2026 Midterm Elections: What’s at Stake for Markets

While the causes of the European equity rally have become more clear over time, so have the caveats that warrant caution over optimism for cyclical stocks.----- Transcript -----Welcome to Thoughts on the Market. I'm Graham Secker, Head of Morgan Stanley's European Equity Strategy Team. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the deflating safety cushion for European equities. It's Tuesday, February the 21st at 3 p.m. in London. With the benefit of hindsight, it's relatively easy to justify the European equity rally since the start of October, given that we've seen an improvement in the macro news flow against a backdrop of low valuation and depressed investor sentiment and positioning. While the macro outlook could continue to improve from here, we think the safety cushion that low valuation and depressed sentiment had previously provided has deflated considerably as investors have been drawn back into the market by rising price momentum. On valuation, the MSCI Europe Index still looks quite inexpensive on a next 12 month forward PE of 13, however the same ratio for Europe's median stock has risen to 16, which is at the upper end of its historic range. Admittedly, a less padded safety cushion is not necessarily a problem if the fundamental economic and earnings trends continue to improve. However, there is now considerably less margin for any disappointment going forward. This rebound in European equities has been led primarily by cyclical sectors who have outperformed their defensive peers by nearly 20% over the last six months. Historically, this pace of outperformance has tended to be a good sign, suggesting that we had started a new economic cycle with further upside for cyclical stocks ahead. However, while this sounds encouraging, we see three caveats that warrant caution rather than optimism at this point. First, we have seen no deterioration in cyclicals’ profitability yet, and the lack of any downturn now makes it harder to envisage an EPS upturn required to drive share prices higher going forward. Second, we get a very different message from the yield curve, which has consistently proved to be one of the best economic leading indicators over many cycles. Today's inverted yield curve is usually followed by a period of cyclical underperformance and not outperformance. And thirdly, cyclicals. Valuations look elevated, with the group trading in a similar price to book value as defensives. When this has happened previously, it usually signals cyclicals’ underperformance ahead. Given our cautious view on cyclicals, we prefer small and mid-cap stocks as a way to gain exposure to a European recovery. Having underperformed both large caps and cyclicals significantly over the last year, relative valuations for smaller stocks looks much more appealing, and relative performance looks like it is breaking out of its prior downtrend. In addition, we see two specific macro catalysts that should help smaller stocks in 2023, namely falling inflation and a rising euro. Historically, both these trends have tended to favor smaller companies over larger companies, and we expect the same to happen this year. At the country level we think the case for small and mid-cap stocks looks most compelling in Germany, where the relative index, the MDAX, has significantly lagged its larger equivalent, the DAX, such that relative valuations are close to a record low. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts, and share Thoughts on the Market with a friend or colleague today.

21 Feb 20233min

As our outlook for global equities becomes more cautious, what is influencing the move and what should investors watch as the story develops?----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, February 17th at 2 p.m. in London. We recently moved to an underweight stance in global equities as part of our cross-asset allocations. I want to talk a bit about why we did this, why we did it recently and what we're watching. The 'why' behind this move is straightforward, global equities now have low risk-adjusted returns in our framework. Our expected return for global stocks is now below what we see for bonds in the U.S., Europe or emerging markets, and it's also lower than what we expect for U.S. dollar cash. With lower expected returns and higher expected volatility, we think it makes sense to hold a lower than normal amount of global equities, hence our underweight stance. In terms of why we've made this change recently, a few things have shifted. Per Morgan Stanley's forecast, we entered the year expecting low returns for U.S. equities, but higher returns for non-U.S. stocks. But as prices have gone up in 2023, our expected returns outside the U.S. have also fallen, while in the U.S. they're now negative. We also think about expected returns based on longer-run valuations, and then adjusting these for economic conditions. We frame those economic expectations through something we call our cycle indicator, which is trying to look at economic data through the lens of being either stronger or weaker than average, and improving or softening. That indicator recently flipped, indicating a regime where the data is still strong but it's no longer improving, and historically that's often meant lower than average equity returns. And all of this has happened at a time when yields have risen, which is improving expected returns for a lot of other assets. The U.S. aggregate bond index now yields about 4.7%, while 12 month U.S. Treasury bills yield about the same amount. That is raising the bar for what global equities need to return to be relatively more attractive within one's portfolio. For a change like this, what are the risks? Well, one would be a stronger economy, which tends to be better for stocks relative to other assets. And some recent data has been strong, especially related to the U.S. labor market and retail sales. Our economists, however, think the growth story is still murky. Recent economic data is being impacted by large seasonal adjustments, which may be accurate, but which could also be flattering January data if economic patterns have changed versus their pre-COVID trends. Meanwhile, other economic indicators from PMIs to the yield curve to commodity prices suggest a softer growth backdrop ahead. Falling expected returns for stocks relative to other assets have led us to downgrade global equities to underweight. A surprising rebound in global growth is a risk to this change, but for now, we see better risk adjusted reward elsewhere in one's portfolio. Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts, or wherever you listen, and leave us a review. We'd love to hear from you.

