Podcast appearances and mentions of seth carpenter

The conclusion of our two-part episode from Morgan Stanley and MUFG's Japan Summit looks at structural shifts in Japan's economy and Prime Minister Sanae Takaichi's strategic growth agenda.Read more insights from Morgan Stanley.----- Transcript -----Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist and Head of Macro Research. This is Part 2 of our podcast from the Japan Summit.It's Friday, May 22nd at 8 am in Tokyo.I might stick with equities for just a minute, and Sho, just to dig deeper into the equity market. Jonathan expressed some of the bullishness. Anything you want to elaborate on where the real strong conviction on this positive view about Japanese equities is coming from?And then just as a warning, I'm going to come back to you and ask, if you're wrong, where could you be wrong? Because again, I think where we add value most to clients is not just giving a clear view, but also pressure testing that view.Sho Nakazawa: Our constructive view on Japan equities comes down to one simple point. Three structural changes are still continuing. So, the first is shifting macro environment. The combination of stable inflation and wage growth is a kind of phenomenon we have not seen, at least in my lifetime. It changes corporates and households' behavior, especially in terms of balance sheet management.And then secondly, the corporates profit improvements. We do not see it as a cyclical recovery. We see it as a structural change. As in the past, Japan corporates heavily relied on cost-cutting amid a deflationary environment. But today, price pass-through is improving, and the Japan corporates are becoming better positioned in growth profit in nominal growth environment.The third is corporate governance reform. Awareness of the capital efficiency has clearly increased. We continue to see share buybacks, dividends increase, and a portfolio restructuring as well. And on top of that, the Takaichi administration has made growth investment and crisis management investment as well.Of course, the Middle East situation is a source of noise. But structurally is a supporting factor for Japan equities secular bear market, which is a view Jonathan has held for very long time, has actually becoming stronger.But let me say that if I'm wrong, maybe I should be more bullish. In fact, the two key drivers here, if we assess the bear case scenario on Japan equities…So, one key driver should be the upside come from the investors constructive view on the Japan fiscal efficiency. And on a micro level, the corporate behavior changing faster than market expects. If we assess the recent rise in long-term yields, it reflect the concern to the Japan fiscal position and that BoJ behind the curve.It would weigh on the Japan equity valuation because it raises cost of capital and it weighs on the Japan equity valuation. But on the other hand, [the] Japanese government will disclose its basic policy in June. And if it could include a credible plan to improve Japan's fiscal positions, perhaps under Japan version of DOGE, which is led by Financial Minister Katayama-san, I think it could alleviate the excessive concern toward the Japan's fiscal position, and it [could] lower the cost of capital on Japan equities.You know, micro level, the corporates behavior is already changing, as I mentioned. But there's still plenty, you know, space for Japan corporates to utilize non-cash generating assets such as cash and deposit, which is equivalent to 60 percent of GDP. The ratio is far higher than our global peers.So, if Japan corporates move further to capital efficiency or portfolio restructuring or use some excess capital, I think there should be additional room for Japan equity market to re-rate higher.Seth Carpenter: All right. So, if you're wrong, it's insufficient bullishness. That's a great place to be.So, so Koichi, Jonathan and Sho are bullish on equities. And so, do you expect big shift in capital flows, and would that drive further appreciation of the currency? How do you think about the global investors' view of Japan? And what it means for capital flows on the one hand, and the value of the currency on the other?Koichi Sugisaki: As for the capital flows, I think under this fresh regime, what's the notable change among the Japanese financials? That they are shifting away from the fixed income product, I mean, like JGBs.Given the current attractive yields, you maybe wonder[ing] why the banking sectors buy the JGBs. But according to the recent disclosures, they have not purchased the JGBs much because their lending activity performed very well. So, as far as their lending activity have performed well, they have no incentive to make money in the securities investment.You know, their lending activity have accelerated thanks to the corporate CapEx investment to improve the productivity amidst the labor shortages in Japan. Once the banking sector starts to see some slowdown or some symptom of the lending activity to slow down, in such a case, they are quickly shifted to the securities investment and the JGB market will change the world.But so far, you know, lending growth [has] accelerated much. You know, the April lending growth is around 6 percent on the year-on-year basis, very strong. So, I think the banking sector still not have a[n] incentive to buy the JGBs.As for the lifers, [the] case is much more serious, I think. Because of the younger ages shifting towards the equities to defend the asset, particularly under the new NISA scheme [which] was launched in 2024. The younger peoples basically allocate their asset to the equities rather than the saving type of the products.Which means that the lifers are struggling to make, to gather the new monies. And this means that the demand for the long-term JGB to shrink. And the Japan lifers already filled the duration this much by 2023 to prepare for the new regulations starting from this fiscal year. Now, fortunately, they already finished the duration this much, this type of operation by 2023. But the yield [has] gone up from 2024, thanks to the BoJ's normalization.So, under such conditions, they are now struggling to the high market loss on the long-term JGBs. And some of lifers are now facing the impairment loss accounting. That actually [makes] lifers a net seller of the long-term JGBs rather than the buyers.Seth Carpenter: Okay, super helpful. Okay, we focused a lot on near-term developments, the energy shock, first quarter GDP. But we can think about a longer-term growth scenario. And there, I think AI comes in at times. Chetan, you've talked about the near-term super cycle, and I think there's a near-term aggregate demand side to AI, but over the longer term, maybe it's more supply.When I think about where growth is going, though, I also think about shifts in the strategy for policy. So maybe Yamaguchi-san, you can talk to me a bit on your take of Prime Minister Takaichi's policies. What do we think is likely to get announced? When? How do you see it affecting the long-term growth outlook for Japan?Takeshi Yamaguchi: [The] Japanese government publishes growth strategy report and the basic policy on fiscal management or honebuto policy in June every year. But I think this year's, you know, documents will be pretty important because these are the first documents under the Takaichi administration.And these documents will set the direction of economic policy by Takaichi-san, Sanae Takaichi. Or Sanae-nomics. Compared with Abenomics, I think Takaichi-san focuses more on the supply side issues, you know, supply domestic investment. While Abenomics focused more on the exit from deflation, focusing on demand side policy, particularly, you know, monetary easing.In the growth strategy report, the focus will be strategic investment in 17 strategic areas, including AI, especially, you know, AI robotics, semiconductors, defense and space, cybersecurity, and content industry and so on.Another important point of Sanaeconomic system, there's overlap between these strategic investment areas and national securities. The government will also update its defense strategy by the end of this year, and there'll be a increase in the defense budget target. The focus will be a lot on, you know, I think, dual use technologies, and also resilience of supply chains going ahead.Another important point is, I think there will be a change in the budget formation process. I think, under deflation there's effectively cap on non-social security spending. But I think this government will likely allocate budget, you know, for multi-investment. So, I think the budget process will be more flexible. And they put more emphasis on the initial budget rather than the supplementary budget.So, I think, these documents will be pretty important to monitor going ahead. But overall, I think, the government – yes, they do care about the market conditions. They will likely avoid massive, you know, expansion. But I think a slight expansion, especially in the area of strategic investment is likely to happen.Seth Carpenter: Very helpful. Alright, that's the end of the panel. Thank you very much to my colleagues. And this is where I have to shift back into podcast mode to say thank you for listening. And if you enjoy Thoughts on the Market, please share it with a colleague or friend today. Thank you very much, everybody.

Recorded live at the Morgan Stanley and MUFG Japan Summit, our Global Chief Economist and Head of Macro Research Seth Carpenter led a discussion on Asia's exposure to the energy shock and Japan's bullish outlook.Read more insights from Morgan Stanley.----- Transcript -----Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist and Head of Macro Research. And on today's episode, we're bringing you a live taping direct from Morgan Stanley and MUFG's Japan Summit to discuss the macroeconomic overlook. And, in particular, Japan's moment: reflation, reform, and the case for a structural re-rating. I am joined by Chetan Ahya, our Chief Asia Economist; Takeshi Yamaguchi, our Chief Japan Economist; Jonathan Garner, our Chief Asia and EM Equity Strategist; Koichi Sugisaki, who is our Head of Japan Macro Strategy; and Sho Nakazawa, who is our Japan Equity Strategist. Seth Carpenter: I will say we have just collectively published our mid-year outlook. So twice a year, Morgan Stanley Macro Research puts together our forecast. We take the time to debate with each other, to pressure test our views on the outlook for the next year and a half to two years. And I have to say this version of the outlook process may have been the most difficult one that I can remember. And in no small part because one of the key fundamental drivers of the outlook globally for growth, for inflation is oil, oil prices. And the swings there have been pretty dramatic. And so, as a result, we put a lot of effort into not just our baseline forecast, but also scenarios and the ways in which our baseline forecast could be wrong. But Chetan, let me start with you. Tell us a little bit about the exposure in Asia to, to the energy shock. Chetan Ahya: So Seth, you're right. Asia is one of the more exposed part of the world. But I would say that we've been surprised in the way this energy shock has been managed. One is, of course, at the global level, two big swings happened. US exports increased dramatically by 3.8 million barrels per day. Just to give you perspective, global consumption of oil is about 100 million barrels, so it's simple math in terms of how big this number was. And then China parallelly also reduced its imports by 3.5 million barrels. So, we had a 7 million barrel swing from a global oil demand balance perspective.And, secondly, as far as gas is concerned, that is where actually we were more concerned about Asia because Asia was very dependent on Middle Eastern gas. And on that front, China single-handedly has bailed out the region. So, China cut its gas imports by about 45 percent, and that had at least avoided the shortages that we were worried about. We can manage oil prices, but shortages is something very difficult to manage. So that's at the global level. And within the region, what every economy did is to switch to an alternative source of fuel, whether it is electricity generated through coal or other renewable sources. And particularly that happened in China and India, which are the two big importers of fuel in the region.And then additionally, what we also saw is that everybody managed the fuel price increase quite well. So, on an average, if I look at the stats as of today, only about 25 to 30 percent of the underlying fuel price increase has been passed on to the consumer. So, the governments are taking it, so there is a burden on the fiscal front that is building up. But as far as the consumers are concerned, this has been a help, and therefore you have not seen a big spike in inflation across the region. Seth Carpenter: Okay. So, a lot of comments about Asia in general. Let's go more specific to here in Japan. And so, Yamaguchi-san, you were an early adopter of the Japan reflation view. If we go back a year, two years, three years, you were probably more optimistic, more bullish about growth in the market than consensus. More recently, you've been a little bit more cautious about where growth is going. And so, can you tell us a little bit first why you're a bit more cautious now relative to where I suspect the market is? And then when it comes to the energy shock, how do you see it playing out with the Japanese economy? And should we worry about it derailing this whole reflation trade? Takeshi Yamaguchi: We think Japanese underlying economic fundamentals remain resilient in the sense that, you know, nominal GDP recovery will continue as a trend. But for this year, I think there's a, you know, short-term slowdown, both in terms of real GDP growth and nominal GDP growth, due to the terms of a trade shock. So far, you know, thanks to the government energy subsidies and Japan's relatively large strategic oil reserves, the direct impact on households has been limited. But we are already seeing a big increase in producer prices in the April data. It jumped to 4.9 percent {year-over-year], and we expect this producer price index will continue to go up due to the higher oil prices, but also because of the NAFTA-related supply side, you know, disruptions in areas, you know, such as, you know, construction materials, plastic products, and industrial solvents and so on. That said, we still believe that, you know, underlying economic fundamentals remain resilient in the sense that there's a structural labor shortage. So, wage growth may somewhat slow, but still I think a solid, you know, base up increase will continue next year, especially among young workers. Also, I think this structural tight labor market [is] encouraging companies to step up labor-saving investment. And, I think, together with government's initiatives for domestic investment, I think, domestic CapEx will also likely remain resilient. So, this year for nominal GDP growth, we expect, you know, slightly negative growth due to the terms of trade loss. But the next year, we are expecting above 4 percent nominal GDP growth. So, the overall, you know, story remains unchanged despite the short-term headwinds. Seth Carpenter: Okay. So fundamental story remains unchanged. We're pretty optimistic, but it's a matter of long term versus short term Jonathan, let me turn to you. Equity markets are generally optimistic, I would say, these days, but there is a bit of a divergence between views on equities here in Asia, between Japan on the one hand, and EM overall. In the mid-year outlook, you have expressed a preference for Japanese equities over EM. Can you talk a little bit about that view? Why that preference? Are there sectors or specific stocks that matter more? How are you thinking about this sort of allocation across equity markets for you in Asia? Jonathan Garner: So, certainly, as Seth indicated and Chetan and Yamaguchi-san said, it's really an environment where the sector call, particularly the CapEx, super cycle call should drive portfolios. And that naturally leads you in Asia more to North Asia, where Japan is very richly endowed in beneficiaries of the CapEx super cycle. And obviously markets like Korea and Taiwan, and much less so to South Asia, where the larger markets are much more populated by consumer and services stocks. So, in our portfolio, we're essentially overweight capital spending, underweight the consumer. And when you look at the Japan market, one of the things that my colleague Daniel Blake has done a lot of work is, is the sort of thematic exposures that exist within our coverage. The four core Morgan Stanley research themes of multipolar world, AI, tech diffusion, future of energy and societal shifts, they map into about 75 percent by stock number of our coverage for the Japan market, and they're quite nicely distributed across the stock coverage. Obviously, some stocks have more than one aspect to them. And that is highly advantageous and much more advantageous than in fact any other large market. Europe of course, doesn't have AI, tech diffusion, or it largely lacks the beneficiaries, the upstream beneficiaries. The US has legacy, sort of, software service, business models and consumer exposure. Now, it's not to say that all is sort of rosy in the garden. There are large auto OEMs here in Japan where the earnings numbers are challenged. So, it's all about the kind of the dispersion that's going on within the portfolio. But just on the base case targets, 4300 for topics, that's set by Nakazawa-san and myself. It's about 12 percent upside in the base. In the two weeks since we published the report, EM has fallen back somewhat, so there's about 8 percent upside to our EM target. But on a kind of risk-adjusted bull-bear skew, bear in mind that EM is much more skewed in terms of the earnings drivers of that market. Essentially, if you strip Korea and Taiwan out, there's no earnings growth in EM right now. You would ultimately have to favor Japan. So, Japan should be at the core of any Asia portfolio at the moment. Seth Carpenter: And can you just give us a little insight as to what you're seeing about how the market is or maybe is not pricing the threat from the energy shock? What are you seeing in equity markets, top line, down into sectors? Do you think there's enough concern? Do you think there's room for that to get, sort of, rerated just on the energy shock situation? Jonathan Garner: So, what you're seeing is that anything that is consumer-related is really struggling in terms of revisions. I think there are six different subcomponents of the consumer that we can track. Every single one of them has downgrades. And the upgrades are in energy, upstream energy, which isn't that well represented in Japan. There are a couple of names. In materials, really across the board. In semis and IT across the board, and broadly, tech hardware. And then in the defense capital goods space. And that dispersion in revisions within the Japan market or within Asia as a whole is something that I've never seen before.It does maybe to some extent question the resilience of the consumer in terms of the way that the numbers are being downgraded. So, I'll just leave that hanging a little bit. Seth Carpenter: Alright, thank you very much to my colleagues. And this is where I have to shift back into podcast mode to say thank you for listening. And if you enjoy Thoughts on the Market, please share it with a colleague or friend today. Thank you very much everybody. Voice: That was Part 1 of a special two-part episode from Morgan Stanley and MUFG's Japan Summit. Join us tomorrow for Part 2 of the conversation.

Our Global Chief Economist and Head of Macro Strategy Seth Carpenter gives his midyear outlook, highlighting why AI investment and U.S. consumers remain key growth engines amid energy shocks.Read more insights from Morgan Stanley.----- Transcript -----Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist and Head of Macro Research. Today, I want to talk about our mid-year outlook that was just published. It's Thursday, May 14th at 10am in New York. Oil, AI, and the consumer now sit at the center of our global economic outlook. With AI and the consumer driving economic momentum in the U.S., the key question is whether the energy shock stays manageable or changes the path for inflation, central banks, and recession risks. We have had and maintain a fundamentally constructive view on global growth, but the energy shock brings unusually high uncertainty. It boosts inflation, it weighs on growth, and it widens the range of outcomes. We forecast global real GDP growth at 3.2 percent in 2026 and 3.4 percent in 2027. That is relative to about 3.5 percent in 2025. So, in our baseline, growth slows modestly this year and then stabilizes and recovers. Writing a forecast is always hard but knowing what to assume about oil prices is even harder than ever now. Our base case assumes that crude returns to about $90 a barrel by the end of this year and declines further in 2027. If, and I do mean if, that happens, the global economy can likely absorb the shock. But if the current situation persists and we do not see a normalization of shipments of oil, it could spell recession. That scenario probably sees oil prices surge through $150 a barrel, but more importantly, we could shift from a price shock to a volume shock. The big risk is physical shortages and supply chain disruptions because it's not just energy, it's also petrochemical inputs to manufacturing and other items. Higher prices slow activity; shortages can stop it. Exposure to the energy shock differs sharply across regions. Among the major economies, China looks the least exposed. Europe is the most exposed, and the U.S. sits in between. China built up substantial stockpiles of oil, and part of why the global oil market has not seen higher oil prices so far is that China has cut back on those imports dramatically. Europe, on the other hand, typically faces faster energy passthrough, meaning energy prices show up much more quickly in household bills, business costs, and ultimately inflation. And Europe is a net importer of energy, so the consideration goes beyond oil to include natural gas. The U.S. is a net exporter of petroleum products, but U.S. consumers will feel the pinch at the gas pump. But even with that in mind, U.S. growth continues to support global growth, thanks largely to strong AI-related capital spending and consumer spending that's being buoyed by the top end of the wealth distribution. We expect that momentum to continue and then ultimately to broaden out. And so we forecast U.S. real GDP growth at about 2.25 in 2026 but rising to about 2.5 percent in 2027. Both of those are up from the 2.1 percent we saw last year. And AI CapEx sits at the center of this U.S. outlook. It includes data centers, power infrastructure, information processing equipment, software. Over time, we think this investment momentum is part of what allows a broadening out of business investment beyond AI. That said, the energy shock has triggered global inflation. We're looking for global headline inflation to rise notably almost to 3 percent in 2026 before coming back off in 2027. But while oil and gas prices are pushing headline inflation higher, the pass-through to core, depending on the economy, seems to remain mostly limited. By 2027, we look for those effects to fade. And combined with somewhat slower growth this year, underlying inflation should soften again. As inflation risks have moved higher, though, central banks have generally become less accommodative. We expect the Fed to now stay on hold all the way through 2026, and then if inflation really does come down, to be able to cut twice in the first half of 2027. We're looking for the ECB to hike twice this year as it grapples with this energy-led inflation, but then reverse course next year in 2027. The Bank of Japan, which had already been hiking policy, probably is set to continue that gradual hiking path. Looking forward to the second half of this year though, global growth still does have a foundation, and the U.S. is a big part of that. AI investment and consumer spending are all what's driving the economy for now. But the energy outlook will determine how bumpy that path gets. Thanks for listening. And if you enjoy this show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Introducing a recent episode of Hard Lessons, featuring Rick Rieder, BlackRock's CIO for Global Fixed Income and Head of the Global Allocation Investment Team, in conversation with Seth Carpenter, Global Chief Economist and Head of Macro Research at Morgan Stanley. Watch and listen on your favorite podcast platform.

Our Global Chief Economist and Head of Macro Research Seth Carpenter discusses whether the economy can adapt fast enough to turn AI into a productivity boom rather than a labor market shock.Read more insights from Morgan Stanley.----- Transcript -----Seth Carpenter: Welcome to Thoughts in the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist and Head of Macro Research. Today we're going to try to look past the hype and the anxiety around AI and ask what will be the effect on the labor market. It's Friday, May 1st at 10am in New York. Now, odds are that you've used AI to draft an email or summarize a document, maybe learn about a new topic, help plan a trip. The new technology is clearly lowering the cost of certain tasks. And I think the research shows that there are plenty and an increasing number of tasks that AI can do better than most humans. But that's not really the question. What I hear all the time is, ‘Well, if we can get the same amount of output with less labor, then surely millions of people will lose their job.' I think the same logic also implies that we can just get a lot more output from the economy using all the labor that we have. And the difference between those two views really is at the heart of the debate. So far, I would say the data allow for some cautious optimism. Despite rapid advances in AI capability and evidence that adoption is spreading, the broad labor market indicators still show remarkably little disruption. Economic growth is holding in there. The unemployment rate is not rising rapidly. If anything, it's ticked down recently. Job openings are not soaring, and separations do not suggest that there's systematic weakness in AI exposed industries. Now, productivity data are beginning to show perhaps a bit of AI's positive effects, but they don't show the mass displacement that many people fear. According to our research, industries with higher AI exposures have recorded stronger labor productivity gains, driven mainly by faster output growth rather than fewer hours worked. And that distinction for me is critical. So far, the evidence looks like workers are producing more than firms are cutting back on labor. There's also a physical constraint. AI adoption depends – and will continue to depend – on infrastructure that is still being built. Of the more than $3 trillion in expected data center and related infrastructure CapEx from 2025 through 2028, only about a quarter of that has been deployed so far. The future remains opaque. No two ways about it. The biggest productivity gains from my perspective are likely still ahead of us, and some job losses are likely unavoidable. Earlier, innovation waves unfolded over decades, and AI is moving much faster, compressing the adjustment period. And that does create the central risk to the labor market; that job destruction happens faster than new job creation happens. And so, what our research has been doing is to try to look beyond the immediate effects. Yes, some jobs and tasks will likely be disrupted. But higher productivity can also mean higher incomes. Higher wealth. With higher income and higher wealth can also mean higher spending, which, in turn, drives the economy faster. Inside corporations, new tasks and new roles will likely emerge giving some of the displaced workers somewhere else to go. And even if employment does slow down for a while – and that could put downward pressure on inflation and maybe upward pressure on the unemployment rate – I don't really think policy makers are simply going to sit back on the sidelines. Central banks can respond by trying to stimulate the economy and bring it back towards full employment. This is something that economists call General Equilibrium. We can't look simply at one side of the equation. We have to think about the system as a whole. And I have to say, if monetary policy runs out of room, fiscal policy makers can get into the game as well. Between automatic stabilizers like unemployment benefits and directed targeted government action, there's another way in which the economy could be pushed back to full employment. So, the bigger point is this, AI clearly has a chance to create some labor market disruption, but the economy has all sorts of other systems and levers in place that can pull us back to full employment. And with those buffers in place, any rise in the unemployment rate from AI is probably going to end up being smaller, shorter, and easier to manage – at least for the next couple of years than maybe some of the first pass analysis that I've seen suggests. AI's labor market impact is not predetermined. The debate will almost certainly come down to speed. How fast is AI adoption relative to the economy's ability to adapt? History suggests that productivity ultimately wins. The economy gets bigger and people stay employed. History also tells us that not everyone benefits equally. And more importantly, not every transition is smooth. So, what does that mean? Should we be just blithely optimistic? Absolutely not. For now, the early evidence is reassuring, but the story is still being written. Thanks for listening, and if you enjoy this show, please leave us a review wherever you listen. And share Thoughts on the Market with a friend or a colleague today.

Still six months out, the U.S. midterm elections are likely to influence government initiatives to deal with higher energy costs. Our Head of Public Policy Research Ariana Salvatore and Global Chief Economist Seth Carpenter discuss how the Congress and the Fed might react.Read more insights from Morgan Stanley.----- Transcript -----Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Head of Public Policy Research for Morgan Stanley.Seth Carpenter: And I'm Seth Carpenter, the firm's Global Chief Economist and Head of Macro Research.Ariana Salvatore: Today we're discussing the run up to the midterm elections and what it could mean for the macro outlook and policy response.It's Wednesday, April 29th at 10am in New York.Last week, Mike Zezas and I talked through the midterm elections and their potential consequences for the economy and markets. This week we figured it might be helpful to talk about the setup into November, especially as we're both increasingly being asked about the macro outlook and potential for targeted stimulus to offset the oil shock.So, Seth, let's start there. we know cost of living is a key issue in elections, and we've seen a pretty meaningful oil shock feed through markets. How are you thinking about that in the context of the broader economy?Seth Carpenter: Our U.S. economics team has estimated that the higher gas prices that we have now and likely to have for the rest of the year are going to be more than enough to offset any boost to consumer spending from the higher tax refunds this year. So, I think that's the first point.If you're expecting a boost to come through that channel, you probably want to unwind that. And In fact, overall, what we've done is lowered our forecast for U.S. growth by about three or four tenths of percentage point worth of growth this year because of the higher energy prices. So, it's a drag on spending, I think, no matter how you cut it.Ariana Salvatore: And that's not happening in isolation, right?Seth Carpenter: No, that's exactly right. That's exactly right. We've also got at least somewhat restrictive monetary policy layered on top. So, financial conditions are already a little bit tight and the oil price shock sort of amplifies that tightening by weighing on spending. That's going to be really important.I think an extra complication then is what does it do to inflation? For now, we don't think it's going to be that big of a deal. History says at least looking at the data that when energy prices go up, when oil prices go up, gasoline prices go up. It does boost headline inflation for sure, but the pass through to core inflation is pretty limited, and the effects tend to go away on their own without too much time.So, I think the real hit here is going to be from the higher costs acting like a drag on consumer spending.Ariana Salvatore: Right. And importantly, it's a very visible shock. Gasoline prices feed directly into how consumers and voters perceive the economy, which brings us into the political overlay as we approach the midterms…Seth Carpenter: Yeah, I think that's exactly right. And whenever we economists are thinking about inflation and prices and consumers, we think about exactly that – what we call salience, just how visible are these prices. And gasoline prices tend to be some of those prices that stick out in people's minds.So, if people are seeing it. And people are reacting to it, give me some idea of what the Congress can realistically do between now and the midterm elections.Ariana Salvatore: Well, I would say in theory there's a range of options. Direct stimulus, targeted transfers. We tend to frame affordability policies across five vectors: energy, healthcare, housing, consumer credit and trade policy. But in practice, the constraints are pretty binding right now and as we've been saying, tariff policy is really the only lever the president can pull easily to have a real impact on voters.Seth Carpenter: All right. So, you said constraints and constraints for the Congress. Can you walk us through what those constraints are?Ariana Salvatore: Sure. So, the first and most obvious is deficits. We're already running large fiscal deficits in the U.S., and I would say there's limited political appetite to expand them meaningfully from here in the near term, especially heading into an election.The second is procedure. If you want to pass something sizable, you're either looking at reconciliation, which requires political alignment in a number of procedural hurdles. Or bipartisan cooperation to get around the filibuster. Both seem difficult to us in this environment.Seth Carpenter: So my experience in Washington for a couple decades of working on policy is that when things are difficult, they tend to take more time. So how does the timing component of all of this matter, and how does it fit into the way that you're thinking about it?Ariana Salvatore: Timing is the third constraint. The legislative calendar in particular. What we see is as you get closer to midterms – really any election – the window for passing major legislation narrows pretty quickly. That's because lawmakers shift their focus toward campaigning, and the agenda itself just becomes more limited.And then to finish off the constraints, the fourth I would say is implementation. Even if something were to pass, there's a lag between legislation and the actual economic impact. Getting funds out the door, whether it's checks or programmatic spending, tends to take time.Seth Carpenter: Yeah, even well targeted policy might not hit the economy in time to have the desired effect before the election.Would you agree with that?Ariana Salvatore: Yeah, but for argument's sake, let's say we're wrong on that and Congress does manage to pass something. Maybe not a broad-based stimulus package, but let's say some form of targeted relief.From a macro perspective, what do you think would matter most? Is it the size of the package, how quickly it gets implemented, or which consumers are targeted?Seth Carpenter: Yeah, I'm going to have to say a little bit of all of the above. I mean, economic analysis really tends to show that tax cuts tend to simulate less than increased spending and transfers matter. But it matters to whom those transfers happen.So, I do think if we're aiming at the lower end of the income distribution, probably has a higher propensity to spend; and so, you're more likely to see more of those dollars getting spent and faster – if that's where it's going. The size of the package has to matter as well, because more money out probably means more money getting spent. But I will add, there are two caveats this time around that we probably need to take into consideration.First, with the increase in tax refunds that we've seen this year, survey suggests that households are using that money to pay down outstanding debt more than they would historically. And so, we might be in a situation because of the past couple of years of affordability issues where households are going to try to get ahead of things and pay down some of that debt. And as a result, maybe there's a more muted effect on spending.And second, we are living in a world right now where inflation is well above the Fed's target. So, if the extra stimulus leads to extra spending at a time when prices are already high, well, there's a chance we might give an extra boost to inflation and then the Fed would have to reconsider what it's doing on monetary policy.But you said Congress is probably constrained. So, let's shift then and ask, is there something that the president could do unilaterally with executive authority? And in particular, sometimes I get this question from clients, even if there's not clear, well-defined legal authority. We've seen something like that before with the tariff policy under the IEEPA authority. It was imposed and then later it was pulled back when it was judged by courts not to be the right authority.So, why wouldn't we think – the argument goes; why wouldn't we think that some sort of large scale maybe rebates or direct payments, could get deployed quickly, even if the, let's say, legal authority is a little bit murky?Ariana Salvatore: Yes, it's an interesting question, but I think there are a few important distinctions that make something like the administration sending out checks, for example, very different from tariff policy. First, fiscal transfers are much more clearly tied to congressional authority, legally speaking.Spending power, as you know, resides in Congress, and that's a pretty firm constitutional boundary. And importantly, even something like tax refunds, which can look like direct payments aren't discretionary. They're preauthorized in the tax code, and Treasury is just returning overpayments under a standing appropriation. So, there isn't really a comparable mechanism the administration could use to send out broad-based checks, for example, without new legislation.Now, trade authorities by contrast, have historically allowed for more executive flexibility, even if contested, like we saw with the IEEPA tariffs. Direct fiscal outlays are different. You generally need explicit appropriation. And then second, there's the operational side to all of this. Even if you were to set aside the legal questions, there isn't a standing mechanism for distributing very large sums of money quickly without legislative backing.Seth Carpenter: Fair enough. And if we stay in this totally hypothetical world, what would you imagine would be the timing of any legal challenges if they did happen?Ariana Salvatore: In a scenario like this, you'd likely see challenges fairly quickly and courts could intervene early in the process, potentially before funds are even fully dispersed. So, Seth, the idea that you could deploy something on a massive scale and only deal with the legal consequences much later is all the more uncertain.But Seth, let's stay with the upside risk scenario for a moment. If Congress did pass something targeted instead, where would you expect policymakers to focus? Can we talk through maybe energy rebates, child tax credits, SNAP or nutrition support… Or do you think something else aimed at the most rate sensitive or cost of living sensitive households might make more sense?Seth Carpenter: Yeah, I think you've laid out there a pretty rational strategy for trying to make things targeted for the people who are going to be feeling this affordability crunch the most. And so, the SNAP benefits, like you said, are nutrition support. That's lower income households, families with children, people who really are living paycheck to paycheck and noticing these higher prices.Energy subsidies or some sort of tax rebate – again, trying to target where the pain is most acute; the higher electricity prices, the higher gasoline prices that people are noticing, that people are feeling. I think all of that seems very plausible.I just want to flag though, that there is this possible hidden effect, which is the more these policies mask the higher cost, the economic pain from the higher energy prices – the more it allows people to keep spending despite the higher prices. And that spending with higher prices, well, that could easily lead to a tick up in inflation.That could lead to a change in the Fed's reaction function. And if it was strong enough, if growth picked up enough and inflation picked up from here, you could easily see the Fed hiking rates instead of cutting.Ariana Salvatore: So, in other words, even if the policy surprise is maybe good news for consumers in the near term, markets would still need to think through whether it extends the inflation problem or changes the expected rate path.Seth Carpenter: I think that is exactly right. I think this is very much a case where good news could be good news, but there are going to be lots of details.So maybe if we take a step back, we've got a constrained Congress, maybe limited scope for unilateral action and a macro backdrop because of inflation that's probably already under some pressure.Ariana Salvatore: Which means the key drivers heading into the midterms later this year are likely to remain the ones that are already in place: energy prices, monetary policy, and underlying growth dynamics rather than potential new fiscal stimulus.Seth Carpenter: And so that means for markets, focus needs to stay on the fundamentals.Ariana Salvatore: Exactly. Elections can shape the policy path at the margin, but the macro cycle is doing most of the heavy lifting here. And we think that's the case following the midterms as well. If you'd like more detail there, please go ahead and listen to our podcast from last week on this topic.Seth, thanks for taking the time to talk.Seth Carpenter: Ariana, thank you for inviting me. And for the listeners, thank you for listening. If you enjoy Thoughts on the Market, please share it with a friend or colleague today. And leave a review wherever you listen to podcasts.

