Podcasts about chief fixed income strategist

Morgan Stanley's midyear outlook defied the conventional view in a number of ways. Our analysts Serena Tang and Vishy Tirupattur push back on the pushback to their conclusions, explaining the thought process behind their research. Read more insights from Morgan Stanley.----- Transcript -----Serena Tang: Welcome to Thoughts on the Market. I'm Serena Tang, Morgan Stanley's Chief Cross-Asset StrategistVishy Tirupattur: And I'm Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist.Serena Tang: Today's topic, pushback to our outlook.It's Friday, June 6th at 10am in New York.Morgan Stanley Research published our mid-year outlook about two weeks ago, a collaborative effort across the department, bringing together our economist views with our strategist high conviction ideas. Right now, we're recommending investors to be overweight in U.S. equities, overweight in core fixed income like U.S. treasuries, like U.S. IG corporate credit. But some of our views are out of consensus.So, I want to talk to you, Vishy, about pushback that you've been getting and how we pushback on the pushback.Vishy Tirupattur: Right. So, the biggest pushback I've gotten is a bit of a dissonance between our economics narrative and our markets narrative. Our economics narrative, as you know, calls for a significant weakening of economic growth. From about – for the U.S. – 2.5 percent growth in 2024 goes into 1 percent in 2025 and in 2026. And Fed doesn't cut rates in 2025, and cuts seven times in 2026.And if you look at a somewhat uninspiring outlook for the U.S. economy from our economists – reconciling an uninspiring economic outlook on the U.S. economy with the constructive view we have on U.S. assets, equities, credit, treasuries – that's been a source of contention. So, reconciling an uninspiring outlook on the U.S. economy with a constructive view on risk assets, as well as risk-free assets in the U.S. economy – so, equities, credit, as well as government bonds – has been a somewhat contentious issue.So how do we reconcile this? So, my pushback to the pushback is the following; that they are different plot lines across different asset classes. So, our economists have slowing of the economy – but not an outright recession. Our economists don't have rate cuts in 2025 but have seven rate cuts in 2026.So, if you look at the total number of rate cuts that are being priced in by the markets today, roughly about two rate cuts in [20]25, and about between two and three rate cuts in 2026, we expect greater policy easing than what's currently priced in the markets. So that makes sense for our constructive view on interest rates, and in government bonds and in duration that makes sense.From a credit point of view, we enter this point with a much better credit fundamentals in leverage and coverage terms. We have the emergence of a total yield-based buyer base, which we think will be largely intact at our expectations, and you layer on top of that – the idea that growth slows but doesn't fall into recession is also constructive for higher quality credit. So that explains our credit view.From an equities view, the drawdowns that we experienced in April, our equity strategists think marks the worst outcomes from a policy point of view that we could have had. That has already happened. So looking forward, they look for EPS growth over the course of the next 12 months. They look for benefits of deregulation to kick in. So, along with that seven rate cuts, get them to be comfortable in being constructive about their views on equities. So all of that ties together.Serena Tang: And I think what you mentioned around macro not being the markets is important here. Because when we did some analysis on historical periods where you had low growth and low inflation, actually in that kind of a scenario equities did fine. And corporate credit did fine. But also, in an environment where you have rather unencouraging growth, that tends to map onto a slightly risk-off scenario. And historically that's also a kind of backdrop where you see the dollar strengthen.This time out, we have a very out of consensus view; not that the dollar will weaken, that seems quite consensus. But the degree of magnitude of dollar weakening. Where have you been getting the most pushback on our expectations for the dollar to depreciate by around 9 percent from here?Vishy Tirupattur: So, the dollar weakness in itself is not out of consensus, largely driven by narrowing of free differentials; growth differentials. I think some of the difference between the extent of weakness that we are projecting comes from the assessment on the policy and certainty. So, the policy uncertainty adds a greater degree of risk premia for taking on U.S. assets.So, in our forecast, we take into account not only the differentials in rates and growth, but also in the policy uncertainty and the risk premia that the investors would demand in the face of that kind of policy uncertainty. And that really explains why we are probably more negative on the outcome for U.S. dollar than perhaps our competition.Serena Tang: The risk premium part, I think bring us to one of the biggest debates we've been having with investors over, not just the last few weeks, but over the last few months. And that is on U.S. exceptionalism. Now clearly, we have a view that U.S. assets can outperform over the next six to 12 months, but why aren't we factoring in higher risk premium for holding any kind of U.S. assets? Why should U.S. assets still do well?Vishy Tirupattur: So, as I said earlier, we are calling for the economy to slow without tipping into recession. We are also calling for greater amount of policy easing than what is currently priced in the markets. Both those factors are constructive.So, I think we also should keep in mind the sheer size of the U.S. markets. The U.S. government bond markets, for example, are 10 times the size of comparably rated European bond markets, government bond markets put together. The U.S. equity markets is four-five times the size of the European equity markets. Same thing for investment grade corporate credit bonds. The market is many, many times larger.So, the sheer size of the U.S. assets makes it very difficult for a globally diversified portfolio to substantially under-allocate to U.S. assets. So, what we are suggesting, therefore, is that allocate to U.S. assets, where there are all these opportunities we described. But if you are not a U.S. investor, hedge the currency risk. Not hedging currency risk had worked in the past, but we are now saying hedge your currency risk.Serena Tang: And the market size and liquidity point is interesting. I think after the outlook was published, we had a lot of questions on this. And I think it's underappreciated, how about, sort of, 60 percent of liquid, high quality fixed income paper is actually denominated in U.S. dollars. So, at the end of the day, or at least over the next six to 12 months, it does seem like there is no alternative.Now Vishy, we've talked a lot about where we are getting pushback. I think that one part of the outlook where – very little discussed because very highly consensus – is credit. And the consensus is credit is boring. So how do you see corporate credit, and maybe securitized credit, fit into the wider allocation views on fixed income?Vishy Tirupattur: Boring is good for a fixed income investor perspective, Serena. Our expectation of rate cuts, slowing growth but not going tipping into recession, and our idea that these spreads are really not going very far from where they are now, gets us to a total return of about over 10 percent for investment related corporate credit.And that actually is a pretty good outcome for credit investors. For fixed income investors in general that calls for continued allocations to high quality credit, in corporate credit as well as in securitized credit.Serena Tang: So just to sum up, Morgan Stanley Research has very differentiated view this time around on how many times the Fed can cut, which is a lot more than what markets are pricing in at the moment, how much yields can fall, and also how much weakening in the U.S. dollar that we can get. We are recommending investors to be overweight U.S. equities and overweight U.S. core fixed income like U.S. treasuries and like U.S. IG corporate credits. And as much as we're not arguing [that] U.S. exceptionalism can continue on forever, over the next six to 12 months, we are constructive on U.S. assets.That is not to say policy uncertainty won't still create bouts of volatility over the next 12 months. But it does mean that during those scenarios, you want to sell U.S. dollars rather than U.S. assets.Vishy, thank you so much for taking the time to talk.Vishy Tirupattur: Great speaking with you, Serena.Serena Tang: And for those tuned in, 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.

In the latest Market Signals podcast, Jeffrey Buchbinder, Chief Equity Strategist, and Lawrence Gillum, Chief Fixed Income Strategist, discuss the drivers of last week's stock market rally, intensifying headwinds in fixed income, and how Trump can still use tariffs despite last week's international trade court's ruling. Tracking: #748252

Markets have reacted positively to the U.S.-China détente in tariffs. Our Chief Fixed Income Strategist, Vishy Tirupattur, digs into the rallies to better understand potential longer-term outcomes.Read more insights from Morgan Stanley.----- Transcript -----Vishy Tirupattur: Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist. Today I'll talk about the impact of last week's 90-day pause in the reciprocal tariffs between the U.S. and China, and the impact on the economy and markets.It's Monday, May 19th at 11am in New York.Market response to last Monday's announcement has been resoundingly positive. The S&P 500 was up 4.5 percent in the first four days since the announcement and the year-to-date returns are back in the black after Liberation Day drove steep declines in April.Credit markets have also rallied, notably with the investment grade spreads tightening by over 10 basis points and high yield spreads by over 50 basis points. And the Treasury market took out 50 basis points of rate cuts in 2025, leaving market implied rate cuts by the end of 2026 at around 100 basis points.While these moves across markets are significant, it is really important to put them into perspective and tease out what this detente in trade tensions implies. And more importantly, what it does not imply.On the positive side, we think that the de-escalation reduces the risk of a sudden stop in trade volumes and a sharp rise in unemployment rate. While this is clearly just a truce and we don't know exactly where the tariffs between the two largest economies in the world will end up, it seems reasonable to infer that tariffs in the vicinity of 125 percent or 145 percent are substantially less likely now. Overall, the probability of a U.S. recession, therefore, has fallen on the margin.To be clear, a recession during 2025 was never really our base case. But the de-escalation shifts risks in the direction of a little more growth, a little less inflation, and keeps unemployment rate at near current levels. If the world before Liberation Day was bimodal and close to a coin toss; it is still bimodal, but skewed towards an expansion, not contraction. Since we were in the expansion mode to begin with, this detente gives us greater comfort in our baseline outlook and strengthens our conviction that the Fed will remain on hold for rest of the year.The positive vibes from Geneva not withstanding, we would stress that it is far from clear that the 90-day pause is an uncertainty clearing event. Trade tensions are likely to remain elevated. The administration is still investigating tariffs on pharmaceuticals, semiconductors, copper, and other products. It is also unclear if the template of negotiations between the U.S. and China can work for other regions, especially Europe. Even if U.S. tariffs on imports from China and the rest of the world end up roughly around the current levels, they would still be about four times higher than the levels at the start of the year.This means inflation should continue to move higher into year end, with the surge that peaks in the third quarter. While the impulse inflation from tariffs is likely to be smaller, it still is coming. Likewise, higher tariffs will dampen growth even though recession will continue to be avoided.For risk markets, we think that the detente has reduced the risk of substantial drawdowns. While policy uncertainty about the ultimate level of tariff remains, a return to last month's mind-boggling volatility driven by trade policy is probably behind us. So, it's unlikely that we will see markets revisiting the lows of April in the near term.For credit markets, a lower likelihood of recession is indeed welcome news, especially considering the current strong credit fundamentals. With the market taking out a couple of rate cuts, the all in yields for credit remain in the range to sustain the demand for yield buyers such as insurance companies.Thanks for listening. If you enjoy the show, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Our analysts Vishy Tirupattur and Joyce Jiang discuss the health of private credit as default pressures are building for borrowers amid weaker growth, fewer rate cuts and policy uncertainty.Read more insights from Morgan Stanley.----- Transcript -----Vishy Tirupattur: Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist.Joyce Jiang: And I'm Joyce Jiang, U.S. Leverage Finance Strategist.Vishy Tirupattur: Today we'll take a look at private credit markets. Will it stay resilient in the current macro conditions? Or a reckoning is ahead of us.It's Tuesday, May 13th at 10am in New York.Tariffs and policy uncertainty are on the top of mind for people with an eye on the economy and markets. Certainly, a frequent topic of discussion for us on this podcast. In this environment, there has been growing concern about the health of corporate credit – and within corporate credit direct lending or middle market segments, where companies tend to be smaller in size and have weaker fundamentals are of particular concern. The business models of these companies are sensitive to slower growth.Joyce, can you map out the risks associated with private credit companies?Joyce Jiang: To your point, risks are rising in private credit, but I think these risks would be measured given the still resilient fundamental backdrop. Looking at fundamental trends, there is no clear sign of leverage building up in the system yet, and multiple data sources actually show that the leverage ratios among direct lending companies have either improved or remained flat. And that's very different from the previous cycles where excessive corporate leverage set the stage for the eventual downturn.So, this time around credit, including both public credit and private credit, is not the source of the problem. But, of course, these direct lending companies would be impacted by higher tariffs. So, Vishy what's your view on the tariff impact?Vishy Tirupattur: So, the direct impact of tariffs, Joyce, we think is likely to be muted. It's quite hard to quantify this exposure, but if you look at a number of different data sources, we find that the direct lending loans are more skewed towards defensive and service-oriented sectors.For example, sectors such as a technology, business services and healthcare account for over half of the loans in typical BDC portfolios or Business Development Company portfolios of direct lending loans. But that said, even though the direct impact could be somewhat limited, there could be second order effects because there is higher uncertainty and weaker confidence, and that could weigh on demand. There could be a tail cohort that could be developing.So, some data from Lincoln International, for example, shows that about 15 per cent of direct lending companies have EBITDA interest coverage ratio below 1x. Another way of looking at tail cohort is by looking at companies generating negative free operating cash flow. According to S&P data, that's about 40 per cent. These tail cohorts are stretched and are weakly positioned to weather macro challenges ahead.So, Joyce, another thing that comes up frequently when we talk about private credit is Payment In Kind interest or the so-called PIK interest. Can you walk us through what is a PIK and why is it a concern?Joyce Jiang: So, Payment In Kind interest – it occurs when the company stops paying interest in cash, but instead the interest is accrued and added to the principal balance. It is quite common for companies under liquidity stress to switch to PIKs for cash preservation, But in many cases, PIKs don't really clean up the company's balance sheet, and the companies may still end up in a conventional default. So, PIK is generally considered as a leading indicator of default by market participants.And to be clear, not all PIK loans are bad. PIK toggles are actually a key feature that distinguishes direct lending loans from syndicated loans because it provides non-distressed companies the flexibility to reallocate cash for other business needs. So, PIKs do not necessarily signal higher defaults. And in fact, data showed that BDCs or Business Development Companies with a higher PIK income don't always see a greater increase in nonaccruals. So, in other words, the relationship between PIK income and defaults is not persistently strong.Vishy Tirupattur: So, to summarize, overall fundamentals are on a relatively strong footing, but risks in private credit are rising, especially if we have a potential economic slowdown ahead. On the other hand, there are a few structural features with the private credit loans that could potentially help mitigate some of the vulnerabilities we've just talked about.First thing, direct lending loans are not marked to market by design, so they have lower volatility and are relatively immune from daily price moves. And really related to that, redemption risk of private credit funds has been fairly contained so far. These funds usually have tools like lockup periods and redemption caps to guard against unexpected large outflows.But of course, the effectiveness of these mechanisms has not yet been tested in severe downturns. Moreover, the capital that is going into private credit is relatively sticky capital. Key investors, such as insurance companies and pension funds are hold-to-maturity type buyers, and they're entering in the space for the attractiveness of the higher yields and to harvest illiquidity premia embedded in these loans. So, with that long-term investment horizon, they would be more willing to support companies through temporary liquidity challenges. Also, small lender groups in direct lending market makes it easier to negotiate restructurings.Joyce Jiang: Lastly, there is also ample dry powder. According to PitchBook, there is $570 billion of dry powder in private debt fund, and another $2 trillion in private equity funds. And this capital can be deployed to backstop distressed companies and help keeping defaults in check. And in terms of defaults, we are expecting syndicated loan defaults to end the year at 4 per cent. And that's our base case.And based on the historical relationship, that implies a like for like default rate for perfect credit at 5 per cent, which means a mild uptake from the current level, but is still below the COVID peak.Vishy Tirupattur: Joyce, thanks for taking the time to talk about this.Joyce Jiang: Thanks for having me, Vishy.Vishy Tirupattur: And to our listeners, thank you for your attention. Let us know what you think of this podcast and the topics we cover. And if you think a friend or a colleague might find this information useful, please share Thoughts on the Market with them today.

In this episode, Dustin Reid, Chief Fixed Income Strategist, provides his key takeaways from the latest FOMC meeting, offering insights into the Fed's stance on interest rates, inflation, and economic growth. He also examines ongoing trade discussions, specifically recent developments between the US and UK, and how tariffs have been impacting market sentiment and risk appetite. Finally, Dustin shares his perspectives on the significance of Prime Minister Carney's visit to the White House and what it may signal for Canadian-US relations going forward.    This episode was recorded on May 8, 2025. 

The traditional correlations between some asset classes went haywire in April. Our analysts Serena Tang and Vishy Tirupattur discuss whether, in this environment, investors still consider U.S. Treasuries and the U.S. dollar to be reliable ports in a storm. Read more insights from Morgan Stanley.----- Transcript -----Serena Tang: Welcome to Thoughts on the Market. I'm Serena Tang, Morgan Stanley's Chief Cross Asset Strategist.Vishy Tirupattur: And I'm Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist.Serena Tang: Today's topic, how investors' perceptions of safe havens are evolving, the impact on correlation between asset classes, and what all this means for your portfolio.It's Wednesday, May 7th at 10am in New York.April was a really challenging month, and some market moves were highly unusual. There was also a lot of investor concern whether U.S. Treasuries would continue to be a safe haven. In fact, this became one of the biggest market debates over the last few weeks.Vishy, let's start here. Prior to this recent sell off, foreign investors looked at U.S. assets as a safe haven. Why is that? And is it still the case now after this turbulent month?Vishy Tirupattur: So, Serena, if you just step back and look at it, U.S. enjoyed positive growth differentials and positive yield differentials with developed markets in the rest of the world. On top of that, there was a consistent policy – not necessarily infallible policy – but there's a consistent policy with a clear sense of demarcation between the executive and the central bank.All of this meant U.S. was a very attractive destination for foreign investor flows. Not only during periods of normalcy where U.S. equities really attracted inflows and performed really well, but also during the periods of economic stress; where even periods where the stress was coming from the U.S. itself, such as the Global Financial Crisis. This correlation between bonds and stocks held and U.S. Treasuries were the safe haven asset as the single largest and most liquid, and highly negatively correlated asset with risk assets. So that really worked.What we are now seeing is that growth differential I talked about may no longer be holding. You know, for these [20]25 and [20]26 U.S. and euro area growth basically will converge – and if our economists' expectations are right, in 2026, euro area will be growing at a faster pace than the U.S.So, growth differential argument is fading. And there are some questions about the continued Fed independence. So put all these things together. Some investors are beginning to question whether U.S. assets will continue to be safe haven assets.So let me come back to you Serena. There've been some recent market moves that have been extremely unusual. That's what created all this debate. In some of – a few days in April, during the periods of sell off, we had both stocks and bonds selling off. And it felt like cross-asset correlations have gone totally haywire.So, can you talk a little bit about which correlations have changed? Which correlations have held up in these sell off?Serena Tang: What was highly unusual, and I think reflects part of the debate on U.S. as a safe haven, is the correlation between U.S. equities and the dollar. It is very high at the moment, about sort of two standard deviation above the five-year average. While it's not unheard of for FX stocks correlation to be high, it is usually more associated with EM or emerging markets rather than DM or developed markets. As a means, investors now require higher risk premium for holding the equities, which is a risk asset; but also holding the dollar, which again, traditionally is not thought of as a risk asset.Vishy Tirupattur: So, Serena, how did the correlation between bonds and stocks hold up in this period?Serena Tang: Surprisingly, the correlation have really, really held up. Stocks and bond return correlation turned very negative during the sell off that we saw, which means that equity losses were actually offset by bond returns. Now, this isn't entirely true across the curve. You saw 2 Year Treasuries being a much effective diversifier than say the 30 Year Treasury. But all in all, I think it means bonds still work as a diversifier.Now on this point Vishy, how do you think policy will impact asset correlations we've been talking about, as well as the perception of U.S. assets as a safe haven.Vishy Tirupattur: So, as I said before, positive growth differentials fade, and we have negative growth differential. And if there are continued questions about the Fed's independence, so some of the attraction of U.S. assets, particularly U.S. Treasuries as a safe haven asset, will be challenged. But that challenge hits the practical reality of the size and the scale of the safe haven assets.So, if you look around, if you add the comparably rated European government bond market and compare that to the U.S. government bond market, the U.S. market is about 10 times as larger. So, more scale, more liquidity, and the ability to deploy capital during the periods of stress is clearly more in the U.S.So, this is what I would say. The status of U.S. dollar as the global reserve currency and U.S. Treasuries as the global safe haven asset have taken a bit of a ding, but not gone away.Serena Tang: Vishy, thanks so much for taking the time to talk.Vishy Tirupattur: Great speaking with you, Serena, as always.Serena Tang: 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.