17 Feb 20233min

Next month the leadership of the Bank of Japan will change hands, so what policy shifts might be in store and what does this imply for markets?----- Transcript -----Welcome to Thoughts on the Market. I'm Daniel Blake from Morgan Stanley's Asia and Emerging Markets Equity Strategy team. Along with my colleagues, bringing you a variety of perspectives, today I'll discuss Japanese equity markets and the changing of the guard at the Bank of Japan. It's Thursday, February 16th at 8 a.m. in Singapore. March the 10th will mark the end of an era for Japan, with Haruhiko Kuroda completing his final meeting at the helm of the Bank of Japan. Alongside the late Shinzo Abe, Kuroda-san has been instrumental in creating and implementing the famous Abenomics program over the last decade, and we think he's been successful in bringing Japan out of its long running deflationary stance. And just this week we've had the nomination of his replacement, Kazuo Ueda, a well-respected University of Tokyo professor and former Bank of Japan board member. He may not be a household name outside of the economics community, but his central bank and policy bloodlines run deep, having studied a Ph.D. at MIT alongside former Fed Chairman Ben Bernanke and under the tutelage of Stanley Fischer, former Bank of Israel governor and vice Fed chair. So as we see a generational handover at the BoJ, what do we expect next and what does it imply for equity markets? Firstly, Japan has made a lot of progress, but we don't think the mission has been fully accomplished on the Bank of Japan's 2% inflation target. Current inflation is being driven by cost pressures and while wage growth is picking up, we don't think wages will move up to the levels needed to see inflation at 2% being sustained. So we don't expect the BoJ under Ueda-san to embark on a tightening cycle the way we have seen for the Fed and the ECB. However, we can look for some change and in particular we think Ueda-san will look to resolve some of the market dysfunction associated with the policy of yield curve control. This is where the BoJ looks to cap bond yields at the ten year maturity, around a target of 0%. We expect he'll exit this policy of yield curve control by summer 2023, allowing the curve to steepen. And thirdly, we'll be watching closely his perspective on negative interest rate policy as we weigh up the costs and benefits and the transmission of negative rates into the real economy, albeit at the cost of profitability impacts for the banking sector. His testimony before the DIT on February 24th and his approach to negative interest rates under his governorship will be important to watch. We expect negative interest rate policy to be dropped, but not until 2024 in our base case, but this remains a key debate. So in terms of implications, this is more evolution than revolution for macro policy in Japan. And importantly, we see fiscal policy remaining supportive as the program of new capitalism and Ueda-san looks to strengthen social safety nets and double defense spending from 1% of GDP. Secondly, for equity markets, we see a resilient but still range bound outlook for the benchmark TOPIX Index. Our base case target of 2020 for December 2023 implies it doesn't quite break the top of its three year trading range, but remains well supported. Finally, at a sector level, banks and insurers may benefit from a tilting policy away from yield curve control. Again, especially if followed by a move back to zero rates from negative rate policy. In summary, we'll be watching for any shifts in the BoJ reaction function under the new leadership of Kazuo Ueda, but we do not expect a macro shock to asset markets. Instead, some micro adjustment in the yield curve control policy, and potentially negative interest rates, could help the sustainability of very low interest rates in Japan. Thanks for listening and if you enjoyed the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