Our Global Chief Economist and Head of Macro Research Seth Carpenter asks Mayank Phadke, a member of his team, to give up an update on tariffs and their real cost to the U.S. economy.Read more insights from Morgan Stanley.----- Transcript -----Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist and Head of Macro Research. And I'm joined by Mayank Phadke, a member of my global economics team. And today we're going to talk about tariffs. I bet that was a surprise. It is Thursday, April 23rd at 10am in New York. I have to say, for the past couple of months, the focus on energy markets, energy supply, energy prices – that has dominated everything that we've been talking to clients about around the world. And so, everyone would be forgiven if they had forgotten that we were talking about tariffs much the same way, nonstop last year. Now, tariffs kind of seem like an afterthought. But part of the stated motivation for tariffs when they were imposed was to boost reshoring. That is to have more production of goods in the United States that had been imported. So, tariffs still matter. They matter for CapEx, in that regard, they matter for domestic production. And because of all of that, presumably they matter for markets and for the Federal Reserve. But for the narrow question of reshoring, the data so far, I would argue, suggests that there's been very little net effect. There will be more tariff news arriving in coming months. So Mayank, I am going to pull you into this conversation because you have been one of the key people on the team, doing of analysis on the data work on tariffs, trade and reshoring. So, could you tell us a little bit about what's been happening to the effective tariff rate for the United States recently? And where we think that's likely to go? Mayank Phadke: Tariff levels have declined steadily in recent months, falling to 8.5 percent as of February, with the decline having accelerated after the Supreme Court ruling. The decision on IEEPA forced a shift in underlying tariff authorities with country level IEEPA tariffs temporarily reconstituted under Section 122. We have long argued, even before the 2025 tariffs that the legal basis for durable tariffs would need to be anchored in section 232 and section 301 based authorities rather than in IEEPA. The current Section 122 tariffs are due to expire on the 24th of July. And after that, we expect more durable authorities to kick in. The shifts that we will see as IEEPA tariffs are replaced by new section 301 and 232 tariffs means that there will be some differences. But from a macro perspective, we expect the level to be roughly similar to where it stood at the end of 2025. An aggregate effective rate of around 10 percent. Two sets of Section 301 investigations were announced by the administration in March, covering virtually all major trading partners. These investigations are likely to run on a faster timeline than prior efforts. Those took around nine months. The comments were requested by the 15th of April, with hearings scheduled for early May. We're inclined to expect completed section 301 investigations over the summer while section 232 tariffs will likely arrive in waves as sector-based investigations proceed. Seth Carpenter: Got it. Okay. So, I'm going to summarize that to say tariffs are not going away. Tariffs are here. In the aggregate for macro economists like us, probably about the same level it's been. But that escapes the question about the individual industries, and it brings us right back to this question of reshoring. Is that what's going to happen? And so, when I think about it, we do have all these negotiations. But the reshoring question forces you to wonder about manufacturing, manufacturing growth and with it CapEx. And like I said at the top, it's non-AI CapEx that's really on the soft side of things. So, you've spent a lot of time looking at the data. I would say one industry that tends to stand out in all these conversations is steel. So, if we look at what's happened with the steel industry, with tariffs, with changes in imports and that sort of things, what's happened? Do we see clear evidence that there's this big reshoring push? Mayank Phadke: The case of steel is certainly very interesting. It helps frame why tariff uncertainty matters. And the supply chain for steel is relatively compact, which makes it easier to observe how the sector responds to tariffs. Domestic production has risen as imports have fallen consistent with the idea of reshoring. But when we look at the total supply of steel to the domestic economy, it hasn't risen. More importantly, U.S. steel prices have materially diverged from global peers. And the risk of more aggressive sector tariffs across the economy, in our view is higher prices. An outcome which is consistent with our expectations from a year ago – and with economic theory. Seth Carpenter: As an economist, I'm always happy when the reality matches what I was expecting in theory. So, that's super helpful. Now, that is one specific industry, and I know that you have spent a bunch of time looking at the data across industries. The point that you made though, about the higher prices, the higher domestic prices for steel means, to me as an economist, that we have to try to maybe separate out the effects of the nominal versus the real. Which is to say, if we're measuring how much output there is, how much that increase is coming from just prices going up versus how much is coming from, total quantity. So, if I asked you, when you look across industries, when you look at the data, what evidence do you see in terms of lots of reshoring. That is to say a diversion of trade, a reduction of imports, and with it an increase in domestic production. Is that there broadly in the data? Mayank Phadke: When we look at production and imports across industries and goods and identify the industries both with and without reduced imports, we see that the increase in domestic production has come largely in nominal terms. Which means that the price has risen, but very little of that increase is actually higher output. The evidence for meaningful reassuring here is quite limited. Seth Carpenter: Alright. So that's super helpful to me because when I think about the implications of tariffs, the economist in me says it reduces the overall productive capacity of the economy. It raises cost for the economy. The counter argument has been we're going to make more in the United States and that's going to boost the U.S. economy. As far as I can tell, when we look at the data themselves, there's not a lot of evidence for the upside. But there is clear evidence that we're raising costs for the U.S. economy. Alright, well Mayank, thank you so much for joining me. And thank you to the listeners. If you enjoy this show, please leave us a review; and share Thoughts on the Market with a friend or a colleague today.

Back from the IMF Spring Meetings in Washington, Simon Waever and Seth Carpenter unpack what policy makers and investors could be underpricing: the growth hit from higher energy costs, the risk of too much tightening by central banks and why emerging markets still look resilient.Read more insights from Morgan Stanley.----- Transcript -----Simon Waever: Welcome to Thoughts on the Market. I'm Simon Waever, Morgan Stanley's Global Head of Emerging Markets Sovereign Credit and LatAm Fixed Income Strategy. Seth Carpenter: And I'm Seth Carpenter, Global Chief Economist and Head of Macro Research. Simon Waever: Today: The key takeaways for investors from the International Monetary Fund spring meetings in Washington, D.C. It's Tuesday, April 21st at 10am in New York. Every six months, the IMF meetings in D.C. bring policy makers and investors together to take stock of the global economy. And we were both there as part of our IMF policy pulse conference. This time, continuing a pattern of recent years, the backdrop was a bit more complicated. Investors are weighing the economic fallout from the Iran conflict, potentially more persistent inflation pressures, and, as always, rising concerns around global debt and fiscal sustainability. So, the key question coming out of Washington is how do these risks reshape the outlook, and what should investors be paying attention to now. Let's start with the growth outlook, Seth. When you think about the Iran conflict, what's the single biggest channel through which it could hit global growth? And is that risk underpriced by markets today? Seth Carpenter: I think it really is underpriced, and not just by markets. I would say I had conversations with investors, but also with policy makers down in Washington. And I would say relative to my views on things, both markets and policy makers are under appreciating how much of a hit to growth this could be. Where is it going to happen? What's the channel? Well, that actually – that differs depending on which economy that you're looking at. I would say here in the U.S., it's primarily the middle- and lower-end of the income distribution. Higher energy prices, gasoline prices going up, taking away at discretionary income, especially in what we've been calling this K-shaped economy where the bottom half is already struggling. So, a bit of a hit primarily to consumption spending. I'd say in other parts of the world, it's broader. Asia – we are already starting to see rationing being imposed for production, for public transportation in lots of ways that really are going to crimp spending both by households and businesses. And then of course Europe. Well, they're still in some ways reeling and adapting from the energy price shock. When Russia invaded Ukraine, natural gas prices went up a lot more then. But I think there's still an adjustment process going on. So, I think the potential hit to growth is real. I think it has spread across economies around the world, but each different economy, each different country has its own sort of nuance and flavor to it. Simon Waever: And what about the central banks? I know you met with quite a few of them as well. Are they at risk of being behind the curve on inflation or is actually the bigger mistake now look like over-tightening? Seth Carpenter: Yeah, I really think the over-tightening is the bigger risk here. It's funny, being behind the curve. That's a phrase that I did hear a lot, especially among some of the European policy makers. And people are feeling scarred, I guess you could say, from the surge in inflation that we got coming out of COVID. But history suggests that these sorts of surges in energy prices tend to be: one, more focused in headline inflation rather than core; and second, they do tend to revert on time and go away, over time. And I would say the bigger the hit to growth, the more likely it is that the inflationary impulse will start to fade on its own. And so, I do think there's too much reliance maybe on the inflation side of things, maybe not quite enough on the growth. And so, when I weigh the pros and cons, I would say the risk is probably too much tightening rather than not enough. But you know, Simon, I tend to spend more of my time in Washington talking to policymakers and investors who are focused on the developed market economy. So, I talked to people about the Fed, talked to people about the ECB. Morgan Stanley's real strong suit, when we do these conferences of the meeting though, is our EM focus. And I know you and the rest of the team have really over the years ramped up our engagement. So, when you think about the conversations that you had with investors and with officials, what do you think has, sort of, shifted most in recent months? And maybe what's shifted over the past week because the news flow has been going back and forth. What's going on in emerging markets that investors need to know about? Simon Waever: Right. I would say the first, and by far the biggest focus throughout the week was the disconnect between the very positive market sentiment versus actual developments in the Iran conflict. I think many participants believe the mood would be much worse and that the decision coming out of the meetings would be whether to buy into a challenging backdrop or just stay away. But instead, I think they came away thinking that the mood was actually fairly upbeat. But also that markets are pricing in a substantial probability of a resolution already. And that brings me to my second takeaways, and that's around EM resilience. EM has faced multiple macro shocks in recent years. And I think it's fair to say that EM policymakers, including central banks, have built up their credibility when it comes to responding to such events and the volatility they bring. Several of the EM central banks we met were positively surprised by the resilience of FX markets but also noted that they would still err on the side of caution. EM fundamentals also help in this aspect, which has seen contained external imbalances versus the past and mechanisms to deal with the energy price shock.Of course, with everything else impacted by the war, duration matters – especially as fiscal buffers are not equal across EM. But I would say in general it reaffirms our view that EM is in a good place to absorb and deal with the uncertainty. And that would actually be my third and final point. That the year as a whole should be good for EM assets, assuming that trajectory remains one of de-escalation. And I think that does extend to FX as well, where the market may quickly return to trading U.S. dollar weakness, particularly if the market's priced more of the Fed cuts that you expect. Seth Carpenter: Got it. So, you did say, assuming we return to a theme of de-escalation, and I guess we have that built into our forecast. The last four or five, six days has seen lots of back and forth. But if we do assume we end up de-escalating the current crisis in the Middle East, looking across EM [be]cause it really is a differentiated, subtly nuanced, broad part of the world. If I had to push you a little bit and say, where do you see the clearest winners? What would you point at? Simon Waever: Sure. I mean, to me, LatAm remains a key winner. We've had this call since the start of the year, but if anything, the Iran conflict and my discussions at the IMF only reinforce this. The region is obviously physically removed from the Middle East, but there are also many large commodity exporters. And a lot of the discussions were around the political realignment with the U.S. and there are several examples. Just to give a few: Argentina as usual, was a key part of the discussions. And compared to the meeting six months ago, they were much more positive given what's been accomplished since, both in terms of the structural reforms and the FX purchases here to date. And I have to mention Venezuela given it was during the meetings last week that the IMF resumed dealing with them, which had been a key positive catalyst that we've been looking for. Brazil is obviously the biggest economy, and I would say sentiment was pretty positive. But also there's an acknowledgement that the elections in October are just too close to call. And that is likely to bring some uncertainty closer to the time. Seth Carpenter: Yeah, those are all super compelling examples [be]cause they mix the economics, the markets with the politics. Obviously you mentioned the elections coming up in Brazil; and then for Argentina it was this real huge landslide shift in what was going on because of an election there a couple years ago. And we're seeing how that's coming out. Alright, so let's go in the opposite direction. And not everything can be rosy, and even if as a class we're pretty optimistic and pretty constructive on EM… Do you think there are some key vulnerabilities across the space that you cover that maybe could surprise us to the downside? Or maybe that markets really aren't appreciating now and might have to rethink? Simon Waever: Yeah, I think to start with, we move outside of LatAm and in all those discussions it was much more about the extent of vulnerability to the conflict and in particular the energy exposure. And I would say in general, an oil price of eighties is a sweet spot for EM, sovereign dollar bonds. But differentiation should pick up a lot. I would say the obvious view would be that energy exporters should outperform importers. But what I would highlight is actually more around the differentiation within all the importers [be]cause that's where policy space can differ significantly. And even just within Central America and Caribbean, I would call out countries like Costa Rica and Guatemala as having more policy space than say, El Salvador or Dominican Republic. And within Africa, it really comes down to the energy balance and whether you have alternative financing sources. Seth Carpenter: Got it. Got it. That's really helpful. I will say every day, every week, every month we get new headlines about what's going on. I think you and I are both going to have to be glued to our screens to, sort of, follow what's going on and see how it affects markets. But I guess for here maybe we will call it quits. I really learned a lot from my time down in Washington. It sounds like you had some really good engagement too. Simon Waever: Yep. I agree. Thanks for taking the time to talk. Seth Carpenter: It's always good to talk to you, Simon. Simon Waever: As a reminder, if you enjoy Thoughts on the Market, please take a moment to rate and review us and share the podcast with a friend or colleague today.

Our Global Chief Economist Seth Carpenter concludes the two-part discussion with chief regional economists Michael Gapen, Jens Eisenschmidt and Chetan Ahya on the second order effects of the energy shock from tensions in the Middle East.Read more insights from Morgan Stanley.----- Transcript -----Seth Carpenter: Welcome to Thoughts in the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist and Head of Macro Research. And once again, I am joined by Morgan Stanley's chief regional economists: Michael Gapen, Chief U.S. Economist, Chetan Ahya, the Chief Asia Economist, and Jens Eisenschmidt, our Chief Europe Economist. Yesterday we focused on the immediate impact of the Iran conflict, how the energy shock is feeding through into inflation, and, as a result, shaping central bank decisions across the U.S., Europe, and Asia.Today we're going to go a level deeper and talk about some structural issues in the global economy. It's Wednesday, April 15th at 10am in New York. Jens Eisenschmidt: And 3pm in London. Chetan Ahya: And 10pm in Hong Kong. Seth Carpenter: So, even as we're waiting to see whether or not oil prices stabilize following a temporary ceasefire – or not – the broader effects are still working their way through the global economy. Labor markets, supply chains, and then, of course, back to the more longer-term structural themes like AI driven growth. So, the question, I think, has to be: what does this shock mean, if anything, for the next phase of global growth? And does it reshape it? Does it change it, or do we just wait for things to go through? Mike, let me come to you first. One risk that we've been focusing on is whether this kind of shock really changes some of the structural positives in the U.S. economy. The U.S. has been, I would say, outperforming in lots of ways. We've had this AI driven CapEx cycle. We've had rising productivity; we've had strong consumer spending. What are you seeing in the data about those more structural trends? Michael Gapen: I think what we're seeing in the data right now is evidence that oil is not disrupting the positive structural trends in the U.S. I think AI CapEx spending is largely orthogonal to what we've seen so far. It doesn't mean that we can't see negative effects, particularly if oil rises to say $150 a barrel or more where we think you might see significant demand destruction. But with oil where it is right now, I would say the evidence is it will probably weigh on consumption. Gasoline prices are higher. It's going to squeeze lower- and middle-income households that way. But so far, the labor market appears to be holding up. And business spending around CapEx seems to be holding up. And the productivity story remains in place. So right now, I'd say this is more of a break on consumer spending, maybe a modest headwind. But not an outright hard stop. And I think those positive structural elements and AI-related CapEx spending are going to stay with us in 2026. Seth Carpenter: I hear in your answer part of what for me is always the most uncomfortable part of these conversations. Where I have to come back to say, ‘But of course it depends on how things evolve…' Michael Gapen: Of course, It depends… Seth Carpenter: So, then let me push you on AI specifically. You and your team have published a few pieces recently about AI. How AI is affecting the labor market, and maybe some hints as to how AI is likely to affect the labor market. So how should we think about that? Michael Gapen: While it's still too early, I think, to draw firm conclusions, Seth, we do find that there's some evidence that AI is pushing unemployment rates higher in specific occupations that are exposed to task replacement. So, what we did do is we broke down the data by occupation, and it's clear that the unemployment rate has been rising. But that's just a general feature of the economy at this point in time. Over the last 18 to 24 months, the unemployment rate has gone higher. So, what we did is a second-round effort at kind of controlling for cyclicality. And when you control for those, we do find evidence that the unemployment rate for occupations that have high exposure to AI is higher than you would expect, given the cyclical performance of the economy. But the effect is really small. It's maybe about 1/10th on the unemployment rate. So, I don't want to be too Pollyannish and say, ‘Oh, there's no evidence here that AI is disrupting the labor market.' We'd say that there is some evidence there. But, so far, it's mild and it's modest. It's a little more micro than it is macro. So, we'll see how this evolves. But that would be our initial conclusion so far. Seth Carpenter: So, Mike, that's super helpful. When I think about the AI investment cycle, though, I have to come back to Asia because a lot of the AI supply chain is there in Asia, especially with semiconductors and others. But there's lots of supply chain around the world. So, Chetan, if I think about different supply chains, different industries in Asia that are at risk, potentially being disrupted by the current shock, where do you focus? And then take a step further and tell me if you see a risk that there's a structural dislocation going on here in any of these sectors? Chetan Ahya: So, Seth, there are two relevant points here from Asia supply chain perspective, particularly the tech sector. Number one, there are some concerns on the supply side issues in the context of helium and sulfur. But from what we see as of today, these companies who need that helium and sulfur are able to pay up. As you would appreciate, this is a sector which is, you know, making a lot of money for those economies, i.e. Korea and Taiwan. And they are able to bid up on gas prices, sulfur, and helium, and still managing their production lines. So, we don't see a supply constraint as of now for their production, but there will be an implication for them if you do see damage on U.S. growth, which is quite meaningful. At the end of the day, these sectors are deep cyclical sectors. But if you do see that, you know, scenario of $150 of oil price and it brings global economy to near recession, then there will be implication for these companies and sectors in Asia as well. Seth Carpenter: All right, so Jens, let me bring it to you then. Because when I think about Europe, I think about a couple things. One, kind of, the intersection of energy vulnerability now markets pricing in tighter policy, industrial exposure, which has been going on for a long time. Takes us back in lots of ways to the energy price shock that started in 2021 and went through all of 2022, where we did see, I think, a hit to European manufacturing that had kind of a long tail to it. So, when you think about the current situation, what do you think this shock means for the medium term? How much of an effect do you think this energy price shock could have on the European economy going out a couple of years?Jens Eisenschmidt: Yeah, I mean, just listening to you guys, I mean, really makes me a little bit more depressed still, in terms of being European economist here. Because I mean, it seems America, well, they have the same energy shock, but at least they have AI. In Asia while they have the same energy shock, but at least they have something to deliver into AI. Europe just has the shock, right? So, in some sense there could be one summary.No, but I mean, going back to the comparison and the question. Of course, we have downgraded, as I said yesterday, our growth outlook. And that's predominantly on simply inflation high that is not great for consumption. Consumption is 50 percent of GDP. So, you want to take down a little bit your forecast and your optimism. And then – to your point – where does this leave Europe? We do have already less energy intense manufacturing than before. So, not sure if you'll see much more, or much further downward pressure on this sector. But, of course, it is an uphill battle from here to get back. To get this industrial renaissance back that to some extent the Germans at least are hoping for. In our growth outlook and our growth revisions, we looked into differentiated impacts. And, of course, one of these impacts is through trade. And again, the backdrop here probably globally is not great for trade – as at least you would not want to be super optimistic in that current backdrop. And that will hurt again Europe. So, to your question, we have an outlook, which is still positive growth; but much more muted than say, a month ago or two. Seth Carpenter: Can I push you then a little bit and say that this shock to the European economy then isn't just a cyclical hit. There's probably an additional sort of structural headwind that might get introduced on the heels of, say, the earlier 2021-2022 energy shock? Jens Eisenschmidt: I would say it's the same thing. It's just a reminder that this is still there, right? Europe needs to, kind of, find ways… I think it's best exemplified by the German economy, who was exporting to the rest of the world. And now it looks like as if China has taken over that role. And so, you have to find a new business model, simply speaking, because the ice cream shop next door is just better than you. And so, this is something, what the European economy has just gotten another reminder, and it came through energy, in particular. So, this is where the similarities are. So that was a [20]22 shock. In the meantime, oil prices had nicely retraced, gas prices had nicely retraced. We have new contracts with different suppliers. But still, I mean, the high energy prices expose us here. Because we are already a continent with very high electricity prices, which are derived from the fossil fuels. And so that is not going to end. And so, the continent really urgently has to address that weakness, that structural weakness. And so yeah, in that sense it's structural. Seth Carpenter: Let me pull this together for maybe a final question for each of you. And I'd love it if you could just answer really quickly. Quick fire answers here. We've got a baseline scenario where energy prices are high. Oil is back up a little bit over $100 a barrel. But I think we, and most of the market, are assuming oil prices gradually come down later this year. Mike, what's the prognosis for the U.S. economy? If instead oil prices skyrocket, say they go through $150 a barrel for a couple of months in a row. Michael Gapen: So, the risk there, Seth, is that you do get significant demand destruction. It's not just a gasoline price story for the consumer. It's about weak asset markets. It's about a pullback in hiring. So, at $150 a barrel or more, I would be afraid about recession risk in the U.S. The U.S. is well positioned to handle an oil price shock, but it also has limits. Seth Carpenter: Got it. Jens, suppose instead we had a rapid de-escalation and all of a sudden in the next two months, oil prices are backed down to say $80 a barrel or so. How much of the damage that you envision for the European economy is already baked in the cake? And how much of it goes away if oil prices retrace over the next two months? Jens Eisenschmidt: I would say a lot for this year is baked in the cake to use your words. While next year, we would be basically back to where we had been before in numbers. 1.2 instead of the 0.9 we are seeing currently. And importantly, the ECB could stay. It would not have to hike into that crisis. Seth Carpenter: So, Chetan, , let me come back to you then to wrap up this whole conversation. We've talked about energy mostly in terms of price, but as we've discussed there is the quantity side of things. So, do you think there's a non-linearity? Is there something that's going to just fundamentally change if instead of the rationing being done by price, we get to a point where there's just simply no supply coming to Asia? Chetan Ahya: Yeah, I think that's a very real risk, and that's particularly more important for Asia because there's a lot of dependence on Middle East, and both gas and oil coming in through the Strait of Hormuz. So yeah, I think there is a risk of non-linearity on Asia's growth dynamics if you see supply shortages. Seth Carpenter: Super helpful. I think that's a great place to leave it. What started as a geopolitical shock is now evolving into something broader, touching everything from inflation, interest rates, possibly productivity and technology investment, and clearly global trade. So, Mike, Chetan, Jens, thank you all for coming to help connect these dots. And to the listener, thank you for listening. If you enjoy the show, please leave us a review wherever you listen to podcasts and share Thoughts on the Market with a friend or a colleague today.