In this episode, Dustin Reid, Chief Fixed Income Strategist, discusses the current market volatility driven by trade tensions, tariffs, and changing economic regimes. Dustin examines the Bank of Canada's decision to hold interest rates at 2.75% and how the upcoming Canadian election may influence fiscal policies and potential rate cuts in the future. He also examines recent changes in US trade policy surrounding tariffs, the escalating tensions between the US and China, and potential for stagflation. Additionally, Dustin shares recent updates to the team's fixed income positioning.    This episode was recorded on April 16, 2025. 

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

In this episode, Dustin Reid, Chief Fixed Income Strategist, discusses the Federal Reserve's shift towards a more uncertain economic outlook, highlighting concerns about downside growth risks and rising inflation projections. He explores trade dynamics between the US and Canada, covering current and upcoming tariffs and the political context influencing Canada's response. Additionally, Dustin examines current events in Canadian politics, the Bank of Canada, and Germany's suspension of the debt brake and its commitment to military and infrastructure spending.     This episode was recorded on March 20, 2025. 

Our Chief Fixed Income Strategist Vishy Tirupattur explains why credit markets have held firm amid macro volatility, and the scenarios which could hurt its strong foundation.----- Transcript -----Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist. Today, I will talk about why credit markets have been resilient even as other markets have been volatile – and market implications going forward. It's Tuesday, March 18th, at 11 am in New York. Market sentiment has shifted quickly from post-election euphoria and animal spirits to increasingly growing concern about downside risks to the U.S. economy, driven by ongoing policy uncertainty and a spate of uninspiring soft data. However, signaling from different markets has not been uniform. For example, after reaching an all-time high just a few weeks ago, the S&P 500 index has given up all of its gains since the election and then some. Treasury yields have also yo-yoed, from a 40-basis points selloff to a 60+ basis points rally. Yet in the middle of this volatility in equities and rates, credit markets have barely budged. In other words, credit has been a low beta asset class so far. This resilience which resonates with our long-standing constructive view on credit has strong underpinnings. We had expected that many of the supporting factors from 2024 would continue – such as solid credit fundamentals, strong investor demand driven by elevated overall yields rather than the level of spreads. While we expected the economic growth in 2025 to slow somewhat, to about 2 per cent, we thought that would still be a robust level for credit investors. These expectations have largely played out until recently. While we maintain our overall positive stance on credit, some of the factors contributing to its resilience are changing, calling the persistence of credit's low beta into question. While we did anticipate that sequencing and severity of policy would be key drivers of the economy and markets in 2025, growth constraining policies, especially tariffs, have come in faster and broader than what we had penciled in. Incorporating these policy signals, our U.S. economists have marked down real GDP growth to 1.5 per cent in 2025 and 1.2 per cent in 2026. From a credit perspective, we would highlight that our economists are not calling for a recession. Their growth expectations still leave us in territory we would deem credit friendly, although edging towards the bottom of our comfort zone. On the positive side of the ledger, cooling growth may also temper animal spirits and continue to constrain corporate debt supply, keeping market technicals supportive. Also, while treasury yields have rallied, overall yields are still at levels that sustain demand from yield-motivated buyers. That said, if growth concerns intensify from these levels, with weakness in soft data spreading notably to hard data, the probability of markets assigning above-average recession probabilities will increase. This could challenge credit's low beta, that has prevailed so far, and the credit beta could increase on further drawdowns in risk assets. Thanks for listening. If you enjoy the show, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Our Chief Fixed Income Strategist Vishy Tirupattur thinks that efficiency gains from Chinese AI startup DeepSeek may drive incremental demand for AI.----- Listener Survey -----Complete a short listener survey at http://www.morganstanley.com/podcast-survey and help us make the podcast even more valuable for you. For every survey completed, Morgan Stanley will donate $25 to the Feeding America® organization to support their important work.© 2025 Morgan Stanley. All Rights Reserved. CRC#4174856 02/2025----- Transcript -----Hi, I'm Michael Zezas, Global Head of Fixed Income research & Public Policy Strategy at Morgan Stanley. Before we get into today's episode … the team behind Thoughts on the Market wants your thoughts and your input. Fill out our listener survey and help us make this podcast even more valuable for you. The link is in the show notes, and you'll hear it at the end of the episode. Plus, help us help the Feeding America organization. For every survey completed, Morgan Stanley will donate $25 toward their important work.Thanks for your time and support. On to the show…Welcome to Thoughts on the Market. I'm Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist. Today I'll be talking about the macro implications of the DeepSeek development.It's Friday February 7th at 9 am, and I'm on the road in Riyadh, Saudi Arabia.Recently we learned that DeepSeek, a Chinese AI startup, has developed two open-source large language models – LLMs – that can perform at levels comparable to models from American counterparts at a substantially lower cost. This news set off shockwaves in the equity markets that wiped out nearly a trillion dollars in the market cap of listed US technology companies on January 27. While the market has recouped some of these losses, their magnitude raises questions for investors about AI. My equity research colleagues have addressed a range of stock-specific issues in their work. Today we step back and consider the broader implications for the economy in terms of productivity growth and investment spending on AI infrastructure.First thing. While this is an important milestone and a significant development in the evolution of LLMs, it doesn't come entirely as a shock. The history of computing is replete with examples of dramatic efficiency gains. The DeepSeek development is precisely that – a dramatic efficiency improvement which, in our view, drives incremental demand for AI. Rapid declines in the cost of computing during the 1990s provide a useful parallel to what we are seeing now. As Michael Gapen, our US chief economist, has noted, the investment boom during the 1990s was really driven by the pace at which firms replaced depreciated capital and a sharp and persistent decline in the price of computing capital relative to the price of output. If efficiency gains from DeepSeek reflect a similar phenomenon, we may be seeing early signs [that] the cost of AI capital is coming down – and coming down rapidly. In turn, that should support the outlook for business spending pertaining to AI.In the last few weeks, we have heard a lot of reference to the Jevons paradox – which really dates from 1865 – and it states that as technological advancements reduce the cost of using a resource, the overall demand for the resource increases, causing the total resource consumption to rise. In other words, cheaper and more ubiquitous technology will increase its consumption. This enables AI to transition from innovators to more generalized adoption and opens the door for faster LLM-enabled product innovation. That means wider and faster consumer and enterprise adoption. Over time, this should result in greater increases in productivity and faster realization of AI's transformational promise.From a micro perspective, our equity research colleagues, who are experts in covering stocks in these sectors, come to a very similar conclusion. They think it's unlikely that the DeepSeek development will meaningfully reduce CapEx related to AI infrastructure. From a macroeconomic perspective, there is a good case to be made for higher business spending related to AI, as well as productivity growth from AI.Obviously, it is still early days, and we will see leaders and laggards at the stock level. But the economy as a whole we think will emerge as a winner. DeepSeek illustrates the potential for efficiency gains, which in turn foster greater competition and drive wider adoption of AI. With that premise, we remain constructive on AI's transformational promise.Thanks for listening. If you enjoy the podcast, help us make it even more valuable to you. Share your feedback on the show at morganstanley.com/podcast-survey or head to the episode notes for the survey link.In the last few weeks… (Laughs) It's almost like the birds are waiting for me to start speaking.The proceeding content is informational only and based on information available when created. It is not an offer or a solicitation nor is it tax or legal advice. It does not consider your financial circumstances and objectives and may not be suitable for you.

In this episode, Dustin Reid, Chief Fixed Income Strategist at Mackenzie Investments, discusses the recent decisions by the Bank of Canada and Federal Reserve, exploring their future actions amid current economic conditions and looming tariff deadlines. Dustin also examines developments in equity markets, particularly the impact of the new Chinese AI model, DeepSeek, and its implications for technology stocks and energy consumption. This episode was recorded on January 29, 2025.

In this episode, Dustin Reid, Chief Fixed Income Strategist, explores the potential implementation of tariffs under the new Trump administration and its implications for cross-asset markets. He discusses the role of the External Revenue Service and Canada's political and economic landscape. Dustin highlights key topics such as market pricing and expectations, deregulation, tax cuts, immigration policies, and potential changes in leadership.   This episode was recorded on January 23, 2025.

In the latest Market Signals podcast, Jeffrey Buchbinder, Chief Equity Strategist, and Lawrence Gillum, Chief Fixed Income Strategist, discuss the lack of a Santa Claus rally, review LPL Research's winning and losing recommendations from 2024, and preview this week's jobs report. Tracking: #678156