16 Feb 20233min

As potential candidates begin to announce their presidential campaigns, is it time to start considering how the 2024 race will drive markets?----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Global Thematic and Public Policy Research for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between public policy and financial markets. It's Wednesday, February 15th at 10 a.m. in New York. With the news that Nikki Haley, former South Carolina governor and ambassador to the United Nations, is now running for the Republican nomination for president, investors are starting to ask questions about how the 2024 race for the White House will drive markets. Well, in our view, it's not worth spending too much time on, at least not yet through the lens of an investor, particularly when compared to the very relevant debate about the path of monetary policy and inflation. Let me explain. When it comes to understanding the impact of elections on markets, it's all about the policy paths opened up by different outcomes. Markets would care deeply, for example, if information we had today, say about who's running for president, could reliably tell us something about whether there will be in 2025 changes in tax policy, existing and emerging trade barriers with China or policy toward Ukraine. But at this point, projecting such changes is nearly pure speculation. Consider that, this far ahead of the election, knowing who the declared candidates are doesn't give us a lot of new information about who will become president. Polls, while never a perfect predictor, have little predictive value this far ahead of an election. Look at Barack Obama and Donald Trump who, when they declared their candidacies, didn't have strong poll numbers but obviously found political success. Also, remember that knowing who will become president is only one piece of the puzzle in forecasting policy outcomes. We also need to assess whether the president's party will control Congress or not. If they do, the markets reasonably might want to present higher probabilities of more dramatic policy changes. But again, this far out, there are far too many variables to make this assessment. Consider we know little about potential congressional candidates, their policy positions, and even which policy issues will motivate the election, which is still over a year and a half away. So bottom line, while it's certainly not too early to think about the 2024 election as a voter, as an investor you're better served focusing elsewhere for the time being. We'll clue you in when there's more for investors to work with. Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague, or leave us a review on Apple Podcasts. It helps more people find the show.

