumption, which in turn is based on real wage gains. And fading restrictiveness of monetary policy, we would get a growth rebound this year. And the signs are there that we are exactly getting this, as expected.So, we had a very strong first quarter, which actually led us to upgrade still our growth that we had before at 0.5 to 0.7. And we have the PMIs, the survey indicators indicating indeed that the growth rebound is set to continue. And we have also upgraded the growth outlook for 2025 from 1 to 1.2 per cent here on the back of stronger external demand assumptions. So, all in all, the picture looks pretty consistent with that rebound.At the same time, one word of caution is that it won't get very fast. We will see growth very likely peaking below the levels that were previous peaks simply because potential growth is lower; we think is lower than it has been before the pandemic. So just as a measure, we think, for instance, that potential growth in Europe could be here lie between one, maybe one, 1 per cent, whereas before it would be rather 1.5 per cent.Seth Carpenter: Okay, that makes a lot of sense. So, some acceleration, maybe not booming, maybe not catching the US, but getting a little bit of convergence. So, Ellen, bring it back to the US for us. What are you thinking about growth for the US? Are we going to slump and slow down and start to look like Europe? Are things going to take off from here?Things have been pretty good. What do you think is going to happen for the rest of this year and into next year?Ellen Zentner: Yes, I think for the year overall, you know, growth is still going to be solid in the US, but it has been slowing compared with last year. And if I put a ‘the big picture view’ around it, you've got a fiscal impulse, where it's fading, right? So, we had big fiscal stimulus around COVID, which continues to fade. You had big infrastructure packages around the CHIPS Act and the IRA, where the bulk of that spending has been absorbed. And so that fiscal impulse is fading. But you've still got the monetary policy drag, which continues to build.Now, within that, the immigration story is a very big offset. What does it mean, you know, for the mid-year outlook? We had upgraded growth for this year and next quite meaningfully. And we completely changed how we were thinking about sort of the normal run rate of job growth that would keep the unemployment rate steady.So, whereas just six months ago, we thought it was around 100,000 to 120,000 a month, now we think that we can grow the labor market at about 250,000 a month, without being inflationary. And so that allows for that bigger but not tighter economy, which has been a big theme of ours since the mid-year outlook.And so, I'm throwing in the importance of immigration in here because I know you want to talk about elections later on. So, I want to flag that as not just a positive for the economy, but a risk to the outlook as well.Now, finally, key upcoming data is going to inform our view for this year. So, I'm looking for: Do households slow their spending because labor income growth is slowing? Does inflation continue to come down? And do job gains hold up?Seth Carpenter: Alright, thanks Ellen. That helps a lot, and it puts things into perspective. And you're right, I do want to move on to elections, but that will be for the second part of this special episode. Catch that in your podcast feeds on Monday.For now, thank you for listening. And if you enjoy the podcast, please leave a review wherever you listen and share Thoughts On the Market with a friend or colleague today.

21 Juni 202412min

Our head of corporate credit research dives into the question of correlation and market volatility, and explains why stock indices can remain stable despite a certain level of turmoil, as we have seen recently in Europe.----- 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 correlations, and why they are currently so important to markets being calmer than they would otherwise be. It’s Thursday, June 20th at 2pm in London.Imagine you’re on a boat, maybe looking for sea life. People are milling around the deck, watching the vessel ripple through the waves. Suddenly someone spotsa whale, and everybody runs to port. The whale swims under the boat, and everybody now runs to starboard. The boat rocks significantly. But imagine the same scenario where marine life is popping up on both sides of the vessel. You and your fellow passengers are all now running past each other in both directions. The movements balance out. The boat is pretty stable. Believe it or not, this is how the volatility in the stock indices work. The individual passengers can be thought of as individual stocks, and how much they’re each moving around can be thought of as each stock’s volatility. The boat is the overall index – say, the S&P 500, the EuroStoxx 50, or an index of corporate bonds. When everybody on the boat moves together, what we’d call a high correlation environment, you’d get a lot of rocking, or volatility, at the index level. But when people are moving in opposite directions, moving past each other; you can still have a lot of running, or individual vol – but the market, or the boat, will appear much more calm. That is exactly what’s been happening, especially last week. Stocks within the S&P 500 are moving with unusual independence from each other, running to opposite sides of the boat, with the lowest such correlation in almost 20 years. That is a big reason why, despite all the volatile headlines out of Europe, and more stocks falling than rising in the US, the overall market has been surprisingly calm – and going up. Even in Europe, this phenomenon of low correlation has really helped. That volatility I mentioned relates to upcoming elections in France, which led the difference between French and German bond yields to jump to their highest level in more than a decade. But because this spread of France to Germany moved in the opposite direction as overall French yields, the overall result for French government bonds was not much. Last week, despite all the apparent ruckus, the yield on French government bonds was basically unchanged. Markets have been calmer than you would usually expect them to be. These correlations are a big reason why. We think they suggest a still healthy dynamic where markets are differentiating between different types of risks. To go back to our original analogy, there is still plenty of sea life out there for the market to look at. But these correlations are also worth watching, were they to rise significantly. If one thing were to dominate the focus and lead everybody to run to the same side of the boat, overall market volatility could rise surprisingly fast. It's something, you could say, that we're on the lookout for. Thanks for listening. If you enjoy the podcast, please leave us a review, wherever you listen, and share Thoughts on the Market with a friend or colleague today.