Original Release Date November 19, 2024: On the second part of a two-part roundtable, our panel gives its 2025 preview for the housing and mortgage landscape, the US Treasury yield curve and currency markets.----- Transcript -----Andrew Sheets: 2024 was a year of transition for economies and global markets. Central banks began easing interest rates, U.S. elections signaled significant policy change, and Generative AI made a quantum leap in adoption and development.Thank you for listening throughout 2024, as we navigated the issues and events that shaped financial markets, and society. We hope you'll join us next year as we continue to bring you the most up to date information on the financial world. This week, please enjoy some encores of episodes over the last few months and we'll be back with all new episodes in January. From all of us on Thoughts on the Market, Happy Holidays, and a very Happy New Year. Vishy Tirupattur: Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist. This is part two of our special roundtable discussion on what's ahead for the global economy and markets in 2025.Today we will cover what is ahead for government bonds, currencies, and housing. I'm joined by Matt Hornbach, our Chief Macro Strategist; James Lord, Global Head of Currency and Emerging Market Strategy; Jay Bacow, our co-head of Securitized Product Strategy; and Jim Egan, the other co-head of Securitized Product Strategy.It's Tuesday, November 19th, at 10am in New York.Matt, I'd like to go to you first. 2024 was a fascinating year for government bond yields globally. We started with a deeply inverted US yield curve at the beginning of the year, and we are ending the year with a much steeper curve – with much of that inversion gone. We have seen both meaningful sell offs and rallies over the course of the year as markets negotiated hard landing, soft landing, and no landing scenarios.With the election behind us and a significant change of policy ahead of us, how do you see the outlook for global government bond yields in 2025?Matt Hornbach: With the US election outcome known, global rate markets can march to the beat of its consequences. Central banks around the world continue to lower policy rates in our economist baseline projection, with much lower policy rates taking hold in their hard landing scenario versus higher rates in their scenarios for re-acceleration.This skew towards more dovish outcomes alongside the baseline for lower policy rates than captured in current market prices ultimately leads to lower government bond yields and steeper yield curves across most of the G10 through next year. Summarizing the regions, we expect treasury yields to move lower over the forecast horizon, helped by 75 [basis points] worth of Fed rate cuts, more than markets currently price.We forecast 10-year Treasury yields reaching 3 and 3.75 per cent by the middle of next year and ending the year just above 3.5 per cent.Our economists are forecasting a pause in the easing cycle in the second half of the year from the Fed. That would leave the Fed funds rate still above the median longer run dot.The rationale for the pause involves Fed uncertainty over the ultimate effects of tariffs and immigration reform on growth and inflation.We also see the treasury curve bull steepening throughout the forecast horizon with most of the steepening in the first half of the year, when most of the fall in yields occur.Finally, on break even inflation rates, we see five- and 10-year break evens tightening slightly by the middle of 2025 as inflation risks cool. However, as the Trump administration starts implementing tariffs, break evens widen in our forecast with the five- and 10-year maturities reaching 2.55 per cent and 2.4 per cent respectively by the end of next year.As such, we think real yields will lead the bulk of the decline in nominal yields in our forecasting with the 10-year real yield around 1.45 per cent by the middle of next year; and ending the year at 1.15 per cent.Vishy Tirupattur: That's very helpful, Matt. James, clearly the incoming administration has policy choices, and their sequencing and severity will have major implications for the strength of the dollar that has rallied substantially in the last few months. Against this backdrop, how do you assess 2025 to be? What differences do you expect to see between DM and EM currency markets?James Lord: The incoming administration's proposed policies could have far-reaching impacts on currency markets, some of which are already being reflected in the price of the dollar today. We had argued ahead of the election that a Republican sweep was probably the most bullish dollar outcome, and we are now seeing that being reflected.We do think the dollar rally continues for a little bit longer as markets price in a higher likelihood of tariffs being implemented against trading partners and there being a risk of additional deficit expansion in 2025. However, we don't really see that dollar strength persisting for long throughout 2025.So, I think that is – compared to the current debate, compared to the current market pricing – a negative dollar catalyst that should get priced into markets.And to your question, Vishy, that there will be differences with EM and also within EM as well. Probably the most notable one is the renminbi. We have the renminbi as the weakest currency within all of our forecasts for 2025, really reflecting the impact of tariffs.We expect tariffs against China to be more consequential than against other countries, thus requiring a bigger adjustment on the FX side. We see dollar China, or dollar renminbi ending next year at 7.6. So that represents a very sharp divergence versus dollar yen and the broader DXY moves – and is a consequence of tariffs.And that does imply that the Fed's broad dollar index only has a pretty modest decline next year, despite the bigger move in the DXY. The rest of Asia will likely follow dollar China more closely than dollar yen, in our view, causing AXJ currencies to generally underperform; versus CMEA and Latin America, which on the whole do a bit better.Vishy Tirupattur: Jay, in contrast to corporate credit, mortgage spreads are at or about their long-term average levels. How do you expect 2025 to pan out for mortgages? What are the key drivers of your expectations, and which potential policy changes you are most focused on?Jay Bacow: As you point out, mortgage spreads do look wide to corporate spreads, but there are good reasons for that. We all know that the Fed is reducing their holdings of mortgages, and they're the largest holder of mortgages in the world.We don't expect Fed balance sheet reduction of mortgages to change, even if they do NQT, as is our forecast in the first quarter of 2025. When they NQT, we expect mortgage runoff to continue to go into treasuries. What we do expect to change next year is that bank demand function will shift. We are working under the assumption that the Basel III endgame either stalls under the next administration or gets released in a way that is capital neutral. And that's going to free up excess capital for banks and reduce regulatory uncertainty for them in how they deploy the cash in their portfolios.The one thing that we've been waiting for is this clarity around regulations. When that changes, we think that's going to be a positive, but it's not just banks returning to the market.We think that there's going to be tailwinds from overseas investors that are going to be hedging out their FX risks as the Fed cuts rates, and the Bank of Japan hikes, so we expect more demand from Japanese life insurance companies.A steeper yield curve is going to be good for REIT demand. And these buyers, banks, overseas REITs, they typically buy CUSIPs, and that's going to help not just from a demand side, but it's going to help funding on mortgages improve as well. And all of those things are going to take mortgage spreads tighter, and that's why we are bullish.I also want to mention agency CMBS for a moment. The technical pressure there is even better than in single family mortgages. The supply story is still constrained, but there is no Fed QT in multifamily. And then also the capital that's going to be available for banks from the deregulation will allow them – in combination with the portfolio layer hedging – to add agency CMBS in a way that they haven't really been adding in the last few years. So that could take spreads tighter as well.Now, Vishy, you also mentioned policy changes. We think discussions around GSE reform are likely to become more prevalent under the new administration.And we think that given that improved capitalization, depending on the path of their earnings and any plans to raise capital, we could see an attempt to exit conservatorship during this administration.But we will simply state our view that any plan that results in a meaningful change to the capital treatment – or credit risk – to the investors of conventional mortgages is going to be too destabilizing for the housing finance markets to implement. And so, we don't think that path could go forward.Vishy Tirupattur: Thanks, Jay. Jim, it was a challenging year for the housing market with historically high levels of unaffordability and continued headwinds of limited supply. How do you see 2025 to be for the US housing market? And going beyond housing, what is your outlook for the opportunity set in securitized credit for 2025?James Egan: For the housing market, the 2025 narrative is going to be one about absolute level versus the direction and rate of change. For instance, Vishy, you mentioned affordability. Mortgage rates have increased significantly since the beginning of September, but it's also true that they're down roughly a hundred basis points from the fourth quarter of 2023 and we're forecasting pretty healthy decreases in the 10-year Treasury throughout 2025. So, we expect affordability to improve over the coming year. Supply? It remains near historic lows, but it's been increasing year to date.So similar to the affordability narrative, it's more challenged than it's been in decades; but it's also less challenged than it was a year ago.So, what does all this mean for the housing market as we look through 2025? Despite the improvements in affordability, sales volumes have been pretty stagnant this year. Total volumes – so existing plus new volumes – are actually down about 3 per cent year to date. And look, that isn't unusual. It typically takes about a year for sales volumes to pick up when you see this kind of significant affordability improvement that we've witnessed over the past year, even with the recent backup in mortgage rates.And that means we think we're kind of entering that sweet spot for increased sales now. We've seen purchase applications turn positive year over year. We've seen pending home sales turn positive year over year. That's the first time both of those things have happened since 2021. But when we think about how much sales 2025, we think it's going to be a little bit more curtailed. There are a whole host of reasons for that – but one of them the lock in effect has been a very popular talking point in the housing market this year. If we look at just the difference between the effective mortgage rate on the outstanding universe and where you can take out a mortgage rate today, the universe is still over 200 basis points out of the money.To the upside, you're not going to get 10 per cent growth there, but you're going to get more than 5 per cent growth in new home sales. And what I really want to emphasize here is – yes, mortgage rates have increased recently. We expect them to come down in 2025; but even if they don't, we don't think there's a lot of room for downside to existing home sales from here.There's some level of housing activity that has to happen, regardless of where mortgage rates or affordability are. We think we're there. Turnover measured as the number of transactions – existing transactions – as a share of the outstanding housing market is lower now than it was during the great financial crisis. It's as low as it's been in a little bit over 40 years. We just don't think it can fall that much further from here.But as we go through 2025, we do think it dips negative. We have a negative 2 per cent HPA call next year, not significantly down. We don't think there's a lot of room to the downside given the healthy foundation, the low supply, the strong credit standards in the housing market. But there is a little bit of negativity next year before home prices reaccelerate.This leaves us generically constructive on securitized products across the board. Given how much of the capital structure has flattened this year, we think CLO AAAs actually offer the best value amongst the debt tranches there. We think non-QM triple AAAs and agency MBS is going to tighten. They look cheap to IG corporates. Consumer ABS, we also think still looks pretty cheap to IG corporates. Even in the CMBS pace, we think there's opportunities. CMBS has really outperformed this year as rates have come down. Now our bull bear spread differentials are much wider in CMBS than they are elsewhere, but in our base case, conduit BBB minuses still offer attractive value.That being said, if we're going to go down the capital structure, our favorite expression in the securitized credit space is US CLO equity.Vishy Tirupattur: Thank you, Jay and Jim, and also Matt and James.We'll close it out here. As a reminder, if you enjoyed the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Original Release Date November 18, 2024: On the first part of a two-part roundtable, our panel discusses why the US is likely to see a slowdown and where investors can look for growth.----- Transcript -----Andrew Sheets: 2024 was a year of transition for economies and global markets. Central banks began easing interest rates, U.S. elections signaled significant policy change, and Generative AI made a quantum leap in adoption and development.Thank you for listening throughout 2024, as we navigated the issues and events that shaped financial markets, and society. We hope you'll join us next year as we continue to bring you the most up to date information on the financial world. This week, please enjoy some encores of episodes over the last few months and we'll be back with all new episodes in January. From all of us on Thoughts on the Market, Happy Holidays, and a very Happy New Year. Vishy Tirupattur: Welcome to Thoughts on the Market. I'm Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist. Today in the podcast, we are hosting a special roundtable discussion on what's ahead for the global economy and markets in 2025.I'm joined by my colleagues: Seth Carpenter, Global Chief Economist; Mike Wilson, Chief US Equity Strategist and the firm's Chief Investment Officer; and Andrew Sheets, Global Head of [Corporate] Credit Research.It's Monday, November 18th, at 10am in New York.Gentlemen. Thank you all for taking the time to talk. We have a lot to cover, and so I'm going to go right into it.Seth, I want to start with the global economy. As you look ahead to 2025, how do you see the global economy evolving in terms of growth, inflation and monetary policy?Seth Carpenter: I have to say – it's always difficult to do forecasts. But I think right now the uncertainty is even greater than usual. It's pretty tricky. I think if you do it at a global level, we're not actually looking for all that much of a change, you know, around 3-ish percent growth; but the composition is surely going to change some.So, let's hit the big economies around the world. For the US, we are looking for a bit of a slowdown. Now, some of that was unsustainable growth this year and last year. There's a bit of waning residual impetus from fiscal policy that's going to come off in growth rate terms. Monetary policy is still restrictive, and there's some lag effects there; so even though the Fed is cutting rates, there's still going to be a little bit of a slowdown coming next year from that.But I think the really big question, and you alluded to this in your question, is what about other policy changes here? For fiscal policy, we think that's really an issue for 2026. That's when the Tax Cut and Jobs Act (TCJA) tax cuts expire, and so we think there's going to be a fix for that; but that's going to take most of 2025 to address legislatively. And so, the fiscal impetus really is a question for 2026.But immigration, tariffs; those matter a lot. And here the question really is, do things get front loaded? Is it everything all at once right at the beginning? Is it phased in over time a bit like it was over 2018? I think our baseline assumption is that there will be tariffs; there will be an increase in tariffs, especially on China. But they will get phased in over the course of 2025. And so, as a result, the first thing you see is some increase in inflation and it will build over time as the tariffs build. The slowdown from growth, though, gets backloaded to the end of 2025 and then really spills over into to 2026.Now, Europe is still in a situation where they've got some sluggish growth. We think things stabilize. We get, you know, 1 percent growth or so. So not a further deterioration there; but not a huge increase that would make you super excited. The ECB should probably keep cutting interest rates. And we actually think there's a really good chance that inflation in the euro area goes below their target. And so, as a result, what do we see? Well, the ECB cutting down below their best guess of neutral. They think 2 percent nominal is neutral and they go below that.China is another big curveball here for the forecast because they've been in this debt deflation spiral for a while. We don't think the pivot in fiscal policy is anywhere near sufficient to ward things off. And so, we could actually see a further slowing down of growth in China in 2025 as the policy makers do this reactive kind of policy response. And so, it's going to take a while there, and we think there's a downside risk there.On the upside. I mean, we're still bullish on Japan. We're still very bullish on India and its growth; and across other parts of EM, there's some bright spots. So, it's a real mixed bag. I don't think there's a single trend across the globe that's going to drive the overall growth narrative.Vishy Tirupattur: Thank you, Seth. Mike, I'd like to go to you next. 2024 has turned out to be a strong year for equity markets globally, particularly for US and Japanese equities. While we did see modest earnings growth, equity returns were mostly about multiple expansion. How do you expect 2025 to turn out for the global equity markets? What are the key challenges and opportunities ahead for the equity markets that you see?Mike Wilson: Yeah, this year was interesting because we had what I would say was very modest earnings growth in the US in particular; relative to the performance. It was really all multiple expansion, and that's probably not going to repeat this year. We're looking for better earnings growth given our soft landing outcome from an economic standpoint and rates coming down. But we don't think multiples will expand any further. In fact, we think they'll come down by about 5 percent. But that still gets us a decent return in the base case of sort of high single digits.You know, Japan is the second market we like relative to the rest of the world because of the corporate governance story. So there, too, we're looking for high single digit earnings growth and high single digits or 10 percent return in total. And Europe is when we're sort of down taking a bit because of tariff risk and also pressure from China, where they have a lot of export business.You know, the challenges I think going forward is that growth continues to be below trend in many regions. The second challenge is that, you know, high quality assets are expensive everywhere. It's not just the US. It's sort of everywhere in the world. So, you get what you pay for. You know, the S&P is extremely expensive, but that's because the ROE is higher, and growth is higher.So, you know, in other words, these are not well-kept secrets. And so just valuation is a real challenge. And then, of course, the consensus views are generally fairly narrow around the soft landing and that's very priced as well. So, the risks are that the consensus view doesn't play out. And that's why we have two bull and two bear cases in the US – just like we did in the mid-year outlook; and in fact, what happened is one of our bull cases is what played out in the second half of this year.So, the real opportunity from our standpoint, I think this is a global call as well – which is that we continue to be pretty big rotations around the macro-outlook, which remains uncertain, given the policy changes we're seeing in the US potentially, and also the geopolitical risks that still is out there.And then the other big opportunity has been stock picking. Dispersion is extremely high. Clients are really being rewarded for taking single stock exposures. And I think that continues into next year. So, we're going to do what we did this year is we're going to try to rotate around from a style and size perspective, depending on the macro-outlook.Vishy Tirupattur: Thank you, Mike. Andrew, we are ending 2024 in a reasonably good setup for credit markets, with spreads at or near multi-decade tights for many markets. How do you expect the global credit markets to play out in 2025? What are the best places to be within the credit spectrum and across different regions?Andrew Sheets: I think that's the best way to frame it – to start a little bit about where we are and then talk about where we might be going. I think it's safe to say that this has been an absolutely phenomenal backdrop for corporate credit. Corporate credit likes moderation. And I think you've seen an unusual amount of moderation at both the macro and the micro level.You've seen kind of moderate growth, moderating inflation, moderating policy rates across DM. And then at the micro level, even though markets have been very strong, corporate aggressiveness has not been. M&A has been well below trend. Corporate balance sheets have been pretty stable.So, what I think is notable is you've had an economic backdrop that credit has really liked, as you correctly note. We've pushed spreads near 20-year tights based on that backdrop. But it's a backdrop that credit markets liked, but US voters did not like, and they voted for different policy.And so, when we look ahead – the range of outcomes, I think across both the macro and the micro, is expanding. And I think the policy uncertainty that markets now face is increasing both scenarios to the upside where things are hotter and you see more animal spirits; and risk to the downside, where potentially more aggressive tariffs or action on immigration creates more kind of stagflationary types of risk.So one element that we're facing is we feel like we're leaving behind a really good environment for corporate credit and we're entering something that's more uncertain. But then balancing that is that you're not going to transition immediately.You still have a lot of momentum in the US and European economy. I look at the forecasts from Seth's team, the global economic numbers, or at least kind of the DM economic numbers into the first half of next year – still look fine. We still have the Fed cutting. We still have the ECB cutting. We still have inflation moderating.So, part of our thinking for this year is it could be a little bit of a story of two halves that we titled our section, “On Borrowed Time.” That the credit is still likely to hold in well and perform better in the first half of the year. Yields are still good; the Fed is still cutting; the backdrop hasn't changed that much. And then it's the second half of the year where some of our economic numbers start to show more divergence, where the Fed is no longer cutting rates, where all in yield levels are lower on our interest rate forecasts, which could temper demand. That looks somewhat trickier.In terms of how we think about what we like within credit, we do think the levered loan market continues to be attractive. That's part of credit where spreads are not particularly tight versus history. That's one area where we still see risk premium. I think this is also an environment where regionally we see Asia underperforming. It's a market that's both very expensive from a spread perspective but also faces potentially kind of outsized economic and tariff uncertainty. And we think that the US might outperform in context to at least initially investors feeling like the US is at less relative risk from tariffs and policy uncertainty than some other markets.So, Vishy, I'll pause there and pass it back to you.Vishy Tirupattur: Thanks, Mike, Seth, and Andrew.Thank you all for listening. We are going to take a pause here and we'll be back tomorrow with our year ahead round table continued, where we'll share our forecast for government bonds, currencies and housing.As a reminder, 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.

In this episode, Dustin Reid, Chief Fixed Income Strategist, discusses the Fed's recent decision to cut interest rates by 25 basis points and its implications for both the US and Canadian markets. He highlights the Fed's forecast for core PCE inflation at 2.5% for 2025, which exceeds their 2% target, and discusses how the Fed is now factoring in the potential economic impacts of tariffs—a notable shift from their traditional approach. Dustin also examines significant global events, such as changes in government leadership and ongoing trade tensions, and their influence on market behavior. This episode was recorded on December 19, 2024.

Of all of the potential policy changes from the incoming U.S. presidential administration, deregulation could have the most significant impact on markets. Our Chief Fixed Income Strategist explains what's coming.----- Transcript -----Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist. Today I'll be discussing the policy changes that we have the highest conviction in terms of their market impact.It's Wednesday, December 18th at 10 a.m. in New York.As our regular readers are aware, Morgan Stanley strategists and economists around the globe came together to formulate our outlook for 2025 across the wide range of markets and economies we cover. A key aspect of this year's outlook is the potential for policy changes ahead from the incoming administration. The substance, severity, and sequencing of policies will matter and will have an important bearing on how markets perform over the course of 2025. We would put the potential range of policy changes into four broad categories: Tariffs and Trade Policy; Immigration Controls; Tax Cuts and Fiscal Policy; and finally, Deregulation. In terms of sequencing, our central case is for tariffs to go first and tax cuts to be last. As our public policy team sees it, the incoming administration will see fast announcements but a slow implementation of policy, especially in terms of tariffs and immigration. Slower implementation will mean that the changes will also be slow and the impacts on the economy and markets likely to be a lot more gradual.That said, it is in the area of deregulation that we expect to see the highest impact on markets, even though precise measurement of these impacts in terms of macroeconomic indicators such as growth and inflation is hard to come through. So with deregulation, we expect an environment in support of bank activity. As our bank equity analysts have noted, banks in their coverage area currently are sitting on record levels of excess capital: 177 billion of excess capital and a weighted average CET1 ratio of 12.8 percent, which is 140 basis points higher than pre-COVID levels of 11.4 percent.If Basel III Endgame is re proposed in a more capital neutral manner, we expect U.S. banks will begin deploying their excess capital into lending, supporting clients in trading and underwriting, increasing their securities purchases, as well as increasing buybacks and dividends. Changes to the existing Basel III Endgame proposal will also make U.S. banks more competitive globally.We also believe all global banks with significant capital markets businesses will benefit from the return of the M&A. Another by-product of Basel III Endgame being reproposed in a capital neutral way pertains to what banks do in their securities portfolios. In the last few years, in anticipation of higher capital requirements, U.S. banks have not been very active in deploying their capital in securities purchases, particularly Asian CMBS and CLO AAAs. With the deregulation focus, we expect that banks will revert to buying the assets that they have stayed away from, in particular, Asian CMBS and CLO AAAs.The return of bank demand for CLO AAAs will have a bearing on the underlying broadly syndicated loan market and even more broadly on credit formation and sponsor activity, which will be supportive of a stronger return of M&A than our credit strategists have been expecting. So in fixed income, if you pardon the pun, we are really banking on the impact of deregulation, which supports our view on the range of relative value opportunities and spread products, especially in securitized products.Thanks for listening. If you enjoyed the show, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague.

Featuring: Jill Disis, Bloomberg News Desk Editor Lawrence Gillum, Chief Fixed Income Strategist at LPL Financial Apple: https://podcasts.apple.com/us/podcast/bloomberg-daybreak-asia/id1663863437Spotify: https://open.spotify.com/show/0Ccfge70zthAgVfm0NVw1bTuneIn: https://tunein.com/podcasts/Asian-Talk/Bloomberg-Daybreak-Asia-Edition-p247557/?lang=es-esSee omnystudio.com/listener for privacy information.

Our Chief Fixed Income Strategist Vishy Tirupattur and Leveraged Finance Strategist Joyce Jiang discuss how the dynamic between private and public credit markets will evolve in 2025, and how each can find their own niches for success.----- Transcript -----Vishy Tirupattur: Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist. Today we'll be talking about how private credit has evolved over 2024 and the outlook for 2025. I'm joined by my colleague, Joyce Jiang, from our Leveraged Finance Strategy team.It's Tuesday, December 3rd at 10am in New York.A lot has happened over 2024 in private credit. We are credit people. Let's talk about defaults and returns. How has 2024 been thus far for private credit in terms of defaults and returns?Joyce Jiang: It's always tricky to talk about defaults in private credit because the reported measures tend to vary a lot depending on how defaults are defined and calculated. Using S&P's credit estimate defaults as a proxy for the overall private credit defaults, we see that defaults appear to have peaked, and the peak level was significantly lower than during the COVID cycle.Since then, defaults have declined and converged to levels seen in public loans. In this cycle, the elevated policy rates have clearly weighed on the credit fundamentals, but direct lenders and sponsors have worked proactively to help companies extending maturities and converting debt into PIK loans. Also, the high level of dry powder enabled both private credit and PE funds to provide liquidity support, keeping default rates relatively contained.From a returns perspective for credit investors, the appeal of private credit comes from the potential for higher and more stable returns, and also its role as a portfolio diversifier. Data from Lincoln International shows that over the past seven years, direct lending loans have outperformed single B public loans in total return terms by approximately 2.3 percentage point annually, largely driven by the better carry profile. And this year, although the spread premium has narrowed, private credit continues to generate higher returns.So, Vishy, credit spreads are close to historical tights. And the market conditions have clearly improved compared to last year. With that, the competition between the public and private credit has intensified. How do you see this dynamic playing out between these two markets?Vishy Tirupattur: The competition between public and private credit has indeed intensified, especially as the broadly syndicated market reopened with some vigor this year.While the public market has regained some share it lost to private credit, I think it is important to note that the activity has been, especially the financing activity, has been really more two-way. Improved market conditions have lured some of the borrowers back to the public markets from private credit markets due to cheaper funding costs.At the same time, borrowers with lower rating or complex capital structure seem to continue to favor private credit markets. So, there is really a lot of give and take between the two markets. Also, traditionally, private credit markets have played a major role in financing LBOs or leveraged buyouts. Its importance has really grown during the last Fed's hiking cycle when elevated policy rates and bouts of market turmoil weaken banks' risk appetite and tighten the public-funding access to many leveraged borrowers.Then, as the Fed's policy tightening ended, and uncertainty about the future direction of policy rates began to fade, deal activity rebounded in both markets, and more materially in public markets. This really led to a decline in the share of LBOs financed by private credit. Of course, the two markets tend to cater for deals of different sizes. Private credit is playing a bigger role in smaller size deals and a broadly syndicated loan market is relatively much more active in larger sized LBOs. So, overall, public credit is both a complement and competitor to private credit markets.Joyce Jiang: The decline in spread basis is evident in larger companies, but more recently, the spread basis have even compressed within smaller-sized deals, although they don't have the access to public credit. This is likely due to some private credit funds shifting their focuses to deals down in the site spectrum. So, the growing competition got spilled over to the lower middle-market segment as well. In addition to pricing conversions, we've also seen a gradual erosion in covenant quality in private credit deals. Some data sources noted that covenant packages have increasingly favored borrowers, a reflection of the heightened competition between these two markets.So Vishy, looking ahead, how do you see this competition between public and private credit evolving in 2025, and what implications might this have for returns?Vishy Tirupattur:, The competition, I think, will persist in [the ]next year. We have seen strong demand from hold to maturity investors, such as insurance companies and pension funds; and this demand, we think, will continue to sustain, so the appetite for private credit from these investors would be there.On the supply side, the deal volume has been light over the last couple of years. Next year, acquisition LBO activity, likely to pick up more materially given the solid macro backdrop, lower rates that we expect, and sponsor pressure to return capital to investors. So, in 2025, we could see greater specialization in terms of deal financing. Instead of competing directly for deals, public and private credit markets can find their own niches. For example, public credit might dominate larger deals, while private credit could further strengthen its competitive advantage within smaller size deals or with companies that value its unique advantages, such as the flexible terms and speed of execution.Regarding returns, while spread premium in private credit has indeed come down, a pickup in deal activity could to some extent be a release valve. But sustained competition may keep the spreads tight. Overall, private credit should continue to offer attractive returns, although with tighter margins compared to historical levels.Joyce, it was great speaking with you on today's podcast.Joyce Jiang: Thank you, Vishy, for having me.Vishy Tirupattur: Thank you all for listening. If you enjoy today's podcast, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