In this first of a two-part discussion, our Global Chief Economist Seth Carpenter leads a discussion with chief regional economists Michael Gapen, Jens Eisenschmidt and Chetan Ahya on impacts of the conflict in Iran and how central banks are responding.Read more insights from Morgan Stanley.----- Transcript -----Seth Carpenter: Welcome to Thoughts in the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist and Head of Macro Research. And today we're going to kick off our quarterly economic roundtable. And this is where we try to step back a little bit from the headlines and the day-to-day changes in markets and try to put the global picture together and frame it for you. In the first of this two-part discussion, we're going to cover the implications of the oil price shock for energy, inflation, and for central bank policy. As always, I'm joined by the Chief Regional Economists here at Morgan Stanley. I've got Michael Gapen, our Chief U.S. Economist, Chetan Ahya, our Chief Asia Economist, and Jens Eisenschmidt, our Chief Europe Economist. It's Tuesday, April 14th at 10am in New York. Jens Eisenschmidt: And 3pm in London. Chetan Ahya: And 10pm in Hong Kong. Seth Carpenter: So, let's just jump right into this. Over the past several weeks, global markets have been dominated by one story. The escalation, de-escalation, the news flow back and forth about the conflict in Iran and the ripple across energy markets, inflation, and growth. Our view has been that even if we don't see another huge leg up in the price of energy and another surge in volatility across financial markets, the persistence of the shock in terms of disrupted supply will be at least as important, if not more so for markets. So, let me start here in the U.S., Mike. You and I have each had lots of conversations with clients about how the Fed's going to react. Market pricing moved a lot before, has retraced, and now is kind of looking at no change in policy for this year, give or take. Your baseline remains that the Fed will have an easing bias and that we'll end up with a couple of cuts later this year. Can you walk us through that thinking, and also where the debate is with clients? Michael Gapen: Sure. So, the evidence in the data… This goes back, let's call it several decades now – that oil price shocks in the U.S. do tend to push headline inflation higher by definition. But they have very limited second round effects on core inflation. And the higher oil prices go, the more likely it is that you get some demand destruction, some weakness in spending, maybe even some weakness in hiring. So, there is a bit of a non-linearity here. In our baseline where oil is elevated, but let's say not excessively high, I can completely buy the argument that the Fed is on hold assessing the evolution of the data and wondering are there second round effects on inflation? Or is this weakening demand? So, Seth, our view is that the Fed is right in its assessment that tariff passed through to goods prices will eventually moderate. And that the oil price effect on headline will diminish. And later this year, core inflation moderates. That should open the door for the Fed to cut two times this year. I do think that the wrong thing to do in this situation is to raise rates into this… Seth Carpenter: I agree with you. Michael Gapen: Yeah. So, I think it's… The Fed's on hold or their cutting. If we're right on where inflation goes, that can open the door to cuts. But to your point, where is the investor debate right now? I think the knee jerk reaction from markets is – the Fed's on the sideline, for, let's call it the foreseeable future. Which as you noted in this market is day-to-day headline to headline. And the Fed will assess where to go later this year. We think they can cut. But I think in general, the Fed is either on hold or cutting. I think the wrong thing to do right now is raise rates. Jens Eisenschmidt: Yeah, let me jump in maybe here from Europe where in theory it's the same problem. Just that the answer that the central bank is likely to give in Europe is slightly different from the one in the U.S. So, the debate we have with clients is not so much about whether or not the ECB is going to hike rates. It's more about how much it will do or have to do this. I mean, again, it has a lot to do with the way oil prices in the end, end up trading. It will be a lot more inflation or less. But it has also to do with the way the mandates are constructed. So, the ECB really has a single inflation mandate and not a dual mandate like the Fed in the case of the U.S. So, there's much more attention on inflation. Next to that, we have stronger second round effects. Historically, we know that from the data. So, it's clear and understandable why ECB policy makers all came out cautioning against that inflation coming, and sort of mulling what had to be done there. We had some leaks out of the governing council meeting in March that maybe [in] April, you've already seen rate hikes. We pushed strongly back against that notion. Since then, we had other policy makers coming out agreeing to that. Yet we likely have a discussion in the June meeting that may lead to a rate hike. We currently forecast a rate hike in June and one in September. Seth Carpenter: What about the growth risks to the euro area? Is that part of why you think the hikes might come later? Is that part of why the ECB might only hike two times this year? How do you think about the growth risks for the euro area in addition to the inflation risks? Jens Eisenschmidt: Yeah, no, I think that's a fair question. We have just updated our growth outlook for this year. Next, we've downgraded growth, obviously. Again, all of that is dependent on the scenario in the end we are in. For now, we assume a scenario of elevated oil prices for this year, but then they will retrace. Now the ECB will look at that in a very similar fashion. So first of all, they will have their new projections. They will see whether there is any hope, reasonable hope that we go back to close to target inflation. Mind you, we were below target, started the year on a very good footing here. And now are projecting we will more or less come out at above 3 percent this year and 2.4 next. Both are above the 2 percent target. That already factors in a mild hit to growth. And I think here is really the crux of the matter. If the ECB has to see a more dramatic downward revision of its growth outlook, they may as well hold a little bit more back with rate hikes. At the same time, for now, all the indications are that the hit to growth will be relatively mild and herein lies if you want the basis for the rate hikes. It's a bit of a signaling device. It's a bit of lowering growth, but not really as much. It's not – we see a central bank leaning strongly against inflation. We are seeing them mildly leaning against it in a bid to stabilize inflation expectations mainly.Seth Carpenter: Alright, that's super helpful. Chetan, I'm going to come to you because we've talked with Mike and with Jens about the inflationary side of things and the growth side of things. But when I think about energy and Asia, I think of Asia as being a bit more exposed than other big economies, definitely relative to the United States. And I think about a lot of sensitivity, not just to the consumer, but also to manufacturing. So how are you thinking about the exposure across your region, across Asia to this energy shock? Where are the biggest risks? Chetan Ahya: So, Seth, first of all, I agree with you. I think Asia is the most exposed region. The best metric for assessing that is how much is the net oil imports of each of the regions in the world. And Asia is at around 2 percent of GDP. Europe is around 1.5 percent of GDP and U.S. is actually a minor surplus. Now in terms of the transmission of this shock to growth, there are two elements to be considered. One is the price of oil and gas, and second is the supply shortages. And in fact, all my life when I have been doing this work of modeling on oil shocks to growth transmission, we've never had to really think about supply shortages. We've always been considering oil price increase and its impact. But in this cycle, we have to also consider the supply shortages. So, when you consider both these factors, we think that there will be a meaningful growth damage to Asia from the evidence of oil price increase and gas supply shortages that we have seen so far. And we have just reduced our growth estimates for the region from 4.8 percent to 4.4 percent. Mind you, first quarter was fine. So, this is all on account of the last three-quarters growth damage. And we are assuming that there will some kind of normalcy that we see in ships transiting through the Strait of Hormuz. And we are resuming oil prices average around $110 in second quarter and then come down to $90. So, in that sense, our base case is still expecting some kind of a resolution very soon. But if that doesn't materialize and you see oil prices rising up to $150, then we think region will take a much bigger hit and growth will come down to 3.9 percent in 2026. Seth Carpenter: So, Chetan, you've made a couple of really good points there. One I want to highlight is the difference between the quantities and the prices. I would say as economists, as people in markets, we're used to thinking about oil shocks as just about the price of oil and how that transmits through.But I do think there's a real risk now, given the virtual shutdown of traffic through the Strait of Hormuz that we see physical shortages. And across different Asian economies, we have seen rationing already come into place. So, when you look across the region, how would you rank the specific economies that are most exposed? Especially if we have to think about physical shortages. Chetan Ahya: Yeah, right. Seth. So, we've considered both the aspects, price effect as well as the supply shortages. And on that basis, we rank India, Taiwan, Thailand, Korea and Philippines are the ones which are most exposed. And on the other hand, China and Malaysia are least exposed. Japan and Australia are moderately exposed. Seth Carpenter: Yeah, and that makes a lot of sense. But I can't let you get away from the discussion on Asia without thinking about China. What are you thinking specifically about China? How exposed is it? What's going to happen with growth there? And you know, one of the themes, you and Robin Xing, our Chief China Economist, had been talking about now for over a year is the deflationary cycle in China. So how should we think about the effects in China? Chetan Ahya: So, I think, yeah, China is uniquely positioned in this cycle. We are expecting China's growth to be down by just 10 basis points. So, it almost is as if there is not much damage to China's growth estimates that we have made. And the reason why we see little damage in China's growth numbers is because of two reasons. Number one is that their net oil imports are relatively low. And second is that they have a lot of control on their supply chain. So, for example, they have coal gasification facility. So, when crude oil prices rise above $100, they can activate this coal gasification facility and use that for all the areas where you can use fuel. And they are also quite good in terms of their own electricity distribution management. They have a lot of surplus thermal power capacity. They have a lot of surplus solar electricity capacity. So, they're able to toggle between gas-based electricity supply into coal and solar. So that gives them a lot of leeway to manage the shock and not have much growth damage. Onto your second point on the impact on its deflationary situation. We think that there will be a rise in prices in China because of the input price increase. We still won't call that as winning this deflation challenge that China has been going through over the last three years. For us, if you want to have true sustainable reflation, you should see consumption demand picking up. At the same time, you should see improvement in corporate margins. And neither of those will happen when you have a rise in inflation because of rise in input prices.Seth Carpenter: Yeah, that makes a lot of sense. As always China is an interesting but complicated story. So maybe this is a good place to stop for today.We focused on the immediate effects of the shock, higher energy prices, central bank reaction. Tomorrow, I think we'll be able to dig in deeper into some of the second order effects, and then also ask the question, where are we going from here? What's going to happen to labor markets productivity – the more structural questions. So, Mike Chetan, Jens, thank you so much for joining today. And to the listener, thank you for listening. And be sure to tune in tomorrow for part two of our conversation. And if you enjoy this show, please leave us a review wherever you listen to podcasts and share Thoughts on the Market with a friend or a colleague today.

Original Release Date: Feb 6, 2026Our Global Head of Fixed Income Research Andrew Sheets and Global Chief Economist Seth Carpenter unpack the inner workings of the Federal Reserve to illustrate the challenges that Fed chair nominee Kevin Warsh may face.Read more insights from Morgan Stanley.----- Transcript -----Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley. Seth Carpenter: And I'm Seth Carpenter, Morgan Stanley's Global Chief Economist and Head of Macro Research. Andrew Sheets: And today on the podcast, a further discussion of a new Fed chair and the challenges they may face. It's Friday, February 6th at 1 pm in New York. Seth, it's great to be here talking with you, and I really want to continue a conversation that listeners have been hearing on this podcast over this week about a new nominee to chair the Federal Reserve: Kevin Warsh. And you are the perfect person to talk about this, not just because you lead our economic research and our macro research, but you've also worked at the Fed. You've seen the inner workings of this organization and what a new Fed chair is going to have to deal with. So, maybe just for some broad framing, when you saw this announcement come out, what were some of the first things to go through your mind? Seth Carpenter: I will say first and foremost, Kevin Warsh's name was one of the names that had regularly come up when the White House was providing names of people they were considering in lots of news cycles. So, I think the first thing that's critically important from my perspective, is – not a shock, right? Sort of a known quantity. Second, when we think about these really important positions, there's a whole range of possible outcomes. And I would've said that of the four names that were in the final set of four that we kept hearing about in the news a lot. You know, some differences here and there across them, but none of them was substantially outside of what I would think of as mainstream sort of thinking. Nothing excessively unorthodox at all like that. So, in that regard as well, I think it should keep anybody from jumping to any big conclusions that there's a huge change that's imminent. I think the other thing that's really important is the monetary policy of the Federal Reserve really is made by a committee. The Federal Open Market Committee and committee matters in these cases. The Fed has been under lots of scrutiny, under lots of pressure, depending on how you want to put it. And so, as a result, there's a lot of discussion within the institution about their independence, making sure they stick very scrupulously to their congressionally given mandate of stable prices, full employment. And so, what does that mean in practice? That means in practice, to get a substantially different outcome from what the committee would've done otherwise… So, the market is pricing; what's the market pricing for the funds rate at the end of this year? About 3.2 percent. Andrew Sheets: Something like that. Yeah. Seth Carpenter: Yeah. So that's a reasonable forecast. It's not too far away from our house view. For us to end up with a policy rate that's substantially away from that – call it 1 percentage, 2 percentage points away from that. I just don't see that as likely to happen. Because the committee can be led, can be swayed by the chair, but not to the tune of 1 or 2 percentage points. And so, I think for all those reasons, there wasn't that much surprise and there wasn't, for me, a big reason to fully reevaluate where we think the Fed's going. Andrew Sheets: So let me actually dig into that a little bit more because I know our listeners tune in every day to hear a lot about government meetings. But this is a case where that really matters because I think there can sometimes be a misperception around the power of this position. And it's both one of the most public important positions in the world of finance. And yet, as you mentioned, it is overseeing a committee where the majority matters. And so, can you take us just a little bit inside those discussions? I mean, how does the Fed Chair interact with their colleagues? How do they try to convince them and persuade them to take a particular course of action? Seth Carpenter: Great question. And you're right, I sort of spent a bunch of time there at the Fed. I started when Greenspan was chair. I worked under the Bernanke Fed. And of course, for the end of that, Janet Yellen was the vice chair. So, I've worked with her. Jay Powell was on the committee the whole time. So, the cast of characters quite familiar and the process is important. So, I would say a few things. The chair convenes the meetings; the chair creates the agenda for the meeting. The chair directs the staff on what the policy documents are that the committee is going to get. So, there's a huge amount of influence, let's say, there. But in order to actually get a specific outcome, there really is a vote. And we only have to look back a couple weeks to the last FOMC meeting when there were two dissents against the policy decision. So, dissents are not super common. They don't happen at every single meeting, but they're not unheard of by any stretch of the imagination either. And if we go back over the past few years, lots going on with inflation and how the economy was going was uncertain. Chair Powell took some dissents. If we go back to the financial crisis Chair Bernanke took a bunch of dissents. If we go back even further through time, Paul Volcker, when he was there trying to staunch the flow of the high inflation of the 1970s, faced a lot of resistance within his committee. And reportedly threatened to quit if he couldn't get his way. And had to be very aggressive in trying to bring the committee along. So, the chair has to find a way to bring the committee along with the plan that the chair wants to execute. Lots of tools at their disposal, but not endless power or influence. Does that make sense? Andrew Sheets: That makes complete sense. So, maybe my final question, Seth, is this is a tough job. This is a tough job in… Seth Carpenter: You mean your job and my job, or… Andrew Sheets: [Laughs] Not at all. The chair of the Fed. And it seems especially tricky now. You know, inflation is above the Fed's target. Interest rates are still elevated. You know, certainly mortgage rates are still higher than a lot of Americans are used to over the last several years. And asset prices are high. You know, the valuation of the equity market is high. The level of credit spreads is tight. So, you could say, well, financial conditions are already quite easy, which can create some complications. I am sure Kevin Warsh is receiving lots of advice from lots of different angles. But, you know, if you think about what you've seen from the Fed over the years, what would be your advice to a new Fed chair – and to navigate some of these challenges? Seth Carpenter: I think first and foremost, you are absolutely right. This is a tough job in the best of times, and we are in some of the most difficult and difficult to understand macroeconomic times right now. So, you noted interest rates being high, mortgage rates being high. There's very much an eye of the beholder phenomenon going on here. Now you're younger than I am. The first mortgage I had. It was eight and a half percent. Andrew Sheets: Hmm. Seth Carpenter: I bought a house in 2000 or something like that. So, by those standards, mortgage rates are actually quite low. So, it really comes down to a little bit of what you're used to. And I think that fact translates into lots of other places. So, inflation is now much higher than the committee's target. Call it 3 percent inflation instead core inflation on PCE, rather than 2 percent inflation target. Now, on the one hand that's clearly missing their target and the Fed has been missing their target for years. And we know that tariffs are pushing up inflation, at least for consumer goods. And Chair Powell and this committee have said they get that. They think that inflation will be temporary, and so they're going to look through that inflation. So again, there's a lot of judgment going on here. The labor market is quite weak. Andrew Sheets: Hmm. Seth Carpenter: We don't have the latest months worth of job market data because of the government shutdown; that'll be delayed by a few days. But we know that at the end of last year, non-farm payrolls were running well below 50,000. Under most circumstances, you would say that is a clear indication of a super weak economy. But! But if we look at aggregate spending data, GDP, private-domestic final purchases, consumer spending, CapEx spending. It's actually pretty solid right now. And so again, that sense of judgment; what's the signal you're going to look for? That's very, very difficult right now, and that's part of what the chair is going to have to do to try to bring the committee together, in order to come to a decision. So, one intellectually coherent argument is – the main way you could get strong aggregate demand, strong spending numbers, strong GDP numbers, but with pretty tepid labor force growth is if productivity is running higher and if productivity is going higher because of AI, for example, over time you could easily expect that to be disinflationary. And if it's disinflationary, then you can cut it. Interest rates now. Not worry as much as you would normally about high inflation. And so, the result could be a lower path for policy rates. So that's one version of the argument that I suspect you're going to hear. On the other hand, inflation is high and it's been high for years. So what does that mean? Well. History suggests that if inflation stays too high for too long, inflation psychology starts to change the way businesses start to set. Andrew Sheets: Mm-hmm. Seth Carpenter: Their own prices can get a little bit loosey-goosey. They might not have to worry as much about consumers being as picky because everybody's got used to these price changes. Consumers might be become less picky because, well, they're kind of sick of shopping around. They might be more willing to accept those higher prices, and that's how things snowball. So, I do think that the new chair is going to face a particularly difficult situation in leading a committee in particularly challenging times. But I've gone on for a long, long time there. And one of the things that I love about getting to talk to you, Andrew, is the fact that you also talked to lots of investors all around the world. You're based in London. And so when the topic of the new Fed chair comes up, what are the questions that you're getting from clients? Andrew Sheets: So, I think that there are a few questions that stand out. I mean, I think a dominant question among investors was around the stability of the U.S. dollar. And so, you could say a good development on the back of Kevin Warsh's nomination is that the market response to that has been the price action you would associate with more stability. You've seen the dollar rise; you've seen precious metals prices fall. You've seen equity markets and credit spreads be very stable. So, I think so far everything in the market reaction is to your; to the point that you raised, you know, consistent with this still being orthodox policy. Every Fed chair is different, but still more similar than different now. I think where it gets more divergent in client opinions is just – what are we going to see from the Fed? Are we going to see a real big change in policy? And I think that this is where there are very different views of Kevin Warsh from investors. Some who say, ‘Well, he's in the past talked about fighting inflation more aggressively, which would imply tighter policy.' And he's also talked more recently about the productivity gains from AI and how that might support lower interest rates. So, I think that there's going to be a lot of interest when he starts to speak publicly, when we see testimony in front of the Senate. I think the other, the final piece, which I think again, people do not have as fully formed an opinion on yet is – how does he lead the Fed if the data is unexpected? And you know, you mentioned inflation and, you know, Morgan Stanley has this forecast that: Well, owner's equivalent rent, a really key part of inflation, might be a little bit higher than expected, which might be a distortion coming off of the government shutdown and impacts on data. But there's some real uncertainty about the inflation path over the near term. And so, in short, I think investors are going to give the benefit of the doubt. For now, I think they're going to lean more into this idea that it will be generally consistent with the Fed easing policy over time, for now. Generally consistent with a steeper curve for now. But I think there's a lot we're going to find out over the next couple of weeks and months. Seth Carpenter: Yeah. No, I agree with you. Andrew, I have to say, I'm glad you're here in New York. It's always great to sit down and talk to you. Let's do it again before too long. Andrew Sheets: Absolutely, Seth. Thanks for taking the time to talk. And to our audience, thank you as always for your time. If you find Thoughts the Market useful, let us know by leaving a review wherever you listen. And also tell a friend or colleague about us today.

Our Global Head of FX and EM Strategy James Lord and Global Chief Economist Seth Carpenter discuss what's driving the U.S. policy for the dollar and the outlook for other global currencies.Read more insights from Morgan Stanley.----- Transcript -----James Lord: Welcome to Thoughts on the Market. I'm James Lord, Global Head of FX and EM Strategy at Morgan Stanley. Seth Carpenter:  And I'm Seth Carpenter, Morgan Stanley's Global Chief Economist and Head of Macro Research. James Lord: Today we're talking about U.S. currency policy and whether recent news on intervention and nominations to the Fed change anything for the outlook of the dollar. It's Thursday, February 19th at 3pm in London. So it's been an interesting few weeks in currency markets. Plenty of dollar selling going on But then, we got news that Kevin Warsh is going to be nominated to Chair of the Board of Governors. And that sent the dollar back higher, reminding everybody that monetary policy and central bank policy still matter. So, in the aftermath of the dollar-yen rate check, investors started to discuss whether or not the U.S. might be starting to target a weaker currency. Not just be comfortable with a weaker currency, but actually explicitly target a weaker currency, which would presumably be a shift away from the stronger strong dollar policy that Secretary Bessent referenced. So, what is your understanding? What do you think the strong dollar policy actually means? Seth Carpenter: Strong dollar policy, that's a phrase, that's a term; it's a concept that lots of Secretaries of the Treasury have used for a long time. And I specifically point to the Secretary of the Treasury because at least in the recent couple of decades, there has been in standard Washington D.C. approach to things, a strong dichotomy that currency policy is the policy of the Treasury Department, not of the central bank. And that's always been important. I remember when I was working at the Treasury Department, that was still part of the talking points that the secretary used. However, you also hear Secretaries of the Treasury say that exchange rates should be market determined; that that's a key part of it. And with the back and forth between the U.S. and China, for example, there was a lot of discussion: Was the Chinese government adjusting or manipulating the value of their currency? And there was a push that currencies should be market determined. And so, if you think about those two things, at the same time – pushing really hard that the dollar should be strong, pushing really hard that currencies should be market determined – you start to very quickly run into a bit of an intellectual tension. And I think all of that is pretty intentional. What does it mean? It means that there's no single clear definition of strong dollar policy. It's a little bit of the eye of the beholder. It's an acknowledgement that the dollar plays a clear key role in global markets, and it's good for the U.S. for that to happen. That's traditionally been what it means. But it has not meant a specific number relative to any other currency or any basket of currency. It has not meant a specific value based on some sort of long run theoretical fair value. It is always meant to be a very vague, deliberately so, very vague concept. James Lord: So, in that version of what the strong dollar policy means, presumably the sort of ambiguity still leaves space for the Treasury to conduct some kind of intervention in dollar-yen, if they wanted to. And that would still be very much consistent with that definition of the strong dollar policy. I also, in the back of my head, always wonder whether the strong dollar policy has anything to do with the dollar's global role. And the sort of foreign policy power that gives the Treasury in sanctions policy. And other areas where, you know, they can control dollar flows and so on. And that gives the U.S. government some leverage. And that allows them to project strength in foreign policy. Has that anything to do with the traditional versions of the strong policy? Seth Carpenter: Absolutely. I think all of that is part and parcel to it. But it also helps to explain a little bit of why there's never going to be a very crisp, specific numerical definition of what a strong dollar policy is.So, first and foremost, I think the discussion of intervention; I think it is, in lots of ways, consistent, especially if you have that more expansive definition of strong dollar, i.e. the currency that's very important, or most important in global financial markets and in global trade. So, I think in that regard, you could have both the intervention and the strong dollar at the same time. I will add though that the administration has not had a clear, consistent view in this regard, in the following very specific sense. When now Governor Myron was chair of the Council of Economic Advisors, he penned a piece on the Council of Economics website that said that the reserve currency status of the dollar had brought with it some adverse effects on the U.S., and in terms of what happened in terms of trade flows and that sort of thing.So again, this administration has also tried to find ways to increase the nuance about what the currency policy is, and putting forward the idea that too strong of a dollar in the FX sense. In the sense that you and your colleagues in FX markets would think about is a high valuation of the dollar relative to other currencies – could have contributed to these trade deficits that they're trying to push back against. So, I would say we went from the previous broad, perhaps vague definition of strong dollar. And now we're in an even murkier regime where there could be other motivations for changing the value of the dollar. Seth Carpenter: So, James, that's been our view in terms of the Fed, but let me come back to you because there are lots of different forces going on at the same time. The central bank is clearly an important one, but it's only one factor among many. So, if you think about where the dollar is likely to go over the next three months, over the next six months, maybe over the next year, what is it that you and your team are looking for? Where are the questions that you're getting from clients? James Lord: Yeah, so when we came into the start of this year, we did have a bearish view on the dollar. I would say that the drivers of it, we'd split up into two components. The first component was a lot more of the conventional stuff about growth expectations, what we see the Fed doing. And then there was another component to it where – what we defined as risk premia, I suppose. The more unconventional catalysts that can push the dollar around, as we saw, come very much to market attention during the second quarter of last year, when the Liberation Day tariffs were announced and the dollar weakened far in excess of what rate differentials would imply. And so, I would say so far this year, the majority of the dollar move that we've seen, the weakening in the dollar that we've seen, has been driven by that second component. What we've kind of called risk premia. And the conversations that, you know, investors have been having about U.S. policy towards Greenland, and then more recently, the conversations that people have been having around FX intervention following the dollar-yen rate check. These sorts of things have been really driving the currency up until , when the Kevin Warsh nomination was announced. When we look at the extent of the risk premia that we see in the dollar now, it is pretty close to the levels that we saw in the second quarter of last year, which is to say it's pretty big. Euro dollar would probably be closer to 1-10, if we were just thinking about the impact of rate differentials and none of this risk premia stuff over the past year had materialized. That's obviously a very big gap. And I think for now that gap probably isn't going to widen much further, particularly now that market attention is much more focused on the impact that Kevin Warsh will have on markets and the dollar. We also have, you know, the ECB and the Bank of England; , house call for those two central banks is for them to be cutting rates. That could also put some downward pressure on those currencies, relative to the dollar. So all of that is to say for some of the major currencies within the G10 space, like sterling, like euro against the dollar, this probably isn't the time to be pushing a weaker dollar. But I think there are some other currencies which still have some opportunity in the short term, but also over the longer run as well. And that's really in emerging markets. So all of that is to say, I think there is a strong monetary policy anchor for emerging market currencies. This is an asset class that has been under invested in for some time. And we do think that there are more gains there in the short term and over the medium term as well. Seth Carpenter: So on that topic, James, would you then agree? So if I think about some of the EM central banks, think about Banxico, think about the BCB – where the dollar falling in value, their currency gaining in value – that could actually have a couple things go on to allow the central bank, maybe to ease more than they would've otherwise. One, in terms of imported inflation, their currency strengthening on a relative basis probably helps with a bit lower inflation. And secondly, a lot of EM central banks have to worry a bit about defending their currency, especially in a volatile geopolitical time. And you were pointing to sort of lower volatility more broadly. So is this a reinforcing trend perhaps, where if the dollar is coming down a little bit, especially against DM currencies, it allows more external stability for those central banks, allowing them to just focus on their domestic mandates, which could also lead to a further reduction in their domestic rates, which might be good for investors. James Lord: Yeah, I think there's something to that. given the strength of emerging market currencies. There should be, over time, more space for them to ease if the domestic conditions warrant it. But so far we're not really seeing many EM central banks taking advantage of that opportunity. There is a sort of general pattern with a lot of EMs that they're staying pretty conservative and more hawkish than I think what markets have generally been expecting, and that's been supporting their currencies. I think it's interesting to think about what would happen if they're on the flip side. What would happen if they did start to push monetary easing at a faster pace? I'm sure on the days where that happens, the currencies would weaken a little bit. However, if the market backdrop is generally constructive on risk, and investors want to have exposure to EM – then what could ultimately happen is that asset managers will simply buy more bonds as they price in a lower path for central bank policy over time. And that causes more capital inflows. And that sort of overwhelms the knee jerk effect from the more dovish stance of monetary policy on the currency. You get more duration flows coming into the market and that helps their currency. So, yes, if EM central banks push back with more dovish policy, significantly, it could pose some short-term volatility. But assuming we remain a low-vol environment globally, I would use those as buying opportunities. Seth Carpenter: Thanks, James. It's been great being on the show with you. Thank you for inviting me, and I hope to be able to come back and join you at some point in the future if you'll have me. James Lord: Thank you, Seth, for making the time to talk. And to all you listening, thank you for lending us your ears. Let us know what you think of this podcast by leaving us a review. And if you enjoy Thoughts on the Market, tell a friend or colleague about us today.

Our Global Head of Fixed Income Research Andrew Sheets and Global Chief Economist Seth Carpenter unpack the inner workings of the Federal Reserve to illustrate the challenges that Fed chair nominee Kevin Warsh may face.Read more insights from Morgan Stanley.----- Transcript ----- Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley. Seth Carpenter: And I'm Seth Carpenter, Morgan Stanley's Global Chief Economist and Head of Macro Research. Andrew Sheets: And today on the podcast, a further discussion of a new Fed chair and the challenges they may face. It's Friday, February 6th at 1 pm in New York. Seth, it's great to be here talking with you, and I really want to continue a conversation that listeners have been hearing on this podcast over this week about a new nominee to chair the Federal Reserve: Kevin Warsh. And you are the perfect person to talk about this, not just because you lead our economic research and our macro research, but you've also worked at the Fed. You've seen the inner workings of this organization and what a new Fed chair is going to have to deal with. So, maybe just for some broad framing, when you saw this announcement come out, what were some of the first things to go through your mind? Seth Carpenter: I will say first and foremost, Kevin Warsh's name was one of the names that had regularly come up when the White House was providing names of people they were considering in lots of news cycles. So, I think the first thing that's critically important from my perspective, is – not a shock, right? Sort of a known quantity. Second, when we think about these really important positions, there's a whole range of possible outcomes. And I would've said that of the four names that were in the final set of four that we kept hearing about in the news a lot. You know, some differences here and there across them, but none of them was substantially outside of what I would think of as mainstream sort of thinking. Nothing excessively unorthodox at all like that. So, in that regard as well, I think it should keep anybody from jumping to any big conclusions that there's a huge change that's imminent. I think the other thing that's really important is the monetary policy of the Federal Reserve really is made by a committee. The Federal Open Market Committee and committee matters in these cases. The Fed has been under lots of scrutiny, under lots of pressure, depending on how you want to put it. And so, as a result, there's a lot of discussion within the institution about their independence, making sure they stick very scrupulously to their congressionally given mandate of stable prices, full employment. And so, what does that mean in practice? That means in practice, to get a substantially different outcome from what the committee would've done otherwise… So, the market is pricing; what's the market pricing for the funds rate at the end of this year? About 3.2 percent. Andrew Sheets: Something like that. Yeah. Seth Carpenter: Yeah. So that's a reasonable forecast. It's not too far away from our house view. For us to end up with a policy rate that's substantially away from that – call it 1 percentage, 2 percentage points away from that. I just don't see that as likely to happen. Because the committee can be led, can be swayed by the chair, but not to the tune of 1 or 2 percentage points. And so, I think for all those reasons, there wasn't that much surprise and there wasn't, for me, a big reason to fully reevaluate where we think the Fed's going. Andrew Sheets: So let me actually dig into that a little bit more because I know our listeners tune in every day to hear a lot about government meetings. But this is a case where that really matters because I think there can sometimes be a misperception around the power of this position. And it's both one of the most public important positions in the world of finance. And yet, as you mentioned, it is overseeing a committee where the majority matters. And so, can you take us just a little bit inside those discussions? I mean, how does the Fed Chair interact with their colleagues? How do they try to convince them and persuade them to take a particular course of action? Seth Carpenter: Great question. And you're right, I sort of spent a bunch of time there at the Fed. I started when Greenspan was chair. I worked under the Bernanke Fed. And of course, for the end of that, Janet Yellen was the vice chair. So, I've worked with her. Jay Powell was on the committee the whole time. So, the cast of characters quite familiar and the process is important. So, I would say a few things. The chair convenes the meetings; the chair creates the agenda for the meeting. The chair directs the staff on what the policy documents are that the committee is going to get. So, there's a huge amount of influence, let's say, there. But in order to actually get a specific outcome, there really is a vote. And we only have to look back a couple weeks to the last FOMC meeting when there were two dissents against the policy decision. So, dissents are not super common. They don't happen at every single meeting, but they're not unheard of by any stretch of the imagination either. And if we go back over the past few years, lots going on with inflation and how the economy was going was uncertain. Chair Powell took some dissents. If we go back to the financial crisis Chair Bernanke took a bunch of dissents. If we go back even further through time, Paul Volcker, when he was there trying to staunch the flow of the high inflation of the 1970s, faced a lot of resistance within his committee. And reportedly threatened to quit if he couldn't get his way. And had to be very aggressive in trying to bring the committee along. So, the chair has to find a way to bring the committee along with the plan that the chair wants to execute. Lots of tools at their disposal, but not endless power or influence. Does that make sense? Andrew Sheets: That makes complete sense. So, maybe my final question, Seth, is this is a tough job. This is a tough job in… Seth Carpenter: You mean your job and my job, or… Andrew Sheets: [Laughs] Not at all. The chair of the Fed. And it seems especially tricky now. You know, inflation is above the Fed's target. Interest rates are still elevated. You know, certainly mortgage rates are still higher than a lot of Americans are used to over the last several years. And asset prices are high. You know, the valuation of the equity market is high. The level of credit spreads is tight. So, you could say, well, financial conditions are already quite easy, which can create some complications. I am sure Kevin Warsh is receiving lots of advice from lots of different angles. But, you know, if you think about what you've seen from the Fed over the years, what would be your advice to a new Fed chair – and to navigate some of these challenges? Seth Carpenter: I think first and foremost, you are absolutely right. This is a tough job in the best of times, and we are in some of the most difficult and difficult to understand macroeconomic times right now. So, you noted interest rates being high, mortgage rates being high. There's very much an eye of the beholder phenomenon going on here. Now you're younger than I am. The first mortgage I had. It was eight and a half percent. Andrew Sheets: Hmm. Seth Carpenter: I bought a house in 2000 or something like that. So, by those standards, mortgage rates are actually quite low. So, it really comes down to a little bit of what you're used to. And I think that fact translates into lots of other places. So, inflation is now much higher than the committee's target. Call it 3 percent inflation instead core inflation on PCE, rather than 2 percent inflation target. Now, on the one hand that's clearly missing their target and the Fed has been missing their target for years. And we know that tariffs are pushing up inflation, at least for consumer goods. And Chair Powell and this committee have said they get that. They think that inflation will be temporary, and so they're going to look through that inflation. So again, there's a lot of judgment going on here. The labor market is quite weak. Andrew Sheets: Hmm. Seth Carpenter: We don't have the latest months worth of job market data because of the government shutdown; that'll be delayed by a few days. But we know that at the end of last year, non-farm payrolls were running well below 50,000. Under most circumstances, you would say that is a clear indication of a super weak economy. But! But if we look at aggregate spending data, GDP, private-domestic final purchases, consumer spending, CapEx spending. It's actually pretty solid right now. And so again, that sense of judgment; what's the signal you're going to look for? That's very, very difficult right now, and that's part of what the chair is going to have to do to try to bring the committee together, in order to come to a decision. So, one intellectually coherent argument is – the main way you could get strong aggregate demand, strong spending numbers, strong GDP numbers, but with pretty tepid labor force growth is if productivity is running higher and if productivity is going higher because of AI, for example, over time you could easily expect that to be disinflationary. And if it's disinflationary, then you can cut it. Interest rates now. Not worry as much as you would normally about high inflation. And so, the result could be a lower path for policy rates. So that's one version of the argument that I suspect you're going to hear. On the other hand, inflation is high and it's been high for years. So what does that mean? Well. History suggests that if inflation stays too high for too long, inflation psychology starts to change the way businesses start to set. Andrew Sheets: Mm-hmm. Seth Carpenter: Their own prices can get a little bit loosey-goosey. They might not have to worry as much about consumers being as picky because everybody's got used to these price changes. Consumers might be become less picky because, well, they're kind of sick of shopping around. They might be more willing to accept those higher prices, and that's how things snowball. So, I do think that the new chair is going to face a particularly difficult situation in leading a committee in particularly challenging times. But I've gone on for a long, long time there. And one of the things that I love about getting to talk to you, Andrew, is the fact that you also talked to lots of investors all around the world. You're based in London. And so when the topic of the new Fed chair comes up, what are the questions that you're getting from clients? Andrew Sheets: So, I think that there are a few questions that stand out. I mean, I think a dominant question among investors was around the stability of the U.S. dollar. And so, you could say a good development on the back of Kevin Warsh's nomination is that the market response to that has been the price action you would associate with more stability. You've seen the dollar rise; you've seen precious metals prices fall. You've seen equity markets and credit spreads be very stable. So, I think so far everything in the market reaction is to your; to the point that you raised, you know, consistent with this still being orthodox policy. Every Fed chair is different, but still more similar than different now. I think where it gets more divergent in client opinions is just – what are we going to see from the Fed? Are we going to see a real big change in policy? And I think that this is where there are very different views of Kevin Warsh from investors. Some who say, ‘Well, he's in the past talked about fighting inflation more aggressively, which would imply tighter policy.' And he's also talked more recently about the productivity gains from AI and how that might support lower interest rates. So, I think that there's going to be a lot of interest when he starts to speak publicly, when we see testimony in front of the Senate. I think the other, the final piece, which I think again, people do not have as fully formed an opinion on yet is – how does he lead the Fed if the data is unexpected? And you know, you mentioned inflation and, you know, Morgan Stanley has this forecast that: Well, owner's equivalent rent, a really key part of inflation, might be a little bit higher than expected, which might be a distortion coming off of the government shutdown and impacts on data. But there's some real uncertainty about the inflation path over the near term. And so, in short, I think investors are going to give the benefit of the doubt. For now, I think they're going to lean more into this idea that it will be generally consistent with the Fed easing policy over time, for now. Generally consistent with a steeper curve for now. But I think there's a lot we're going to find out over the next couple of weeks and months. Seth Carpenter: Yeah. No, I agree with you. Andrew, I have to say, I'm glad you're here in New York. It's always great to sit down and talk to you. Let's do it again before too long. Andrew Sheets: Absolutely, Seth. Thanks for taking the time to talk. And to our audience, thank you as always for your time. If you find Thoughts the Market useful, let us know by leaving a review wherever you listen. And also tell a friend or colleague about us today.