20 Juni 20243min

Investors watching for market reactions would do well to stick to their existing plans in an environment where the economic impacts of any particular US election outcome remains unclear. Our Global Head of Fixed Income and Thematic Research explains.----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Global Head of Fixed Income and Thematic Research. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about the US elections and its impacts on markets.It's Tuesday, June 18th at 10:30am in New York. We first started covering the 2024 US election in December of last year. With about five months to go until the event, it’s a good time to take stock of what we’ve learned that might be useful for investors. In short, there’s a lot of noise around this election, and recognizing that noise is a first step toward not making mistakes around the event. First, don’t make the mistake of confidently predicting an outcome. All indicators suggest it’s very unlikely that we’ll have a good sense about which candidate will win the election in the run up to the Election Day, and perhaps even in the days that follow. Neither candidate has a lead beyond a polling margin of error in sufficient states to suggest that if the election were held today that they would win the electoral college.Prediction markets and polling models also point to a race that’s a toss-up. It all suggests a tight race going into Election Day. And with the sustained popularity of voting by mail, vote counts could move slowly, as they did in 2020; meaning we may have to dig in for another election week.Second, don’t make the mistake of making big strategic changes in your portfolio just because it’s an election year. We recently studied this and there’s little pattern for how markets behave in the run up to an election, even when filtering for factors like similar outcomes and closeness of the race. Markets in the aggregate don’t seem to consistently price in US election outcomes ahead of time. There’s more evidence that they price in expected policy impacts once the outcome is known, which brings me to my third point.Don’t make the mistake of overconfidence when it comes to how post-election policies will impact the economy. Sure, if we knew one outcome was bad for growth and the other good, it might be advisable to buy risk assets on the news of the latter outcome occurring. But especially in this election it’s not that simple.For example, in scenarios where Republicans win the White House, you can expect greater tariffs, immigration curbs, and – if they also control congress – bigger deficits driven by tax cuts relative to alternative outcomes. According to our economists, these policies have different effects on growth, inflation and monetary policy depending on how they are constructed and timed; and so it defies simple conclusions of growth positive or growth negative, at least at this point.So bottom line, don’t mistake noise for signal when it comes to the election. Stick to the plan, such as the cross-asset framework recently put forward in our mid-year outlook. And maybe focus on some equity sectors, such as industrials and defense, which are well placed currently but have upside in certain election scenarios.Thanks for listening. If you enjoy the podcast, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