On the second part of a two-part roundtable, our panel gives its 2025 preview for the housing and mortgage landscape, the US Treasury yield curve and currency markets.----- Transcript -----Vishy Tirupattur: Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist. This is part two of our special roundtable discussion on what's ahead for the global economy and markets in 2025.Today we will cover what is ahead for government bonds, currencies, and housing. I'm joined by Matt Hornbach, our Chief Macro Strategist; James Lord, Global Head of Currency and Emerging Market Strategy; Jay Bacow, our co-head of Securitized Product Strategy; and Jim Egan, the other co-head of Securitized Product Strategy.It's Tuesday, November 19th, at 10am in New York.Matt, I'd like to go to you first. 2024 was a fascinating year for government bond yields globally. We started with a deeply inverted US yield curve at the beginning of the year, and we are ending the year with a much steeper curve – with much of that inversion gone. We have seen both meaningful sell offs and rallies over the course of the year as markets negotiated hard landing, soft landing, and no landing scenarios.With the election behind us and a significant change of policy ahead of us, how do you see the outlook for global government bond yields in 2025?Matt Hornbach: With the US election outcome known, global rate markets can march to the beat of its consequences. Central banks around the world continue to lower policy rates in our economist baseline projection, with much lower policy rates taking hold in their hard landing scenario versus higher rates in their scenarios for re-acceleration.This skew towards more dovish outcomes alongside the baseline for lower policy rates than captured in current market prices ultimately leads to lower government bond yields and steeper yield curves across most of the G10 through next year. Summarizing the regions, we expect treasury yields to move lower over the forecast horizon, helped by 75 [basis points] worth of Fed rate cuts, more than markets currently price.We forecast 10-year Treasury yields reaching 3 and 3.75 per cent by the middle of next year and ending the year just above 3.5 per cent.Our economists are forecasting a pause in the easing cycle in the second half of the year from the Fed. That would leave the Fed funds rate still above the median longer run dot.The rationale for the pause involves Fed uncertainty over the ultimate effects of tariffs and immigration reform on growth and inflation.We also see the treasury curve bull steepening throughout the forecast horizon with most of the steepening in the first half of the year, when most of the fall in yields occur.Finally, on break even inflation rates, we see five- and 10-year break evens tightening slightly by the middle of 2025 as inflation risks cool. However, as the Trump administration starts implementing tariffs, break evens widen in our forecast with the five- and 10-year maturities reaching 2.55 per cent and 2.4 per cent respectively by the end of next year.As such, we think real yields will lead the bulk of the decline in nominal yields in our forecasting with the 10-year real yield around 1.45 per cent by the middle of next year; and ending the year at 1.15 per cent.Vishy Tirupattur: That's very helpful, Matt. James, clearly the incoming administration has policy choices, and their sequencing and severity will have major implications for the strength of the dollar that has rallied substantially in the last few months. Against this backdrop, how do you assess 2025 to be? What differences do you expect to see between DM and EM currency markets?James Lord: The incoming administration's proposed policies could have far-reaching impacts on currency markets, some of which are already being reflected in the price of the dollar today. We had argued ahead of the election that a Republican sweep was probably the most bullish dollar outcome, and we are now seeing that being reflected.We do think the dollar rally continues for a little bit longer as markets price in a higher likelihood of tariffs being implemented against trading partners and there being a risk of additional deficit expansion in 2025. However, we don't really see that dollar strength persisting for long throughout 2025.So, I think that is – compared to the current debate, compared to the current market pricing – a negative dollar catalyst that should get priced into markets.And to your question, Vishy, that there will be differences with EM and also within EM as well. Probably the most notable one is the renminbi. We have the renminbi as the weakest currency within all of our forecasts for 2025, really reflecting the impact of tariffs.We expect tariffs against China to be more consequential than against other countries, thus requiring a bigger adjustment on the FX side. We see dollar China, or dollar renminbi ending next year at 7.6. So that represents a very sharp divergence versus dollar yen and the broader DXY moves – and is a consequence of tariffs.And that does imply that the Fed's broad dollar index only has a pretty modest decline next year, despite the bigger move in the DXY. The rest of Asia will likely follow dollar China more closely than dollar yen, in our view, causing AXJ currencies to generally underperform; versus CMEA and Latin America, which on the whole do a bit better.Vishy Tirupattur: Jay, in contrast to corporate credit, mortgage spreads are at or about their long-term average levels. How do you expect 2025 to pan out for mortgages? What are the key drivers of your expectations, and which potential policy changes you are most focused on?Jay Bacow: As you point out, mortgage spreads do look wide to corporate spreads, but there are good reasons for that. We all know that the Fed is reducing their holdings of mortgages, and they're the largest holder of mortgages in the world.We don't expect Fed balance sheet reduction of mortgages to change, even if they do NQT, as is our forecast in the first quarter of 2025. When they NQT, we expect mortgage runoff to continue to go into treasuries. What we do expect to change next year is that bank demand function will shift. We are working under the assumption that the Basel III endgame either stalls under the next administration or gets released in a way that is capital neutral. And that's going to free up excess capital for banks and reduce regulatory uncertainty for them in how they deploy the cash in their portfolios.The one thing that we've been waiting for is this clarity around regulations. When that changes, we think that's going to be a positive, but it's not just banks returning to the market.We think that there's going to be tailwinds from overseas investors that are going to be hedging out their FX risks as the Fed cuts rates, and the Bank of Japan hikes, so we expect more demand from Japanese life insurance companies.A steeper yield curve is going to be good for REIT demand. And these buyers, banks, overseas REITs, they typically buy CUSIPs, and that's going to help not just from a demand side, but it's going to help funding on mortgages improve as well. And all of those things are going to take mortgage spreads tighter, and that's why we are bullish.I also want to mention agency CMBS for a moment. The technical pressure there is even better than in single family mortgages. The supply story is still constrained, but there is no Fed QT in multifamily. And then also the capital that's going to be available for banks from the deregulation will allow them – in combination with the portfolio layer hedging – to add agency CMBS in a way that they haven't really been adding in the last few years. So that could take spreads tighter as well.Now, Vishy, you also mentioned policy changes. We think discussions around GSE reform are likely to become more prevalent under the new administration.And we think that given that improved capitalization, depending on the path of their earnings and any plans to raise capital, we could see an attempt to exit conservatorship during this administration.But we will simply state our view that any plan that results in a meaningful change to the capital treatment – or credit risk – to the investors of conventional mortgages is going to be too destabilizing for the housing finance markets to implement. And so, we don't think that path could go forward.Vishy Tirupattur: Thanks, Jay. Jim, it was a challenging year for the housing market with historically high levels of unaffordability and continued headwinds of limited supply. How do you see 2025 to be for the US housing market? And going beyond housing, what is your outlook for the opportunity set in securitized credit for 2025?James Egan: For the housing market, the 2025 narrative is going to be one about absolute level versus the direction and rate of change. For instance, Vishy, you mentioned affordability. Mortgage rates have increased significantly since the beginning of September, but it's also true that they're down roughly a hundred basis points from the fourth quarter of 2023 and we're forecasting pretty healthy decreases in the 10-year Treasury throughout 2025. So, we expect affordability to improve over the coming year. Supply? It remains near historic lows, but it's been increasing year to date.So similar to the affordability narrative, it's more challenged than it's been in decades; but it's also less challenged than it was a year ago.So, what does all this mean for the housing market as we look through 2025? Despite the improvements in affordability, sales volumes have been pretty stagnant this year. Total volumes – so existing plus new volumes – are actually down about 3 per cent year to date. And look, that isn't unusual. It typically takes about a year for sales volumes to pick up when you see this kind of significant affordability improvement that we've witnessed over the past year, even with the recent backup in mortgage rates.And that means we think we're kind of entering that sweet spot for increased sales now. We've seen purchase applications turn positive year over year. We've seen pending home sales turn positive year over year. That's the first time both of those things have happened since 2021. But when we think about how much sales 2025, we think it's going to be a little bit more curtailed. There are a whole host of reasons for that – but one of them the lock in effect has been a very popular talking point in the housing market this year. If we look at just the difference between the effective mortgage rate on the outstanding universe and where you can take out a mortgage rate today, the universe is still over 200 basis points out of the money.To the upside, you're not going to get 10 per cent growth there, but you're going to get more than 5 per cent growth in new home sales. And what I really want to emphasize here is – yes, mortgage rates have increased recently. We expect them to come down in 2025; but even if they don't, we don't think there's a lot of room for downside to existing home sales from here.There's some level of housing activity that has to happen, regardless of where mortgage rates or affordability are. We think we're there. Turnover measured as the number of transactions – existing transactions – as a share of the outstanding housing market is lower now than it was during the great financial crisis. It's as low as it's been in a little bit over 40 years. We just don't think it can fall that much further from here.But as we go through 2025, we do think it dips negative. We have a negative 2 per cent HPA call next year, not significantly down. We don't think there's a lot of room to the downside given the healthy foundation, the low supply, the strong credit standards in the housing market. But there is a little bit of negativity next year before home prices reaccelerate.This leaves us generically constructive on securitized products across the board. Given how much of the capital structure has flattened this year, we think CLO AAAs actually offer the best value amongst the debt tranches there. We think non-QM triple AAAs and agency MBS is going to tighten. They look cheap to IG corporates. Consumer ABS, we also think still looks pretty cheap to IG corporates. Even in the CMBS pace, we think there's opportunities. CMBS has really outperformed this year as rates have come down. Now our bull bear spread differentials are much wider in CMBS than they are elsewhere, but in our base case, conduit BBB minuses still offer attractive value.That being said, if we're going to go down the capital structure, our favorite expression in the securitized credit space is US CLO equity.Vishy Tirupattur: Thank you, Jay and Jim, and also Matt and James.We'll close it out here. As a reminder, if you enjoyed the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

On the first part of a two-part roundtable, our panel discusses why the US is likely to see a slowdown and where investors can look for growth.----- Transcript -----Vishy Tirupattur: Welcome to Thoughts on the Market. I'm Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist. Today in the podcast, we are hosting a special roundtable discussion on what's ahead for the global economy and markets in 2025.I'm joined by my colleagues: Seth Carpenter, Global Chief Economist; Mike Wilson, Chief US Equity Strategist and the firm's Chief Investment Officer; and Andrew Sheets, Global Head of [Corporate] Credit Research.It's Monday, November 18th, at 10am in New York.Gentlemen. Thank you all for taking the time to talk. We have a lot to cover, and so I'm going to go right into it.Seth, I want to start with the global economy. As you look ahead to 2025, how do you see the global economy evolving in terms of growth, inflation and monetary policy?Seth Carpenter: I have to say – it's always difficult to do forecasts. But I think right now the uncertainty is even greater than usual. It's pretty tricky. I think if you do it at a global level, we're not actually looking for all that much of a change, you know, around 3-ish percent growth; but the composition is surely going to change some.So, let's hit the big economies around the world. For the US, we are looking for a bit of a slowdown. Now, some of that was unsustainable growth this year and last year. There's a bit of waning residual impetus from fiscal policy that's going to come off in growth rate terms. Monetary policy is still restrictive, and there's some lag effects there; so even though the Fed is cutting rates, there's still going to be a little bit of a slowdown coming next year from that.But I think the really big question, and you alluded to this in your question, is what about other policy changes here? For fiscal policy, we think that's really an issue for 2026. That's when the Tax Cut and Jobs Act (TCJA) tax cuts expire, and so we think there's going to be a fix for that; but that's going to take most of 2025 to address legislatively. And so, the fiscal impetus really is a question for 2026.But immigration, tariffs; those matter a lot. And here the question really is, do things get front loaded? Is it everything all at once right at the beginning? Is it phased in over time a bit like it was over 2018? I think our baseline assumption is that there will be tariffs; there will be an increase in tariffs, especially on China. But they will get phased in over the course of 2025. And so, as a result, the first thing you see is some increase in inflation and it will build over time as the tariffs build. The slowdown from growth, though, gets backloaded to the end of 2025 and then really spills over into to 2026.Now, Europe is still in a situation where they've got some sluggish growth. We think things stabilize. We get, you know, 1 percent growth or so. So not a further deterioration there; but not a huge increase that would make you super excited. The ECB should probably keep cutting interest rates. And we actually think there's a really good chance that inflation in the euro area goes below their target. And so, as a result, what do we see? Well, the ECB cutting down below their best guess of neutral. They think 2 percent nominal is neutral and they go below that.China is another big curveball here for the forecast because they've been in this debt deflation spiral for a while. We don't think the pivot in fiscal policy is anywhere near sufficient to ward things off. And so, we could actually see a further slowing down of growth in China in 2025 as the policy makers do this reactive kind of policy response. And so, it's going to take a while there, and we think there's a downside risk there.On the upside. I mean, we're still bullish on Japan. We're still very bullish on India and its growth; and across other parts of EM, there's some bright spots. So, it's a real mixed bag. I don't think there's a single trend across the globe that's going to drive the overall growth narrative.Vishy Tirupattur: Thank you, Seth. Mike, I'd like to go to you next. 2024 has turned out to be a strong year for equity markets globally, particularly for US and Japanese equities. While we did see modest earnings growth, equity returns were mostly about multiple expansion. How do you expect 2025 to turn out for the global equity markets? What are the key challenges and opportunities ahead for the equity markets that you see?Mike Wilson: Yeah, this year was interesting because we had what I would say was very modest earnings growth in the US in particular; relative to the performance. It was really all multiple expansion, and that's probably not going to repeat this year. We're looking for better earnings growth given our soft landing outcome from an economic standpoint and rates coming down. But we don't think multiples will expand any further. In fact, we think they'll come down by about 5 percent. But that still gets us a decent return in the base case of sort of high single digits.You know, Japan is the second market we like relative to the rest of the world because of the corporate governance story. So there, too, we're looking for high single digit earnings growth and high single digits or 10 percent return in total. And Europe is when we're sort of down taking a bit because of tariff risk and also pressure from China, where they have a lot of export business.You know, the challenges I think going forward is that growth continues to be below trend in many regions. The second challenge is that, you know, high quality assets are expensive everywhere. It's not just the US. It's sort of everywhere in the world. So, you get what you pay for. You know, the S&P is extremely expensive, but that's because the ROE is higher, and growth is higher.So, you know, in other words, these are not well-kept secrets. And so just valuation is a real challenge. And then, of course, the consensus views are generally fairly narrow around the soft landing and that's very priced as well. So, the risks are that the consensus view doesn't play out. And that's why we have two bull and two bear cases in the US – just like we did in the mid-year outlook; and in fact, what happened is one of our bull cases is what played out in the second half of this year.So, the real opportunity from our standpoint, I think this is a global call as well – which is that we continue to be pretty big rotations around the macro-outlook, which remains uncertain, given the policy changes we're seeing in the US potentially, and also the geopolitical risks that still is out there.And then the other big opportunity has been stock picking. Dispersion is extremely high. Clients are really being rewarded for taking single stock exposures. And I think that continues into next year. So, we're going to do what we did this year is we're going to try to rotate around from a style and size perspective, depending on the macro-outlook. Vishy Tirupattur: Thank you, Mike. Andrew, we are ending 2024 in a reasonably good setup for credit markets, with spreads at or near multi-decade tights for many markets. How do you expect the global credit markets to play out in 2025? What are the best places to be within the credit spectrum and across different regions?Andrew Sheets: I think that's the best way to frame it – to start a little bit about where we are and then talk about where we might be going. I think it's safe to say that this has been an absolutely phenomenal backdrop for corporate credit. Corporate credit likes moderation. And I think you've seen an unusual amount of moderation at both the macro and the micro level.You've seen kind of moderate growth, moderating inflation, moderating policy rates across DM. And then at the micro level, even though markets have been very strong, corporate aggressiveness has not been. M&A has been well below trend. Corporate balance sheets have been pretty stable.So, what I think is notable is you've had an economic backdrop that credit has really liked, as you correctly note. We've pushed spreads near 20-year tights based on that backdrop. But it's a backdrop that credit markets liked, but US voters did not like, and they voted for different policy.And so, when we look ahead – the range of outcomes, I think across both the macro and the micro, is expanding. And I think the policy uncertainty that markets now face is increasing both scenarios to the upside where things are hotter and you see more animal spirits; and risk to the downside, where potentially more aggressive tariffs or action on immigration creates more kind of stagflationary types of risk.So one element that we're facing is we feel like we're leaving behind a really good environment for corporate credit and we're entering something that's more uncertain. But then balancing that is that you're not going to transition immediately.You still have a lot of momentum in the US and European economy. I look at the forecasts from Seth's team, the global economic numbers, or at least kind of the DM economic numbers into the first half of next year – still look fine. We still have the Fed cutting. We still have the ECB cutting. We still have inflation moderating.So, part of our thinking for this year is it could be a little bit of a story of two halves that we titled our section, “On Borrowed Time.” That the credit is still likely to hold in well and perform better in the first half of the year. Yields are still good; the Fed is still cutting; the backdrop hasn't changed that much. And then it's the second half of the year where some of our economic numbers start to show more divergence, where the Fed is no longer cutting rates, where all in yield levels are lower on our interest rate forecasts, which could temper demand. That looks somewhat trickier.In terms of how we think about what we like within credit, we do think the levered loan market continues to be attractive. That's part of credit where spreads are not particularly tight versus history. That's one area where we still see risk premium. I think this is also an environment where regionally we see Asia underperforming. It's a market that's both very expensive from a spread perspective but also faces potentially kind of outsized economic and tariff uncertainty. And we think that the US might outperform in context to at least initially investors feeling like the US is at less relative risk from tariffs and policy uncertainty than some other markets.So, Vishy, I'll pause there and pass it back to you.Vishy Tirupattur: Thanks, Mike, Seth, and Andrew.Thank you all for listening. We are going to take a pause here and we'll be back tomorrow with our year ahead round table continued, where we'll share our forecast for government bonds, currencies and housing.As a reminder, 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.