In the second of their two-part roundtable, Seth Carpenter and Morgan Stanley's top economists break down the forces influencing growth across different regions.Read more insights from Morgan Stanley.----- Transcript -----Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist and Head of Macro Research. And yesterday I sat down with my colleagues, Michael Gapen, our Chief U.S. Economist, Chetan Ahya, our Chief Asia Economist, and Jen Eisenschmidt, our Chief Europe Economist. And we spent a lot of time talking about monetary policy around the world. Today, let's go back to them, talk about the real side of the economy. It's Friday, January 23rd at 10am in New York. Jens Eisenschmidt: And 4pm in Frankfurt. Chetan Ahya: And 9pm in Hong Kong. Seth Carpenter: Michael, let me start with you, back on the U.S. And when I think about the U.S. economy, we have to start by talking about the U.S. consumer. Walk us through what investors need to understand about consumer spending in the U.S. What's driving it, what's going to hold it up, and where are the risks? Michael Gapen: I think the primary thing to remember here is that the upper income consumer drives about 40 percent or more of total spending. So, there can be higher inflation that eats into real labor market income growth. There can be inflation dispersion, which hits lower income households more than upper income households. We can have tariffs that get applied to goods and lower- and middle-income households buy goods more than upper income households. But when asset markets continue to appreciate, when home prices hold on to their prior gains, sometimes that doesn't matter in the aggregate statistics because that upper income household keeps spending.I do think that's a lot of what happened in 2025. So, there is a K-shaped economy. I think one of the main risks about the U.S. is that its expansion is narrowly driven. We think that will broaden out in 2026. If we're right, that inflation comes down and we're past, kind of, the peak effect of tariffs, then we think that lower- and middle-income household can have a little more residual spending power. And you might get the consumer operating on two fronts, rather than one. Seth Carpenter: Another part of domestic spending that gets a lot of attention is business investment spending, CapEx spending. First would you agree with that statement that CapEx spending last year was characterized by AI CapEx spending? Second, should we feel confident that that underlying sort of momentum in CapEx spending should continue for this year? And then third, what's it going to take for there to be a broadening out, maybe like what you said about consumers, but a broadening out of investment spending so that it's not just the AI story that's driving CapEx. Michael Gapen: I do agree that the primary, almost exclusive story in 2025 for business spending was AI. So, when you look at residential and non-residential spending, unrelated to AI, that I think did feel the effects of policy uncertainty in a changing environment. what keeps kind of sustainability around business spending? Obviously, it's a multi-year investment story around AI. There's a level versus growth rate argument here where you can have a heck of a lot of CapEx spending. May not always show up in GDP because some of it is intermediate goods, some of it is imported. But that doesn't diminish, I think, the quality of the overall story. What gets business spending to broaden out, I do think is related to whether consumer spending broadens out. Most business spending kind of follows demand with a lag. So, AI is a different story, but there's a cyclical component to business spending. There could be a housing related component, if mortgage rates come down and stimulate at least a little more turnover in the housing market. So, if the recovery does broaden out, we see greater real income growth in low- and middle-income households. The labor market stabilizes. Maybe mortgage rates come down a little bit, then I think you could get carry through momentum to non-AI related business spending. That would look more like a cyclical upswing for the economy. May be a heavy lift, but that's what I think it would take to get there. Seth Carpenter: So, Jens, let me come to you. We talked yesterday about the ECB possibly easing more on disinflation. But when I think of disinflation, I think of a weak economy. And that's maybe not really the case. So, I guess the first question to you would you characterize euro area economic growth as strong, or a little bit more complicated? Jens Eisenschmidt: A little bit more complicated. And that's always the right answer for an economist – I think it depends. Well, it is strong in some quarters. And these quarters will change from where it has been in the past.So concretely, we think the German economy has most potential to catch up and actually accelerate, and that's due to fiscal stimulus mainly. While we have other quarters, the French and the Italian one, which will be below potential and so weak – each of them for their own reason. And then we have the Spanish economy, which performs exceptionally and is really strong, but it's only a small part of the euro area economy. If we had everything together, I think the outlook is an economy that's accelerating mildly and only towards the end of our projection horizon, which is [20]27. So, in say two years, hits growth rates that are above potential. Here we are really talking about quarterly increments above 0.3. So, we are currently between 0.1 and 0.2. So, you sort of get the picture of a mildly accelerating economy that goes from 0.15 to 0.035 say in the span of two years. Seth Carpenter: One of the key narratives in markets is about fiscal policy in Germany, potentially driving growth. I know in equity markets it's been a key investing theme. So how excited should people be about the possibility of fiscal policy in Germany driving a resilient European economy? Jens Eisenschmidt: Pretty excited, I would say, in a sense that the positioning of the German government for its economy is actually exceptional in terms of the amount of fiscal space that exists and that has been made available. It's just that, of course, the connection of that sort of abstract excitement that we economists have to what actually happens in markets is sometimes a little bit loose; in the sense that equity [markets would like to see everything coming online tomorrow, and that's going to be a more drawn-out process. So, to my point before, it will take some time. We do have implementation lags. We do have lags in say, for instance, on defense procurement. There is maybe not as much capacity in the economy to deliver into everything. But the direction of travel is clear and up. So, from that perspective, I have no doubts that the future is better for the German economy over the medium term for all the reasons mentioned, but it won't be immediate. And we have just seen in recent headlines, Germany is the most trade exposed European economy. If we get more friction in global trade, that's not great. So, you could even have short term, more negative news on GDP than positive ones. Seth Carpenter: Chetan, I'm going to turn to you. Yesterday when we talked about Asia, we focused on Japan. But, of course, when it comes to the real side of the economy, the big mover in Asia is China.So, let's talk a little bit about how you see China evolving. What the key themes are for China. Last year in particular, we talked a lot about the deflationary cycle in China and how it was protracted. It wasn't going away. That policy was not sufficient to drive a huge surge in demand to push things away. Are we in the same place for China in 2026? What kind of growth should we expect and what sort of policy reactions should we be expecting from China? Chetan Ahya: Well, I think the macro backdrop for China we think will still be challenging in 2026. But at the same time, we expect the micro positives to continue. Now on the macro backdrop, when I say it's going to remain challenging because the number one issue that we are focused on from a macro perspective in China is deflation. Now we do expect some easing of deflationary pressures, but [the] economy will still stay in deflation in 2026. And on the micro front what we've seen is that China is emerging from a situation where it is making inroads into advanced manufacturing, and that's enabling it to increase market share in global goods exports. And it's also one of the reasons why when you see the numbers coming out from China on exports, they seem to be outperforming. Even just the latest month number as we saw, China's exports were surprising on the upside relative to market expectations. And that's the micro story – that you'll see China continuing to gain market share in global goods export. And that supports the corporate micro positive story. Seth Carpenter: We know collectively that export is a key part of China's economy. The productive capacity, as you point out, important for China. When you think about exports from China, the currency has to come in. And recently the renminbi has been appreciating. Lots of questions from clients here or there. How important is the renminbi in reflating or rebalancing the China economy? Can you walk us through a little bit some of these considerations about the role that the currency is playing now and over the next few quarters for China and its economic outlook. Chetan Ahya: Yeah, that's right, Seth. Actually, I've been getting a number of clients calling me and asking whether PBOC is going to allow a significant appreciation in RNB. We've seen it appreciate quite a lot in the last few days. And then whether this will mean China's economy will rebalance faster towards consumption. Look, on the first point, we don't think PBOC will allow a significant currency appreciation because, as I just mentioned earlier, the deflation problem is still there. It's not gone. While we see reduced deflationary pressures, as long as the economy is in deflation, it'll be very difficult for PBOC to allow significant currency appreciation. And what we are also watching on RMB is to see what is happening to the trade weighted RMB. The RMB basket, if you were to call it. That interestingly has been in a stable range since 2016, and we don't think that changes. We've learned from Japan's experience in the nineties that if you have deflation problem, you shouldn't be taking up currency appreciation. And we think PBOC pretty much follows that rule book. On the rebalancing part, look, I think when you have deflation and if currency appreciation is going to add to deflation pressures, that will mean corporate sector revenue suffers. They will actually be cutting wage growth and therefore that has a negative impact on consumption. And so, in our view, instead of helping rebalancing currency appreciation with China's current macro backdrop, we'll actually be making rebalancing more difficult. Seth Carpenter: And of course, we're used to China being a key driver of the economy, not just in Asia, but around the world. But if we think about then broadening out from China, what should we be expecting in terms of growth for the other economies in Asia? Chetan Ahya: For the other economies in the region, I think the most important driver will be what happens to exports more broadly. In 2025, Asia did benefit from better tech exports, but because of tariffs and also what was happening in the U.S. in terms of its own domestic demand, we'd seen that there was significant weakness in non-tech exports. So, from an outlook perspective in 2026, we think that that non-tech export story turns around and that will help the recovery in the region to broaden out from it just being tech exports to non-tech exports, to improvement in CapEx, job growth and consumption. So, I think that the whole region is going to see the benefit from this turnaround. But particularly the non-China part of the region will be seeing a meaningful improvement in their export growth, real GDP growth and normal GDP growth in 2026. Seth Carpenter: I'm getting ready to wrap things up. But before I do, I'm going to ask each of the three of you, one last rapid-fire question. Michael, I'm going to start with you. AI is on everyone's lips. If we were to see a rapid adoption of AI technology across all the economies. What would it mean for the Fed? Michael Gapen: Well, I think that would mean a substantial uptick in productivity growth. Maybe closer to 3 percent like we saw in the tech boom in the nineties. So faster real growth. But probably still disinflation. You can argue the Fed could even lower rates in that environment. It may take them a while to figure it out [be]cause they'd be balancing incoming data that shows a lot of strong growth. But probably further evidence that inflation's coming down. So, if it's supply side driven, then I think you could still probably get some rate cuts out of the Fed to normalize policy as inflation comes down. But I'd be thinking those cuts could even come much later. Seth Carpenter: Okay, Jens to you, a lot of discussion in the news about possible additional tariffs from the U.S. on Europe in some of the negotiations. Suppose some of the announcements, 10 percent tariffs rising to 25 percent tariffs later. Suppose those were actually put in place. What does that mean for European growth? Jens Eisenschmidt: So, I would say 10 percent additional tariffs, we have a framework for that. Pointing to drag on GDP growth somewhere between 30 and 60 basis points. So roughly half of what we think 2026 will bring in growth. Now, for sure the answer is additional tariffs are not great for growth. Big question mark here is though whether we get any retaliation from the European side, which we think this time around if we get additional tariffs from the U.S. side is more likely. And that would just increase the downside risk for Europe here from that additional round of trade or tariff uncertainty. Seth Carpenter: Chetan, I'm going to end up with you. When we think about China, when we think about policy, what do you think it would take for there to be a fundamental shift in policy out of Beijing to get a real full blown, demand driven fiscal stimulus? Or is that just not in the cards whatsoever? Chetan Ahya: Well, in our base case, we don't think that's likely to happen in our forecast horizon. But if we do get a big social stability challenge emerging in China, then we could get that big pivot from [a] policy response perspective, where policy makers move towards consumption. And our recommendation there is to boost social welfare spending, particularly targeted towards migrant workers, which could be taken up if you get that social stability risk event materializing. Seth Carpenter: Mike, Chetan, Jens, thank you so much for joining today. And for the listener, thank you for joining us. If you enjoy this show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or a colleague today.

Our Global Chief Economist Seth Carpenter joins our chief regional economists to discuss the outlook for interest rates in the U.S., Japan and Europe.Read more insights from Morgan Stanley.----- Transcript -----Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist and Head of Macro Research. And today we're kicking off our quarterly economic roundtable for the year. We're going to try to think about everything that matters in economics around the world. And today we're going to focus a little bit more on central banking. And when we get to tomorrow, we'll focus on the nuts and bolts of the real side of the economy. I'm joined by our chief regional economists. Michael Gapen: Hi, Seth. I'm Mike Gapen, Chief U.S. Economist at Morgan Stanley. Chetan Ahya: I'm Chetan Ahya, Chief Asia economist. Jens Eisenschmidt: And I'm Jens Eisenschmidt, Chief Europe economist. Seth Carpenter: It's Thursday, January 22nd at 10 am in New York. Jens Eisenschmidt: And 4 pm in Frankfurt. Chetan Ahya: And 9 pm in Hong Kong. Seth Carpenter: So, Mike Gapen, let me start with you as we head into 2026, what are we thinking about? Are we going into a more stable expansion? Is this just a different phase with the same amount of volatility? What do you think is going to be happening in the U.S. as a baseline outlook? And then if we're going to be wrong, which direction would we be wrong? Michael Gapen: Yeah, Seth, we took the view that we would have more policy certainty. Recent weeks have maybe suggested we're incorrect on that front. But I still believe that when it comes to deregulation, immigration policy and fiscal policy, we have much more clarity there than we did a year ago. So, I think it's another year of modest growth, above trend growth. We're forecasting something around 2.4 percent for 2026. That's about where we finished 2025. I think what's key for markets and the outlook overall will be whether inflation comes down. Firms are still passing through tariffs to the consumer. We think that'll happen at least through the end of the first quarter. It's our view that after that, inflation pressures will start to diminish. If that's the case, then we think the Fed can execute one or two more rate cuts. But we have those coming [in] the second half of the year. So, it looks like growth is strong enough. The labor market has stabilized enough for the Fed to wait and see, to look around, see the effects of their prior rate cuts, and then push policy closer to neutral if inflation comes down. Seth Carpenter: And if we go back to last year to 2025, I will give you the credit first. Morgan Stanley did not shift its forecast for recession in the U.S. the way some of our main competitors did. On the other hand, and this is where I maybe tweak you just a little bit. We underestimated how much growth there would be in the United States. CapEx spending from AI firms was strong. Consumer spending, especially from the top half of the income distribution in the U.S. was strong. Growth overall for the year was over 2 percent, close to 2.5 percent. So, if that's what we just came off of, why isn't it the case that we'd see even stronger growth? Maybe even a re-acceleration of growth in 2026? Michael Gapen: Well, some of that, say, improvement vis-à-vis our forecast, the outperformance. Some of that I think comes mechanically from trade and inventory variability. So, . I'm not sure that that says a lot about an improving trend rate of growth. Where there was other outperformance was, as you noted, from the consumer. Now our models, and I don't mean to get too technical here, but our model suggests that consumption is overshooting its fundamentals. Which I think makes it harder for the economy to accelerate further. And then AI; it's harder for AI spending to say get incrementally stronger than where it is. So, we're getting a little extra boost from fiscal. We've got that coming through. And I just think what it is, is more of the same rather than further acceleration from here. Seth Carpenter: Do you think there's a chance that the Fed in fact does not cut rates like you have in your forecast? Michael Gapen: Yes, I do think... Where we could be wrong is we've made assumptions around the One Big Beautiful Bill and what it will contribute to the economy. But as you know, there's a lot of variability around those estimates. If the bill is more catalytic to animal spirits and business spending than we've assumed, you could get, say, a demand driven animal spirits upside to the economy, which may mean inflation doesn't decelerate all that much. But I do think that that's, say, the main upside risk that we're considering. Markets have been gradually taking out probabilities of Fed cuts as growth has come in stronger. So far, the inflation data has been positive in terms of signaling about disinflation, but I would say the jury's still out on how much that continues. Seth Carpenter: Chetan, When I think about Japan, we know that it's been the developed market central bank that's been going in the opposite direction. They've been hiking when other central banks have been cutting. We got some news recently that probably put some risk into our baseline outlook that we published in our year ahead view about both growth and inflation in Japan. And with it what the Bank of Japan is going to do in terms of its normalization. Can you just walk us through a little bit about our outlook for Japan? Because right now I think that the yen, Japanese rates, they're all part of the ongoing market narrative around the world. Chetan Ahya: Yeah, Seth. So, look, I mean, on a big picture basis, we are constructive on the Japan macro-outlook. We think normal GDP growth remains strong. We are expecting to see the transition for the consumers from them seeing, you know, supply side inflation. Keeping their real wage growth low to a dynamic where we transition to real wage growth accelerating. That supports real consumption growth, and we move away from that supply side driven inflation to demand side driven inflation. So broadly we are constructive, but I think in the backdrop, what we are seeing on currency depreciation is making things a bit more challenging for the BOJ. While we are expecting that demand side pressure to build up and drive inflation, in the trailing data, it is still pretty much currency depreciation and supply side factors like food inflation driving inflation. And so, BOJ has been hesitant. So, while we had the expectation that BOJ will hike in January of 2027, we do see the risk that they may have to take up rate hike earlier to manage the currency not getting out of hand and adding on to the inflation pressures. Seth Carpenter Would I be right in saying that up until now, the yen has swung pretty widely in both directions. But the weakening of the yen until now hasn't been really the key driver of the Bank of Japan's policy reaction. It's been growth picking up, inflation picking up, wanting to get out of negative interest rates first, wanting to get away from the zero lower bounds. Second, the weaker yen in some sense could have actually been seen as a positive up until now because Japan did go through 25 years of essentially stagnant nominal growth. Is this actually that much of a fundamental change in the Bank of Japan's thinking – needing to react to the weakness of the yen? Chetan Ahya: Broadly what you're saying is right, Seth, but there is also a threshold of where the currency can be. And beyond a point, it begins to hurt the households in form of imported inflation pressures. And remember that inflation has been somewhat high, even if it is driven by currency depreciation and supply side factors for some time. And so, BOJ has to be watchful of potential lift in inflation expectations for the households. And at the same time, they are also watching the underlying inflation impact of this currency depreciation – because what we have seen is that over period workers have been demanding for higher wages. And that is also influenced by what happens to headline inflation, which is driven by currency depreciation. So, I would say that, yes, it's been true up until now. But, when currency reaches these very high levels of range, you are going to see BOJ having to act. Seth Carpenter: Jens, let's shift then to Europe. The ECB had been on a cutting cycle. They came to the end of that. President Lagarde said that she thought the disinflationary process had ended. In your year ahead forecast and a bunch of your writing recently, you've said maybe not so fast. There could still be some more disinflationary, at least risk, in the pipeline for Europe. Can you talk a little bit about what's going on in terms of European inflation and what it could mean for the European Central Bank? Because clearly that's going to be first order important for markets.Jens Eisenschmidt: I think that is right. I think we have a crucial inflation print ahead of us that comes out on the 4th of February. So, early February we get some signal, whether our anticipated fall of headline inflation here below the ECB's target is actually materializing. We think the chances for this are pretty good. There's a mix why this is happening. One is energy. Energy disinflation and base effects. But the other thing is services inflation resets always at the beginning of the year. January and February are the crucial month here. We had significant services upward pressure on prices the last years. And so just from base effects, we think we will see less of that. Another picture or another element of that picture is that wage disinflation is proceeding nicely. We have notably a significant weakness in the export-oriented manufacturing sector in Germany, which is a key sector of setting wages for the country. The country is around 30 percent of the euro area GDP. And here we had seen significant wage gains over the last year. So, the disinflationary trend coming from lower wage gains from this country, that will be very important. And an important signal to watch. Again, that's something we don't know. I think soon we have to watch simply monthly prints here. But a significant print for the first quarter comes out in May, and all of that together makes us believe that the ECB will be in a position to see enough data or have seen enough data that confirms the thesis of inflation staying below target for some time to come. So that they can cut in June and September to a terminal rate of 1.5 percent. Seth Carpenter: That is, I would say, out of consensus relative where the market is. When you talk to investors, whether they're in Europe or around the world, what's the big pushback that you get from them when you are explaining your view on how the ECB is going to act? Jens Eisenschmidt: There are two essential pushbacks. So, one is on substance. So, 'No, actually wages will not come down, and the economy will actually start overheating soon because of the big fiscal stimulus.' That, in a nutshell is the pushback on substance. I would say here, as you would say before, not so fast. Because the fiscal stimulus is only in one country. It's 30 percent. But only 30 percent of the euro area.Plus, there is another pushback, which is on the reaction function of the ECB. Here we tend to agree. So far, we have heard from policy makers that they feel rather comfortable with the 2 percent rate level that they're at. But we think that discussion will change. The moment you are below target in an actual inflation print; the burden of proof is the opposite. Now you have to prove: Is the economy really on a track that inflation will get back up to target without further monetary stimulus? We believe that will be the key debate. And again, happy to, sort of, concede that there is for now not a lot of signaling out of the ECB that further rate cuts are coming. But we believe the first inflation print of the year will change that debate significantly. Seth Carpenter: Alright, so that makes a lot of sense. However, looking at the clock, we are probably out of time for today. So, for now, Michael, Chetan, Jens, thank you so much for joining today. And to the listener, thanks for listening. And be sure to tune in tomorrow for part two of our conversation. And I have to say, if you enjoy this show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or a colleague today.

Original Release Date: November 17, 2025In the first of a two-part episode presenting our 2026 outlooks, Chief Global Cross-Asset Strategist Serena Tang has Chief Global Economist Seth Carpenter explain his thoughts on how economies around the world are expected to perform and how central banks may respond.Read more insights from Morgan Stanley.----- Transcript -----Serena Tang: Welcome to Thoughts on the Market. I'm Serena Tang, Morgan Stanley's Chief Global Cross-Asset Strategist. Seth Carpenter: And I'm Seth Carpenter, Morgan Stanley's Global Chief Economist. Serena Tang: Today, we'll focus on [the] all-important macroeconomic backdrop. Serena Tang: It's Monday, November 17th at 10am in New York. So, Seth, 2025 has been a year of transition. Global growth slowed under the weight of tariffs and policy uncertainty. Yet resilience in consumer spending and AI driven investments kept recession fears at bay. Your team has published its economic outlook for 2026. So, what's your view on global growth for the year ahead? Seth Carpenter: We really think next year is going to be the global economy slowing down a little bit more just like it did this year, settling into a slower growth rate. But at the same time, we think inflation is going to keep drifting down in most of the world. Now that anodyne view, though, masks some heterogeneity around the world; and importantly, some real uncertainty about different ways things could possibly go. Here in the U.S., we think there is more slowing to come in the near term, especially the fourth quarter of this year and the beginning of next year. But once the economy works its way through the tariffs, maybe some of the lagged effects of monetary policy, we'll start to see things pick up a bit in the second half of the year. China's a different story. We see the really tepid growth there pushed down by the deflationary spiral they've been in. We think that continues for next year, and so they're probably not quite going to get to their 5 percent growth target. And in Europe, there's this push and pull of fiscal policy across the continent. There's a central bank that thinks they've achieved their job in terms of inflation, but overall, we think growth there is, kind of, unremarkable, a little bit over 1 percent. Not bad, but nothing to write home about at all. So that's where we think things are going in general. But I have to say next year, may well be a year for surprises. Serena Tang: Right. So where do you see the biggest drivers of global growth in 2026, and what are some of the key downside risks? Seth Carpenter: That's a great question. I really do think that the U.S. is going to be a real key driver of the story here. And in fact – and maybe we'll talk about this later – if we're wrong, there's some upside scenarios, there's some downside scenarios. But most of them around the world are going to come from the U.S. Two things are going on right now in the U.S. We've had strong spending data. We've also had very, very weak employment data. That usually doesn't last for very long. And so that's why we think in the near term there's some slowdown in the U.S. and then over time things recover. We could be wrong in either direction. And so, if we're wrong and the labor market sending the real signal, then the downside risk to the U.S. economy – and by extension the global economy – really is a recession in the U.S. Now, given the starting point, given how low unemployment is, given the spending businesses are doing for AI, if we did get that recession, it would be mild. On the other hand, like I said, spending is strong. Business spending, especially CapEx for AI; household spending, especially at the top end of the income distribution where wealth is rising from stocks, where the liability side of the balance sheet is insulated with fixed rate mortgages. That spending could just stay strong, and we might see this upside surprise where the spending really dominates the scene. And again, that would spill over for the rest of the world. What I don't see is a lot of reason to suspect that you're going to get a big breakout next year to the upside or the downside from either Europe or China, relative to our baseline scenarios. It could happen, but I really think most of the story is going to be driven in the U.S. Serena Tang: So, Seth, markets have been focused on the Fed, as it should. What is the likely path in 2026 and how are you thinking about central bank policy in general in other regions? Seth Carpenter: Absolutely. The Fed is always of central importance to most people in markets. Our view – and the market's view, I have to say, has been evolving here. Our view is that the Fed's actually got a few more rate cuts to get through, and that by the time we get to the middle of next year, the middle of 2026, they're going to have their policy rate down just a little bit above 3 percent. So roughly where the committee thinks neutral is. Why do we think that? I think the slowing in the labor market that we talked about before, we think there's something kind of durable there. And now that the government shutdown has ended and we're going to start to get regular data prints again, we think the data are going to show that job creation has been below 50,000 per month on average, and maybe even a few of them are going to get to be negative over the next several months. In that situation, we think the Fed's going to get more inclination to guard against further deterioration in the labor market by keeping cutting rates and making sure that the central bank is not putting any restraint on the economy. That's similar, I would say, to a lot of other developed markets' central banks. But the tension for the ECB, for example, is that President Lagarde has said she thinks; she thinks the disinflationary process is over. She thinks sitting at 2 percent for the policy rate, which the ECB thinks of as neutral, then that's the right place for them to be. Our take though is that the data are going to push them in a different direction. We think there is clearly growth in Europe, but we think it's tepid. And as a result, the disinflationary process has really still got some more room to run and that inflation will undershoot their 2 percent target, and as a result, the ECB is probably going to cut again. And in our view, down to about 1.5 percent. Big difference is in Japan. Japan is the developed market central bank that's hiking. Now, when does that happen? Our best guess is next month in December at the policy meeting. We've seen this shift towards reflation. It hasn't been smooth, hasn't been perfectly linear. But the BoJ looks like they're set to raise rates again in December. But the path for inflation is going to be a bit rocky, and so, they're probably on hold for most of 2026. But we do think eventually, maybe not till 2027, they get back to hiking again – so that Governor Ueda can get the policy rate back close to neutral before he steps down. Serena Tang: So, one of the main investor debates is on AI. Whether it's CapEx, productivity, the future of work. How is that factoring into your team's view on growth and inflation for the next year? Seth Carpenter: Yeah, I mean that is absolutely a key question that we get all the time from investors around the world. When I think about AI and how it's affecting the economy, I think about the demand side of the economy, and that's where you think about this CapEx spending – building data centers, buying semiconductors, that sort of thing. That's demand in the economy. It's using up current resources in the economy, and it's got to be somewhat inflationary. It's part of what has kept the U.S. economy buoyant and resilient this year – is that CapEx spending. Now you also mentioned productivity, and for me, that's on the supply side of the economy. That's after the technology is in place. After firms have started to adopt the technology, they're able to produce either the same amount with fewer workers, or they're able to produce more with the same amount of workers. Either way, that's what productivity means, and it's on the supply side. It can mean faster growth and less inflation. I think where we are for 2026, and it's important that we focus it on the near term, is the demand side is much more important than the supply side. So, we think growth continues. It's supported by this business investment spending. But we still think inflation ends 2026, notably above the Fed's inflation target. And it's going to make five, five and a half years that we've been above target. Productivity should kick in. And we've written down something close to a quarter percentage point of extra productivity growth for 2026, but not enough to really be super disinflationary. We think that builds over time, probably takes a couple of years. And for example, if we think about some of the announcements about these data centers that are being built, where they're really going to unleash the potential of AI, those aren't going to be completed for a couple of years anyway. So, I think for now, AI is dominating the demand side of the economy. Over the next few years, it's going to be a real boost to the supply side of the economy. Serena Tang: So that makes a lot of sense to me, Seth. But can you put those into numbers? Seth Carpenter: Sure, Serena totally. In numbers, that's about 3 percent growth. A little bit more than that for global GDP growth on like a Q4-over-Q4 basis. But for the U.S. in particular, we've got about 1.75 percent. So that's not appreciably different from what we're looking for this year in 2025. But the number really, kind of, masks the evolution over time. We think the front part of the year is going to be much weaker. And only once we get into the second half of next year will things start to pick up. That said, compared to where we were when we did the midyear outlook, it's actually a notable upgrade. We've taken real signal from the fact that business spending, household spending have both been stronger than we think. And we've tried to add in just a little bit more in terms of productivity growth from AI. Layer on top of that, the Fed who's been clearly willing to start to ease interest rates sooner than we thought at the time of the mid-year outlook – all comes together for a little bit better outlook for growth for 2026 in the U.S. Serena Tang: Seth thanks so much for taking the time to talk. Seth Carpenter: Serena, it is always my pleasure to get to talk to you. Serena Tang: And thanks for listening. Please be sure to tune into the second half of our conversation tomorrow to hear how we're thinking about investment strategy in the year ahead. 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.