15 Feb 20232min

Though U.S. consumer spending was surprisingly robust in 2022, this poses both new and continuing challenges as households draw down their excess savings.----- Transcript -----Michelle Weaver: Welcome to Thoughts on the Market. I'm Michelle Weaver from the Morgan Stanley U.S. Equity Strategy Team. Sarah Wolfe: And I'm Sarah Wolfe from the U.S. Economics Team. Michelle Weaver: On this special episode of the podcast, we'll discuss how the U.S. consumer is faring. It's Tuesday, February 14th at 10 a.m. in New York. Michelle Weaver: The health of the consumer is critical for the equity market, and consumer spending last year helped companies continue to grow their earnings. Sarah, can you give us a snapshot of the overall health of the U.S. consumer right now? Do people still have plenty of savings, and what are you expecting around consumer savings for the rest of the year? Sarah Wolfe: The U.S. consumer was extraordinarily strong in 2022, despite negative real disposable income growth. For perspective, spending was about 3% growth year over year in 2022, and real disposable income was negative 6.5%. Part of that was inflation eroding all income gains, but it was also a tough year as we lapped fiscal stimulus from 2021. So what got consumers through negative 6.5% real income growth? It was this excess savings story. Consumers tapped their excess savings pretty significantly, and we estimate that the drawdown was roughly 30% from its peak. However, when we look into 2023, we don't think consumers are going to be tapping into their savings reserves quite as much. Michelle Weaver: It sounds like households draw down quite a bit of their excess saving. Is there any danger that they're going to run out? And if that's the case, when do you think that will play out? Sarah Wolfe: So we don't think 100% of excess savings are going to get spent ever. Remember, savings is not cash in your wallet, it's just anything that hasn't been spent. So some of these savings have moved into longer term investment vehicles as well. We think that an additional 15% will get spent in 2023, and 10% in 2024, after 30% drawdown last year. This slower drawdown in the excess savings will allow the savings rate to recover after sitting at a two decade low in 2022 at roughly 3%. But there are important divergences when you look at the distributional holding of excess savings. For example, the bottom 25% has drawn down over 50% of their excess savings, compared to 30% overall. And we believe they're on track to run their savings dry by 2Q 2023. Michelle Weaver: Great. And then income, of course, is another really important source of spending for consumers. And the January jobs report we got was a big surprise. And the labor market continues to be pretty resilient without any clear signs of stopping. I run a proprietary survey in conjunction with our Alphawise team, and in our most recent wave we found that despite the tech layoffs that have been all over the news, 31% of people are actually less worried about losing their job now versus a year ago. Can you tell me a little bit about what your team expects for the labor market in 2023? Sarah Wolfe: Well, the February jobs report was a whopper by any standard, 517,000 jobs and the unemployment rate hitting all time lows at 3.4%. However, I think it's important to put these numbers into a bit of context. We identified three temporary factors that boosted nonfarm payrolls in January and that we think are unlikely to persist in February. The first is weather. A warmer than usual January added about 130,000 jobs last month. The return of strike workers added 36,000 jobs and seasonal factors added 3 million jobs. Typically, we see the shedding of a lot of workers in January after the holidays, so leisure and hospitality, retail workers, transportation. But because we're dealing with significant labor shortages, and as a result companies are hoarding workers, we're seeing a lot fewer layoffs than we typically would given this time of the year and as a result, the seasonal factors are adding too many jobs right now. We expect the February print to be about 200,000, which is more in line with the trend that we had seen from July until December of 2022. We continue to expect job growth to slow this year, hitting a low of 50,000 jobs a month in mid 2023, pushing the unemployment rate up to about 3.9% by the end of this year. Michelle, you mentioned that you have an alphawise survey. Could you tell us a little bit more about what the survey’s telling you about consumer spending plans? Michelle Weaver: Sure. So on this wave of the survey, we asked people to think about major purchases that they're planning on making over the next three months. And we defined a major purchase like a vehicle, large appliance or vacation. And we found that about a quarter of people are considering shifting to a cheaper alternative, while a third are expecting to delay the purchase altogether. We also asked several questions on everyday purchases, and our survey indicates that consumers are planning to spend less on more discretionary categories. So that would include tech products, electronics, clothing, alcohol and home improvement. Sarah Wolfe: Michelle, that makes a lot of sense, and it's great to see when the hard data matches the soft data. We've done a lot of modeling work on how higher interest rates impact consumer spending, and we see a similar response in those categories. In particular, consumers tend to pull back on durable goods consumption, including home furnishing, electronics and appliances and motor vehicles. We haven't really talked about the services side yet. There was a big travel boom, post-COVID, do we expect this to continue this year? Michelle Weaver: Stocks exposed to travel did really well post-COVID as people were excited to get out there and travel again. Last year, we saw international travel restrictions lifted, making it a big year for vacations. And so there is some reversion likely here. And our survey showed that consumers are less positive on travel spending this year versus last year, with 34% of people expecting to spend less on travel and only 23% expecting to spend more. Sarah Wolfe: That's a pretty big step down in spending intentions on travel that your survey work shows. It also looks like in the economic data that the strongest part of the services recovery is behind us. We saw 10% nominal spending growth on services in 2021 and 2022. So, it's no wonder that this should decelerate in 2023 as the labor market cools and we return back to normal spending behavior. Michelle Weaver: Finally, Sarah, let's talk about inflation. Inflation is something I've definitely felt a lot as a consumer. For example, when I go to the grocery store, egg prices seem to be out of control, but when I look at my energy bill, things seem to be getting a little bit better. Can you tell us what's going on here and what you expect on inflation for the rest of the year? Sarah Wolfe: Unfortunately, we don't have a lot of transparency on the future of food prices right now, but we have seen pretty remarkable progress in other components of inflation that were weighing on household wallets in 2022. The first and foremost being energy inflation, which has returned back to its pre-COVID levels. We've also seen nice progress on goods inflation, where price levels have been coming off, in particular on new and used motor vehicles. And then we are seeing a slowing among services prices as well. In fact, headline PCE inflation has moderated from 7% this past summer to 5% today. And while this is great progress, the job is not done yet. We think inflation does reach 2.5% by the end of 2023, but this is going to require more aggressive action by the Fed. We now have two more 25 basis point hikes from the Fed in March and in May, reaching a peak rate of 5.25%. And we think they're going to have to keep rates on hold at their peak through the end of the year in order to make sure that inflation is getting where it needs to be. Michelle Weaver: Sarah, thanks for taking the time to talk. Sarah Wolfe: It was great speaking with you, Michelle. Michelle Weaver: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review on Apple Podcasts and share the podcast with a friend or colleague today.