In the latest LPL Market Signals podcast, LPL Research's Chief Equity Strategist, Jeffrey Buchbinder, is joined by Chief Fixed Income Strategist, Lawrence Gillum, as they recap last week's stock market decline, share some perspective on the latest bond market selloff, and highlight some things that may be different with Trump's trade policy this time around. Stocks fell last week, led down by healthcare and small caps. Markets were held back by rising rates after Federal Reserve Chair Powell indicated the Fed was in no hurry to raise rates, while the prospects for RFK Jr. as President-elect Trump's Healthcare Secretary rattled vaccine makers. Since the September 16 low, the 10-year Treasury yield is higher by over 0.80%. The bulk of the move higher is due to better economic data that has pushed out the need for aggressive rate cuts from the Fed. The strategists believe markets are better aligned with likely Fed cuts so, the bulk of the move higher in bond yields could be behind us. The strategists then put Trump's tariffs into perspective by looking back at how much of the so-called “tax” was paid by consumers and how much was absorbed by producers and international manufacturers. Tracking: #659651

In this week's episode, Liz Ann Sonders, Schwab's Chief Investment Strategist, and Kathy Jones, Schwab's Chief Fixed Income Strategist, discuss the immediate market reactions following the recent election, focusing on the equity and bond markets. They explore the implications of potential fiscal policies, the Federal Reserve's upcoming decisions, and the importance of cautious investment strategies in light of uncertainty. The discussion also highlights the significance of economic indicators and the potential for market volatility in the near future. On Investing is an original podcast from Charles Schwab. For more on the show, visit schwab.com/OnInvesting.If you enjoy the show, please leave a rating or review on Apple Podcasts. Important DisclosuresThe information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed. Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve. All names and market data shown above are for illustrative purposes only and are not a recommendation, offer to sell, or a solicitation of an offer to buy any security. Investing involves risk, including loss of principal. Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors.International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks.Currencies are speculative, very volatile and are not suitable for all investors.Schwab does not recommend the use of technical analysis as a sole means of investment research.Diversification and asset allocation strategies do not ensure a profit and cannot protect against losses in a declining market.Commodity-related products carry a high level of risk and are not suitable for all investors. Commodity-related products may be extremely volatile, may be illiquid, and can be significantly affected by underlying commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions.Performance may be affected by risks associated with non-diversification, including investments in specific countries or sectors. Additional risks may also include, but are not limited to, investments in foreign securities, especially emerging markets, real estate investment trusts (REITs), fixed income, municipal securities including state specific municipal securities, small capitalization securities and commodities. Each individual investor should consider these risks carefully before investing in a particular security or strategy.Treasury Inflation Protected Securities (TIPS) are inflation-linked securities issued by the US Government whose principal value is adjusted periodically in accordance with the rise and fall in the inflation rate. Thus, the dividend amount payable is also impacted by variations in the inflation rate, as it is based upon the principal value of the bond. It may fluctuate up or down. Repayment at maturity is guaranteed by the US Government and may be adjusted for inflation to become the greater of the original face amount at issuance or that face amount plus an adjustment for inflation. Treasury Inflation-Protected Securities are guaranteed by the US Government, but inflation-protected bond funds do not provide such a guarantee.The information and content provided herein is general in nature and is for informational purposes only. It is not intended, and should not be construed, as a specific recommendation, individualized tax, legal, or investment advice. Tax laws are subject to change, either prospectively or retroactively. Where specific advice is necessary or appropriate, individuals should contact their own professional tax and investment advisors or other professionals (CPA, Financial Planner, Investment Manager) to help answer questions about specific situations or needs prior to taking any action based upon this information.Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly. For more information on indexes, please see schwab.com/indexdefinitions.The policy analysis provided by the Charles Schwab & Co., Inc., does not constitute and should not be interpreted as an endorsement of any political party.Forecasts contained herein are for illustrative purposes only, may be based upon proprietary research and are developed through analysis of historical public data.(1124-48LR)

In this episode, Dustin Reid, Chief Fixed Income Strategist provides a comprehensive analysis of the potential economic and market impacts of President-elect Trump's return to the White House. Dustin explores the implications of Trump's proposed economic policies on supply chains, inflation, and the global economy, and expected focus on immigration and deregulation. Dustin also discusses the Fed's recent rate cut, future monetary policy, and the challenges ahead. This episode was recorded on November 8, 2024.

On the eve of a competitive US election, our CIO and Chief US Equity Strategist joins our head of Corporate Credit Research and Chief Fixed Income Strategist to asses how investors are preparing for each possible outcome of the race.----- Transcript -----Mike Wilson: Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley's CIO and Chief US Equity Strategist.Andrew Sheets: I'm Andrew Sheets, head of Corporate Credit Research at Morgan Stanley.Vishy Tirupattur: And I'm Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist.Mike Wilson: Today on the show, the day before the US election, we're going to do a conversation with my colleagues about what we're watching out for in the markets.It's Monday, November 4th, at 1130am in New York.So let's get after it.Andrew Sheets: Well, Mike, like you said, it's the day before the US election. The campaign is going down to the wire and the polling looks very close. Which means both it could be a while before we know the results and a lot of different potential outcomes are still in play. So it would be great to just start with a high-level overview of how you're thinking about the different outcomes.So, first Mike, to you, as you think across some of the broad different scenarios that we could see post election, what do you think are some of the most important takeaways for how markets might react?Mike Wilson: Yeah, thanks, Andrew. I mean, it's hard to, you know, consider oneself as an expert in these types of events, which are extremely hard to predict. And there's a lot of permutations, by the way. There's obviously the presidential election, but then of course there's congressional elections. And it's the combination of all those that then feed into policy, which could be immediate or longer lasting.So, the other thing to just keep in mind is that, you know, markets tend to pre-trade events like this. I mean, this is a known date, right? A known kind of event. It's not a surprise. And the outcome is a surprise. So people are making investments based on how they think the outcome is going to come. So that's the way we think about it now.Clearly, you know, treasury markets have sold off. Some of that's better economic data, as our strategists in fixed income have told us. But I think it's also this view that, you know, Trump presidency, particularly Republican sweep, may lead to more spending or bigger budget deficits. And so, term premium has widened out a bit, so that's been an area; here I think you could get some reversion if Harris were to win.And that has impact on the equity markets -- whether that's some maybe small cap stocks or financials; some of the, you know, names that are levered to industrial spending that they want to do from a traditional energy standpoint.And then, of course, on the negative side, you know, a lot of consumer-oriented stocks have suffered because of fears about tariffs increasing along with renewables. Because of the view that, you know, the IRA would be pared back or even repealed.And I think there's still follow through particularly in financials. So, if Trump were to win, with a Republican Congress, I think, you know, financials could see some follow through. I think you could see some more strength in small caps because of perhaps animal spirits increasing a little further; a bit of a blow off move, perhaps, in the indices.And then, of course, if Harris wins, I would expect, perhaps, bonds to rally. I think you might see some of these, you know, micro trades like in financials give back some along with small caps. And then you'd see a big rally in the renewables. And some of the tariff losers that have suffered recently. So, there's a lot, there's a lot of opportunity, depending on the outcome tomorrow.Andrew Sheets: And Vishy, as you think about these outcomes for fixed income, what really stands out to you?Vishy Tirupattur: I think what is important, Andrew, is really to think about what's happening today in the macro context, related to what was happening in 2016. So, if you look at 2016; and people are too quick to turn to the 2016 playbook and look at, you know, what a potential Trump, win would mean to the rates markets.I think we should keep in mind that going into the polls in 2016, the market was expecting a 30 basis points of rate hikes over the next 12 months. And that rate hike expectation transitioned into something like a 125 place basis points over the following 12 months. And where we are today is very different.We are looking at a[n] expectation of a 130-135 basis points of rate cuts over the next 12 months. So what that means to me is underlying macroeconomic conditions in where the economy is, where monetary policy is very, very different. So, we should not expect the same reaction in the markets, whether it's a micro or macro -- similar to what happened in 2016.So that's the first point. The second thing I want to; I'm really focused on is – if it is a Harris win, it's more of a policy continuity. And if it's a Trump win, there is going to be significant policy changes. But in thinking about those policy changes, you know, before we leap into deficit expansion, et cetera, we need to think in terms of the sequencing of the policy and what is really doable.You know, we're thinking three buckets. I think in terms of changes to immigration policy, changes to tariff policy, and changes to tax code. Of these things, the thing that requires no congressional approval is the changes to tariff policy, and the tariffs are probably are going to be much more front loaded compared to immigration. Or certainly the tax policy [is] going to take a quite a bit of time for it to work out – even under the Republican sweep scenario.So, the sequencing of even the tariff policy, the effect of the tariffs really depends upon the sequencing of tariffs itself. Do we get to the 60 per cent China tariffs off the bat? Or will that be built over time? Are we looking at across the board, 10 per cent tariffs? Or are we looking at it in much more sequential terms? So, I would be careful not to jump into any knee-jerk reaction to any outcome.Andrew Sheets: So, Mike, the next question I wanted to ask you is – you've been obviously having a lot of conversations with investors around this topic. And so, is there a piece of kind of conventional wisdom around the election or how markets will react to the election that you find yourself disagreeing with the most?Mike Wilson: Well, I don't think there's any standard reaction function because, as Vishy said -- depending on when the election's occurring, it's a very different setup. And I will go back to what he was saying on 2016. I remember in 2016, thinking after Trump won, which was a surprise to the markets, that was a reflationary trade that we were very bullish on because there was so much slack in the economy.We had borrowing capabilities and we hadn't done any tax cuts yet. So, there was just; there was a lot of running room to kind of push that envelope.If we start pushing the envelope further on spending or reflationary type policies, all of a sudden the Fed probably can't cut. And that changes the dynamics in the bond market. It changes the dynamics in the stock market from a valuation standpoint, for sure. We've really priced in this like, kind of glide path now on, on Fed policy, which will be kind of turned upside down if we try to reflate things.Andrew Sheets: So Vishy, that's a great point because, you know, I imagine something that investors do ask a lot about towards the bond market is, you know, we see these yields rising. Are they rising for kind of good reasons because the economy is better? Are they rising for less good reasons, maybe because inflation's higher or the deficit's widening too much? How do you think about that issue of the rise in bond yields? At what point is it rising for kind of less healthy reasons?Vishy Tirupattur: So Andrew, if you look back to the last 30 days or so, the reaction the Treasury yields is mostly on account of stronger data. Not to say that the expectation changes about the presidential election outcomes haven't played a role. They have. But we've had really strong data. You know, we can ignore the data from last Friday – because the employment data that we got last Friday was affected by hurricanes and strikes, etc. But take that out of the picture. The data has been very strong. So, it's really a reflection of both of them. But we think stronger data have played a bigger role in yield rise than electoral outcome expectation changes.Andrew Sheets: Mike, maybe to take that question and throw it back to you, as you think about this issue of the rise in yields – and at what point they're a problem for the equity market. How are you thinking about that?Mike Wilson: Well, I think there's two ways to think about it. Number one, if it really is about the data getting better, then all of a sudden, you know, maybe the multiple expansion we've seen is right. And that, it's sort of foretelling of an earnings growth picture next year that's, you know, much faster than what, the consensus is modeling.However, I'd push back on that because the consensus already is modeling a pretty good growth trajectory of about 12 per cent earnings growth. And that's, you know, quite healthy. I think, you know, it's probably more mixed. I mean, the term premium has gone up by 50 basis points, so some of this is about fiscal sustainability – no matter who wins, by the way. I wouldn't say either party has done a very good stewardship of, you know, monitoring the fiscal deficits; and I think some of it is definitely part of that. And then, look, I mean, this is what happened last year where, you know, we get financial conditions loosened up so much that inflation comes back. And then the Fed can't cut.So to me, you know, we're right there and we've written about this extensively. We're right around the 200-day moving average for 10-year yields. The term premium now is up about 50 basis points. There's not a lot of wiggle room now. Stock market did trade poorly last week as we went through those levels. So, I think if rates go up another 10 or 20 basis points post the election, no matter who wins and it's driven at least half by term premium, I think the equity market's not gonna like that.If rates kind of stay right around in here and we see term premium stabilize, or even come down because people get more excited about growth -- well then, we can probably rally a bit. So it's much a reason of why rates are going up as much as how much they're going up for the impact on equity multiples.Vishy Tirupattur: Andrew, how are you thinking about credit markets against this background?Andrew Sheets: Yeah, so I think a few things are important for credit. So first is I do think credit is a[n] asset class that likes moderation. And so, I think outcomes that are likely to deliver much larger changes in economic, domestic, foreign policy are worse for credit. I mean, I think that the current status quo is quite helpful to credit given we're trading at some of the tightest spreads in the last 20 years. So, I think the less that changes around that for the macro backdrop for credit, the better.I think secondly, you know, if I -- and Mike correct me, if you think I'm phrasing this wrong. But I think kind of some of the upside case that people make, that investors make for equities in the Republican sweep scenario is some version of kind of an animal spirits case; that you'll see lower taxes, less regulation, more corporate risk taking higher corporate confidence. That might be good for the equity market, but usually greater animal spirits are not good for the credit market. That higher level of risk taking is often not as good for the lenders. So, there are scenarios that you could get outcomes that might be, you know, positive for equities that would not be positive for credit.And then I think conversely, in say the event of a democratic sweep or in the scenarios where Harris wins, I do think the market would probably see those as potentially, you know, the lower vol events – as they're probably most similar to the status quo. And again, I think that vol suppression that might be helpful to credit; that might be helpful for things like mortgages that credit is compared to. And so, I think that's also kind of important for how we're thinking about it.To both Mike and Vishy, to round out the episode, as we mentioned, the race is close. We might not know the outcome immediately. As you're going to be looking at the news and the markets over Tuesday evening, into Wednesday morning. What's your process? How closely do you follow the events? What are you going to be focused on and what are kind of the pitfalls that you're trying to avoid?Maybe Vishy, I'll start with you.Vishy Tirupattur: I think the first thing I'd like to avoid is – do not make any market conclusions based on the first initial set of data. This is going to be a somewhat drawn out; maybe not as drawn out as last time around in 2020. But it is probably unlikely, but we will know the outcome on Tuesday night as we did in 2016.So, hurry up and wait as my colleague, Michael Zezas puts it.Mike Wilson: And I'm going to take the view, which I think most clients have taken over the last, you know, really several months, which is -- price is your best analyst, sadly. And I think a lot of people are going to do the same thing, right? So, we're all going to watch price to see kind of, ‘Okay, well, how was the market adjusting to the results that we know and to the results that we don't know?'Because that's how you trade it, right? I mean, if you get big price swings in certain things that look like they're out of bounds because of positioning, you gotta take advantage of that. And vice versa. If you think that the price movement is kind of correct with it, there's probably maybe more momentum if in fact, the market's getting it right.So this is what makes this so tricky – is that, you know, markets move not just based on the outcome of events or earnings or whatever it might be; but how positioning is. And so, the first two or three days – you know, it's a clearing event. You know, volatility is probably going to come down as we learn the results, no matter who wins. And then you're going to have to figure out, okay, where are things priced correctly? And where are things priced incorrectly? And then I can look at my analysis as to what I actually want to own, as opposed to tradeAndrew Sheets: That's great. And if I could just maybe add one, one thing for my side, you know, Mike – which you mentioned about volatility coming down. I do think that makes a lot of sense. That's something, you know, we're going to be watching on the credit side. If that does not happen, kind of as expected, that would be notable. And I also think what you mentioned about that interplay between, you know, higher yields and higher equities on some sort of initial move – especially if it was, a Republican sweep scenario where I think kind of the consensus view is that might be a 'stocks up yields up' type of type of environment. I think that will be very interesting to watch in terms of do we start to see a different interaction between stocks and yields as we break through some key levels. And I think for the credit market that interaction could certainly matter.It's great to catch up. Hopefully we'll know a lot more about how this all turned out pretty soon.Vishy Tirupattur: It's great chatting with both of you, Mike and Andrew.Mike Wilson: Thanks for listening. If you enjoy the show, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

As the U.S. presidential race continues to be neck and neck according to opinion polls, our Chief Fixed Income Strategist considers the possible market implications if some policies proposed during this campaign are implemented.----- 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 understanding market dynamics against the backdrop of U.S. elections. It's Monday, Oct 28th at 1 pm in New York.The outcome of the U.S. elections, now just over a week away, has been at the center of every discussion I have had in the last several days. There have been significant moves, not so much in the opinion polls – but in prediction markets. In the opinion polls, the presidential race remains tight and neck-to-neck in key swing states with poll numbers well within the margin of error. But some prediction markets have shifted meaningfully toward Republicans in the contests for both the presidency and control of Congress. Financial markets have also moved a lot. Stocks exposed to a Republican win outcome have risen a fair bit. To understand the potential policy changes that can have an impact on markets, I think it is crucial to understand the sequencing of those policy changes. Given the moves in the prediction markets, let us first frame a Trump win scenario. It seems reasonable to bucket the possible shifts into three categories – fiscal policy, immigration controls, and tariffs. Meaningful changes in fiscal policy require control of both houses of Congress; and even in a Republican sweep, scenario legislation would still be time-consuming and likely come last. We don't really have many details on how changes to immigration policy would be implemented and so their timing remains very unclear. On the other hand, given broad presidential discretion on trade policy, Trump's expressed intentions in his campaign messaging, and the precedent of his first term, tariff changes would likely come first.Our economists have looked at the potential impact of tariffs on the economy. They concluded that broad tariffs imply downside risks to growth through declines in consumption, investment spending, payrolls, and labor income, and upside risks to inflation. Their estimates suggest that imposing all the tariffs currently under discussion could result in a delayed drag of -1.4 per cent on real GDP growth and a more rapid boost of 0.9 per cent to inflation. How do we reconcile the equity market's reaction to the increasing odds of a Trump win in some prediction markets with the idea that there will be a drag on GDP growth and boost to inflation that our economists assess? Two explanations. Markets could be counting on the prospect that all tariffs would not be imposed. Or at least would be sequenced over an extended period, with some coming much later than others. Also, markets could be putting greater emphasis on the revival of “animal spirits” driven by expectations of regulatory easing, which is hard to define or quantify.Let us look at other markets. In the bond markets, treasury yields have risen notably in the last month. Many investors see the Republican sweep outcome as most bearish for US Treasuries, based on the experience of the 2016 election. As Matt Hornbach, our global head of macro strategy has noted, there are meaningful differences between the Fed's monetary policy today and the pre-election period in 2016, suggesting that any rise in Treasury yields would be more contained this time, even in a Republican sweep outcome. In 2016, markets were pricing in about 30 basis points of rate hikes over the next 12 months. Contrast that to the current market expectation of about 135 basis points in rate cuts over the next 12 months. Also, in the year after the 2016 election, expectations for the Fed Funds Rate rose nearly 125 basis points. A similar rise in expectations for Fed policy now would require market participants to expect the Fed to stop cutting immediately; and refrain from further cuts through 2025. This seems like a remote possibility – even under a Republican sweep elections scenario. Given the recent moves across markets and the expectations they are pricing in, markets may now be somewhat offside should Harris win, as they would have to reverse the course. Elections are a known unknown. Based on opinion polls, this race remains extremely tight, and multiple combinations of presidential and congressional outcomes are very much in play. We must also contend with the prospect that determining the outcome may take much longer this time.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.

In this episode, Dustin Reid, Chief Fixed Income Strategist, discusses the Bank of Canada's decision to lower interest rates by 50 basis points and what investors may expect in the coming months. In China, recent stimulus measures have sparked both optimism and skepticism in the markets. Dustin provides his insights and the potential impacts on the global economy. Lastly, Dustin provides an update on the state of the US economy and explores how evolving dynamics in polling and betting markets ahead of the US election may influence market behaviour and various asset classes. This episode was recorded on October 23, 2024.