Our Chief Global Economist Seth Carpenter and Global Cross-Asset Strategist Serena Tang return to conclude their two-part episode on 2026 outlooks and explain why the market environment is turning in favor of risk assets, especially U.S. stocks.Read more insights from Morgan Stanley.----- Transcript -----Seth Carpenter: Welcome to Thoughts in the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist.Serena Tang: And I'm Serena Tang, Morgan Stanley's Chief Global Cross-Asset Strategist.Seth Carpenter: Yesterday, Serena, we discussed our views on the global economy, and today I'm going to turn the tables on you and start asking you questions about our market outlook and how to invest across regions and across asset classes.It's Tuesday, November 18th at 10am in New York.Alright, Serena in 2025, global markets rode some significant volatility driven by tariffs, policy uncertainty. Things went up, they went down. Equities ultimately outperformed bonds as rate cuts began. But cross-asset strategy depended so much on identifying correlations, opportunities – all in a world that is still adapting to the new geopolitical dynamics and what seemed like evolving rules.So, with that backdrop, could you just broadly tell us what the investment strategy should be in 2026?Serena Tang: We think 2026 will be a strong year for risk assets as you have unusually pro-cyclical policy mix that's supportive of earnings. And that frees up markets to shift the focus from global macro concerns, which of course have dominated this year, to more micro asset specific narratives. Particularly those related to AI CapEx investment.And I think such a constructive environment really calls for a risk on tilt. We recommend equities over credit and government bonds, with a preference for U.S. assets.Seth Carpenter: Okay. I think last year we had some preference, at least for U.S. equities. Are there any other big rotations versus more of the same that you really want to highlight for folks?Serena Tang: In terms of, I think the strategy outlook itself, a big shift has been what we think drive investor focus the most. Our strategy mid-year outlook had focused heavily on global macro risks, right? Especially those, I think, emanated from trade tensions, which you alluded to earlier.I think this time around as the distribution of outcomes on tariffs, I think, has become a bit narrower, it's very much more about asset specific stories. And yes, you know, to your point about being, bullish on U.S. equities, we've maintained that view this time round and believe that U.S. equities can generally do better than rest of world.As you know, Mike Wilson, a colleague and chief U.S. equity strategist, he has a price target of 7800 for the S&P 500 index …Seth Carpenter: Wow.Serena Tang: Beating the expected returns from other regional equities by like quite a bit. So that's not changed. But I think that with this backdrop of post cyclical policy combo lifting U.S. earnings, we've also turned more bullish on high-yield corporate credit – that is bonds which are riskier.I think very much like U.S. equities, we believe that the asset class can benefit from the combination of monetary deregulation policy. But there's also like a very interesting technical component there, which is, as we expect, a surge in investment grade issuance to fund AI related CapEx. I think the high-yield market will be more insulated from this, which means outperformance versus higher quality corporate bonds.Seth Carpenter: Got it. Okay. So, as you're coming up with these strategies and these recommendations in lots of ways, it just relies on forecasting. And I have to say I'm sympathetic to how hard forecasting is, especially when it comes to the future. In our economic forecast, we also included a bunch of different alternate scenarios because I just see that much uncertainty in the global economy.So, with that as a backdrop, nothing is for sure. But where would you say your highest conviction calls are when it comes to investing in 2026?Serena Tang: Well, as I mentioned, we like U.S. equities and that remains a very high conviction call for us. [I] sort of dug through the details of that already. And so, I want to turn to a[n]other high conviction view, which is curve steepening. We see pretty material U.S. treasury curve steepening over the next year. I think even as a macro strategist, actually expect yields at least in the backend to be mostly range bound. And this steepening will be very much driven by what happens in the two-year point – I think as markets continue to, we think, underpriced, future Fed easing and growth slow down tail risks.Seth Carpenter: So that's super helpful in terms of the places where you're convicted. Let me be perhaps a little bit unfair because nothing is in fact certain. And so, if there are things that we feel pretty sure about, there've got to be things where we're either not sure or parts of the market that really pose the most risk.So, if I asked you then, where do you see the biggest risk for investors in markets next year, what would you say?Serena Tang: So, one of them really is AI investment cycle abruptly ending. And this has been a topic of huge debate in all of the investor meetings that we've had over the last several weeks. Because the idea is you have a sharp pullback in investment in the next 12 months, which could trigger a pretty cascading effect. And of course that would likely pressure U.S. equities, I think given hyperscalers index weight. But could weirdly enough benefit IG credit by reducing issuance, which has been the main driver of wider spreads in our forecast. But I think the other risk here actually is if animal spirits run a bit too hot. Underlying our equities over credit over rates allocation is some revival in animal spirits, but it's not the kind of irrational exuberance that marks the end of cycle in our view.Given, I think there's still rational belief in that policy triumvirate that we touched on earlier, that can still be supportive of risk. But you know, I think if sentiment does overheat then our allocation tilt towards cyclicals and beta would be wrong. And historically late cycle expansions see investment grade outperforming high yield inequities, with bonds eventually leading returns.The last risk, I think, to our asset allocation, is really the Fed. Either the FOMC not easing further over the next 12 months or if it changes its reaction function. And I think both of those will have very different implications of what happens to the front end of the yield curve. So, my question to you, Seth, is what do you see as the probability around both of those scenarios?Seth Carpenter: Look, with the data that we have before the government shut down, it was clear there was a tension. Spending by households, spending by businesses was strong. Employment data were getting weaker and weaker, and the Fed has decided to start cutting to err on the side of insulating against further deterioration in the labor market.So, one thing that could upend our forecast is that the real signal is from the spending. Spending stays strong, the labor market eventually catches up to the stronger spending, and we start to see job gains come back. If that happens, especially with inflation now running notably above the Fed's target, I just don't really think we're going to get anywhere near the number of rate cuts that we forecast or that are already priced into market. So, you'd have to see a reversal.How likely is that you can't rule it out? I'd say 20 percent or something like that. Maybe a little bit more. On the other hand, to the downside. I wonder if what you're getting at a little bit is there's going to be some turnover in the personnel at the Fed. And do we have to worry about a fundamentally different reaction function from the Fed going forward and cutting rates aggressively, even if the macro considerations don't warrant? Is that really what you were getting at?Serena Tang: Yes. I think that has been the question on the forefront of investors' minds…Seth Carpenter: Yeah, I think that's a real question. The way I look at it is Chair Powell is in charge of the Fed now. His term goes through May of next year. And so, until we get to the middle of next year, I don't really think there's any fundamental change in how the Fed does business. But it really does seem like we're going to have a new Fed chair in June of next year. But even there, we have got to remember that the committee is a committee and that's how policy is decided. And so, if there was a new chair who really, really, really wanted to take policy in a truly unorthodox way, I also don't think that's really feasible over the second half of next year – because there just won't have been that much turnover in terms of the personnel of the Fed. That's how we're looking at it for now. I really don't think that latter version of the world is a big risk. That said, I'm going to throw it back to you [be]cause I always have to get the last word.You talked about asset classes, bullish on U.S. equities. We talked about high yield bonds; we talked about some of the risks that markets have to face. But one thing I didn't hear – and we do have a global investor base – Is about currencies and specifically the dollar.So, this time last year, the team made a pretty bold call that the dollar would depreciate a great deal. And here we are and the dollar has come off a lot on net over this year. That stabilized a little bit. Maybe not for the whole year [be]cause that kind of forecasting is hard for currencies. But what do you see over the next few months called the next half year for the dollar? Is it going to continue the trend or do you think we should see a reversal?Serena Tang: So, we do think the dollar will continue its trend downwards from here to the middle of next year. And I know, I know. There's been a lot of discussion, there's been a lot of debate around whether the dollar has basically stopped where we are. But the thing is, you know, going back to what you mentioned around the path for growth in the U.S. and unemployment in the U.S. – if we do see softer economic data in the first half of next year, that can drive the dollar downwards. In fact, we're once again, more bearish than consensus on the dollar by the middle of next year.Seth Carpenter: Got it. All right. That's super helpful. Serena, thank you so much for taking the time to talk with me today and let me ask the questions of you.Serena Tang: Always a pleasure, Seth.Seth Carpenter: And thank you 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 a colleague today.

In the first of a two-part episode presenting our 2026 outlooks, Chief Global Cross-Asset Strategist Serena Tang has Chief Global Economist Seth Carpenter explain his thoughts on how economies around the world are expected to perform and how central banks may respond.Read more insights from Morgan Stanley.----- Transcript -----Serena Tang: Welcome to Thoughts on the Market. I'm Serena Tang, Morgan Stanley's Chief Global Cross-Asset Strategist. Seth Carpenter: And I'm Seth Carpenter, Morgan Stanley's Global Chief Economist. Serena Tang: So today and tomorrow, a two-part conversation on Morgan Stanley's year ahead outlook. Today, we'll focus on the all-important macroeconomic backdrop. And tomorrow, we'll be back with our views on investing across asset classes and markets. Serena Tang: It's Monday, November 17th at 10am in New York. So, Seth, 2025 has been a year of transition. Global growth slowed under the weight of tariffs and policy uncertainty. Yet resilience in consumer spending and AI driven investments kept recession fears at bay. Your team has published its economic outlook for 2026. So, what's your view on global growth for the year ahead? Seth Carpenter: We really think next year is going to be the global economy slowing down a little bit more just like it did this year, settling into a slower growth rate. But at the same time, we think inflation is going to keep drifting down in most of the world. Now that anodyne view, though, masks some heterogeneity around the world; and importantly, some real uncertainty about different ways things could possibly go. Here in the U.S., we think there is more slowing to come in the near term, especially the fourth quarter of this year and the beginning of next year. But once the economy works its way through the tariffs, maybe some of the lagged effects of monetary policy, we'll start to see things pick up a bit in the second half of the year. China's a different story. We see the really tepid growth there pushed down by the deflationary spiral they've been in. We think that continues for next year, and so they're probably not quite going to get to their 5 percent growth target. And in Europe, there's this push and pull of fiscal policy across the continent. There's a central bank that thinks they've achieved their job in terms of inflation, but overall, we think growth there is, kind of, unremarkable, a little bit over 1 percent. Not bad, but nothing to write home about at all. So that's where we think things are going in general. But I have to say next year, may well be a year for surprises. Serena Tang: Right. So where do you see the biggest drivers of global growth in 2026, and what are some of the key downside risks? Seth Carpenter: That's a great question. I really do think that the U.S. is going to be a real key driver of the story here. And in fact – and maybe we'll talk about this later – if we're wrong, there's some upside scenarios, there's some downside scenarios. But most of them around the world are going to come from the U.S. Two things are going on right now in the U.S. We've had strong spending data. We've also had very, very weak employment data. That usually doesn't last for very long. And so that's why we think in the near term there's some slowdown in the U.S. and then over time things recover. We could be wrong in either direction. And so, if we're wrong and the labor market sending the real signal, then the downside risk to the U.S. economy – and by extension the global economy – really is a recession in the U.S. Now, given the starting point, given how low unemployment is, given the spending businesses are doing for AI, if we did get that recession, it would be mild. On the other hand, like I said, spending is strong. Business spending, especially CapEx for AI; household spending, especially at the top end of the income distribution where wealth is rising from stocks, where the liability side of the balance sheet is insulated with fixed rate mortgages. That spending could just stay strong, and we might see this upside surprise where the spending really dominates the scene. And again, that would spill over for the rest of the world. What I don't see is a lot of reason to suspect that you're going to get a big breakout next year to the upside or the downside from either Europe or China, relative to our baseline scenarios. It could happen, but I really think most of the story is going to be driven in the U.S. Serena Tang: So, Seth, markets have been focused on the Fed, as it should. What is the likely path in 2026 and how are you thinking about central bank policy in general in other regions? Seth Carpenter: Absolutely. The Fed is always of central importance to most people in markets. Our view – and the market's view, I have to say, has been evolving here. Our view is that the Fed's actually got a few more rate cuts to get through, and that by the time we get to the middle of next year, the middle of 2026, they're going to have their policy rate down just a little bit above 3 percent. So roughly where the committee thinks neutral is. Why do we think that? I think the slowing in the labor market that we talked about before, we think there's something kind of durable there. And now that the government shutdown has ended and we're going to start to get regular data prints again, we think the data are going to show that job creation has been below 50,000 per month on average, and maybe even a few of them are going to get to be negative over the next several months. In that situation, we think the Fed's going to get more inclination to guard against further deterioration in the labor market by keeping cutting rates and making sure that the central bank is not putting any restraint on the economy. That's similar, I would say, to a lot of other developed markets' central banks. But the tension for the ECB, for example, is that President Lagarde has said she thinks; she thinks the disinflationary process is over. She thinks sitting at 2 percent for the policy rate, which the ECB thinks of as neutral, then that's the right place for them to be. Our take though is that the data are going to push them in a different direction. We think there is clearly growth in Europe, but we think it's tepid. And as a result, the disinflationary process has really still got some more room to run and that inflation will undershoot their 2 percent target, and as a result, the ECB is probably going to cut again. And in our view, down to about 1.5 percent. Big difference is in Japan. Japan is the developed market central bank that's hiking. Now, when does that happen? Our best guess is next month in December at the policy meeting. We've seen this shift towards reflation. It hasn't been smooth, hasn't been perfectly linear. But the BoJ looks like they're set to raise rates again in December. But the path for inflation is going to be a bit rocky, and so, they're probably on hold for most of 2026. But we do think eventually, maybe not till 2027, they get back to hiking again – so that Governor Ueda can get the policy rate back close to neutral before he steps down. Serena Tang: So, one of the main investor debates is on AI. Whether it's CapEx, productivity, the future of work. How is that factoring into your team's view on growth and inflation for the next year? Seth Carpenter: Yeah, I mean that is absolutely a key question that we get all the time from investors around the world. When I think about AI and how it's affecting the economy, I think about the demand side of the economy, and that's where you think about this CapEx spending – building data centers, buying semiconductors, that sort of thing. That's demand in the economy. It's using up current resources in the economy, and it's got to be somewhat inflationary. It's part of what has kept the U.S. economy buoyant and resilient this year – is that CapEx spending. Now you also mentioned productivity, and for me, that's on the supply side of the economy. That's after the technology is in place. After firms have started to adopt the technology, they're able to produce either the same amount with fewer workers, or they're able to produce more with the same amount of workers. Either way, that's what productivity means, and it's on the supply side. It can mean faster growth and less inflation. I think where we are for 2026, and it's important that we focus it on the near term, is the demand side is much more important than the supply side. So, we think growth continues. It's supported by this business investment spending. But we still think inflation ends 2026, notably above the Fed's inflation target. And it's going to make five, five and a half years that we've been above target. Productivity should kick in. And we've written down something close to a quarter percentage point of extra productivity growth for 2026, but not enough to really be super disinflationary. We think that builds over time, probably takes a couple of years. And for example, if we think about some of the announcements about these data centers that are being built, where they're really going to unleash the potential of AI, those aren't going to be completed for a couple of years anyway. So, I think for now, AI is dominating the demand side of the economy. Over the next few years, it's going to be a real boost to the supply side of the economy. Serena Tang: So that makes a lot of sense to me, Seth. But can you put those into numbers? Seth Carpenter: Sure, Serena totally. In numbers, that's about 3 percent growth. A little bit more than that for global GDP growth on like a Q4-over-Q4 basis. But for the U.S. in particular, we've got about 1.75 percent. So that's not appreciably different from what we're looking for this year in 2025. But the number really, kind of, masks the evolution over time. We think the front part of the year is going to be much weaker. And only once we get into the second half of next year will things start to pick up. That said, compared to where we were when we did the midyear outlook, it's actually a notable upgrade. We've taken real signal from the fact that business spending, household spending have both been stronger than we think. And we've tried to add in just a little bit more in terms of productivity growth from AI. Layer on top of that, the Fed who's been clearly willing to start to ease interest rates sooner than we thought at the time of the mid-year outlook – all comes together for a little bit better outlook for growth for 2026 in the U.S. Serena Tang: Seth thanks so much for taking the time to talk. Seth Carpenter: Serena, it is always my pleasure to get to talk to you. Serena Tang: And thanks for listening. Please be sure to tune into the second half of our conversation tomorrow to hear how we're thinking about investment strategy in the year ahead. 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 second of a two-part episode, Morgan Stanley's chief economists talk about their near-term U.S. outlook based on tariffs, labor supply and the Fed's response. They also discuss India's path to strong economic growth.Read more insights from Morgan Stanley.----- Transcript ----- Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist. Yesterday I sat down with my colleagues, Mike Gapen, Chetan Ahya and Jens Eisenschmidt, who cover the U.S., Asia, and Europe respectively. We talked about... Well, we didn't get to the U.S. We talked about Asia. We talked about Europe. Today, we are going to focus on the U.S. and maybe one or two more economies around the world. It's Wednesday, October 1st at 10am in New York. Jens Eisenschmidt: And 4pm in Frankfurt. Chetan Ahya: And 10 pm in Hong Kong. All right, gentlemen. So yesterday we talked a lot about China, the anti-involution policy, and what's going on with deflation there. Talked a little bit about Japan and what the Bank of Japan is doing. We shifted over to Europe and what the ECB is doing there – there were lots of questions about deflation, disinflation, whether or not inflation might actually pick up in Japan. So, [that] was all about soft inflation. Mike, let me put you on the spot here, because things are, well, things are a little bit different in the U.S. when it comes to inflation. A lot of attention on tariffs and whether or not tariffs are going to drive up inflation. Of course, inflation, the United States never got back to the Fed's target after the COVID surge of inflation. So, where do you see inflation going? Is the effect of tariffs – has that fully run its course, or is there still more entrained? How do you see the outlook for inflation in the U.S.? Michael Gapen: Yeah, certainly a key question for the outlook here. So, core PCE inflation is running around 2.9 percent. We think it can get towards 3, maybe a little above 3 by year end. We do not think that the economy has fully absorbed tariffs yet; we think more pass through is coming. The President just announced additional tariffs the other day. We had them factored into our baseline. I think it's fair to say companies are still figuring out exactly how much they can pass through to consumers and when. So, I think the year-on-year rate of inflation will continue to move higher into year end. Hit 3 percent, maybe a little bit above. The key question then is what happens in 2026. Is inflation driven by tariffs transitory – the famous T word; and the year-on-year rate of inflation will come back down? That's what the Fed's forecast thinks; we do as well. But as everyone knows, the Fed has started to ease policy to support the labor market. The economy has performed pretty well, so there's a risk maybe that inflation doesn't come down as much next year. Seth Carpenter: Alright, so tariffs are clearly a key policy variable that can affect inflation. There's also been immigration restriction, to say the least, and what we saw coming out of COVID – when people were reluctant to go back to work, and businesses were reporting lots of shortages of workers – is that in certain services industries, we saw some pressure on prices. So, tariffs mostly affect consumer goods prices. Is there a contribution from immigration restriction onto overall inflation through services? Michael Gapen: I think the answer is yes; and I hesitate there because it's hard to see it in real time. But it is fair to say the average immigrant in the U.S. is younger. They have higher rates of labor force participation. They tend to reside in lower income households. So, they're labor supply heavy in terms of their effect on the economy. And yes, they tend to have larger relative presence in construction and manufacturing. But in terms of numbers, a lot of immigrants work in the service sector, as you note. And services inflation has been to the upside lately, right? So, the surprise has been that goods inflation maybe hasn't been as strong. The pass through from tariffs has been weaker. But in terms of upside surprises in inflation, it's common services and in many cases, non-housing related services. So, I'd say there's maybe some nascent signs that immigration controls may be keeping services prices firmer than thought. But may be hard to tie that directly at the moment. So, it's easier to say I think immigration controls may prevent inflation from coming down as much next year. It's not altogether clear how much they're pushing services inflation up. I think there's some evidence to support that, and we'll have to see whether that continues. Seth Carpenter: Alright, so we're seeing higher costs and higher prices from tariffs. We're seeing less labor supply when it comes to immigration. Those seem like a recipe for a big slowdown in growth, and I think that's been your forecast for quite some time – is that the U.S. was going to slow down a lot. Are we seeing that in the data? Is the U.S. economy slowing down or is everything just fine? How are you thinking about it? And what's the evidence that there's a slowdown and what are maybe the counterarguments that there's not that much of a slowdown? Michael Gapen: Well, I think that the data doesn't support much of a slowdown. So yes, the economy did moderate in the first half of the year. I think the smart thing to do is average through Q1 and Q2 outcomes [be]cause there was a lot of volatility in trade and inventories. If you do that, the economy grew at about a 1.8 percent annualized rate in the first half of the year, down from about 2.5 percent last year. So, some moderation there, but not a lot. We would argue that that probably isn't a tariff story. We would've expected tariffs and immigration policies to have greater downward pressure on growth in the second half of the year. But to your question, incoming data in the third quarter has been really strong, and we're tracking growth somewhere around 3 percent right now.So, there's not a lot of evidence in hand at present that tariffs are putting significant downward pressure on growth. Seth Carpenter: So those growth numbers that you cite are on spending, which is normally the way we calculate things like GDP, consumption spending. But the labor market, I mean, non-farm payroll reports really have been quite weak. How do you reconcile that intellectual tension on the one hand spending holding up? On the other hand, that job creation [is] pretty, pretty weak. Michael Gapen: Yeah. I think the way that we would reconcile it is when we look at the data for the non-financial corporate sector, what appears to be clear is that non-labor costs have risen and tariffs would reside in that. And the data does show that what would be called unit non-labor costs. So, the cost per unit of output attributable to everything other than labor that rose a lot. What corporates apparently did was they reduced labor costs. And they absorbed some of it in lower profitability. What they didn't do was push price a lot. We'll see how long this tension can go on. It may be that corporates are in the early stages of passing through inflation, so we will see more inflation further out in a slowdown in spending. Or it may be that corporates are deciding that they will bear most of the burden of the tariffs, and cost control and efficiencies will be the order of the day. And maybe the Fed is right to be worried about downside risk to employment. So, I reconcile it that way. I think corporates have absorbed most of the tariff shock to date, and we're still in the early stages of seeing whether or not they will be able to pass it along to consumers. Seth Carpenter: All right, so then let's think about the Fed, the central bank. Yesterday, I talked to Chetan about the Bank of Japan. There reflation is real. Talked to Jens yesterday about the ECB where inflation has come down. So, those other developed market economies, the prescriptions for monetary policy are pretty straightforward. The Fed, on the other hand, they're in a bit of a bind in that regard. What do you think the Fed is trying to achieve here? How would you describe their strategy? Michael Gapen: I would describe their strategy as a recalibration, which is, I think, you know, technical monetary policy jargon for – where their policy stance is now; is not correct to balance risks to the economy. Earlier this year, the Fed thought that the primary risk was to persistent inflation. Boy, the effective tariff rate was rising quickly and that should pass due to inflation. We should be worried about upside risk to inflation. And then employment decelerated rapidly and has stayed low now for four consecutive months. Yes, labor supply has come down, but there's also a lot of evidence that labor demand has come down. So, I think what the Fed is saying is the balance of risks have become more balanced. They need to worry about inflation, but now they also need to worry about the labor market. So having a restrictive policy stance in their mind doesn't make sense. The Fed's not arguing – we need to get below neutral. We need to get easy. They're just saying we probably need to move in the direction of neutral. That will allow us to respond better if inflation stays firm or the labor market weakens. So, a recalibration meaning, you know, we think two more rate cuts into year end get a little bit closer to neutral, and that puts them in a better spot to respond to the evolving economic conditions. Seth Carpenter: All right. That makes a lot of sense. We can't end a conversation this year about the Fed, though, without touching on the fact that the White House has been putting a lot of pressure on the Federal Reserve trying to get Chair Powell and his committee to push interest rates substantially lower than where they are now. Michael Gapen: You've noticed? Seth Carpenter: I've noticed. From my understanding, a lot of people in markets have noticed as well. There's been some turnover among policy makers. We have a new member of the Board of Governors of the Fed. This discussion about Federal Reserve independence. How do you think about it? Is Chair Powell changing policy based on political pressure? Michael Gapen: I don't think so. I think there's enough evidence in the labor market data to support the Fed's shift in stance. We have certainly highlighted immigration controls, what they would mean for the labor force. And how that means even a slowing, growing economy could keep the unemployment rate low. But it's also fair to say labor demand has come down. If labor demand were still very strong, you might see job openings higher, you might see vacancies higher. You may even see faster wage growth. So, I think the Fed's right to look at the labor market and say, ‘Okay, on the surface, it looks like a no hire, no fire labor market. We can live with that, but there are some layoffs underneath. There are signs of weakness. Slack is getting created slowly.' So, I think the Fed has solid ground to stand on in terms of shifting their view. But you're right, that looking forward into 2026 with the end of Powell's term as chair and likely turnover in other areas of the board. Whether the Fed maintains a conventional reaction function or one that's perhaps more politically driven remains an open question – and I think is a risk for investors. Seth Carpenter: I want to change things up a lot here. Chetan, yesterday you and I talked about China. We talked about Japan. Two really big economies that I think are well known to investors.Another economy in Asia that you cover is India. For a long time, we have said India was going to be the fastest growing major economy in the world. Do you still see it to be the case? That India's got a really bright growth outlook? And in the current circumstance with tariffs going on, how do you think India is fairing vis-a-vis U.S. tariffs? Chetan Ahya: So yes, Seth, we are still optimistic about India's growth outlook. Having said that, you know, there are two issues that the economy has been going through. Number one is that the domestic demand had slowed down because of previous tightening of fiscal and monetary policies. And at the same time, we have now seen this trade tensions, which will slow global trade. But also, directly India will be affected by the fact that the U.S. has imposed 50 percent tariff on close to 60 percent of India's exports to the U.S. So, both these issues are affecting the outlook in the near term. We still don't have clarity on what happens on trade tensions, but what we have seen is that the government has really worked quite hard to get the economy going from domestic demand perspective. And so, they have taken up three sets of policy actions. They have reduced household income tax. The central bank has cut interest rates because inflation has been in control. And at the same time, they have now just recently announced reduction in Goods and Services Tax, which is akin to like consumption tax. And so, these three policy actions together we think will drive domestic demand growth from the fourth quarter of this year itself. It will still be not back up to strong growth levels. And for that we still need that solution to trade policy uncertainty. But I think there will be a significant recovery coming up in the next few months. Seth Carpenter: All right. Thanks for that, Chetan. It's such an interesting story going on there in India. Well, Michael, Chetan, thank the three of you for joining me today in this conversation. And to the listeners, thank you for listening. If you enjoy this show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or a colleague today.