18 Juni 20243min

The AI revolution has helped fuel the tech IPO sector’s resurgence following a two-year lull. Our Co-Heads of Technology Equity Capital Markets join our Global Head of Fixed Income and Thematic Research to discuss the sustainability of this trend. ----- Transcript -----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income and Thematic Research for Morgan Stanley.Diana Doyle: I am Diana Doyle, Managing Director and Co-Head of Technology Equity Capital Markets in the Americas.Lauren Garcia Belmonte: And I'm Lauren Garcia Belmonte, Managing Director, Co-Head of Technology Equity Capital Markets Americas.Michael Zezas: And on this episode of the podcast, we'll dive into what's ahead for the tech IPO market this year.It's Monday, June 17th, at 11 am in New York.Diana Doyle: And 8 am in San Francisco.Michael Zezas: Since 2023 only nine technology companies completed an initial public offering, which is one of the longest periods of reduced IPO activity in history. For context, compare that with the all-time record of 124 technology IPOs in 2021. But with the first quarter of 2024 behind us, we're starting to see that picture improve. With tech and AI in focus right now, on today's episode, I want to speak with Diana and Lauren from our global capital markets team to get their take on where the tech IPO environment might be headed and what investors may want to watch for.Lauren, maybe to start -- what's contributing to this resurgence in IPO activity this year?Lauren Garcia Belmonte: Well, the market backdrop has been constructive. We've had the SMP and NASDAQ trading up 10 -- 11 per cent this year and multiples have been stable for technology businesses. And against this backdrop, we've seen some IPO issuers recognize that this is a good environment in which to move forward with their IPO event. There are several benefits to becoming a public company, not just the opportunity to raise capital -- but to give liquidity to employees and to early investors in the business, and to set the company up to be a real industry leader as a public company.So, issuers are seeing the opportunity; and meanwhile, the demand side from investors has been encouraging as well. Investors in the public equities recognize that there's limited opportunity, in some instances, to underwrite growth. Right now, 55 per cent of publicly traded technology businesses are growing top line 10 per cent or less. So, the IPO opportunity, where companies generally have an attractive growth profile, is a way for these investors to get access to an opportunity to underwrite exciting growth profiles -- even when that opportunity isn't so prevalent in the public markets right now.Michael Zezas: And Diana, do you see the rebound in IPO activity as a durable trend? Maybe take us into 2025.Diana Doyle: Well, 2024 is definitely going to be better than 2022 and 2023. Now, it'll be a long time before we get back to that 124 tech IPOs in 2021 that you mentioned, Michael. But in an average year, we have about 35 to 40 IPOs, and we expect 2025 to approach more of an average. So, as Lauren said, we're encouraged by the breadth of investor demand for IPOs that we've done this year, and investors’ appetite to take risk. And all that lays the foundation for a healthy IPO market in 12 to 18 months.But it will be a slow build because IPOs are not a quick turnaround financing. It takes about six months on average to get through an IPO process. So, if you're not already underway, you're likely looking at 2025. In the meantime, we're seeing many late-stage private companies. They have plenty of cash. They're doing secondary raises to provide liquidity to employees and early investors, and they're waiting for growth rates to be more predictable -- for profitability to improve and to get more scale.So, we're excited for 2025, and the IPO market is wide open for companies that have growth and scale, profitability and that offer investors something different than what's available in the public market today.Michael Zezas: Got it. And what about macro conditions, Lauren? So perhaps the Fed's pivoting to cutting rates, the overall economic backdrop, geopolitical considerations. How do those things impact the tech IPO market?Lauren Garcia Belmonte: Yeah, absolutely. The tech IPO market is influenced by these macro considerations -- and it's in a few different ways.First, of course, and importantly, the valuation impact is real for technology businesses that have a lot of their growth on the come and a higher rate environment. Of course, that future growth needs to be discounted more significantly. The second key impact is around just how these management teams are able to manage, predict, and model out their business.In a more uncertain environment, it can be more challenging to articulate and defend the forward model that is a part of all IPO processes where you're explaining to the research analysts and investors how your business will perform, as a public company. And, of course, management teams want to set their companies up for success as public companies -- and set up for a beat and raise cadence -- which can be difficult to do when you're dealing with an uncertain macro backdrop.I think one encouraging signal -- as much as we haven't seen the Fed cut as much as people had anticipated as would have happened at the start of this year -- is that the rate of change has slowed.So, the rate increase environment was one of the quickest that we've seen; and although we haven't seen the cuts as people had anticipated, I think it's encouraging that that rate of change has adjusted and that will allow for, hopefully, more predictability in businesses going forwardMichael Zezas: Got it. That connection between predictability and rates makes a lot of sense. And it seems that the market's particularly hungry for AI names. Diana, what AI related trends are you seeing?Diana Doyle: Well, AI is this black hole right now that's drawing all the energy and attention in the private markets. There's this huge enthusiasm because the technology is improving so quickly, and there's an uncertainty how long that rapid pace of advancement will continue. This cycle, in fact, is an exaggerated version of what we've seen in prior cycles, where the monetization typically accrues first to the semiconductors and hardware, then eventually to software. So right now, a lot of the investment is going into the semiconductors and hardware, the picks and shovels, and the fundamental model of research.But in software, there's still a lot to play out in private companies to create the type of profitable, proven business models that public market investors are looking for. There are big unknowns in how enterprises are going to reallocate spend in a world of AI, what happens with all the efficiency these new tools create, how a lower barrier to entry for software creation impacts margins.Michael Zezas: And aside from AI, Lauren, what other areas within tech are seeing more activity?Lauren Garcia Belmonte: I would say that these businesses aren't in a particular spot within the tech landscape, but rather have certain characteristics in that they share -- namely that they are in attractive markets.Additionally, being a market leader is of critical importance today. No longer do people want to back the third, fourth, fifth player in a market. I think people are really focused on market leadership. So that one or two spot is going to be really important. And investors are looking for businesses that are already scaled. That market leadership typically comes along with a certain scale qualifier. But that is absolutely going to be an important feature of the businesses that are successful transitioning from the private to public markets.These companies are in the software space and the internet side. So, there's a diversity of companies that have this in common, and that could be great IPO candidates on that timeline that Diana was mentioning.Michael Zezas: And finally, I'm curious how the political election cycle might have an impact on IPO activity during the rest of this year. Diana, what's your read?Diana Doyle: Well, we do expect to see some volatility in the pre-election window in the fall, like we do in every presidential election cycle. But what's different this time is that we have a pretty good sense, not only of who the candidates will be -- but also what their presidency is likely to look like and what policies they're likely to prioritize.So that de-risks the election as a market event materially versus prior cycles. And for the IPO market, any company that's been looking at an IPO in the second half of 2024 has already evaluated pulling it forward to hit the September-October time frame and get ahead of that likely market event.But there's a narrow window for anyone who hasn't yet pulled the trigger to accelerate. Before the holidays, post-election -- where some IPOs will be able to squeeze in. In practice, most of the companies that aren't already in the pipeline now -- have their eye on 2025.Michael Zezas: Okay, so, putting it all together, seems you're both pretty confident that there's going to be a durable pickup in IPO activity.Lauren Garcia Belmonte: That's right.Diana Doyle: Yes.Michael Zezas: Okay, great. So, our audience should stay tuned. Well, Diana, Lauren, thanks for taking the time to talk.Diana Doyle: Great speaking with you, Michael.Lauren Garcia Belmonte: Yes. Thank you for having us.Michael Zezas: 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.

17 Juni 20249min