Credit likes moderation, and the Fed's rate cut indicates its belief that the economy is heading for a soft landing. Our Chief Fixed Income Strategist warns that markets still need to keep an eye on incoming data.----- 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 implications of the Fed's 50 basis points interest rate cut for corporate credit markets. It's Friday, Sep 27th at 10 am in New York. For credit markets, understanding why the Fed is cutting is actually very critical. Unlike typical rate cutting cycles, these cuts are coming when the economic growth is still decelerating but not falling off the cliff. Typically, rate cuts have come in when the economy is already in a recession or approaching recession. Neither is the case this time. So the US expanded by 3 per cent in the second quarter; and the third quarter, it is tracking well over 2 per cent. So, these cuts do not aim to stimulate the economy but really to acknowledge that there's been significant progress on inflation, and move the policy towards a much more normalized policy stance. In some way, this really reflects the Fed's confidence in the inflation path. So that means, not cutting now would mean restraining the economy further through high real interest rates. So, this cut really reflects a growing faith by the Fed in achieving a soft landing. Also, the size of the cut, the 50 basis point cut as opposed to 25 basis points, shows the Fed's willingness to go big in response to weaker data, especially in labor markets. So since the beginning of the year, we have been pretty constructive on spread products across the board, particularly corporate credit and securitized credit, even though valuations have been tightening. Our stance is based on the idea that credit fundamentals will stay reasonably healthy even if economic growth decelerates, as long as it doesn't fall off the cliff. Further, we also believe that credit fundamentals will improve with rate cuts because stress in this cycle has mainly come from higher interest expenses weighing on both corporations and households. This is in stark contrast to other recent periods of stress in credit markets – such as 2008/09 when we had the financial crisis, 2015/16 we had the challenges in the energy sector and then 2020, of course, we faced COVID. So the best point of illustrating this would be through leveraged loans, which are floating-rate instruments. As the Fed started tightening in 2022, we saw increasing pressures on interest coverage ratios for leveraged loan borrowers. That led to a pick-up in downgrades and defaults in loans. As rate hikes ended, we started seeing stabilization of these coverage ratios, and the pace of downgrades and defaults slowed. And now, with rate cutting ahead of us and the dot plot implying 150 basis points more of cuts for the rest of this year and the next year to come, the pressure on interest coverage ratios are going to be easing, especially if the economy stays in soft landing mode. This suggests that while spreads are today tight, the fundamentals could even improve with rate cuts – that means the spreads could remain around these levels, or even tighten a bit further. After all, if you remember the mid-1990s, which was the the last time that the Fed achieved a soft landing, investment grade corporate credit spreads were about 30 basis points tighter relative to where we are today. That 'if' is a big if. If we are wrong on the soft landing thesis, our conviction about the spread products being valuable will prove to have been misplaced. Really the challenge with any landing is that we can't be certain of the prospect until we actually land. Till then, we are really looking at incoming data and hypothesizing: are we heading into a soft or hard landing? So this means incoming data pose two-sided risks to the path ahead for credit spreads. If incoming data are weak – particularly employment data are weak – it is likely that faith in this soft landing construct will dim and spreads could widen. But if they are robust, we can see spreads tightening even further from the current tight levels. 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.

Investors widely expected a rate cut from the Fed, but the bold decision to lower interest rates by 50 basis points took many by surprise. In this episode, Dustin Reid, Chief Fixed Income Strategist, delves into the Fed's first rate cut decision since 2020, its future outlook, and how it could affect other central banks worldwide. Dustin also examines recent Canadian inflation data, highlighting signs of economic weakness compared to the US, and how this might influence the Bank of Canada's future decisions. Lastly, Dustin touches on the upcoming US presidential election and its potential impact on economic policies, particularly regarding immigration and labour market dynamics. This episode was recorded on September 19, 2024.

Office buildings continue to struggle in the post-pandemic era, but our Chief Fixed Income Strategist notes that other properties have turned a corner. ----- 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 how the challenges facing the US commercial real estate markets have evolved and talk about where they are headed next.It's Wednesday, Sep 11th at 10 am in New York.Over the last year and half, the challenges of commercial real estate, or CRE in short, have been periodically in the spotlight. The last time we discussed this issue here was in the first quarter of this year. That was in the aftermath of loan losses announced by a regional bank that primarily focused on rent-stabilized multifamily and CRE lending in the New York metropolitan area. At the same time, lenders and investors in Japan, Germany and Canada also reported sizable credit losses and write-down related to US commercial real estate.At that time, we had said that CRE issues should be scrutinized through the lenses of lenders and property types; and that saw meaningful challenges in both – in particular, regional banks as lenders and office as a property type.Rolling the calendar forward, where do things stand now?Focusing on the lenders first, there is some good news. While regional bank challenges from their CRE exposures have not gone away, they are not getting any worse. That means incremental reserves for CRE losses have been below what we had feared. Our economists' expectations of Fed's rate cuts on the back of their soft-landing thesis, gives us the conviction that lower rates should be an incremental benefit from a credit quality perspective for banks because it alleviates pressure on debt service coverage ratios for borrowers. Lower rates also give banks more room to work with their borrowers for longer by providing extensions. For banks, this means while CRE net charge-offs could rise in the near term, they are likely to stabilize in 2025.In other words, even though the fundamental deterioration in terms of the level of delinquencies and losses may be ahead, the rate of change seems to have clearly turned. In that sense, as long as the rate cuts that we anticipate materialize, the worst of the CRE issues for regional banks may now be behind us.From the lens of property types, it is important not to paint all property types with the same brushstroke of negativity. Office lots remain the pain point. Looking at the payoff rates in CMBS pools gives us a granular look at the performance across different property types.Overall, 76 per cent of the CRE loans that matured over the past 12 months paid off, which is a pretty healthy rate. However, in office loans, the payoff rate was just 43 per cent. Other property types were clearly much better. For example, 100 per cent of industrial property loans, 96 per cent of multi-family loans, 89 per cent of hotel loans that matured in the last 12 months paid off. The payoff rates in retail property loans were a bit lower but still pretty healthy at 76 per cent, in clear contrast to office properties. Delinquency rates across property types also show a similar trend with office loans driving the lion's share of the overall increase in delinquencies.In short, the secular headwinds facing the office market have not dissipated. Office property valuations, leasing arrangements and financing structures must adjust to the post-pandemic realities of office work. While this shift has begun, more is needed. So, there is really no quick resolution for these challenges which we think are likely to persist. This is especially true in central business district offices that require significant capex for upgrades or repurposing for use as residential housing.Overall, we stick to our contention that commercial real estate risks present a persistent challenge but are unlikely to become systemic for the economy. Thanks for listening. If you enjoy the podcast, please leave us a review wherever you listen to this and share Thoughts on the Market with a friend or colleague today.

In the latest LPL Market Signals podcast, LPL Financials' Chief Equity Strategist, Jeff Buchbinder, and Chief Fixed Income Strategist, Lawrence Gillum discuss the S&P 500 Index's value-led rally to near record highs, some implications of the U.S. debt problem, and September seasonality. Tracking #622972

On this episode, Dustin Reid, Chief Fixed Income Strategist, analyzes the latest US CPI and PPI data, shedding light on the current state of inflation and its potential impact on the Fed's decisions for the remainder of the year. Dustin shares his insights on the recent surge in market volatility, examining both technical factors and fundamental concerns. Additionally, Dustin discusses the Bank of Canada's rate cut trajectory and highlights his team's recent portfolio trades. This episode was recorded on August 14, 2024.

Morgan Brennan and David Faber tackle today's biggest Money Movers from the floor of the New York Stock Exchange. 

Our Global Head of Thematic and Fixed Income Research joins our Chief Fixed Income Strategist to discuss the recent market volatility and how it impacts investor positioning within fixed income. ----- Transcript -----Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Global Head of Fixed Income and Thematic Research.Vishy: And I am Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist.Zezas: And on this episode of Thoughts on the Market, we'll talk about the recent market volatility and what it means for fixed income investors.It's Wednesday, August 7th at 10am in New York.Vishy, on yesterday's show, you discussed the recent growth of money market funds. But today I want to talk about a topic that's top of mind for investors trying to make sense of recent market volatility. For starters, what do you think tipped off these big moves across global markets?Vishy: Mike, a confluence of factors contributed to the volatility that we've seen in the last six or seven trading sessions. To be clear, in the last few weeks, there have been some downside surprises in incoming data. They were capped off by last Friday's US employment report that came in soft across the board. In combination, that raised questions on the soft-landing thesis that had been baked into market prices, where valuations were already pretty stretched. And this one came after a hawkish hike by Bank of Japan just two days prior.While Morgan Stanley economists were expecting it, this hike was far from consensus going in. So, what this means is that this could lead to a greater divergence of monetary policy between the Fed and the Bank of Japan. That is, investors perceiving that the Fed may need to cut more and sooner, and that Bank of Japan may need to hike more; in both cases, more than expected.As you know, when negative surprises show up together, volatility follows.Zezas: Got it. And so last week's soft US employment data raises the question of whether the Fed's overtightened and the US economy might be weaker than expected. So, from where you sit, how does this concern impact fixed income assets?Vishy: To be clear, this is really not our base case. Our economists expect US economy to slow, but not fall off the cliff. Last Friday's data do point to some slowing, on the margin more slowing than market consensus as well as our economists expected. And really what this means is the markets are likely to challenge our soft-landing hypothesis until some good data emerge. And that could take some time. This means recent weakness in spread products is warranted, and especially given tight starting levels.Zezas: So, it seems in the coming days and maybe even weeks, the path for total fixed income market returns is likely to be lower as the market adjusts to a weaker growth outlook. What areas of fixed income do you think are best positioned to weather this transition and why?Vishy: We really need more data to confirm or push back on the soft-landing hypothesis. That said, fears of growth challenges will likely build in expectations for more Fed cuts. And that is good for duration through government bonds.Zezas: And conversely, what segments of fixed income are most exposed to risk?Vishy: In one way or the other, all spread products are exposed. In my mind, the US corporate credit market recession risks are least priced into high yield single B bonds, where valuations are rich, and positioning is stretched.Zezas: So clearly the recent market volatility has affected global markets, not just the US and Japan. So, what are you seeing in other markets? And are there any surprises there?Vishy: Emerging market credit. In emerging market credit, investment grade sovereign bonds will likely outperform high yield bonds, causing us to close our preference for high yield versus investment grade. It is too soon to completely flip our view and turn bearish on the overall emerging market credit index.We do see a combination of emerging market single name CDSs as an attractive hedge. South Africa, Colombia, Mexico, for example.Zezas: So finally, where do we go from here? Do you think it's worth buying the dip?Vishy: Our message overall is that while there have been significant moves, it is not yet the time to buy on dips.Zezas: Well, Vishy, thanks for taking the time to talk.Vishy: Great speaking with you, Mike.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.

Risk-averse investors have poured trillions into money-market funds since 2019. Our Chief Fixed Income Strategist explains why investors shouldn't expect this money to pivot to equities and other risk assets as rates fall. ----- 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 money market funds. It's Tuesday, August 6th at 3pm in New York. Well over $6.5 trillion sit in US money market funds. A popular view in the financial media is that the assets under management in money market funds represent money on sidelines, waiting to be allocated to risk assets, especially stocks. The underlying thesis is that the current level of interest rates and the consequent high money market yields have resulted in accumulation of assets in money market funds; and, when policy easing gets under way and money market yields decline, these funds will be allocated towards risk assets, especially stocks. To that I would say, curb your enthusiasm. Recent history provides helpful context. Since the end of 2019, money market funds have seen net inflows of about $2.6 trillion, occurring broadly in three phases. The first phase followed the outbreak of COVID, as the global economy suddenly faced a wide array of uncertainties. The second leg mainly comprised retail inflows, starting when the Fed began raising rates in 2022.The third stage came during the regional bank crisis in March-April 2023, with both retail and institutional flows fleeing regional bank deposits into money market funds. Where do we go from here? We think money market funds are unlikely to return to their pre-COVID levels of about $4 trillion, even if policy easing begins in September as our economists expect. They see three 25 basis point rate cuts in 2024 and four in 2025 as the economy achieves a soft landing; and they anticipate a shallow rate-cutting cycle, with the Fed stopping around 3.75 per cent. This means money market yields will likely stabilize around that level, albeit with a lag – but still be attractive versus cash alternatives. In a hard landing scenario, the Fed will likely deliver significantly more cuts over a shorter period of time, but we think investors would be more inclined to seek liquidity and safety, allocating more assets to money market funds than to alternative assets. Further, money market funds can delay the decline in their yields by simply extending the weighted average maturities of their portfolios and locking in current yields in the run-up to the cutting cycle. This makes money market funds more attractive than both short-term CDs and Treasury bills, whose yields reprice lower in sync with rate cuts. This relative appeal explains much of the lag between rate cuts and the peak in assets under management in money market funds. These have lagged historically, but average lag is around 12 months. Finally, it is important to distinguish between institutional and retail flows into and out of money market funds, as their motivations are likely to be very different. Institutional funds account for 61 per cent of money market funds, while funds from retail sources amount to about 37 per cent. When they reallocate from money market funds, we think institutional investors are more likely to allocate to high-quality, short-duration fixed income assets rather than riskier assets such as stocks, motivated by safety rather than level of yield. Retail investors, the smaller segment, may have greater inclination to reallocate towards risk assets such as stocks. The bottom line: While money market fund assets under management have grown meaningfully in the last few years, it is likely to stay high even as policy easing takes hold. Allocation toward risk assets looks to be both lagged and limited. Thus, this 'money on the sidelines' may not be as positive and as imminent a technical for risk assets as some people expect. 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.

Although the market did not anticipate a rate cut, early indications suggest the Fed is leaning towards cutting rates in September. On this episode, Dustin Reid, Chief Fixed Income Strategist, discusses the recent Fed meeting, analyzing the Fed's forward guidance and the likelihood of upcoming rate cuts. Dustin also highlights key Canadian economic data and potential further rate cuts by the BoC, updates from the Bank of Japan, and insights on the US election's potential impacts on market volatility. This episode was recorded on August 1, 2024.

On this special episode of Market Exchange, Dustin Reid, Chief Fixed Income Strategist, recaps the pivotal events leading to Vice President Kamala Harris' rise as the presumptive Democratic nominee. Dustin analyzes the potential market and economic implications of a Harris administration. Dustin also explores the dynamics of the so-called ‘Trump trade' and examines how the Vice Presidential nominees could influence this year's election. This episode was recorded on July 25, 2024.

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.

Our Chief Fixed Income Strategist takes listeners behind the curtain on Morgan Stanley's expectations for markets over the next 12 months.----- Transcript -----Welcome to Thoughts on the Market. I am Vishy Tirupathur, Morgan Stanley's Chief Fixed Income Strategist. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about the key debates we engaged in during the mid-year outlook process.It's Tuesday, June 4th at 1pm in New York.Over the last few episodes, you've been hearing a lot about Morgan Stanley's midyear outlook, where our economists have forecasted a sunny macro environment of decelerating growth and inflation, and policy easing in most developed market economies, leading to a positive backdrop for risk assets in the base case, especially in the second half of the year.But beyond the year end, many uncertainties -- uncertainties of outcomes and uncertainties of the consequences of those outcomes -- point to a wider range of outcomes, driving a wider than normal bull versus bear skew in our expectations for markets over the next 12 months.As always, these outlooks are the culmination of a process involving much deliberation and spirited debate among economists and strategists across all the regions and asset classes we cover. I thought it might be useful to detail some of these debates that we've had during the process to shed a better light on the forecast in our outlook.First, given the many changes to market pricing of Fed's rate cuts year to date, driven by higher-than-expected inflation, the path ahead for US inflation was heavily debated. Our economists argued that the acceleration in goods and financial services prices, which explains a substantial portion of the upside in the first quarter inflation data should decelerate from here. And also that leading indicators point to a weaker shelter inflation ahead. Their analysis also showed that residual seasonality contributed to the unexpected strength in first quarter [20]24 inflation data, suggesting a payback has to happen in the second half of 2024.The outlook for China economy and our cautious stance on the market was another point of debate, mainly because China's growth has surprised to the upside relative to our 2024 year ahead outlook. Our economists argued that while there are a few policy positives on housing and green products mitigating the debt deflation spiral, growth remains unbalanced and subpar. So, we discussed our cautious stance on China equity markets against this backdrop and concluded that the equity market recovery is still very challenging in China.Third, given the combination of favorable technicals, solid fundamentals, and a relatively benign economic outlook, we debated whether corporate credit, on which we are constructive, should we be even more constructive in our forecasts. After all, the setup for corporate credit has many elements similar to those during the mid 1990s, when, for example, US IG index spreads were about 30 basis points tighter versus the current spread targets. Our strategist highlighted the significant differences in the market structure, the composition of the index, and the duration of the underlying bonds that make up this index today, versus 1990s -- all of which put a higher floor on spreads, which explains our spread targets.The debates notwithstanding, we cannot argue with the benign macro backdrop and what that means for the second half of 2024. We turn overweight in global equities and overweight in a range of spread products within fixed income, most notably agency MBS, EM Sovereign credit, leveraged loans, securitized credit, especially CLO equity tranches.Thanks for listening. If you enjoyed the podcast, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Our Chief Fixed Income Strategist explains why the Federal Reserve's most recent meeting was so consequential, and the likeliest path ahead for interest rates.----- Transcript -----Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist. Along with my colleagues bringing you a variety of perspectives, I'll be talking about last week's FOMC meeting and its impact on fixed income markets. It's Thursday, May 9th at 1pm in New York.Last week's Fed meeting was consequential. It had a clear and unambiguous messaging about the path ahead for Fed's monetary policy. Fed's next move in policy rate is unlikely to be a hike. The Fed's focus now is on how long the current target range for the fed funds rate will be maintained; and the next move, whenever it happens, is likely a cut. Importantly, the FOMC's decision was unanimous and their statement maintained an overall easing bias.In the aftermath of recent upside surprises to inflation and the reaction in the rates market, many market participants, yours truly included, were apprehensive that the FOMC's tone might be overtly hawkish. Turns out, that was not the case. By setting a very high bar for the next move to be a hike, the Fed's message has meaningfully narrowed the distribution of outcomes for policy rates, at least in 2024 As our economists led by Ellen Zentner note, the two likely policy outcomes now are keeping the rates on hold or cutting. Given the prospect that policy rates may remain in the current target range, the negative carry of an inverted yield curve keeps us from pounding the table to move to outright long in duration, although the direction of travel does suggest that. We would note that Guneet Dhingra, our head of US interest rate strategy, sees better risk/reward in duration longs through 3 month 10 year receivers than in the very crowded curve steepener trade. In general, spread products in fixed income – agency MBS, corporate credit and securitized credit – stand to benefit the most from this notably less hawkish messaging, in our view.As Jay Bacow, our head of agency MBS strategy, observes, the backdrop in which tail risks of higher policy rates are much more remote than they were before the FOMC meeting is supportive for agency MBS. At current valuations, agency MBS offers an attractive expression for investors seeking to play for lower interest rates, lower interest rate volatility or both. Their high all-in yields have bolstered strong inflows and sustained demand for corporate credit across a wide range of investor types. If policy rates remain in the current range, we expect the demand for corporate credit to accelerate. If policy rates stay in the current range or go lower, pressures on interest coverage are unlikely to get worse going forward. Given their high single-digit all-in yields, we see an attractive risk/reward calculus favoring leveraged loans. We like expressing this view directly in loans as well as in securitized credit through CLO tranches. In sum, the message from the Fed was clear and unambiguous. The policy rate path ahead is for rates to remain in the current range or decline, and the bar for the next move to be a hike is very high. This bodes well for a wide range of instruments in fixed income.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.