Morgan Stanley's chief economists discuss how policymakers in China, Japan and the European Union are addressing slower growth, deflation or the return of inflationary pressures. Read more insights from Morgan Stanley.----- Transcript ----- Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist.Well, a lot has changed since the second quarter and the last time we did one of these around the world economics roundtable. After an extended pause, the United States Federal Reserve started cutting rates again. Europe's recovery is showing, well, some mixed signals. And in Asia, there's once again increasing reliance on policy support to keep growth on track.Today for the first part of a two-part conversation, I'm going to engage with Chetan Ahya, our Chief Asia economist, and Jens Eisenschmidt, our Chief Europe economist, to really get into a conversation about what's going on in the economy around the world.It's Tuesday, September 30th at 10am in New York.Jens Eisenschmidt: And 4pm in Frankfurt.Chetan Ahya: And 10pm in HongSeth Carpenter: So, it's getting to be the end of the third quarter, and the narrative around the world is still quite murky from my perspective. The Fed has delivered on a rate cut. The ECB has decided that maybe disinflation is over. And in Asia, China's policymakers are trying to lean in and push policy to right the wrongs of deflation in that economy.I want to get into some of the real hard questions that investors around the world are asking in terms of what's going on in the economy, how it's working out, and what we should look for. So, Chetan, if I can actually start with you. One of the terms that we've heard a lot coming out of China is the anti-involution policy.Can you just lay out briefly for us, what do we mean when we say the anti-involution policy in China?Chetan Ahya: Well, the anti-evolution policy is a response to China's excess capacity and persistent deflation challenge. And in China's context, involution refers to the dynamic where producers compete excessively, resulting in aggressive price cuts and diminishing returns on capital employed. And look, at the heart of this deflation challenge is China's approach of maintaining high real GDP growth with more investment in manufacturing and infrastructure when aggregate demand slows. And in the past few years, policy makers push for investment in manufacturing and infrastructure to offset the sharp slow down in property sector.And as a result, a number of industry sectors now have large excess capacities, explaining this persistent deflationary environment. And after close to two and a half years of deflation, policy makers are recognizing that deflation is not good for the corporate sector, households and the government. And from the past experience, we know that when policymakers in China signal a clear intention, it will be followed up by an intensification of policy efforts to cut capacity in select sectors. However, we think moving economy out of deflation will be challenging. These supply reduction efforts may be helpful but will not be sufficient on their own. And this time for a sustainable solution to deflation problem, we think a pivot is needed – supporting consumption via systematic efforts to increase social welfare spending, particularly targeted towards migrant workers in urban China and rural poor. But we are not optimistic that this solution will be implemented in scale.Seth Carpenter: So that makes sense because in the past when we've been talking about the issue of deflation in China, it's essentially this mismatch between the amount of demand in the economy not being sufficient to match the supply. As you said, you and your team have been thinking that the best solution here would be to increase demand, and instead what the policymakers are doing is reducing supply.So, if you don't think this change in policy, this anti-evolution policy is sufficient to break this deflation cycle – what do you see as the most likely outcome for economic growth in China this year and next?Chetan Ahya: So, this year we expect GDP growth to be around 4.7 percent, which implies that in the back half of the year you'll see growth slowing down to around 4.5 percent because we already grew at 5.2 in the first half. And, going forward we think that, you know, you should be looking more at normal GDP growth set because as we just discussed deflation is a key challenge.So, while we have real GDP growth at 4.7 for 2025, normal GDP growth is going to be 4 percent. And next year, again, we think normal GDP growth will be in that range of 4 percent.Seth Carpenter: That whole spiral of deflation – it's sort of interesting, Japan as an economy has broken that sort of stagnation or disinflation spiral that it was in for 25 years. We've been writing for a long time about the reflation story going on in Japan. Let me ask you, our forecast has been that the reflationary dynamic is there. It's embedded, it's not going away anytime. But, on the other hand, we basically see the Bank of Japan as on hold, not just for the rest of this year, but for all of next year as well.Can you let us know a little bit about what's going on with Japan and why we don't think the Bank of Japan might raise interest rates anytime soon?Chetan Ahya: So, Seth, at the outset, we think BoJ needs still some more time to be sure that we are on that virtuous cycle of rising prices and wages. Yes, both prices and wages have gone up. But it is very clear from the data that a large part of this rise in prices can be attributed to currency depreciation and supply side factors, such as higher energy prices earlier, and food prices now. And similarly, currency depreciation has also played a role in lifting corporate profits, which then has allowed the corporate sector to increase wages.So, if you look at the drivers to rise in prices and wage growth as of now, we think that demand has not really played a big role. To just establish that point, if you look at Japan's GDP, it's just about 1 percent higher than pre-COVID on a real basis. And if you look at Japan's consumption, real consumption trend, it's still 1 percent below pre-COVID levels.So, we think BoJ still needs more time. And just to add one more point on this. BoJ is also conscious about what tariffs will do to Japan's exports, and economy; and therefore, they want to wait for some more time to see the evidence that demand also picks up before they take up a policy rate hike.Seth Carpenter: So, one economy in deflation and policy is probably not enough to prevent it. Another economy that's got reflation, but a very cautious central bank who wants to make sure it continues. Jens, let's pivot now to Europe because at the last policy meeting, President Lagarde of the ECB said pretty, pretty strongly that she thinks the disinflationary process in Europe has come to an end. And that the ECB is basically on hold at this point going forward.Do you agree with her assessment? Do you think she's got it right? You think she's got it wrong? How could she be wrong, if she's wrong? And what's your outlook for the ECB?Jens Eisenschmidt: Yeah, there a ton of questions here. I think I was also struck by the statement as you were. I think there is probably – that's at least my interpretation – a reference here to – Okay, we have come down a long way in terms of inflation in the Euro area. Rather being at 10 percent at some point in the past and now basically at target. And we think; I mean, we just got the data actually, for September in. It's more or less in line with what we had expected up again to 2.3. But that's really it. And then from here it's really down.Very good reasons to believe this will be the case. We have actually inflation below target next year, and the ECB agrees. So that's why I think she can't have made reference to what Liza had because the ECB itself is predicting that inflation from here will fall. So, I think it's really probably rather description of the way traveled. And then there may be some nuances here in the policy prescription forward.So, for now we think inflation will undershoot the target. And we think this undershoot has good chances to extend well into the medium term. So that's the famous 2027 forecast. The ECB in its last installment of the forecast in September doesn't disagree. Or it's actually, in theory at least, in agreement because it has a 1.9 here for 2027. So, it's also below target.But when asked about that at the press conference, the President said, yes, it's actually, very close to 2. So, it really cannot be really distinguished here. So, from that perspective, policy makers probably want to wait it out. In particular for the October meeting, which is not a forecast meeting, we don't expect any change.And then the focus of attention is really on the December meeting with the new forecast. What will 2028 show in their forecast for inflation? And will the 1.9 in [20]27 actually be rather 1.8? In which case I think the discussion on further cuts will heat up. We have a cut for December, and we have another one for March.Seth Carpenter: Of course, very often one of the things that drives inflation is overall economic growth and a key determinant of economic growth tends to be fiscal policy. And there we've got two big economies very much in the headlines right now. Germany, on the one hand, with plans to increase spending both on infrastructure and on defense spending. And then France, who's seen lots of instability, shall we say, with the government as they try to come up with a plan for fiscal consolidation.So, with those two economies in mind, can you walk us through what is the fiscal outlook for Germany, in particular? Is it going to be enough to stimulate overall growth in Europe? And then for France, are they going to be able to get the fiscal consolidation that they're looking for? How do you see those two economies evolving in terms of fiscal policy?Jens Eisenschmidt: Yeah, it's of course neither black or white, as you know. I think here we really look into the German case specifically, as the clear case where fiscal stimulus will happen. It may just not happen as quickly, and it's a very trade open economy. So, it's very much exposed to the current headwinds coming out of China for one. Or also U.S. tariffs. So, from that we conclude our net-net is actually, yes, there is textbook fiscal stimulus. So, basically domestic demand replacing less foreign demand.So that's fine, but just not enough. We see essentially better growth in Germany, but that's more cyclically driven. But it was; it just would not be enough for what you would normally think given the size of the fiscal stimulus, which is enormous. But it will also take some time, this fiscal stimulus to unfold.On the other side in France, as you rightly ask, how much consolidation are we going to get? I think the answer has to be very likely less than what the last – or the previous Prime Minister has had planned. So, all in all, that gets us into a situation of a country that lacks a clear economic policy structure, a clear governance structure; tries to – on a very fragile parliamentary majority – tries to consolidate the budget. Probably gets less consolidation going forward than what would be desirable. And, you know, here is sort of – not really...It's been muddling through a little bit. This is probably a good description of the approach here in France, and we actually have on the lack of a clear economic policy agenda and still some fiscal consolidation. We have actually lackluster growth in France for this year and next.Seth Carpenter: Okay, so what I'm hearing you saying is inflation seems likely to come down and probably undershoot their target causing President Lagarde and the ECB to reconsider how many cuts they're going to do. And then growth probably isn't going to be as stimulated by fiscal policy as I think lots of people in markets are hoping for.Chetan, Jens, thanks for joining us.And to the listeners, thank you for listening. Be sure to turn in tomorrow where I'm going to put Michael Gapen, Morgan Stanley's Chief U.S. Economist on the hot seat, talk about the U.S. and maybe one or two more economies around the world.And if you enjoy this show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or a colleague today.

As Fed Chair Jerome Powell's term ends next year, our Global Chief Economist Seth Carpenter discusses the potential policy impact of a so-called “shadow Fed chair”.Read more insights from Morgan Stanley.----- Transcript -----Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist. And today – well, there's a topic that's stirring up a lot of speculation on Wall Street and in Washington. It's this idea of a Shadow Fed Chair. It's Monday, July 21, at 2 PM in New York. Let's start with the basics. Fed Chair Jerome Powell's term expires in May of next year. And look at any newspaper that covers the economy or markets, and you will see that President Trump has been critical of monetary policy under Chair Powell. Those facts have led to a flurry of questions: Who might succeed Chair Powell? When will we know? And—maybe most importantly—how should investors think about these implications? President Trump has been clear in his messaging: he wants the Fed to cut rates more aggressively. But even though it seems clear that there will be a new Chair in June of next year, market pricing suggests a policy rate just above 3 percent by the end of next year. That level is lower than the current Fed rate of 4.25 [percent] to 4.50 [percent], but not aggressively so. In fact, Morgan Stanley's base case is that the policy rate is going to be even a bit lower than market pricing suggests. So why this disconnect? First, although there are several names that have been floated by media sources, and the Secretary of the Treasury has said that a process to select the next Chair has begun, we really just don't know who Powell's successor would be. News reports suggest we will get a name by late summer though. Another key point, from my perspective, is even when Powell's term as Chair ends, the Fed's reaction function—which is to say how the Fed reacts to incoming economic data—well, it's probably not going to change overnight. The Federal Open Market Committee, or the FOMC, makes policy and that policy making is a group effort.  And that group dynamic tends to restrain sudden shifts in policy. So, even after Powell steps down, this internal dynamic could keep policy on a fairly steady course for a while. But some changes are surely coming. First, there's a vacancy on the Fed Board in January. And that seat could easily go to Powell's successor—before the Chair position officially changes.  In other words, we might see what people are calling a Shadow Chair, sitting on the FOMC, influencing policy from the inside.Would that matter to markets?Possibly. Especially if the successor is particularly vocal and signals a markedly different stance in policy.  But again, the same committee dynamics that should keep policy steady so far might limit any other immediate shifts. Even with an insider talking. As importantly, history suggests that political appointees often shed their past affiliations once they take office, focusing instead on the Fed's dual mandate: maximum sustainable employment and stable prices.But there are always quirky twists to most stories: Powell's seat on the Board doesn't actually expire when his term as Chair ends. Technically, he could stay on as a regular Board member—just like Michael Barr did after stepping down as the Vice Chair for Supervision. Now Powell hasn't commented on all this, so for now, it's just a thought experiment. But here's another thought experiment: the FOMC is technically a separate agency from the Board of Governors. Now, by tradition, the chair of the board is picked by the FOMC to be chair of the FOMC, but that's not required by law. In one version of the world, in theory, the committee could choose someone else. Would that happen?  Well, I think that's unlikely. In my experience, the Fed is an institution that has valued orthodoxy and continuity. But it's just a reminder that rules aren't always quite as rigid as they seem. And regardless, the Chair of the Fed always matters. While the FOMC votes on policy, the Chair sets the tone, frames the debate, and often guides where consensus ends up. And over time, as new appointees join the Board, the new Chair's influence will only grow. Even the selection of Reserve Bank Presidents is subject to a Board veto, and that would give the Chair indirect sway over the entire FOMC.Where does all of this leave us? For now, this Shadow Chair debate is more of a nuance than the primary narrative. We don't expect the Fed's reaction function to change between now and May. But beyond that, the range of outcomes starts to widen more and more and more.  Until then, I would say the bigger risk to our Fed forecast isn't politics. It's our forecast for the economy—and on that front we remain, as always, very humble. Well, thanks for listening. And 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.

Our analysts Serena Tang and Seth Carpenter discuss Morgan Stanley's out-of-consensus view on U.S. exceptionalism, and how investors should position their portfolios given the current market uncertainty.Read more insights from Morgan Stanley.----- Transcript -----Seth: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist.Serena: And I'm Serena Tang, Morgan Stanley's, Chief Global Cross-Asset Strategist.Seth: Today, we're going to pick up the conversation where we left it off, talking about our mid-year outlook; but this time I get to ask Serena the questions.It's Thursday, May 22nd at 10am in New York.Serena, we're back for part two of this podcast. Let's jump in where we left off. We've seen a lot of policy surprise in the last six months. We've had a big sell off in the beginning of April, in part inspired by all of this uncertainty.What are you telling clients? What do you think investors should be doing? How should they be positioning their portfolios in the current circumstances?Serena: So, we are recommending going overweight in U.S. equities and going overweight in core fixed income like U.S. treasuries and like investment grade corporate credit. And we have a very strong preference for U.S. over rest of the world assets, except the dollar. Now I think for us, the main message is that you have global growth slowing, which is what you talked about yesterday.But you know, risky assets can look past the low growth and do well, while treasuries can look forward to the many Fed cuts you guys are expecting in 2026 and rally. But if I look at valuations that does suggest equities and credit have completely, almost priced out, growth slowdown odds. Meaning that I think there is still some downside and we'd recommend quality across the board.Seth: In your judgment then, looking around the world at all the different asset classes, how well, or perhaps how poorly, are those asset classes priced for the sort of macro views that we were just discussing?Serena: So I think the market that's probably least priced for the slowing economy that you and your team have been forecasting is really in the government bond space. I think the prospect of a lot more Fed cuts than what is currently priced into the market will lower government bond yields, particularly starting in 2026.As you know, our rates team has a target of 3.45 percent for U.S. Treasury 10-year yields, and 2.6 percent for U.S. Treasury two-year yields. Meaning that we also get a steeper curve by this time next year. And this translates to more than 10 percent of total returns for U.S. Treasuries – very attractive; in large part because the markets aren't priced for the Fed scenario that you and your team are forecasting.Seth: Let me, then push a little bit on one of the things that I've been talking to clients about, or at least been asked about, which is the dollar. The role of the dollar? U.S. exceptionalism? Is it real?Serena: Yeah that's a great question because I think this is where we are the most out of consensus. If you've noticed, all of our views right now really line up as us being pretty constructive on U.S. dollar assets. Like at a time when everyone's still really debating the end of U.S. exceptionalism. And we really push back against the idea that foreign investors would or should abandon U.S. assets significantly.There are very few alternatives to U.S. dollar assets right now. I mean, like if you look at investible stock market cap, U.S. is nearly five times the size of the next biggest market, which is Europe. And in the fixed income side of things, more than half of liquid high grade fixed income paper is in U.S. dollars.Now, even if there were significant outflows from U.S. dollar assets, there are very few places that money can find a haven, safe or otherwise. This is not to say there won't ever be any other alternatives to U.S. dollar assets in the future. But that shift in market size takes time, which means that TINA -- there is no alternative -- remains a theme for now.Seth: That view on the dollar weakening from here, it's baked into my team's economic forecast. It's baked into the strategy team's forecast across research. So then let me take it one step forward. What does all this mean about portfolio preferences, your recommendation for clients when when they're investing in assets that are not U.S. dollar denominated.Serena: You are right. I mean, if there's one U.S. asset that we just like, it's the U.S. dollar. So, you know, over the next 12 months we expect key factors, which drove the dollar strength. You know, positive growth, yield differentials relative to other G10 economies. Those factors will fade substantially. And we also think because of the political uncertainty in the U.S. currency hedging ratios on exposure to U.S. assets may increase, which could further pressure the U.S. dollar. So, our FX team sees euro/dollar at 1.25 and dollar/yen at 1.30 by the second quarter of 2026.Which means that we're really recommending non-U.S. dollar investors to buy U.S. stocks and fixed income on an FX hedge basis.Seth: If we look forward but focus just on the next, call it three to six months; what asset classes, or if you want, what regions around the world are best positioned, and what would you say to investors?Serena: So, you're right. I think there is a big difference between what we like over the next three to six months versus what we like over the next 12 months. Because if I look at U.S. equities and U.S. government bonds, both of which we're overweight on most of the gains, probably won't happen until the first half of next year because you have to have U.S. equities really feeling the tailwind of dollar weakness. And you need to have U.S. government bond investors to grow more confident that we will get all of those Fed cuts next year.What we do like over the next three to six months and feel pretty highly convicted on is really U.S. investment grade corporate credit, which we think can, you know, do well in the second half of this year and do well in the first half of next year.Seth: But then let's take a step back [be]cause I think investors around the world are wrestling with a lot of the same issues. They're talking to, you know, strategists like us at lots of different places. What would you say are our most out of consensus views right now?Serena: I think we're pretty out of consensus on our preference for U.S. and U.S. dollar assets. As I mentioned, there was still a huge debate on the end of U.S. exceptionalism. Now the other place where I think it's notable is we're much more bullish on U.S. treasuries than what's being priced into markets and where consensus is. And I think that's really been driven by your economics team being much more convicted on many Fed cuts in 2026.And the last thing I would point out here is, again, we're more bearish than consensus on the dollar. If I look at euro/dollar, if I look at dollar/yen, the kind of appreciation we're forecasting for at around through 10 percent, is higher than I think what most investors are expecting at the moment.Now back to Seth. Given all of the uncertainty around U.S. fiscal, trade, and industrial policy, what indicators are you watching to assess whether global growth is becoming more fragile or more resilient?Seth: Yeah, it's a great question. It's always difficult to monitor in real time how things are going, especially with these sorts of shocks. We are looking at a bunch of the shipping data to see how trade flows are going. There was clearly some front-running into the United States of imports to try to get ahead of tariffs. There's got to be some payback for that. I think the question becomes where do we settle in when it comes to trade?I'm going to be looking in the U.S. at the labor market to see signs of reduced demand for labor. But also try to pay attention to what's going on with the supply of labor from immigration restriction. And then there are all the normal indicators about spending, especially consumer spending. Consumer spending tends to drive a lot of the big developed market economies around the world and how well that holds up or doesn't. That's going to be key to the overall outlook.Serena: Thank you so much, Seth. Thanks for taking the time to talk.Seth: Serena, I could talk to you all day.Serena: 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.

Our analysts Seth Carpenter and Serena Tang discuss why they believe the global economy is set to slow meaningfully in the second half of 2025.Read more insights from Morgan Stanley.----- Transcript -----Serena: Welcome to Thoughts on the Market. I'm Serena Tang, Morgan Stanley's, Chief Global Cross-Asset Strategist.Seth: And I'm Seth Carpenter, Morgan Stanley's Global Chief Economist.Serena: Today we'll discuss Morgan Stanley's midyear outlook for the global economy and markets.It's Wednesday, May 21st at 10am in New York.Seth, you published a year ahead outlook last November. Since President Trump took office back in January, there's been pretty significant policy and economic uncertainty and quite a few surprises. With this in mind, what is your current outlook for the global economy for the second half of this year and into 2026.Seth: So, we titled the outlook Skewed to the Downside because we really do think the U.S. economy, the global economy, is set to slow meaningfully from where we were coming into this year. Let's start with the U.S.As you said, policy changes came in a lot this year since the new administration took over. I would say the two key ones from a macro perspective so far have been trade policy and immigration policy.Tariffs have gone up, tariffs have gone down, tariffs have been suspended. Right now, what we think is going to ultimately take place is that we will see persistent, notable tariffs on China, lower tariffs on the rest of the world, and then we'll have to see how things evolve. What does that mean? Well, it means for the U.S. higher inflation and lower growth. In addition, immigration reform means that growth is going to slow because the growth rate of the labor force is going to slow.Now around the rest of the world, the tariff shock matters as well. When the U.S. puts in tariffs on its imports from other countries, that's negative demand for those other countries. So, we're looking for pretty weak growth in the euro area. Now, I will note, lots of people were excited about possible expansionary fiscal policy in Germany, and we think that's still there. We just don't think it's enough to give the euro area robust growth.In Asia, China's a main driver of the economy. China is a big recipient of these tariffs. We think the deflation cycle that we expected in China keeps going on. This reduction in demand from the U.S. is not going to help, but there'll probably be a little bit at the margin offsetting fiscal policy.So, what does that mean put together? Lackluster growth in China. Call it 4 percent slow growth for yet another year. Overall, the global economy should step down. Will it be a recession? That's one of the key questions that we hear from clients, but we don't think so. Not quite. Just a meaningful step downSerena: Interesting. Any particular regions that seem to be bright spots or surprises -- or perhaps have seen the biggest shift in your outlook?Seth: I guess I'd flag two potential bright spots around the world. The first is India. India has been, for us, a favorite. It will have the highest growth rate of any economy that we have in our coverage area. And because it's such a big economy, that's part of why the global economy can't lose that much steam. India has lots going for it. There are cyclical factors boosting growth in the near term. But there are also longer-term structural policy driven reasons to think that Indian growth will stay solid for the foreseeable future.I guess I'd also throw in Japan. Now its growth rate isn't going to be anywhere near the kind of growth in number terms that we're going to see from India. But this has to be taken in the context of 25 years of essentially zero growth of nominal GDP. The reflationary cycle that we think started a couple years ago remains intact, even with the tariff shock. And so, we're pretty optimistic still that Japanese reflation will continue.Serena: And to what extent are U.S. tariffs contributing to global inflationary pressures? I mean, how do you expect the Fed and other central banks to respond?Seth: The tariffs are imposed by the United States on most of the imports coming into the country, whereas other countries, maybe they have some retaliatory tariffs just against the U.S., but definitely not as broad as the U.S. That means for the U.S. tariffs are going to drive up inflation domestically and drive down growth, whereas for the rest of the world, it's mostly just a negative demand shock. So, they will be disinflationary for the rest of the world and pushing down growth.What does that mean for central banks? Well, outside of the U.S., central banks are going to see this as slowing aggregate demand, and so it's pretty clear what it is that they want to do. If they were hiking, they can stop hiking. If they were going to hold steady, they can lower rates a little bit. And if they were already lowering interest rates like the European Central Bank, well they can probably keep going with that without having to worry. And that's why we think the ECB is going to lower its policy rate to probably 1.5 percent and maybe even lower, which is below where the market is expecting things.Now for the Fed, things are much more tricky. The Fed cares about inflation, the Fed cares about U.S. growth, and both of those variables are going in the opposite direction of what they want over the rest of this forecast. Right now, inflation's too high for the Fed, and history shows that inflation goes up first with tariffs before the growth rate hits. So, the Fed's probably going to wait until the hard data show a bigger slowdown in the economy, a worsening. And the labor market. That is a bigger concern for them than the already too high inflation that is set to rise further over the rest of the year.Serena: And in your view, how does trade policy uncertainty influence business investment, particularly in export-oriented industries or in economies tightly linked to U.S. demand?Seth: Yeah. I think it has to be negative and therein lies one of the biggest challenges is just how negative. And I can't say for sure. But what we do know is that an uncertainty tends to be very negative for business investment spending decisions. If you're trying to make a decision, should I build a new factory?This is something that's going to have a long life to it, and you're going to get benefits hopefully for several years. How big are those benefits relative to the cost? Well, right now it's not at all clear, and so there's an option value to waiting.And we think that uncertainty is depressing investment decisions right now. I think it has to affect export-oriented industries. There's a lot of questions about what sort of retaliatory tariffs, other countries might impose.But it also affects domestic driven businesses because, well, they're going to have to see what their demand is. And some of the ones that are just focused on the U.S. economy are selling imported goods. So, it affects businesses across the board. Serena: Right. And how do U.S. tariff hikes spill over into emerging markets, and how might these countries buffer against these shocks?Seth: Yeah, I think there's a range of outcomes and the range is as wide as there are different countries. If you stay close to home. Take Mexico. Mexico is a big trading partner with the U.S. and early on in this whole tariff discussion, they were actually the targets of lots of tariff threats. That could have hurt them directly because there'd be less demand for their exports to the United States.Now we've got some resolution. We have the trade agreement with Canada and Mexico, and most of Mexico's exports to the U.S. are exempt under those conditions. However, the indirect effect is important as well. Mexico is very attached to the U.S. economy, and so as the U.S. economy slows because of these tariffs, the Mexican economy will slow as well.But there's also an indirect effect through currency markets, and I think this is a channel that's more broadly applicable across EM. If the Fed is going to be on hold, like we think holding interest rates higher for longer than the market might currently think, that means that EM central banks who might want to lower their policy rate to support their economy are going to be caught in a bit of a bind.They can't afford to take the risks that their currency will misbehave if they ease too much too far ahead of the Fed. And so, I think there is a little bit of a constraint for EM central banks, thinking about how much can I attend to domestic matters and how much do I have to pay attention to external matters?Serena: Now, I know forecasting economic growth is difficult in even the best of times, and this has been a period of exceptional volatility. How are you and your economic colleagues factoring all of this uncertainty?Seth: It's a great question and luminary minds like Neils Bohr, the Nobel Laureate in physics, and Yogi Berra, everyone's favorite prophet, have both said, ‘Forecasting is hard, especially about the future.' And this time, as you note, is even more so. So, what can we do? We try to come up with as many different scenarios as we can. We ask ourselves not just what's the most likely outcome, because there's uncertainty. The policy changes could come fast and furious. We also try to ask ourselves, if tariffs were to go back up from where they are now, how would that outcome turn out. If tariffs were to go away entirely, how would that turn out?You have to start thinking more and more, I think, in terms of scenarios.Serena:  And does this, in your view, change how much or how little investors should focus on the macro economy?Seth: Well, I think it means that investors have to focus every bit as much on the macro economy as they have in the past. I think it's undeniable that if we're right – and the U.S. economy slows down materially, and the global economy slows down with it – longer-term interest rates are probably going to come down along the lines of what our colleagues in interest rate strategy think. That makes a lot of sense to me. I think the trickier part though is knowing where the macro economy is going.We've got our forecast, but we are ready to make a revision if the facts change. And I think that's the trickier part for investors. The macro economy still matters but having a lot of conviction about where it's going, and as a result, what it means for asset prices? Well, that's the trickier part.Serena, you've been asking me lots of questions and they've been great questions, but I'm going to turn the table. I'm going to start asking questions right back to you.But we probably have to save that for another episode. So, let's pause it there.Serena: That sounds great Seth.Seth: And to the people listening, I want to say thanks for listening. And if you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or a colleague today.