14 Feb 20237min

Inflation was a key topic in a recent meeting at the Brookings Institution. While it has trended downward recently, the details are critical to tracking the path ahead.----- Transcript -----Welcome to Thoughts on the Market. I'm Seth Carpenter, Global Chief Economist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about inflation and the U.S. economy. It's Monday, February 13th at 10 a.m. in New York.This past week, I was fortunate to be part of a panel discussion at the Brookings Institution, a research think tank in Washington, D.C. I was one of three economists in discussion with one of the White House's main economic advisers. Unsurprisingly, the topic of inflation came up.One key chart from the White House economist juxtaposed services wage inflation with core services inflation, excluding housing. The key point of the chart was that falling wage inflation in the services sector may put some downward pressure on inflation in core services, excluding housing. This topic is timely because Chair Powell has repeatedly referenced services inflation, excluding housing, as a key risk to their goal for achieving price stability.A couple of weeks ago I'd written on the same topic, and there we tried to show that even the link itself between wage inflation and services inflation is a bit tenuous. But just looking at the raw data, it is clear that the monthly run rate on other services remains elevated. But a question we have to ask ourselves is, 'is it elevated a lot or a little?'Since June of last year, core services inflation, excluding housing, has trended down, and for December, it was at about 32 basis points on a month-over-month basis. That December pace is 3.9% in annual terms and would contribute about 2.1 percentage points to core PCE inflation. To put those numbers into context, recall that from 2013 to 2019, before COVID, core services inflation, excluding housing, averaged about 18 basis points a month or 2.2% at an annual rate. So yes, services inflation is higher than it has been historically, but it is nowhere near as high, relative to history, as housing inflation has been or core goods inflation has been, until recently. Indeed, from 2013 to 2019, core PCE inflation ran below the Fed's 2% inflation target. If goods inflation and housing inflation just went back to their averages from that period and services inflation, excluding housing, was at the rate that we saw in December, core PCE inflation would have overshot target, but by less than a half a percentage point. And we can't forget, for the past year, month-over-month services inflation, excluding housing, has been trending down.So are we out of the woods? No. Clearly, services inflation, excluding housing, is still high and needs to come down over time for the Fed to hit its target. But goods inflation and housing inflation were much bigger drivers of the surge in inflation. So, we really need to consider what's the path from here.Goods Inflation has been negative for the past few months, but used car prices look to have edged up a bit. Our US economics team expects the monthly change in core goods prices to be positive five basis points in January, interrupting that losing streak. We do not expect this reversion to last long, but the next couple of months could have some bumps in the path.Similarly, for housing inflation, the data on current new leases clearly points to a sharp deceleration in housing inflation over the rest of this year. Although overall housing inflation should come down, the closely watched component of owners' equivalent rent will likely stay elevated a bit longer and possibly give markets a bit of a head fake. The details matter, as always.The bottom line for us is twofold. First, inflation is coming down, but it will not be a smooth decline. A return to target for inflation was never very likely this year, so patience is required no matter what. Second, the recent high wage inflation does not spell failure for the Fed. Services inflation is not too far off target and the link between wages and inflation is there but it's small and both wage inflation and price inflation has been trending down despite the strong labor market.I conclude with what might be the most underappreciated moment from Chair Powell's public comments last week. He said he sees inflation getting close to 2% in 2024. When the FOMC did their projections in December, the median forecast was for 3.5% inflation at the end of this year. So, it seems like, based on the incoming data, Chair Powell might be pointing to a meaningful downward revision to the March forecast for inflation.Thanks for listening and if you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