Watch Carol and Tim LIVE every day on YouTube: http://bit.ly/3vTiACF. Bloomberg News Technology and E-Commerce Reporter Spencer Soper provides the details of Amazon CEO Andy Jassy's annual letter to shareholders outlining how the company's cloud infrastructure will become an essential part of the generative artificial intelligence boom. Louise Phillips Forbes, Agent at Brown Harris Stevens, breaks down the New York City real estate market. Roberta Goss, Head of the Bank Loan and CLO Platform at Pretium, discusses the private credit outlook. And we Drive to the Close with with Kathy Jones, Chief Fixed Income Strategist at Schwab Center for Financial Research. Hosts: Carol Massar and Tim Stenovec. Producer: Paul Brennan.See omnystudio.com/listener for privacy information.

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

Morgan Stanley's Chief Fixed Income Strategist explains why private credit markets have expanded rapidly in recent years, and how they may fare if public credit makes an expected comeback.----- Transcript -----Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the implications of the rapid growth in private credit for the broader credit markets. It's Monday, March 25th at 12 noon in New York.The evolution of private credit is reshaping the landscape of leveraged finance. Investors of all stripes and all around the world are taking notice. The rapid expansion of private credit in the last few years has come against a much different backdrop in the public credit markets – a contraction in the high yield bond market and lackluster growth in the broadly syndicated loan market. What the emergence of private credit means for the public credit and the broader credit markets is a topic of active debate.Just to be clear, let me define what we mean by private credit. Private credit is debt extended to corporate borrowers on a bilateral basis or involving very small number of lenders, typically non-banks. Lenders originate and negotiate terms directly with borrowers without the syndication process that is the norm in public markets for both bonds and loans. These private credit loans are typically not publicly rated; they're not typically traded in secondary markets; tend to have stronger lender protections and offer a spread premium to public markets.Given the higher overall borrowing costs as well the need to provide stronger covenant protection to lenders, what motivates borrowers to tap private credit versus public credit? Three key factors explain the recent rapid growth in private credit and show how private credit both competes and complements the public credit markets.First, small and medium-sized companies that used to rely on banks had to find alternative sources of credit as banks curtailed lending in response to regulatory capital pressures. A majority of these borrowers have very limited access to syndicated bond and loan markets, given their modest size of borrowings.Second, because of the small number of lenders per deal – frequently just one – private credit offers both speed and certainty of execution along with flexibility of term. The last two years of monetary policy tightening has meant that there was a lot of uncertainty around how high policy rates would go and how long they will stay elevated – which has led investors to pull back. The speed and certainty of private credit ended up taking market share from public markets against this background, given this uncertainty in the public markets.Third, the pressure on interest coverage ratios from higher rates resulted in a substantial pick-up in rating agency downgrades into the B- and CCC rating categories. At these distressed ratings levels, public markets are not very active, and private credit became the only viable source of financing.Where do we go from here? With confidence growing that policy tightening is behind us and the next Fed move will be a cut, the conditions that contributed to deal execution uncertainty are certainly fading. Public markets, both broadly syndicated loan and high yield bond markets, are showing signs of strong revival. The competitive advantage of execution certainty that private credit lenders were offering has become somewhat less material. Further, given the amount of capital raised for private credit that is waiting to be deployed – the so-called dry powder – the spread premium in private credit may also need to come down to be competitive with the public markets.So private credit is both a competitor and a complement to the public markets. Its competitive attractiveness will ebb and flow, but we expect its complementary benefit as an avenue for credit where public markets are challenged to remain as well as grow.Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts or wherever you get this podcast – and share Thoughts on the Market with a friend or colleague today.

As traditional financial institutions tightened their lending standards last year, private credit stepped in to fill some of the gaps. But with rates now falling, public lenders are poised to compete again on the terrain that private credit has transformed.----- Transcript -----Vishy Tirupattur: 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 we'll have a conversation with Joyce Jiang, our US leveraged finance strategist, on the topic of private credit.It's Thursday, February 22nd at noon in New York.Joyce, thank you for joining. Private credit is all over the news. Let's first understand – what is private credit. Can you define it for us?Joyce Jiang: There isn't a consensus on the definition of private credit. But broadly speaking, private credit is a form of lending extended by non-bank lenders. It's negotiated privately on a bilateral basis or with a small number of lenders, bypassing the syndication process which is standard with public credit.This is a rather broad definition and various types of debt can fall under this umbrella term; such as infrastructure, real estate, or asset-backed financing. But what's most relevant to leveraged finance – is direct lending loans to corporate borrowers.Private credit lenders typically hold deals until maturity, and these loans aren't traded in the secondary market. So, funding costs in private credit tend to be higher as investors need to be compensated for the illiquidity risk. For example, between 2017 and now, the average spread premium of direct lending loans is 250 basis points higher compared to single B public loans.Vishy Tirupattur: That's very helpful Joyce. The size of the private credit market has indeed attracted significant attention due to its rapid growth. You often see estimates in the media of [the] size being around $1.5 to $1.7 trillion. Some market participants expect the market to reach $2.7 trillion by 2027. Joyce, is this how we should think about the market? Especially in the context of public corporate credit market?Joyce Jiang: I've seen these numbers as well. But to be clear, they reflect assets under management of global private debt funds. So not directly comparable to the market size of high yield bonds or broadly syndicated loans.In our estimate, the total outstanding amount of US direct lending loans is in the range of $630-710 billion. So, we see the direct lending space as roughly half the size of the high yield bonds or broadly syndicated loan markets in the US.Vishy Tirupattur: Understood. Can you provide some color on the nature of private credit borrowers and their credit quality in the private credit space?Joyce Jiang: Traditionally, private credit targets small and medium-sized companies that do not have access to the public credit market. Their EBITDA is typically one-tenth the size of the companies with broadly syndicated loans. However, this is not representative of every direct lending fund because some funds may focus on upper middle-market companies, while others target smaller entities.Based on the data that's available to us, total leverage and EBITDA coverage in private credit are comparable to a single B to CCC profile in the public space. Additionally, factors such as smaller size, less diversified business profiles, and limited funding access may also weigh on credit quality.Given this lower quality skew and smaller size, there have been concerns around how these companies can navigate the 500 basis point of rate hikes. However, based on available data, two years into the hiking cycle, coverage has deteriorated – mainly due to the floating-rate heavy nature of these capital structures. But on the bright side, leverage generally remained stable. Similar to what we've seen in public credit.Now let me turn it around to you, Vishy. What about defaults in private credit and how do they compare to public credit markets?Vishy Tirupattur: So when it comes to defaults, unlike in the public markets, data that cover the entire private credit market is not really there. We have to depend on the experience of sample portfolios from a variety of sources. These data tend to vary a lot, given the differences in defining what a default is and how to calculate default rates, and so on. So, all of this is a little bit tricky. We should also keep in mind that the data we do have on private credit is over the last few years only. So, we should be careful about generalizing too much.That said, based on available data we can say that the private credit defaults have remained broadly in the same range as the public credit. In other words, not substantially higher default rates in the private credit markets compared to the public credit defaults.A few things we should keep in mind as we consider this relatively benign default picture. What contributes to this?First, private credit deals have stronger lender protections. This is in contrast to the broadly syndicated loan market – which is, as you know, predominantly covenant-lite market. Maintenance covenants in private credit can really act as circuit breakers, reining in borrower behavior before things deteriorate a lot. Second, private credit deals usually involve only a very small number of lenders. So it's easier to negotiate a restructuring or a workout plan. All of this contributes to the default experience we've observed in private credit markets.Joyce Jiang: And finally, what are your thoughts on the future of private credit?Vishy Tirupattur: The rapid growth of private credit is really reshaping the landscape of leveraged finance on the whole. Last year, as banks retreated, private credit stepped in and filled the gap – attracting many borrowers, especially those without access to the public market. Now, as rate cuts come into view, we see public credit regaining some of the lost ground. So how private credit adapts to this changing environment is something we'll be monitoring closely. With substantial dry powder ready to be deployed, the competition between public and private credit is likely to intensify, potentially impacting the overall market.Joyce, let's wrap it up here, Thanks for coming on the podcast.Joyce Jiang: Thanks for having me.Vishy Tirupattur: Thank you all 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.

Our Fixed Income Strategist outlines commercial real estate's post-pandemic challenges, which could make regional bank lenders vulnerable. ----- Transcript -----Welcome to Thoughts on the Market, I'm Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the challenges of the commercial real estate markets. It's Friday, Feb 16th at 3 pm in New York.Commercial real estate – CRE in short – is back in the spotlight in the aftermath of the loan losses and dividend cuts announced by New York Community Bancorp. Lenders and investors in Japan, Germany, and Canada have also reported sizable credit losses or write-downs related to US commercial real estate. The challenges in CRE have been on a slow burn for several quarters. In our view, the CRE issues should be scrutinized through the lenses of both lenders and property types. We see meaningful challenges in both of them.From the lenders' perspective, we now estimate that about a trillion and a half of commercial real estate debt matures by the end of 2025 and needs to be refinanced; about half of this sits on bank balance sheets.The regulatory landscape for regional banks is changing dramatically. While the timeline for implementing these changes is not finalized, the proposed changes could raise the cost of regional bank liabilities and limit their ability to deploy capital; thereby pressuring margins and profitability. This suggests that the largest commercial real estate lender – the regional banking sector – might be the most vulnerable.Office as a property type is confronting a secular challenge. The pandemic brought meaningful changes to workplace practice. Hybrid work has now evolved into the norm, with most workers coming into the office only a few days a week, even as other outdoor activities such as air travel or dining out have returned to their pre-Covid patterns. This means that property valuations, leasing arrangements, and financing structures must adjust to the post-pandemic realities of office work. This shift has already begun and there is more to come.It goes without saying, therefore, that regional banks with office predominant in their CRE exposures will face even more challenges.Where do we go from here? Property valuations will take time to adjust to shifts in demand, and repurposing office properties for other uses is far from straightforward. Upgrading older buildings turns out to be expensive, especially in the context of energy efficiency improvements that both tenants and authorities now demand. The bottom line is that the CRE challenges should persist, and a quick resolution is very unlikely.Is it systemic? We get this question a lot. Whether or not CRE challenge escalates to a broader system-wide stress depends really on one's definition of what systemic risk is. In our view, this risk is unlikely to be systemic along the lines of the global financial crisis of 2008. That said, strong linkages between the regional banks and CRE may impair these banks' ability to lend to households and small businesses. This, in turn, could lead to lower credit formation, with the potential to weigh on economic growth over the longer term.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.

Our credit experts from Research and Investment Management give their overview of private and public credit markets, comparing their strengths and weaknesses following two years of rate hikes.----- Transcript -----Vishy Tirupattur: Welcome to Thoughts on the Market. I am Vishy Tirupattur, Chief Fixed Income Strategist in Morgan Stanley Research.David Miller: And I'm David Miller, Head of Global Private Credit and Equity for Morgan Stanley Investment Management.Vishy Tirupattur: And on this special edition of the podcast, we'll be taking a deep dive into the 2024 credit landscape, both from a private credit and public credit perspective.Vishy Tirupattur: So, David, you and I come at credit from two different avenues and roles. I cover credit, and other areas of fixed income, from a sell side research perspective. And you work for our investment management division, covering both private credit and private equity. Just to set the table for our listeners, maybe we could start off by you telling listeners how private credit investing differs from public credit.David Miller: Great. The main differences are: First, privately negotiated loans between lenders and borrowers. They're typically closely held versus widely distributed in public credit. The loans are typically held to maturity and those strategies are typically has that long duration, sort of look. Private credit -- really -- has three things of why their borrowers are valuing it. Certainty, that's committed capital; certainty of pricing. There's speed. There's no ratings -- fewer parties, working on deals. And then flexibility -- structures can be created to meet the needs of borrowers versus more highly standardized parts of the public credit spectrum. Lastly and importantly, you typically get an illiquidity premium in private credit for that holding to maturity and not being able to trade.Vishy Tirupattur: So, as we look forward to 2024, from your perspective, David, what would you say are some of the trends in private credit?David Miller: So private credit, broadly speaking, continues to grow -- because of bank regulations, volatility in capital markets. And it is taking some share over the past couple of years from the broadly syndicated markets. The deal structures are quite strong, with large equity contributions -- given rates have gone up and leverage has come down. Higher quality businesses typically are represented, simply as private equity is the main driver here and there tend to be selling their better businesses. And default rates remain reasonably low. Although we're clearly seeing some pressure, on interest coverage, overall. But volumes are starting to pick up and we're seeing pipelines grow into [20]24 here.Vishy Tirupattur: So obviously, it's interesting, David, that you brought up, interest rates. You know, it's a big conversation right now about the timing of the potential interest rate cuts. But then we also have to keep in mind that we have come through nearly two years of interest rate hikes. How have these 550 basis points of rate hikes impacted the private credit market?David Miller: The rate hikes have generally been positive. But there are some caveats to that. Obviously, the absolute return in the asset class has gone up significantly. So that's a strong positive, for the new deals. The flip side is -- transaction volumes have come down in the private credit market. Still okay but not at peak levels. Now older deals, right, particularly ones from 2021 when rates were very low -- you're seeing some pressure there, no doubt. The last thing I will say, what's noteworthy from the increase in rates is a much bigger demand for what I'll call capital solutions. And that's junior capital, any type of security that has pick or structure to alleviate some of that pressure. And we're quite excited about that opportunity.Vishy Tirupattur: David, what sectors and businesses do you particularly like for private credit? And conversely, what are the sectors and businesses you'd like to avoid?David Miller: Firstly, we really like recurring or re-occurring revenue businesses with stable and growing cash flows through the cycle, low capital intensity, and often in consolidating industries. That allows us to grow with our borrowers over time. You know, certain sectors we continue to like: insurance brokerage, residential services, high quality software businesses that have recurring contracts, and some parts of the healthcare spectrum that really focus on reducing costs and increasing efficiency. The flip side, cyclicals. Any type of retail, restaurants, energy, materials, that are deeply cyclical, capital intensive and have limited pricing power and high concentration of customers.So, now I get to ask some questions. So, Vishy, I'd love to turn it to you. How do returns, spreads, and yields in private credit compare to the public credit markets?Vishy Tirupattur: So, David, yields and spreads in private credit markets have been consistently higher relative to the broadly syndicated loan market for the last six or seven years -- for which we have decent data on. You know, likely reflecting, as you mentioned earlier, illiquidity premia and perhaps potentially investor perception of the underlying credit quality. The basis in yields and spreads between the two markets has narrowed somewhat over the last couple of years. Between 2014 and the first half of 2023, private credit, on average, generated higher returns and recorded less volatility relative to the broadly syndicated loan market. For example, since the third quarter of 2014, the private credit market realized negative total returns just in one quarter. And you compare that to eight quarters of negative returns on the broadly syndicated loan market.David Miller: Something we both encounter is the idea of covenants -- which simply put, are additional terms on lending agreements around cash flow, leverage, liquidity. How do covenants help investors of private credit?Vishy Tirupattur: Over the last several years, the one thing that stands out in the public credit markets -- especially in the leveraged loan market -- is the loosening of the covenant protection to lenders. Cov-Lite, which means, nearly no maintenance covenants, has effectively become the norm in the broadly syndicated loan market. This is one place that I think private credit markets really stand out. In our view, covenant quality is meaningfully better in private credit. This is mainly because given the much smaller number of lenders in typical private credit deals, private credit has demonstrably stronger loan documentation and creditor protections. Maintenance covenants are typically included. And to a great extent, these covenant breaches could act potentially as circuit breakers to better manage outcomes, you know, as credit gets weaker.David, we also hear a lot about the risk of defaults, in private credit markets. How much concern do you have around defaults?David Miller: We are watching, obviously stress on credits and the default rates overall, and they are at historically quite low levels. We do expect them to tick up over time. But there are some reasons why we clearly like private credit from that perspective. First, as mentioned, the covenant protections typically are a little better. If you look historically, depending on the data, private credit, default rates have been, somewhat lower than public leveraged credit and its been quite a resilient asset class, for a number of reasons. We like the amount of private equity dry powder that sits waiting to support some of the companies that are underperforming. And it's important to remember that private credit lenders typically have an easier time resolving some of these stresses and workouts given that they're quite bilateral or a very small group, to make decisions and reach those negotiated settlements. So overall, we feel like there will be a category of businesses that are underperforming and are in structural decline and that will default. But that number will be still very low relative to the universe of overall private credit.Vishy Tirupattur: So David, it's been great speaking with you.David Miller: Thanks for having me on the podcast, Vishy.Vishy Tirupattur: As a reminder, if you enjoy Thoughts on the Market, please take a moment to rate and review us on Apple Podcasts app. It helps more people find the show.