Investors were caught off guard last week when the Taiwanese dollar surged to a multi-year high. Our strategists Michael Zezas and James Lord look at what was behind this unexpected rally.Read more insights from Morgan Stanley.----- Transcript -----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Global Head of Fixed Income Research and Public Policy Strategy.James Lord: And I'm James Lord Morgan Stanley's, Global Head of FX and EM Strategy.Michael Zezas: Today, we'll focus on some extreme moves in the currency markets and give you a sense of what's driving them, and why investors should pay close attention.It's Thursday, May 8th at 10am in New York.James Lord: And 3pm in London.Michael Zezas: So, James, coming into the year, the consensus was that the U.S. dollar might strengthen quite a bit because the U.S. was going to institute tariffs amongst other things. That's actually not what's happened. So, can you explain why the dollar's been weakening and why you expect this trend to continue?James Lord: I think a big factor for the weakening in the dollar, at least in the initial part of the year before the April tariff announcements came through, was a concern that the U.S. economy was going to be slowing down this year. I mean, this was against some of the consensus expectations at the beginning of the year.In our year ahead outlook, we made this call that the dollar would be weakening because of the potential weakness in the U.S. economy, driven by slow down in immigration, limited action on fiscal policy. And whatever tariffs did come through would be kind of damaging for the U.S. economy.And this would all sort of lead to a big slowdown and a kind of end to the U.S. exceptionalism trade that people now talk about all the time. And I think since April 1st or April 2nd tariff announcements came, the tariffs were so large that it raised real concerns about the damage that was potentially going to happen to the U.S. economy.The sort of methodology in which the tariff formulas were created raised a bit of concern about the credibility of the announcements. And then we had this constant on again, off again, on again, off again tariffs. That just created a lot of uncertainty. And in the context of a 15-year bull market of the dollar where it had sucked enormous amounts of capital inflows into the U.S. economy. You know, investors just felt that maybe it was worth taking a few chips off the table and unwinding a little bit of that dollar risk. And we've seen that play out quite notably over the last month. So, I think it's been, yeah, really that those concerns about growth but also this sort of uncertainty about policy in general in the context of, you know, a big bull run for the dollar; and fairly heavy valuations and positioning. Those have been the main issues, I think.Michael Zezas: Right, so we've got here this dynamic where there are economic fundamental reasons the dollar could keep weakening. But also concerns from investors overseas, whether they're ultimately founded or not, that they just might have less demand for owning U.S. dollar denominated assets because of the U.S. trade dynamic. Now it seems to me, and correct me if I'm wrong, that there was a major market move in the past week around the Taiwanese dollar, which reflected these concerns and created an unusually large move in that currency. Can you explain that dynamic?James Lord:  Yeah, so we've seen really significant moves in the Taiwan dollar. In fact, on May 2nd, the currency saw its largest one-day rally since the 1980s, and over two days gained over 6.5 percent, which for a Taiwan dollar, which is pretty low volatility currency usually, these are really big moves. So in our view, the rally in the Taiwan dollar, and it was remarkably big. We think it's been mostly driven by Taiwanese exporters selling some of their dollar assets with a little bit of foreign equity inflow helping as well. And this is linked back to the sort of trade negotiations as well.I mean, as you know, like one of the things that the U.S. administration has been focused on currency valuations. Historically, many people in the U.S. administration believe the dollar is very strong. And so there has been this sort of issue of currency valuations hanging over the trade negotiations between the U.S. and various Asian countries. And local media in Taiwan have been talking about the possibility that as part of a trade negotiation or trade deal, there could be a currency aspect to that – where the U.S. government would ask the Taiwanese authorities to try to push Taiwan dollar stronger.And you know, I think this sort of media reporting created a little bit of a -- well, not just a little, a significant shift from Taiwanese exporters where they suddenly rush to sell their dollar deposits in to get ahead of any possible effort from the Taiwanese authorities to strengthen their currency. The central bank is being very clear on this.We should have to point this out that the currency has not been part of the trade deal. And yet this hasn't prevented market participants from acting on the perceived risk of it being part of the trade talks. So, you know, Taiwanese exporters own a lot of dollars. Corporates and individuals in Taiwan hold about $275 billion worth of FX deposits and for an $800 billion or so economy, that's pretty sizable. So we think that is that dynamic, which has been the biggest factor in pushing Taiwan dollar stronger.Michael Zezas: Right, so the Taiwan dollar is this interesting case study then in how U.S. public policy choices might be creating the perception of changes in demand for the dollar changes in policy around how foreign governments are supposed to value their currency and investors might be getting ahead of that.Are there any other parts of the world where you're looking at foreign exchange globally, where you see things mispriced in a way relative to some of these expectations that investors need to talk about?James Lord: We do think that the dollar has further to go. I mean, it's on the downside. It's not necessarily linked to expectations that currency agreements will be part of any trade agreement. But, we think the Fed will need to cut rates quite a bit on the back of the slow down in the U.S. economy. Not so much this year. But Mike Gapen and Seth Carpenter, and the U.S. economics team are expecting to see the Fed cut to around 2.5 per cent or so next year. And that's absolutely not priced. And, And so I think as this slowdown – and, this is more of a sort of traditional currency driver compared to some of these other policy issues that we've been talking about. But if the Fed does indeed cut that far, I do think that that's going to put some meaningful pressure on the dollar. And on a sort of interest rate differential perspective, and when we look at what is mispriced and correctly priced, we see the Fed as being mispriced, but the ECB is being quite well priced at the moment.So as that weakening downward pressure comes through on the dollar, it should be reflected on the euro leg. And we see it heading up to 1.2. But just on the trade issue, Mike, what's your view on how those trade negotiations are going? Are we going to get lots of deals being announced soon?Michael Zezas: Yeah, so the news flow here suggests that the U.S. is engaged in multiple negotiations across the globe and are looking to establish agreements relatively quickly, which would at least give us some information about what happens next with regard to the tariffs that are scheduled to increase after that 90 day pause that was announced in earlier in April. We don't know much beyond that.I'd say our expectation is that because the U.S. has enough in common in terms of interests and how it manages its own economy and how most of its trading partners manage their own economies – that there are trade agreements, at least in concept. Perhaps memorandums of understanding that the U.S. can establish with more traditional allies, call it Japan, Europe, for example, that can ultimately put another pause on tariff escalation with those countries.We think it'll be harder with China where there are more fundamental disagreements about how the two countries should interact with each other economically. And while tariffs could come down from these very, very high levels with China, we still see them kind of settling out at still meaningful substantial headline numbers; call it the 50 to 60 per cent range. And while that might enable more trade than we're seeing right now with China because of these 145 per cent tariff levels, it'll still be substantially less than where we started the year where tariff levels were, you know, sub 20 per cent for the most part with China.So, there is a variety of different things happening. I would expect the general dynamic to be – we are going to see more agreements with more counterparties. However, those will mostly result in more pauses and ongoing negotiation, and so the uncertainty will not be completely eliminated. And so, to that point, James, I think I hear you saying that there is potentially a difference between sometimes currencies move based on general policy uncertainty and anxieties created around that.James Lord: Yeah, that's right. I think that's safer ground, I think for us as currency strategists to be anchoring our view to because it's something that we deal with day in, day out for all economies. The impact of this uncertainty variable. It could be like, I think directionally supports a weaker dollar, but sort of quantifying it, understanding like how much of that is in the price; could it get worse, could it get better? That's something that's a little bit more difficult to sort of anchor the view to. So, at the moment we feel that it's pushing in the same direction as the core view. But the core view, as you say, is based around those growth and monetary policy drivers.So, best practice here is let's keep continuing to anchor to the fundamentals in our investment view, but sort of recognize that there are substantial bands of uncertainty that are driven by U.S. policy choices and by investors' perceptions of what those policy choices could mean.Michael Zezas: So, James conversations like this are extremely helpful to our audience. We'll keep tracking this carefully. And so, I just want to say thank you for taking the time to talk with us today.James Lord: I really enjoyed it. Looking forward to the next one.Michael Zezas: Great. And thank you for listening. If you enjoy the podcast, please leave us a review wherever you listen to the podcast and share Thoughts on the Market with a friend or colleague today.

Stocks closed well off worst levels, but the rout in April continues. A deepening market selloff takes center stage with Anastasia Amoroso of iCapital and Sameer Samana of Wells Fargo breaking down pressure points across sectors. Our Deirdre Bosa reports on the unraveling of AI optimism. Morgan Stanley's Seth Carpenter weighs in on Trump vs. Powell tensions and macro dynamics, while Citi's Scott Chronert discusses the implications of today's sharp drop—and the situation he says you should be buying right now. Technical analysis from Katie Stockton provides levels to watch, and Steve Kovach covers Apple's decline on renewed China and tariff concerns. Earnings from Zions Bancorp and Western Alliance with Baird's David George.

As market turmoil continues, our global economists give their view on the ramifications of the Trump administration's tariffs, and how central banks across key regions might react.Read more insights from Morgan Stanley. ---- Transcript -----Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's, Global Chief Economist, and today we're going to be talking tariffs and what they mean for the global economy.It's Monday, April 7th at 10am in New York.Jens Eisenschmidt: It's 4pm in Frankfurt. Chetan Ahya: And it's 10pm in Hong Kong. Seth Carpenter: And so, I'm here with our global economists from around the world: Mike Gapen, Chief U.S. Economist, Chetan Ahya, our Chief Asia Economist, and Jens Eisenschmidt, our Chief Europe Economist. So, let's jump into it. Let me go around first and ask each of you, what is the top question that you are getting from investors around the world?Chetan?Chetan Ahya: Tariffs.Seth Carpenter: Jens?Jens Eisenschmidt: Tariffs.Seth Carpenter: Mike?Michael Gapen: Tariffs.Seth Carpenter: All right. Well, that seems clear. Before we get into the likely effects of the tariffs, maybe each of you could just sketch for me where you were before tariffs were announced. Chetan, let me start with you. What was your outlook for the Chinese economy before the latest round of tariff announcements?Chetan Ahya: Well Seth, working with our U.S. public policy team, we were already assuming a 15-percentage point increase on tariffs on imports from China. And China also was going through some domestic challenges in terms of high levels of debt, excess capacities, and deflation. And so, combining both the factors, we were assuming China's growth will slow on Q4 by Q4 basis last year – from 5.4 percent to close to 4 percent this year.Jens, what about Europe? Before these broad-based tariffs, how were you thinking about the European economy?Jens Eisenschmidt: We had penciled in a slight recovery, not really getting us much beyond 1 percent. Backdrop here, still rising real wages. We had some tariffs in here, on steel, aluminum; in cars, much again a bit more of a beefed-up version if you want, of the 18 tariffs – but not much more than that. And then, of course, we had the German fiscal expansion that helped our outlook to sustain this positive growth rates into 2026.Seth Carpenter: Mike, for you. You also had thought that there were going to be some tariffs at some point before this last round of tariffs. Maybe you can tell us what you had in mind before last week's announcements.Michael Gapen: Yeah, Seth. We had a lot of tariffs on China. The effective rate rising to say 35 to 40 percent. But as Jens just mentioned, outside of that, we had some on steel and aluminum, and autos with Europe, but not much beyond that. So, an effective tariff rate for the U.S. that reached maybe 8 to 9 percent.We thought that would gradually weigh on the economy. We had growth at around 1.5 percent this year and 1 percent next year. And the disinflation process stopping – meaning inflation finishes the year at around 2.8 core PCE, roughly where it is now. So, a gradual slowdown from tariff implementation.Seth Carpenter: Alright, so a little bit built in. You knew there was going to be something, but boy, I guess I have to say, judging from market reactions, the world was surprised at the magnitude of things. So, what's changed in your mind? It seems like tariffs have got to push down the outlook for growth and up the out outlook for inflation. Is that about right? And can you sketch for us how this new news is going to affect the outlook?Michael Gapen: Sure. So instead of effective tariff rates of 8 to 9 percent, we're looking at effective tariff rates, maybe as high as 22 percent.Seth Carpenter: Oh, that's a lot.Michael Gapen: Yeah. So more than twice what we were expecting. Obviously, some of that may get negotiated down. Seth Carpenter: And would you say that's the highest tariff rate we've seen in a while?Michael Gapen: At least a century. If we were to a 1.5 percent on growth before, it's pretty easy to revise that down, maybe even a full percentage point, right?So you're, it's a tax on consumption and a tariff rate that high is going to pull down consumer spending. It's also going to lead to even much higher inflation than we were expecting. So rather than 2.8 for core PCE year-on-year, I wouldn't be surprised if we get something even in the high threes or perhaps even low fours.So, it pushes the economy, we would say, at least closer to a recession. If not, you're getting closer to the proverbial coin toss because there are the potential for a lot of indirect effects on business confidence. Do they spend less and hire less? And obviously we're seeing asset markets melt down. I think it's fair to describe it that way. And you could have negative wealth effects on the upper income consumers. So, the direct effects get you very modest growth a little bit above zero. It's the indirect effects that we're worried about.Seth Carpenter: Wow, that's quite a statement. So, a substantial slowdown for the U.S. Flirting with no growth. And then given all the uncertainty, the possibility that the U.S. actually goes into recession, a real possibility there. That feels like a big call.Jens, if the U.S. could be on the verge of recession with uncertainty and all of that, what are you thinking about Europe now? You had talked about Europe before the tariffs growing around 1 percent. That's not that far away from zero. So, what are you thinking about the outlook for Europe once we layer in these additional tariffs? And I guess every bit is important. Do you see retaliatory tariffs coming from the European Union?Jens Eisenschmidt: No, I think there are at least three parts here. I totally agree with that framing. So, first of all, we have the tariffs and then we have some estimates what they might mean, which, just suppose what we have heard last week sticks, would get us already in some countries into recessionary territory; and for the aggregate Euro area, not that far from it. So, we think effects could range between 60 and 120 basis points of less growth. Now that to some extent, incorporates retaliation. And so, the question is how much retaliation we might expect here. This is a key question we get from clients. I'd say we get something; that seems, sure.At the same time, it seems that Europe weighs a response that is taking into account all the constraints that are in the equation. After all the U.S. is an ally also in security concerns. You don't wanna necessarily endanger that good relationship. So that will for sure play a role. And then the U.S. has a services surplus with Europe, so it's also likely to be a response in the space of services regulation, which is not necessarily inflationary on the European side, and not necessarily growth impacting so much.But, you know, be it as it may. This is going to be down from here, for sure. And then the other thing just mentioned by Michael, I mean there is clearly a read across from a slower U.S. growth environment that will also not help growth in the Euro area. So, all being told it could very well mean, if we get the U.S. close to recession, that the Euro area is flirting with recession too.Seth Carpenter: Got it. Chetan Ahya: Seth, can I interrupt you on this one? I just wanted to add the perspective on retaliatory tariffs from China. What we had actually originally billed was that China would take up a retaliatory response, which would be less than be less than proportionate, just like the last time. But considering that China has actually, mashed U.S. reciprocal tariffs, it makes us feel that it's very unlikely that a deal will be done anytime soon.Seth Carpenter: Okay. So then how would you revise your view for what's going on with China?Chetan Ahya: Yeah, so as I mentioned earlier, we had already built in some downside but with these reciprocal tariffs, we see another 50 to 100 [basis points] downside to China's growth, depending upon how strong is the policy stimulus.Seth Carpenter: So, at some point, I suspect we're going to start having a discussion about what it really means to have a global recession, and markets are going to start to look to central banks.So, Mike, let me turn to you. Jay Powell spoke recently. He repeated that he is in no hurry to cut interest rates. Can you talk to me about the challenges that the Fed is facing right now?Michael Gapen: The Fed is faced with this problem where tariffs mean it's missing on both sides of its mandate, where inflation is rising and there's downside risk to the economy.So how do you respond to that?Really what Powell said is it's going to be tough for us to look through this rise in inflation and pre-emptively ease. So, for the moment they're on hold and they're just going to evaluate how the economy responds. If there's no recession, it likely means the Fed's on hold for a very long time. If we get negative job growth, if you will, or job cuts, then the Fed may be moving to ease policy. But right now, Powell doesn't know which one of those is going to materialize first.Seth Carpenter: Alright Mike. So, I understand what you're saying. Inflation going higher, growth going lower. Really awkward position for the Fed, and I think central banks around the world really have to weigh the two sides of these sorts of things, which one's going to dominate…Jens Eisenschmidt: Exactly. Seth, may I jump in here because I think that's a perfect segue to the ECB; which I was thinking a lot about that – just recently coming back from the U.S. – how different the position really is here. So, the ECB currently is on the way to neutral, at least as we have always thought as a good way of framing their way. Inflation is falling to target. Now with all the risks that we have mentioned, there's a clear risk we see. Inflation going below 2 percent, already by mid this year – if oil prices were to stay as low as they are and with the euro appreciation that we have seen.The tariffs scare in terms of the inflationary impact from tariffs, that's much less clear. Now, whether that's really something to worry about simply because what you typically see with these tariffs – it's actually a depreciation of the exchange rate, which we haven't seen. So, we think there is a clear risk, downside risk to our path; at least that we have an anticipation. A quicker rate cutting cycle by the ECB. And potentially if the growth outlook that we have just outlined all these risks really materializes, or threatens is more likely to materialize, then the cuts could also be deeper.Seth Carpenter: That's super tricky as well though, because they're going to have to deal with all the same uncertainty. I will say this brings up to me the Bank of Japan because it was the one major central bank that was going the opposite direction before all of this. They were hiking while the other central banks were cutting.So, Chetan, let me turn to you. Do you think the Bank of Japan's gonna be able to follow through on the additional rate hike that you all had already had in your forecast?Chetan Ahya: Yes Seth. I think Bank of Japan will have a difficult time. Japan is exposed to direct effect of 24 percent reciprocal tariffs. It will see downside from global trade slowdown, which will weigh on its exports and yen appreciation will weigh on its inflation outlook. Hence, unless if U.S. removes tariffs very quickly in the near term, we see the risk that BOJ will pause instead of hiking as we had assumed in our earlier base case.Seth Carpenter: Well, this is a good place to stop. Let me see if I can summarize the conversations we've had so far. Before this latest round of tariffs had been announced, we had thought there'd be some tariffs, and we had looked for a bit of slowdown in the U.S. and in Europe and in China – the three major economies in the world. But these new rounds of tariffs have added a lot to that slowdown pushing the, the global economy right up to the edge of recession. And what that means as well is for central banks, they're left in at least something of a bind. The Bank of Japan though, the one major central bank that had been hiking, boy, there's a really good chance that that rate hike gets derailed.Seth Carpenter: Well, thank you for listening. And if you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or a colleague today.

Our global economists Seth Carpenter and Rajeev Sibal discuss how global trade will need to realign in response to escalating U.S. tariff policy.Read more insights from Morgan Stanley.

The Consumer Confidence Index had its biggest drop in more than three years in February. We're at a crossroads moment in the economy. Uncertainty is back, according to financial experts and consumers alike. In a special interview-only episode, WSJ's Take On the Week co-host Telis Demos talks with Seth Carpenter, Morgan Stanley's chief global economist, about where we are in the fight against inflation and what that means for the stock market, the Federal Reserve, and more. This is WSJ's Take On the Week where co-hosts Gunjan Banerji, lead writer for Live Markets, and Telis Demos, Heard on the Street's banking and money columnist, cut through the noise and dive into markets, the economy and finance—the big trades, key players and business news ahead. Have an idea for a future guest or episode? How can we better help you take on the week? We'd love to hear from you. Email the show at takeontheweek@wsj.com.  To watch the video version of this episode, visit our WSJ Podcasts YouTube channel or the video page of WSJ.com. Further Reading The Two-Headed Monster Stalking the Economy Has a Name: Stagflation  How Uncertainty From Trump's Tariffs Is Rippling Through the Economy  For more coverage of the markets and your investments, head to WSJ.com, WSJ's Heard on The Street Column, and WSJ's Live Markets blog.  Sign up for the WSJ's free Markets A.M. newsletter.  

Our Global Chief Economist Seth Carpenter explains the potential domino effect that President Trump's reciprocal tariffs could have on the U.S. and global economies.----- 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.----- 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… Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist, and today I'm going to talk about downside risks to the U.S. economy, especially from tariffs.It's Thursday, February 20th at 10am in New York.Once again, tariffs are dominating headlines. The prospect of reciprocal tariffs is yet one more risk to our baseline forecast for the year. We have consistently said that the inflationary risk of tariffs gets its due attention in markets but the adverse growth implications that's an underappreciated risk.But we, like many other forecasters, were surprised to the upside in 2023 and 2024. So maybe we should ask, are there some upside risks that we're missing?The obvious upside risk to growth is a gain in productivity, and frequent readers of Morgan Stanley Research will know that we are bullish on AI. Indeed, the level of productivity is higher now than it was pre-COVID, and there is some tentative estimate that could point to faster growth for productivity as well.Of course, a cyclically tight labor market probably contributes and there could be some measurement error. But gains from AI do appear to be happening faster than in prior tech cycles. So, we can't rule very much out. In our year ahead outlook, we penciled in about a-tenth percentage point of extra productivity growth this year from AI. And there is also a bit of a boost to GDP from AI CapEx spending.Other upside risks, though, they're less clear. We don't have any boost in our GDP forecast from deregulation. And that view, I will say, is contrary to a lot of views in the market. Deregulation will likely boost profits for some sectors but probably will do very little to boost overall growth. Put differently, it helps the bottom line far more than it helps the top line. A notable exception here is probably the energy sector, especially natural gas.Our baseline view on tariffs has been that tariffs on China will ramp up substantially over the year, while other tariffs will either not happen or be fleeting, being part of, say, broader negotiations. The news flow so far this year can't reject that baseline, but recently the discussion of broad reciprocal tariffs means that the risk is clearly rising.But even in our baseline, we think the growth effects are underestimated. Somewhere in the neighborhood of two-thirds of imports from China are capital goods or inputs into U.S. manufacturing. The tariffs imposed before on China led to a sharp deterioration in industrial production. That slump went through the second half of 2018 and into and all the way through 2019 as a drag on the broader economy. Just as important, there was not a subsequent resurgence in industrial output.Part of the undergraduate textbook argument for tariffs is to have more produced at home. That channel works in a two-economy model. But it doesn't work in the real world.Now, the prospect of reciprocal tariffs broadens this downside risk. Free trade has divided production functions around the world, but it's also driven large trade imbalances, and it is precisely these imbalances that are at the center of the new administration's focus on tariffs. China, Canada, Mexico – they do stand out because of their imbalances in terms of trade with the U.S., but the underlying driving force is quite varied. More importantly, those imbalances were built over decades, so undoing them quickly is going to be disruptive, at least in the short run.The prospect of reciprocity globally forces us as well to widen the lens. The risks aren't just for the U.S., but around the world. For Latin America and Asia in particular, key economies have higher tariff supply to U.S. goods than vice versa.So, we can't ignore the potential global effects of a reciprocal tariff.Ultimately, though, we are retaining our baseline view that only tariffs on China will prove to be durable and that the delayed implementation we've seen so far is consistent with that view. Nevertheless, the broad risks are clear.Thanks for listening. And 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.

Morgan Stanley Chief Global Economist Seth Carpenter discusses the long term impact of Trump Administration tariffs on Canada and Mexico. He speaks with Bloomberg's Alix Steel and Romaine Bostick. See omnystudio.com/listener for privacy information.

Our Global Chief Economist Seth Carpenter weighs the myriad variables which could impact global markets in 2025, and why this year may be the most uncertain for economies since the start of the pandemic.----- Transcript -----Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist, and today I'll be talking about 2025 and what we might expect in the global economy.It's Tuesday, January 7th at 10am in New York.Normally, our year ahead outlook is a roadmap for markets. But for 2025, it feels a bit more like a choose your own adventure book.uncertainty is a key theme that we highlighted in our year ahead outlook. The new U.S. administration, in particular, will choose its own adventure with tariffs, immigration, and fiscal policy.Some of the uncertainty is already visible in markets with the repricing of the Fed at the December meeting and the strengthening of the dollar. Our baseline has disinflation stalling on the back of tariffs and immigration policy, while growth moderates, but only late in the year as the policies are gradually phased in.But in reality, the sequencing, the magnitude and the timing of these policies remains unknown for now, but they're going to have big implications for the economies and central banks around the world. The U.S. economy comes into the year on solid footing with healthy payrolls and solid consumption spending.Disinflation is continuing, and the inflation data for November were in line with our forecast, but softer in terms of PCE than what the Fed expected. While the Fed did lower their policy rate 25 basis points at the December meeting, Chair Powell's tone was very cautious, and the Fed's projections had inflation risks skewed to the upside.The chair noted that the FOMC was only beginning to build in assumptions about policy changes from the new administration. Now, we have conviction that tariffs and immigration restriction will both slow the economy and boost inflation -- but we've assumed that these policies are phased in gradually over the entirety of the year. And consequently -- that materially Stagflationary impetus? Well, it's reserved for 2026, not this year.Similarly, we've assumed that effectively the entire year is consumed by the process of tax cut extensions. And so, we've penciled in no meaningful fiscal impetus for this year. And in fact, with the bulk of the process simply extending current tax policy, we have very little net fiscal impact, even in 2026.Now, in China, the deflationary pressure is set to continue with any policy reaction further complicated by U.S. policy uncertainty. The policymaker meeting in late December that they held provided only a modest upside surprise in terms of fiscal stimulus, so we're going to have to wait for any further details on that spending until March with the National People's Congress.Meanwhile, during our holiday break, the renminbi broke above 7.3, and that level matches roughly the peaks that we saw in 2022 and 2023. The strong dollar is clearly weighing on the fixing. The framework for policy will have to account for a potentially trade relationship with the U.S. So, again, in China, there's a great deal of uncertainty, a lot of it driven by policy.The euro area is arguably less exposed to U.S. trade risks than China. A weaker euro may help stabilize inflation that's trending lower there, but our growth forecasts suggest a tepid outlook. Private consumption spending should moderate, and maybe firm a bit, as inflation continues to fall, and continued policy easing from the ECB should support CapEx spending.Fiscal consolidation, though, is a key risk to growth, especially in France and Italy, and any postponement in investment from potential trade tensions could further weaken growth.Now, in Japan, the key debate is whether the Bank of Japan will raise rates in January or March. After the last Bank of Japan meeting, Governor Ueda indicated a desire for greater confidence on the inflation outlook.Nonetheless, we've retained our call that the hike will be in January because we believe the Bank of Japan's regional Branch manager meeting will give sufficient insight about a strong wage trend. And in combination with the currency weakness that we've been watching, we think that's gonna be enough for the BOJ to hike this month. Alternatively, the BOJ might wait until the Rengo negotiation results come out in March to decide if a hike is appropriate. So far, the data remains supportive and Japanese style core CPI inflation has gone to 2.7 per cent in November. The market's going to focus on Deputy Governor Himino's speech on January 14th for clues on the timing – January or March.Finally, as the Central Bank of Mexico highlighted in their most recent rate cut decision, caution is the word as we enter the new year. As economists, we could not agree more. The year ahead is the most uncertain since the start of the pandemic. Politics and policy are inherently difficult to forecast. We fully expect to revise our forecasts more -- and more often than usual.Thanks for listening, and 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.

Seth Carpenter, Chief Economist at Morgan Stanley, takes a look at what could be in store for the global economy as Trump re-enters the White House. He speaks with hosts Tom Keene and Paul Sweeney.See omnystudio.com/listener for privacy information.

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.

Our Global Chief Economist explains why a predictable end to 2024 for central banks may give way to a tempestuous 2025.----- Transcript -----Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist, and today I'll be talking about how the year end is wrapping up with, surprisingly, a fair amount of certainty about central banks.It's Tuesday, December 17th at 10 a. m. in New York.Unlike the rest of this past year, year end seems to have a lot more certainty about the last few central bank meetings. Perhaps it is just the calm before the storm, but for now, let's enjoy a benign central bank week ahead of the holidays. Last Thursday, the ECB cut interest rates 25 basis points, right in line with what we were thinking and what the market was thinking. Similarly, but I have to say, with a pretty different narrative, we expect the Fed to cut 25 basis points this week and the market seems to be all in there as well.The Bank of England, the Bank of Japan, well, we think they're closed accounts; that is to say, they're going to be on pause until the new year. Last week's 25 basis point cut by the ECB came amidst a debate as to whether or not the ECB should accelerate their pace of rate cuts. With most doubts about disinflation resolved, it's downside growth risks that have gained prominence in the decision making process there. Restrictive monetary policy is starting to look less and less necessary and President Lagarde's statement seems to reflect that the council's negotiated stance, that easing will continue until the ECB reaches neutral. The question is what happens next? In our view, the ECB will come to see there's a need to cut through neutral and get all the way down to 1%.In stark contrast, there's the Fed, where there are very few residual growth concerns, but there have been more and more questions about the pace of disinflation. The recent employment data, for example, clearly suggests that the recession risk is low. Some members on the committee have started to express concerns, however, that inflation data really have proven stickier and that maybe the disinflation process is stalled.From our perspective, last week's CPI data and all the other inflation data we just got really point to the next PCE print showing continued clear disinflation, leaving very little room for debate for the Fed to cut 25 basis points in December. And indeed, if it's as weak as we think it is, that provides extra fuel for a cut in January.That said, our baseline view of cuts in March and May are going to get challenged if future data releases show a reversal in this disinflationary trend, if it's from residual seasonality or maybe pass through from newly imposed tariffs, and Chair Powell's remarks at next week's press conference are really going to be critical to see if they really are becoming more cautious about cuts.Now, we don't expect the Bank of England or the Bank of Japan to move until next year. The recent currency weakness in Japan has raised the prospect of a rate hike as soon as this month, but we've kept the view that a January rate hike is much more likely. The timing would allow the Bank of Japan to get greater insight into the Shunto wage negotiations, and that gives them greater insight into future inflation. And recent communications from the Bank of Japan also aligns with our view and in particular, there is a scheduled speech by Deputy Governor Himino on January 14th, one week before the January 23rd and 24th meeting. All of that says the stars are lined up for a January rate hike. Market pricing over the past couple weeks have moved against a hike in December and towards our call for a hike in January.Now, the market's also pricing the next Bank of England cut to be next year rather than this year. We expect those cuts to come at alternating meetings. December on pause, a cut in February, and gradual rate cuts thereafter. Now, services inflation, the key focus of the Bank of England so far, has remained elevated through the end of the year, but we expect to see mounting evidence of labor market weakness, and as a result, wage growth deceleration, and that, we think, is what pushes the MPC towards more cuts. All of that said, the recent announcement of fiscal stimulus in the UK starts to raise some inflationary risks at the margin.All right, well, as the year comes to an end, it has been quite a year to say the least. Elections around the world, not least of which here in the United States, wildly swinging expectations for central banks, and a structural shift in Japan ending decades of nominal stagnation. And I have to say an early glimpse into 2025 suggests that the roller coaster is not over yet. But for now, let's take some respite because there should be limited drama from central banks this week. Happy holidays.Well, thanks for listening, and 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.

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.

As President-Elect Trump's new administration takes shape, all eyes are on fiscal policy that may follow. Our Global Chief Economist Seth Carpenter uses the United Kingdom's recent election as a guide for how markets could react to a policy shift in the US. ----- Transcript -----Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist, and today I'll be talking about the US election and fiscal policy and what lessons we might be able to draw from the fiscal experience in the UK. It's Wednesday, November 13th at 10am in New York. In a lot of our recent research, the US election has figured prominently, and we highlighted three key policy dimensions that the US administration is going to have to confront. Immigration, tariffs, and, of course, fiscal policy. We're going to keep elections as a theme, but it might be useful to draw some comparisons to the UK to see what lessons we might have for the US. We think the experience in the UK, which recently proposed a new fiscal budget months after an election, is relevant mostly because of the time between taking power and the budget being presented. While markets are in the business of anticipating changes, the process of actually creating policy is a lot more cumbersome and time consuming. In this week, where we've seen lots of expectations already being priced in, it's probably useful to try to think about that process of forming policy in the UK and see what lessons it implies for the US. Back in May, the UK elected a new government, changing party control after 14 years. A key moment for markets came just over a week ago, though, when the new government's presentation of their budget for the next fiscal year came up. Now, we should remember, the trust government had faced a market test when the announcement of their budget proposals led to a big sell off in interest rates. As a result, markets were keenly attuned this time to the new labor government's budget, particularly because the US fiscal position requires a primary balance to stabilize the debt to GDP ratio. And in particular, when their debt costs rise, when interest rates go up, the primary balances that are needed keep increasing if they want to keep the debt stable. Now, the new labor government proposed to fill a funding gap through tax increases while simultaneously increasing Government investment spending. To manage some of the communication challenges here, many of these proposals, especially about the tax increases, they were made public in advance. The likelihood of additional government spending was also well known, and UK rates had moved higher for months leading up to the formal presentation of the budget. But, markets reacted on the day of the budget reveal, despite all of that prelude. The degree of front loading of the investment spending was seen as a surprise in markets, as was the Office of Budget Responsibility's concurrent assessment that the policy would lead to higher growth, higher inflation, and as a result, a need for higher interest rates. Now, conversations with clients have brought up the similarities of the US and the UK. US interest costs are steadily rising as the cost of the debt reprices to the current yield curve. And, over time, the ratio of interest expense on the debt relative to, say, the GDP of the country, well, that's going to continue to rise as well, and it will very soon eclipse its previous all time high. So, fiscal consolidation would be needed in the United States if we really want to see a stabilized debt to GDP ratio. Markets will need to assess the credibility of fiscal policy and the scrutiny will increase the higher the interest burden gets. The budget process for the US is much less clear cut than that in the UK and deliberations and debates will likely happen over most of 2025. And there's an additional question of how much revenue tariffs might be able to generate on a sustained basis. History suggests that trade diversion tends to limit those revenue gains. All of these facts taken together suggest that the outlook for US fiscal policy will continue to evolve for quite some time. Well, thanks for listening, and if you enjoy this show, please leave us a review wherever you listen to podcasts and share thoughts on the market with a friend or a colleague today.