13 Feb 20234min

While the risk of economic contraction has lessened in a few regions, is the story of recession and market risk being oversimplified?----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, February 10th at 2 p.m. in London. Markets have been fixated on the question of whether the U.S. and Europe will enter recession this year. With Europe benefiting from a fall in energy prices and the U.S. adding half a million jobs in January, it's tempting to think that recession risk is now lower and by extension, the risk to markets has passed. But the story may be more complicated. Near term, the risk of an economic contraction or recession has fallen. Europe has seen the largest swings here, where much lower energy prices, a result of a mild winter and plentiful supply from the United States, is leading to both less inflation and better growth, the proverbial 2-for-1 deal. Recession risk has also fallen a bit in the U.S., where our economists tracking estimate for U.S. GDP has been moving modestly higher. For markets, however, we fear that this story is getting oversimplified, to a recession is bad and no recession is good. At one level yes, avoiding a recession is definitely preferable. But markets often care most about the rate of change. It remains likely that U.S. growth will decelerate meaningfully this year, even in a scenario where a recession is avoided. For one, the idea that the U.S. avoids recession but still sees a meaningful slowdown in growth is the current forecast from Morgan Stanley's economists. And that's also the signal that we're getting from our market indicators. We classify an environment where leading economic data is strong but starting to soften as 'downturn'. That phase tends to see below average returns for stocks relative to bonds over the ensuing 6 to 12 months. We entered that phase recently. Of course, the U.S. economy has been defying predictions of a slowdown for many months now, and it could still have a few surprises up its sleeve. For now, however, we think favoring bonds over stocks is still consistent with our forecast for slowing growth, even if a recession is avoided. In Europe, we think the biggest beneficiary of lower energy prices and better growth prospects is the euro. What we think the euro performs well broadly, we think it does especially well versus the British pound, where economic challenges remain greater and our economists do forecast a recession this year. Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts, or where ever you listen, and leave us a review. We'd love to hear from you.

10 Feb 20232min

With the latest U.S. employment report showing unexpected resilience in the labor market, what happens now for the Fed and the policy tightening cycle?----- Transcript -----Welcome to Thoughts on the Market. I'm Vishy Tirupattur, Morgan Stanley's Head of Fixed Income Research and Director of Quantitative Research. Along with my colleagues, bringing you a variety of perspectives, today I will discuss the market implications from the latest U.S. employment report. It's Thursday, February 9th at noon in New York. When it comes to economic data releases, there are surprises and there are shockers. Last Friday's U.S. employment report was clearly in the latter category. Ahead of the release, the market consensus estimate was for 185,000 new jobs based on Bloomberg's survey of 77 economists. And yet the Bureau of Labor Statistics reported 517,000 new jobs added during the month, which is about eight and half standard deviations from the average expectation of the Bloomberg survey participants. By any measure, that's huge. The report showed strength across the board. Of course, there were some temporary drivers, like technical adjustments to seasonality factors, mild weather in January, and a resolution of certain strikes that contributed to this large scale boost to the January employment data. These things are unlikely to persist. Still, the U.S. labor market remains far more resilient than previously expected, with really no clear signs of stopping on the Monday following the January data release, Fed Chair Powell struck a more hawkish tone as he emphasized there is a significant road ahead before policymakers would be assured that inflation is returning to the 2% target. So what happens now? Even if the January employment report is not indicative of a change of trajectory in the U.S. labor market, it will likely take a few more months for the true underlying trends to emerge. Respecting the strength of the current labor market conditions, our U.S. economists believe that more evidence of labor market slowing is needed for the Fed to consider an end of the tightening cycle. Therefore, they now expect the Fed to deliver a 25 basis point hike, both in March and in May, that brings the peak policy rate to range of 5% to 5.25%, which would be in line with the FOMCs December projections. Given the change in the expectation for the Fed policy path, our strategists across multiple markets have revised many of our market goals. I would like to flag three key tactical changes. First, we turn neutral on U.S. Treasuries versus our previous overweight recommendation. Considering how big of an outlier the job number was, we think hard data is too strong for the Fed to look past it. With this realization, we think investors no longer assume that the interest rates have peaked. The market debate will likely turn into the interest rate sensitivity of the economy, and if the neutral rate should be higher than previously thought. Until we have greater clarity on these issues, we think being neutral is a better call on treasuries. Second, in the foreign exchange market, we turn neutral on the U.S. dollar, versus our previous call for a weakening dollar. The strong U.S. labor market data will likely cause investors to question whether the U.S. economy is slowing relative to the rest of the world. As a result, investors are likely to be a little more bullish in their U.S. dollar positioning. Third, in the agency mortgage market, we turned to underweight from neutral. The January employment report increases the uncertainty of the rate paths, which means higher interest rate volatility going forward, that's not great for agency MBS. Relative to other fixed income securities, we don't think investors are being compensated sufficiently for this higher interest rate uncertainty. Thanks for listening. If you enjoyed the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

9 Feb 20233min