Original Release on November 14th, 2023: Our roundtable discussion on the future of the global economy and markets continues, as our analysts preview what is ahead for government bonds, currencies, housing and more.----- Transcript -----Vishy Tirupattur: Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist. This is part two of our special roundtable discussion on what is ahead for the global economy and markets in 2024. It's Tuesday, November 14th at 10 a.m. in New York. Yesterday you heard from Seth Carpenter, our Global Chief Economist, and Mike Wilson, our Chief Investment Officer and the Chief U.S. Equity Strategist. Today, we will cover what is ahead for government bonds, corporate credit, currencies and housing. I am joined by Matt Hornbach, our Chief Macro Strategist, James Lord, the Global Head of Currency and Emerging Markets Strategy, Andrew Sheets, Global Head of Credit Research, and Jay Bacow, Co-Head of U.S. Securities Products.Vishy Tirupattur: Matt, 2023 was quite a year for long end government bond yields globally. We saw dramatic curve inversion and long end yields reaching levels we had not seen in well over a decade. We've also seen both dramatic sell offs and dramatic rallies, even just in the last few weeks. Against this background, how do you see the outlook for government bond yields in 2024? Matt Hornbach: So we're calling our 2024 outlook for government bond markets the land of confusion. And it's because bond markets were whipped around so much by central banks in 2023 and in 2022. In the end, what central banks gave in terms of accommodative monetary policy in 2020 and 2021, they more than took away in 2022 and this past year. At least when it came to interest rate related monetary policies. 2024, of course, is going to be a pretty confusing year for investors because, as you've heard, our economists do think that rates are going to be coming down, but so too will balance sheets. But for the past couple of years, both G10 and EM central banks have raised rates to levels that we haven't seen in decades. Considering the possibility that equilibrium rates have trended lower over the past few decades, central bank policy rates may be actually much more restricted today than at any point since the 1970s. But, you know, we can't say the same for central bank balance sheets, even though they've been shrinking for well over a year now. They're still larger than before the pandemic. Now, our economists forecast continued declines in the balance sheets of the Fed, the ECB, the Bank of England and the Bank of Japan. But nevertheless, in aggregate, the balance sheet sizes of these G4 central banks will remain above their pre-pandemic levels at the end of 2024 and 2025.Vishy Tirupattur: Matt, across the developed markets. Where do you see the best opportunity for investors in the government bond markets? Matt Hornbach: So Vishy we think most of the opportunities in 2024 will be in Europe given the diverging paths between eurozone countries. Germany, Austria and Portugal will benefit from supportive supply numbers, while another group, including Italy, Belgium and Ireland will likely witness a higher supply dynamic. Our call for a re widening of EGB spreads should actually last longer than we originally anticipated. Elsewhere in Europe, we're expecting the Bank of England to deliver 100 basis points of cumulative cuts by the end of 2024, and that compares to significantly less that's priced in by the market. Hence, our forecasts for gilts imply a much lower level of yields and a steeper yield curve than what you see implied in current forward rates. So the UK probably presents the best duration and curve opportunity set in 2024. Vishy Tirupattur: Thank you, Matt. James, a strong dollar driven by upside surprises to U.S. growth and higher for longer narrative that has a world during the year characterized the strong dollar view for much of the year. How do you assess 2024 to be? And what differences do you expect between developed markets and emerging market currency markets? James Lord: So we expect the recent strengthening of US dollar to continue for a while longer. This stronger for a longer view on the US dollar is driven by some familiar drivers to what we witnessed in 2023, but with a little bit of nuance. So first, growth. US growth, while slowing, is expected to outperform consensus expectations and remain near potential growth rates in the first half of 2024. This is going to contrast quite sharply with recessionary or near recessionary conditions in Europe and pretty uncompelling rates of growth in China. The second reason we see continued dollar strength is rate differentials. So when we look at our US and European rate strategy teams forecasts, they have rates moving in favor of the dollar. Final reason is defense, really. The dollar likely is going to keep outperforming other currencies around the world due to its pretty defensive characteristics in a world of continued low growth, and downside risks from very tight central bank monetary policy and geopolitical risks. The dollar not only offers liquidity and safe haven status, but also high yields, which is of course making it pretty appealing. We don't expect this early strength in US Dollar to last all year, though, as fiscal support for the US economy falls back and the impact of high rates takes over, US growth slows down and the Fed starts to cut around the middle of the year. And once it starts cutting, our U.S. econ team expects it to cut all the way back to 2.25 to 2.5% by the end of 2025. So a deep easing cycle. As that outlook gets increasingly priced into the US rates, market rate differentials start moving against the dollar to push the currency down. Vishy Tirupattur: Andrew, we are ending 2023 in a reasonably good setup for credit markets, especially at the higher quality end of the trade market. How do you expect this quality based divergence across global trade markets to play out in 2024? Andrew Sheets: That's right. We see a generally supportive environment for credit in 2024, aided by supportive fundamentals, supportive technicals and average valuations. Corporate credit, especially investment grade, is part of a constellation of high quality fixed income that we see putting up good returns next year, both outright and risk adjusted. When we talk about credit being part of this constellation of quality and looking attractive relative to other assets, it's important to appreciate the cross-asset valuations, especially relative to equities, really have moved. For most of the last 20 years the earnings yield on the S&P 500, that is the total earnings you get from the index relative to what you pay for it, has been much higher than the yield on U.S. triple B rated corporate bonds. But that's now flipped with the yield on corporate bonds now higher to one of the greatest extents we've seen outside of a crisis in 20 years. Theoretically, this higher yield on corporate bonds relative to the equity market should suggest a better relative valuation of the former. So what are we seeing now from companies? Well companies are buying back less stock and also issuing less debt than expected, exactly what you'd expect if companies saw the cost of their debt as high relative to where the equities are valued. A potential undershoot in corporate bonds supply could be met with higher bond demand. We've seen enormous year to date flows into money market funds that have absolutely dwarfed the flows into credit. But if the Fed really is done raising rates and is going to start to cut rates next year, as Morgan Stanley's economists expect, this could help push some of this money currently sitting in money market funds into bond funds, as investors look to lock in higher yields for longer. Against this backdrop, we think the credit valuations, for lack of a better word, are fine. With major markets in both the U.S. and Europe generally trading around their long term median and high yield looking a little bit expensive to investment grade within this. Valuations in Asia are the richest in our view, and that's especially true given the heightened economic uncertainty we see in the region. We think that credit curves offer an important way for investors to maximize the return of these kind of average spreads. And we like the 3 to 5 year part of the U.S. credit curve and the 5 to 10 year part of the investment grade curve in Europe the most. Vishy Tirupattur: Thanks, Andrew. Jay, 2023 was indeed a tough year for the agency in the US market, but for the US housing market it held up quite remarkably, despite the higher mortgage rates. As you look ahead to 2024, what is the outlook for US housing and the agency MBS markets and what are the key drivers of your expectations? Jay Bacow: Let's start off with the broader housing market before we get into the views for agency mortgages. Given our outlook for rates to rally next year, my co-head of securitized products research Jim Egan, who also runs US housing, thinks that we should expect affordability to improve and for sale inventory to increase. Both of these developments are constructive for housing activity, but the latter provides a potential counterbalance for home prices. Now, affordability will still be challenged, but the direction of travel matters. He expects housing activity to be stronger in the second half of '24 and for new home sales to increase more than existing home sales over the course of the full year. Home prices should see modest declines as the growth in inventory offsets the increased demand. But it's important to stress here that we believe homeowners retain strong hands in the cycle. We don't believe they will be forced sellers into materially weaker bids, and as such, we don't expect any sizable correction in prices. But we do see home prices down 3% by the end of 2024. Now, that pickup in housing activity means that issuance is going to pick up as well in the agency mortgage market modestly with an extra $50 billion versus where we think 2023 ends. We also think the Fed is going to be reducing their mortgage portfolio for the whole year, even as Q2 starts to taper in the fall, as the Fed allows their mortgage portfolio to run off unabated. And so the private market is going to have to digest about $510 billion mortgages next year, which is still a concerning amount but we think mortgages are priced for this. Vishy Tirupattur: Thanks, Jay. And thank you, Matt, James and Andrew as well. And thank you to our listeners for joining us for this 2 part roundtable discussion of our expectations for the global economy and the markets in 2024. As a reminder, 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.

Original Release on November 13th, 2023: As global growth takes a hit and inflation begins to cool, how does the road ahead look for central banks and investors? Chief Fixed Income Strategist Vishy Tirupattur hosts a roundtable with Chief Economist Seth Carpenter and Chief U.S. Equity Strategist Mike Wilson to discuss.----- Transcript -----Vishy Tirupattur: Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist. Today on the podcast we'll be hosting a very special roundtable discussion on what is ahead for the global economy and markets by 2024. I am joined by my colleagues, Seth Carpenter, Global Chief Economist and Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist. It's Monday, November 13th at 9 a.m. in New York. Vishy Tirupattur: Thanks to both of you for taking the time to talk. We have a lot to cover, so I am going to go right into it. Seth, I want to start with the global economy. As you look ahead to 2024, how do you see the global economy evolving in terms of growth, inflation and monetary policy? Seth Carpenter: Thanks, Vishy. As we look forward over the next couple of years, there are a few key themes that we're seeing in terms of growth, inflation and monetary policy. First, looks like global growth has stepped down this year relative to last year and we're expecting another modest step down in the global economy for 2024 and into 2025. Overall, what we're seeing in the developed market economies is restrictive monetary policy in general restraining growth, whereas we have much more mixed results in the emerging market world.Inflation, though, is a clear theme around the world. Overall, we see the surge in inflation. That has been a theme in global markets for the past couple of years as having peaked and starting to come down. It's coming down primarily through consumer goods, but we do see that trend continuing over the next several years. That backdrop of inflation having peaked and coming down along with weaker growth means that we're setting ourselves up for overall a bit of an easing cycle for monetary policy. We are looking for the Fed and the ECB each to start an easing cycle in June of this year. For the Fed, it's because we see growth slowing down and inflation continuing to track down along the path that we see and that the Fed will come around to seeing. I would say the stark exception to this among developed market economies is the Bank of Japan. We have seen them already get to the de facto end of yield curve control. We think by the time we get to the January policy meeting, they will completely eliminate yield curve control formally and go from negative interest rate policy to zero interest rate policy. And then over the course of the next year or so, we think we're going to see very gradual, very tentative increases in the policy rate for Japan. So for every story, there's a little bit of a cross current going on. Vishy Tirupattur: Can you talk about some of the vulnerabilities for the global economy? What worries you most about your central case, about the global economy? Seth Carpenter: We put into the outlook a downside scenario where the current challenges in China, the risks, as we've said, of a debt deflation cycle, they really take over. What this would mean is that the policy response in beijing is insufficient to overcome the underlying dynamics there as debt is coming down, as inflation is weak and those things build on themselves. Kind of a smaller version of the lost decade of Japan. We think from there we could see some of that weakness just exported around the globe. And for us, that's one of the key downside risks to the global economy. I'd say in the opposite direction, the upside risk is maybe some of the strength that we see in the United States is just more persistent than we realize. Maybe it's the case that monetary policy really hasn't done enough. And we just heard Chair Powell talk about the possibility that if inflation doesn't come down or the economy doesn't slow enough, they could do more. And so we built in an alternate scenario to the upside where the US economy is just fundamentally stronger. Let me pass it back to you Vishy. Vishy Tirupattur: Thank you Seth. Mike, next I'd like to go to you. 2023 was a challenging year for earnings growth, but we saw significant multiple expansion. How do you expect 2024 to turn out for the global equity markets? What are the key challenges and opportunities you see for equity markets in 2024? Mike Wilson: 2023 was obviously, you know, kind of a challenging year, I think, for a lot of equity managers because of this incredible dispersion that we saw between, kind of, how economies performed around the world and how that bled into company performance. And it was very different region by region. So, you know, first off, I would say US growth, the economic level was better than expected, better than the consensus expected for sure, and even better than our economists view, which was for a soft landing. China was, on the other hand, much worse than expected. The reopening really never materialized in any meaningful way, and that bled into both EM and European growth. I would say India and Japan surprised in the upside from a growth standpoint, and Japan was by far the star market this year. The index was up a lot, but also the average stock performed extremely well, which is very different than the US. India also had pretty good performance equity wise, but in the US we had this incredible divergence between the average stock and the S&P 500 benchmark index, with the average stock underperforming by as much as 12 or 1300 basis points. That's pretty unusual. So how do we explain that and what does that mean for next year? Well, look, we think that the fiscal support is starting to fade. It's in our forecast now. In other words, economic growth is likely to soften up, not a recession yet for 2024, but growth will be deteriorating. And we think that will bleed into further earnings deterioration. So for 2024, we continue to favor Japan, where the earnings of breadth has been the best looks to us, and that's in a new secular bull market. In the US, it's really a tale of two worlds. It's companies that have cost leadership or operational efficiency, a thing we've been espousing for the last two years. Those types of companies should continue to outperform into the first half of next year. And then eventually we suspect, will be flipping pretty aggressively to companies that have poor operational efficiency because we're going to want to catch the upside leverage as the economy kind of accelerates again in the back half of 2024 or maybe into 2025. But it's too early for that in our view.Vishy Tirupattur: How do you expect the market breadth to evolve over 2024? Can you elaborate on your vision for market correction first and then recovery in the later part of 2024? Mike Wilson: Yes. In terms of the market breadth, we do ultimately think market breadth will bottom and start to turn up. But, you know, we have to resolve, kind of, the index price first. And this is why we've continued to maintain our $3900 price target for the S&P 500 for, you know, roughly year end of this year. That, of course, would argue you're not going to get a big rally in the year-end. And the reason we feel that way, it's an important observation, is that market breadth has deteriorated again very significantly over the last three months. And breadth typically leads the overall index. So until breadth bottoms out, it's very difficult for us to get bullish at the index level as well. So the way we see it playing out is over the next 3 to 6 months, we think the overall index will catch down to what the market breadth has been telling us and should lead us out of what has been, I think a pretty, you know, persistent bear market for the last two years, particularly for the average stock. And so we suspect we're going to be making some significant changes in both our sector recommendations. New themes will emerge. Some of that will be around existing themes. Perhaps AI will start to actually have a meaningful impact on overall productivity, something we see really evolving in 2025, more than 2024. But the market will start to get ahead of that. And so I think it's going to be another year to be very flexible. I'd say the best news is that although 2023 has been somewhat challenging for the average stock, it's been a great year for dispersion, meaning stock picking. And we think that's really the key theme going into 2024, stick with that high dispersion and stock picking mentality. And then, of course, there'll be an opportunity to kind of flip the factors and kind of what's working into the second half of next year. Vishy Tirupattur: Thanks, Mike. We are going to take a pause here and we'll be back tomorrow with our special year ahead roundtable, where we'll share our forecasts for government bonds, corporate credit, currencies and housing. As a reminder, 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.

Hear our perspective on market action following the Fed's change in direction, and what it means for our 2024 outlook. ----- Transcript -----Vishy Tirupattur: Welcome to Thoughts on the Market. I'm Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist. In this special episode I'm joined by my colleague and Global Head of Cross-Asset Strategy, Serena Tang. Along with our colleagues bringing you a variety of perspectives, we'll be talking about how our views have evolved since we published our 2024 outlook over a month ago. It's Tuesday, December 19th, at 10 a.m. in New York. Vishy Tirupattur: Hello, Serena. Thank you for joining me in the show. Serena Tang: Very happy to join you. Vishy Tirupattur: Since we published our 2024 outlook, we've had some big moves across markets. So how do you think our views have changed from your perch as the Head of Cross-Asset Strategy? Serena Tang: Markets have moved a lot and have moved very, very quickly. When we first published our outlook just a month ago, you and I both had investors push back on our macro strategy team's forecast of U.S. ten year Treasury yields at below 4%. And you know what? We are at those levels now. In a similar vein, MSCI EM, which is the broad index of emerging market equities that we track, that is at our equity strategies price target. And we are now also through our base case target for U.S. high grade corporate bonds. So I would say this has shifted our short term views. Our U.S. rate strategy team, they've recently gone tactically neutral on government bonds as the markets have repriced quickly, maybe a bit too quickly. Now, that being said, on a strategic horizon, my team and I have been arguing for a strong preference for high quality fixed income over higher beta assets going into 2024. In large part because risky assets like equities, like high yield corporate bonds, they have been pricing in a perfect landing and not paying investors enough premium for the risk that the world may be less than perfect. And the assets which have valuation cushion right now, especially after rally we've seen these past few weeks, is still high grade fixed income. You know U.S. yields are close to post global financial crisis highs, while equity risk premiums have been falling most of this past year. So, yes, markets have moved, but our strategic view of being overweight in high quality fixed income over higher beta markets have not changed. So for you Vishy, you know, when we published our year ahead outlook, we had some pushback, not just on the rates view but also on a forecast for the Fed to cut four times next year. The market is clearly moved beyond that now. What do you think has driven that rally? Vishy Tirupattur: Serena, the pushback we had was really about the motivation and timing of the Fed cuts. As you know, our economists are calling for cuts starting in June as the economy and inflation begin to decelerate. Some people initially pushed back on this idea, that the Fed starts cutting rates before we get to the 2% core PCE target rate. After the downward surprise in CPI last week and more so after the FOMC meeting, which came across more dovish than the markets as well as us expected, the market narrative, including the pushback we've been getting, have dramatically changed. Clearly, the markets interpreted the messaging from the FOMC statement, the dot plot and the press conference to be unequivocally dovish. The changes in the market narratives notwithstanding, we continue to expect 100 basis point cuts over 2024. I would note that in a world where inflation is falling, standard economic models would prescribe rate cuts and in 2024 inflation is projected to fall further. And because the Fed targets the level of real leads to maintain the same level of restraint, the Fed needs to cut nominal rates in line with falling inflation. This is the reasoning we see behind Fed's projection for cutting cycle to begin next year. Cutting the policy rate is not to stimulate the economy, but really to move monetary policy towards a more normalized level. While the real rate will be likely lower at the end of next year than it is today, it will still remain elevated above neutral, nevertheless. Serena Tang: So do you think the markets are right to go with the Fed pivot narrative at this point in time? What are the market's pricing in right now for what the Fed will do in 2024? And compared to our U.S. economist forecasts, do you see the market pricing as too bullish or bearish? Vishy Tirupattur: The market pricing now reflects about 140 basis points of rate cuts in 2024, and market is assigning a nearly two thirds probability of a cut materializing in March. In our view, for a march cut to be realized, we need to continue to see downward surprises in incoming inflation and growth data. To quote Chair Powell on inflation, "I'm not calling into question the progress. It's great. We just need to see more" end quote. So we don't think the Fed would be confident that enough progress has been achieved by March. So that means cuts arrive in June, if there are no further downside surprises to our inflation path. So we think market has gotten a bit ahead of itself and thus will remain tactically neutral on duration? So Serena, if the pivot is real, why are you not more bullish on equities or fixed income? Also, why are you not bullish on higher beta fixed income? Serena Tang: Right. As I mentioned earlier, there's a strong valuation case for fixed income over equities. The latter is pretty much priced to perfection, while the former is not. But also in an environment where the Fed pivot is real and I think you and I both believe the Fed will start easing policy next year, the rally we've seen is not entirely surprising. My team's done some work looking into past episodes of rate hikes and cuts and pauses and what it means for cross-asset performance. Now, 3 to 6 months after the last Fed hike, normally everything rallies, which makes sense. Equities rates, credit, all these markets are just very relieved there is no more policy tightening. But in 3 to 6 months going into that first Fed cut, that's when you see bonds outperform equities, investment grade bonds outperform lower quality and quality within equities outperforming as investors recognize that easing usually comes along with decelerating growth. And I think that moment of epiphany is still to come. Vishy Tirupattur: Thank you, Serena. Thank you for joining me. Vishy Tirupattur: Thank you 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.