Our Head of Corporate Credit Research and Global Chief Economist explain why they're watching the consumer savings rate, tariffs and capital expenditures.----- Transcript -----Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley.Seth Carpenter: And I'm Seth Carpenter, Morgan Stanley's Global Chief Economist.Andrew Sheets: And today on this special episode of the podcast, we'll be discussing what could cause our optimistic view on the economy and credit to go wrong.Andrew Sheets: It's Friday, Oct 11th at 4pm in London.Seth Carpenter: And as it turns out, I'm in London with Andrew.Andrew Sheets: So, Seth you and your global economics team have been pretty optimistic on the economy this year. And have been firmly in the soft-landing camp. And I think we've seen some oscillation in the market's view around the economy over the course of the year, but more recently, we've started to see some better data and increasing confidence in that view.So, this is actually maybe the perfect opportunity to talk about – well, what could go wrong? And so, what are some of the factors that worry you most that could derail the story?Seth Carpenter: We have been pretty constructive all along the whole hiking cycle. In fact, we've been calling for a soft- landing. And if anything, where we were wrong with our forecast so far is that things have turned out even better than we dare hoped. But it's worth remembering part of the soft-landing call for us, especially for the US is that coming out of COVID; the economy rebounded employment rebounded, but not proportionally. And so, for a long time, up until basically now, US firms had been operating shorthanded. And so, we were pretty optimistic that even if there was something that caused a slowdown, you were not going to see a wave of layoffs. And that's usually what contributes to a recession. A slowdown, then people get laid off, laid off people spend less, the economy slows down more, and it snowballs.So, I have to say, there is gotta be just a little bit more risk because businesses basically backfilled most of their vacancies. And so, if we do get a big slowdown for some reason, maybe there's more risk than there was, say, a year ago. So, what could that something be is a real question. I think the first one is just -- there's just uncertainty.And maybe, just maybe, the restraint that monetary policy has imparted -- takes a little bit longer than we realized. It's a little bit bigger than we realized, and things are slowing down. We just haven't seen the full force of it, and we just slowed down a lot more.Not a whole lot I can do about that. I feel pretty good. Spending data is good. The last jobs report was good. So, I see that as a risk that just hangs over my head, like the sword of Damocles, at all times.Andrew Sheets: And, Seth, another thing I want to talk to you about is this analysis of the economy that we do with the data that's available. And yet we recently got some pretty major revisions to the US economic picture that have changed, you know, kind of our basic understanding of what the savings rate was, you know, what some of these indicators are.How have those revisions changed what you think the picture is?Seth Carpenter: So those benchmark revisions were important. But I will say it's not as though it was just a wholesale change in what we thought we understood. Instead, the key change that happened is we had information on GDP -- gross domestic product -- which comes from a lot of spending data. There's another bit of data that's gross domestic income that in some idealized economic model version of the world, those two things are the same -- but they had been really different. And the measured income had been much lower than the measured gross domestic product, the spending data. And so, it looked like the saving rate was very, very low.But it also raised a bit of a red flag, because if the savings rate is, is really low, and all of a sudden households go back to saving the normal amount, that necessarily means they'd slow their spending a lot, and that's what causes a downturn.So, it didn't change our view, baseline view, about where the economy was, but it helped resolve a sniggling, intellectual tension in the back of the head, and it did take away at least one of the downside risks, i.e. that the savings rate was overdone, and consumers might have to pull back.But I have to say, Andrew, another thing that could go wrong, could come from policy decisions that we don't know the answer to just yet. Let you in on a little secret. Don't tell anybody I told you this; but later this year, in fact, next month, there's an election in the United States.Andrew Sheets: Oh my goodness.Seth Carpenter: One of the policies that we have tried to model is tariffs. Tariffs are a tax. And so, the normal way I think a lot of people think about what tariffs might do is if you put a tax on consumer goods coming into the country, it could make them more expensive, could make people buy less, and so you'd get a little bit less activity, a little bit higher prices.In addition to consumer goods, though, we also import a lot of intermediate goods for production, so physical goods that are used in manufacturing in the United States to produce a final output. And so, if you're putting a tax on that, you'll get less manufacturing in the United States.We also import capital goods. So, things that go into business CapEx spending in the United States. And if you put a tax on that, well, businesses will do less investment spending. So, there's a disruption to actual US production, not just US consumption that goes on. And we actually think that could be material. And we've tried to model some of the policy proposals that are out there. 60 per cent tariff on China, 10 per cent tariff on the rest of the world.None of these answers are going to be exact, none of these are going to be precise, but you get something on the order of an extra nine-tenths of a percentage point of inflation, so a pretty big reversion in inflation. But maybe closing in on one and a half percentage points of a drag on GDP – if they were all implemented at the same time in full force.So that's another place where I think we could be wrong. It could be a big hit to the economy; but that's one place where there's just lots of uncertainty, so we have to flag it as a risk to our clients. But it's not in our baseline view.Seth Carpenter: But I have to say, you've been forcing me to question my optimism, which is entirely unfair. You, sir, have been pretty bullish on the credit market. Credit spreads are, dare I say it, really tight by historical standards.And yet, that doesn't cause you to want to call for mortgage spreads to widen appreciably. It doesn't call for you to want to go really short on credit. Why are you so optimistic? Isn't there really only one direction to go?Andrew Sheets: So, there are kind of a few factors the way that we're thinking about that. So, one is we do think that the fundamental backdrop, the economic forecast that you and your team have laid out are better than average for credit -- are almost kind of ideal for what a credit investor would like.Credit likes moderation. We're forecasting a lot of moderation. And, also kind of the supply and demand dynamics of the market. What we call the technicals are better than average. There's a lot of demand for bonds. And companies, while they're getting a little bit more optimistic, and a little bit more aggressive, they're not borrowing in the kind of hand over fist type of way that usually causes more problems. And so, you should have richer than average valuations. Now, in terms of, I think, what disrupts that story, it could be, well, what if the technicals or the fundamentals are no longer good? And, you know, I think you've highlighted some scenarios where the economic forecasts could change. And if those forecasts do change, we're probably going to need to think about changing our view. And that's also true bottom up. I think if we started to see Corporates get a lot more optimistic, a lot more aggressive. You know, hubris is often the enemy of the bond investor, the credit investor. I don't think we're there yet, but I think if we started to see that, that could present a larger problem. And both, you know, fundamentally it causes companies to take on more debt, but also kind of technically, because it means a lot more supply relative to demand.Seth Carpenter: I see. I see. But I wonder, you said, if our outlook, sort of, doesn't materialize, that's a clear path to a worse outcome for your market. And I think that makes sense.But the market hasn't always agreed with us. If we think back not that long ago to August, the market had real turmoil going on because we got a very weak Non Farm Payrolls print in the United States. And people started asking again. ‘Are you sure, Seth? Doesn't this mean we're heading for a recession?' And asset markets responded. What happened to credit markets then, and what does it tell you about how credit markets might evolve going forward, even if, at the end of the day, we're still right?Andrew Sheets: Well, so I think there have been some good indications that there were parts of the market where maybe investors were pretty vulnerably positioned. Where there was more leverage, more kind of aggressiveness in how investors were leaning, and the fact that credit, yes, credit weakened, but it didn't weaken nearly as much -- I think does suggest that investors are going to this market eyes wide open. They're aware that spreads are tight. So, I think that's important.The other I think really fundamental tension that I think credit investors are dealing with -- but also I think equity investors are -- is there are certain indicators that suggest a recession is more likely than normal. Things like the yield curve being inverted or purchasing manager indices, these PMIs being below 50.But that also doesn't mean that a recession is assured by any means. And so, I do think what can challenge the market is a starting point where people see indicators that they think mean a recession is more likely, some set of weak data that would seem to confirm that thesis, and a feeling that, well, the writing's on the wall.But I think it's also meant, and I think we've seen this since September, that this is a real, in very simple terms, kind of good is good market. You know, I got asked a lot in the aftermath of some of the September numbers, internally at Morgan Stanley, 'Is it, is it too good? Was the jobs number too good for credit?'And, and my view is, because I think the market is so firmly shifted to ‘we're worried about growth,' that it's going to take a lot more good data for that fear to really recede in the market to worry about something else.Seth Carpenter: Yeah, it's funny. Some people just won't take yes for an answer. Alright, let me, let me end up with one more question for you.So when we think about the cycle, I hear as I'm sure you do from lots of clients -- aren't we, late cycle, aren't things coming to an end? Have we ever seen a cycle before where the Fed hiked this much and it didn't end in tears? And the answer is actually yes. And so, I have often been pointing people to the 1990s.1994, there was a pretty substantial rate hiking cycle that doesn't look that different from what we just lived through. The Fed stopped hiking, held out at the peak for a while, and then the economy wobbled a little bit. It did slow down, and they cut rates. And some of the wobbles, for a while at least, looked pretty serious. The Fed, as it turns out, only cut 75 basis points and then held rates steady. The economy stabilized and we had another half decade of expansion.So, I'm not saying history is going to repeat itself exactly. But I think it should be, at least from my perspective, a good example for people to have another cycle to look at where things might turn out well with the soft landing.Looking back to that period, what happened in credit markets?Andrew Sheets: So, that mid-90s soft-landing was in the modern history of credit -- call it the last 40 years -- the tightest credit spreads have ever been. That was in 1997. And they were still kind of materially tighter from today's levels.So we do have historical evidence that it can mean the market can trade tighter than here. It's also really fascinating because the 1990s were kind of two bull markets. There was a first stage that, that stage you were suggesting where, you know, the Fed started cutting; but the market wasn't really sure if it was going to stick that landing, if the economy was going to be okay. And so, you saw this period where, as the data did turn out to be okay, credit went tighter, equities went up, the two markets moved in the same direction.But then it shifted. Then, as the cycle had been extending for a while, kind of optimism returned, and even too much optimism maybe returned, and so from '97, mid-97 onwards, equities kept going up, the stock market kept rallying, credit spreads went wider, expected volatility went higher. And so, you saw that relationship diverge.And so, I do think that if we do get the '90s, if we're that lucky, and hopefully we do get that sort of scenario, it was good in a lot of ways. But I think we need to be on the watch for those two stages. We still think we're in stage one. We still think they're that stage that's more benign, but eventually benign conditions can lead to more aggressiveness.Seth Carpenter: I think that's really fair. So, we started off talking about optimism and I would like to keep it that you pointed out that the '90s required a bit of good luck and I would wholeheartedly agree with that.So, I still remain constructive, but I don't remain naive. I think there are ways for things to go wrong. And there is a ton of uncertainty ahead, so it might be a rocky ride. It's always great to get to talk to you, Andrew.Andrew Sheets: Great to talk to you as well, Seth.And 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.

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

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

Our US Consumer Economist Sarah Wolfe lays out the impact of the Federal Reserve's rate cut on labor market and consumers, including which goods could see a rise in spending over the next year.----- Transcript -----Welcome to Thoughts on the Market. I'm Sarah Wolfe, from the Morgan Stanley US Economics Team. Today, a look at what the Fed cut means for US consumers. It's Thursday, September 26, at 2 PM in Slovenia. Earlier this week, you heard Mike Wilson and Seth Carpenter talk about the Fed cut and its impact on markets and central banks around the world. But what does it actually mean for US consumers and their wallets? Will it make it easier to pay off credit card debt and secure mortgages? We explore these questions in this episode. Looking back to last week, the FOMC cut rates by a larger chunk than many anticipated as risks from inflation have come down significantly while labor market risks have risen. Now, with inflation wrangled in, it's time to start reducing the restrictiveness of policy to prevent a rise in the unemployment rate and a slump in economic growth. In fact, my colleague Mike Wilson believes the US labor data will be the most important factor driving US equities for the next three to six months. Despite potential risks, the current state of the U.S. labor market is still solid and that's where the Fed wants it to stay. The health of the labor market, in my opinion, is best reflected in the health of consumer spending. If we look at this quarter, we're tracking over 3 per cent growth in real consumption, which is a strong run rate for consumption by all measures. And if we look at how the whole year has been tracking, we've only seen a very modest slowdown in real consumer spending from 2.7 per cent last year to 2.5 per cent today. For a bit of perspective, if we go back to 2018 and 2019, when rates were much lower than they are today, and we had a tight labor market, consumption was running closer to 2 to 2.3 per cent. So we can definitively say, consumption is pretty solid today. What is most notable, however, is the slowdown in nominal consumption which takes into account unit growth and pricing. This has slowed much more notably this year from 5.6 per cent last year to 4.9 per cent today. It's reflected by the significant progress we've seen in inflation this year across goods and services, despite solid unit growth – as reflected by stronger real consumer spending. Our US Economics team has been stressing that the fundamentals that drive consumption – which are labor income, wealth, and credit – would be cooler this year but still support healthy spending. When it comes to consumption, in my opinion, I think what matters most is labor income. A slowdown in job growth has stoked fears of slower consumer spending, but if you look at aggregate labor income growth and household wealth, across both equities and real estate, those factors remain solid. So, then we ask ourselves, what has driven more of the slowdown in consumer spending this past year?And with that, let's go back to interest rates. Rates have been high, and credit conditions have been tight – undeniably restraining consumer spending. Elevated interest rates have pushed banks to pull back on lending and have curbed household demand for credit. As a result, if you look at consumer loan growth from banks, it's fallen from about 12 per cent in 2022 to 7 per cent last year, and just 3 per cent in the first half of this year. Tight credit is dampening consumption. When interest rates are high, people buy less -- especially on credit. And this is a key principle of monetary policy and it's used to lower inflation. But it can have adverse effects. The brunt of the pain has been borne by the lowest-income households which rely heavily on revolving credit for basic spending needs and more easily max out on their credit limits and fall delinquent. As such, as the Fed begins to lower interest rates, the rates charged on consumer loan products have started to moderate. And with a lag, we expect credit conditions to ease up as well, allowing households across the income distribution to begin to access more credit. We should first see a rebound in durable goods spending – like home furnishing, electronics, appliances, and autos. And then that should all be further supported by more activity in the housing market. While interest rates are on their way down, they are still relatively elevated, which means the rebound in consumption will take time. The good news, however, is that we do think we are moving through the bottom for durable goods consumption – with pricing for goods likely to stabilize next year and unit growth to pick back up.Thank you 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.

Our Global Chief Economist, Seth Carpenter, explains why, despite last week's big Fed move, there's still plenty of uncertainty in global markets and questions about how other central banks will respond. ----- Transcript -----Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist.Today, I'll be talking about the Fed meeting, where they cut rates for the first time in this cycle, and what it means for the economy around the world.It's Monday, September 23rd at 10am in New York.The Fed cut rates by 50 basis points; but we did not see a huge shift in its reaction function. Rather, the 50 basis points was to show a commitment to not falling behind the curve -- to use Chair Powell's words. From here, the most likely path, from my perspective, is a string of 25 basis point cuts. Powell has again demonstrated that the Fed can move gradually, or quickly, depending on perceptions of risk.But for now, judging from Powell, or other policy makers comments, the Fed still sees the economy as healthy in the labor market; as solid. But another payroll print of 100, 000 or softening in consumer spending, well, that would tip the balance. So, the market debate will continue to focus on the pace of rate cuts and the ultimate landing zone.Our baseline is a touch more front loaded than the dot plot would imply; with us expecting the funds rate to reach just below 3.5 per cent in the middle of next year, rather than the end of next year. The Fed's projections have declines in the target rate into 2026 and beyond, but I have to say the dispersion in the dots that they put up shows just how much consensus is yet to be built within the committee. And, as a result, the phrase data dependency, well, that's not a term that we want to drop from the lexicon anytime soon.The magnitudes of the changes differ, but a comparison that we have made often here is to the 1990s, and that cutting cycle eventually it paused as the economy stabilized and continued to grow. So, there are lots of options for where we go next.Globally, central banks will be adapting and reacting both to global financial conditions like this Fed rate cut, as well as their domestic outlook. Among emerging market economies, Brazil and Indonesia make for useful case studies. With an eye on defending its policy credibility and on market expectations, the central bank in Brazil hiked rates to 10-and-three-quarters per cent this week after a cutting cycle and then a long pause. A weaker currency is the external push, but strong domestic growth is the internal consideration and both of those imply some inflation risks.The Bank of Indonesia cut rates after a strong appreciation in the currency, which lowered the risk from inflations, and it really enabled them to change their footing.Now, for DM central banks, the 50 basis point cut really doesn't materially shift our expectations for what's going to happen. If we are right, and ultimately we get a string of 25 basis point cuts, there's little reason for other developed market central banks to really adjust what they're doing. In Europe, we're waiting for inflation data to confirm the slowdown after the softening of wages that we've seen. So, we have high conviction that there's a cut in September, and we expect another cut in December.Now, more cutting by the Fed might lead to a stronger Euro, which would reinforce that inflation trend, but I don't think it would be enough to really change the path and prompt more aggressive cutting from the ECB. After skipping a rate move in September, given all the question marks they still see about inflation in the UK, we think the Bank of England restarts their cuts in November.The split decision at this most recent meeting shows that the MPC is not making frequent adjustments to its plan based on small tweaks to the incoming data. And finally, for the Bank of Japan, we expect them to stay on hold until January. The meeting for the Bank of Japan was primarily about communication, and indeed, Governor Ueda's comments did not prompt the type of reaction that we saw at the July meeting. So, if we're right, and the Fed's path is mostly, like we think it will be, these other developed market central banks don't have to make big changes.So, the Fed didn't really fully recalibrate its outlook. Instead, what it did was signal a willingness, but just a willingness, to make large shifts; with no clear indication that the fundamental strategy has changed.The market implications seem like they could be clear. With the Fed easing, amid economic conditions that remain resilient, that should be positive for risk assets. But the Fed is also trying to prevent complacency, and I have to say, uncertainty is plentiful. If for no other reason, we've got an election coming up, and that makes forecasting what happens in 2025 very difficult.Thanks for listening. And if you enjoy this show, please leave us a review wherever you listen to podcasts and share Thoughts on the Market with a friend or colleague today.

After sending global markets in a brief tailspin in early August, the Bank of Japan is once again the center of attention. Our Global Chief Economist and Chief Asia Economist discuss the central bank's next steps to help ease volatility and inflation.----- Transcript -----Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist.Chetan Ahya: And I'm Chetan Ahya, Chief Asia Economist.Seth Carpenter: And on today's episode, Chetan and I are going to be discussing the Bank of Japan and the role it has been playing in recent market turmoil.It's Friday, September 13th at 12.30pm in New York.Chetan Ahya: And it's 5.30pm in London.Seth Carpenter: Financial markets have been going back and forth for the past month or so, and a lot of what's been driving the market movements have been evolving expectations of what's going on at central banks. And right at the center of it has been the Bank of Japan, especially going back to their meeting at the very end of July.So, Chetan, maybe you can just level set us about where things stand with the Bank of Japan right now? And how they've been communicating with markets?Chetan Ahya: Well, I think what happened, Seth, is that Bank of Japan (BoJ) saw that there was a significant progress in inflation and wage growth dynamic. And with that they went out and told the markets that they wanted to start now increasing rate hikes. And at the same time, the end was weakening.And to ensure that they kind of convey to the markets that they want to be now taking rates higher, the governor of the central bank came out and indicated that they are far away from neutral.Now while that was having the desired effect of bringing the yen down, i.e. appreciated. But at the same time, it caused a significant volatility in the equity markets and make it more challenging for the BoJ.Seth Carpenter: Okay, so I get that. But I would say the market knew for a long time that the Bank of Japan would be hiking. We've had that in our forecast for a while. So, do you think that Governor Ueda really meant to be quite so aggressive? That meeting and his comments subsequently really were part of the contribution to all of this market turmoil that we saw in August. So, do you think he meant to be so aggressive?Chetan Ahya: Well, not really. I think that's the reason why what we saw is that a few days later, when the deputy governor Uchida was supposed to speak, he tried to walk back that hawkishness of the governor. And what was very interesting is that the deputy governor came out and indicated that they do care for financial conditions. And if the financial conditions move a lot, it will have an impact on growth and inflation; and therefore, conduct of monetary policy.In that sense, they conveyed the endogeneity of financial conditions and their reaction function. So, I think since that point of time, the markets have had a little bit of reprieve that BoJ will not take up successive rate hikes, ignoring what happens to the financial conditions.Seth Carpenter: But this does feel a little bit like some back and forth, and we've seen in the market that the yen is getting a little bit whipsawed; so the Bank of Japan wants to hike, and markets react strongly. And then the Bank of Japan comes out and says, ‘No, no, no, we're not going to hike that much,' and markets relax a little bit. But maybe that relaxation allows them to hike more.It kind of reminds me, I have to say, of the 2014 to 2015 period when the Federal Reserve was getting ready to raise interest rates for the first time off of the zero lower bound after the financial crisis. And, you know, markets reacted strongly -- when then chair Yellen started talking about hiking and because of the tightening of financial conditions, the Fed backed down.But then because markets relaxed, the Fed started talking about hiking again. Do you think that's an apt comparison for what's going on now?Chetan Ahya: Absolutely, Seth. I think it is exactly something similar that is going on with Bank of Japan.Seth Carpenter: So, I guess the question then becomes, what happens next? We know with the Fed, they eventually did hike rates at the end of 2015. What do you think we're in line for with the Bank of Japan, and is it likely to be a bumpy ride in the future like it has been over the past couple months?Chetan Ahya: Well, so I think as far as the market's volatility is concerned, we do think that the fact that the BoJ has come out and indicated that their reaction function is such that they do care about financial conditions. Hopefully we should not see the same kind of volatility that we saw at the start of the month of August.But as far as the next steps are concerned, we do see BoJ taking up one more rate hike in January 2025. And there is a risk that they might take up that rate hike in December.But the reason why we think that they will be able to take up one more rate hike is the fact that there is continued progress on wage growth and inflation; and wage growth is the most important variable that BoJ is tracking.We just got the last month's wage growth number. It has risen up to 3 percent. And going forward, we think that as the BoJ gets comfort that next year's wage negotiations are also heading in the right direction, they will be able to take one more rate hike in January 2025.Well, Seth, I think, you know, when we are talking about this volatility that we saw in the financial markets and particularly yen, the other side of this story is what the Fed has to do, and what is Fed indicating in terms of its policy path. And we saw that, after the nonfarm payrolls data, Governor Waller was indicating that the Fed could consider front-loading its rate cuts. What are your thoughts on that?Seth Carpenter: So, we do think the Fed's getting ready to start cutting rates. Our baseline is that they move at 25 increments per meeting, from now through the middle of next year. I would take Governor Waller's comments though about front-loading cuts -- which I took to mean, you know, the possibility of 50 basis point rate moves -- very much in context, and with a grain of salt.When he gave that speech, I think what he was trying to do, and I think the last paragraph of that speech really bears it out. He was saying there's a lot of uncertainty here. He said, if the data suggests that they need to front load rates, then he would advocate for it. But he also said that, if the data implied that they need to cut at consecutive meetings, he'd be in favor of that as well. So, he was saying that the data are going to be the thing that drives the policy decisions.But thanks for asking that question. And thanks to the listeners. If you enjoy this podcast, please leave us a review wherever you listen and share Thoughts on the Market with a friend or a colleague today.

As the US Federal Reserve mulls a forthcoming interest rate cut, our Head of Corporate Credit Research and Global Chief Economist discuss how it is balancing inflationary risks with risks to growth.----- Transcript -----Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley.Seth Carpenter: And I'm Seth Carpenter, Morgan Stanley's Global Chief Economist.Andrew Sheets: And today on the podcast, we'll be discussing the Federal Reserve, whether its policy is behind the curve and what's next.It's Thursday, August 29th at 2pm in London.Seth Carpenter: And it's 9am in New York.Andrew Sheets: Seth, it's always great to talk to you. But that's especially true right now. The Federal Reserve has been front and center in the markets debate over the last month; and I think investors have honestly really gone back and forth about whether interest rates are in line or out of line with the economy. And I was hoping to cover a few big questions about Fed policy that have been coming up with our clients and how you think the Fed thinks about them.And I think this timing is also great because the Federal Reserve has recently had a major policy conference in Jackson Hole, Wyoming where you often see the Fed talking about some of its longer-term views and we can get your latest takeaways from that.Seth Carpenter: Yeah, that sounds great, Andrew. Clearly these are some of the key topics in markets right now.Andrew Sheets: Perfect. So, let's dive right into it. I think one of the debates investors have been having -- one of the uncertainties -- is that the Fed has been describing the risk to their outlook as balanced between the risk to growth and risk to inflation. And yet, I think for investors, the view over the last month or two is these risks aren't balanced; that inflation seems well under control and is coming down rapidly. And yet growth looks kind of weak and might be more of a risk going forward.So why do you think the Fed has had this framing? And do you think this framing is still correct in the aftermath of Jackson Hole?Seth Carpenter: My personal view is that what we got out of Jackson hole was not a watershed moment. It was not a change in view. It was an evolution, a continuation in how the Fed's been thinking about things. But let me unpack a few things here.First, markets tend to look at recent data and try to look forward, try to look around the corner, try to extrapolate what's going on. You know as well as I do that just a couple weeks ago, everyone in markets was wondering are we already in recession or not -- and now that view has come back. The Fed, in contrast, tends to be a bit more inertial in their thinking. Their thoughts evolve more slowly, they wait to collect more data before they have a view. So, part of the difference in mindset between the Fed and markets is that difference in frequency with which updates are made.I'd say the other point that's critical here is the starting point. So, the two risks: risks to inflation, risks to growth. We remember the inflation data we're getting in Q1. That surprised us, surprised the market, and it surprised the Fed to the upside. And the question really did have to come into the Fed's mind -- have we hit a patch where inflation is just stubbornly sticky to the upside, and it's going to take a lot more cost to bring that inflation down. So those risks were clearly much bigger in the Fed's mind than what was going on with growth.Because coming out of last year and for the first half of this year, not only would the Fed have said that the US economy is doing just fine; they would have said growth is actually too fast to be consistent with the long run, potential growth of the US economy. Or reaching their 2 per cent inflation target on a sustained basis. So, as we got through this year, inflation data got better and better and better, and that risk diminished.Now, as you pointed out, the risk on growth started to rise a little bit. We went from clearly growing too fast by some metrics to now some questions -- are we softened so much that we're now in the sweet spot? Or is there a risk that we're slowing too much and going into recession?But that's the sense in which there's balance. We went from far higher risks on inflation. Those have come down to, you know, much more nuanced risks on inflation and some rising risk from a really strong starting point on growth.Andrew Sheets: So, Seth, that kind of leads to my second question that we've been getting from investors, which is, you know, some form of the following. Even if these risks between inflation and growth are balanced, isn't Fed policy very restrictive? The Fed funds rate is still relatively high, relative to where the Fed thinks the rate will average over the long run. How do you think the Fed thinks about the restrictiveness of current policy? And how does that relate to what you expect going forward?Seth Carpenter: So first, and we've heard this from some of the Fed speakers, there's a range of views on how restrictive policy is. But I think all of them would say policy is at least to some degree restrictive right now. Some thinking it's very restrictive. Some thinking only modestly.But when they talk about the restrictiveness of policy in the context of the balance of these risks, they're thinking about the risks -- not just where we are right now and where policy is right now; but given how they're thinking about the evolution of policy over the next year or two. And remember, they all think they're going to be cutting rates this year and all through next year.Then the question is, over that time horizon with policy easing, do we think the risks are still balanced? And I think that's the sense in which they're using the balance of risks. And so, they do think policy is restrictive.They would also say that if policy weren't restrictive, [there would] probably be higher risks to inflation because that's part of what's bringing inflation out of the system is the restrictive stance of policy. But as they ease policy over time, that is part of what is balancing the risks between the two.Andrew Sheets: And that actually leads nicely to the third question that we've been getting a lot of, which is again related to investor concerns -- that maybe policy is moving out of line with the economy. And that's some form of the following: that by even just staying on hold, by not doing anything, keeping the Fed funds rate constant, as inflation comes down, that rate becomes higher relative to inflation. The real policy rate rises. And so that represents more restrictive monetary policy at the very moment, when some of the growth data seems to be decelerating, which would seem to be suboptimal.So, do you think that's the Fed's intention? Do you think that's a fair framing of kind of the real policy rate and that it's getting more restrictive? And again, how do you think the Fed is thinking about those dynamics as they unfold?Seth Carpenter: I do think that's an important framing to think -- not just about the nominal level of interest rates; you know where the policy rate is itself, but that inflation adjusted rate. As you said, the real rate matters a lot. And inside the Fed as an institution there, that's basically how most of the people there think about it as well. And further, I would say that very framing you put out about -- as inflation falls, will policy become more restrictive if no adjustment is made? We've heard over the past couple of years, Federal Reserve policymakers make exactly that same framing.So, it's clearly a relevant question. It's clearly on point right now. My view though, as an economist, is that what's more important than realized inflation, what prices have done over the past 12 months. What really matters is inflation expectations, right? Because if what we're trying to think about is -- how are businesses thinking about their cost of capital relative to the revenues are going to get in the future; it's not about what policy, it's not about what inflation did in the past. It's what they expect in the future.And I have to say, from my perspective, inflation expectations have already fallen. So, all of this passive tightening that you're describing, it's already baked in. It's already part of why, in my view, you know, the economy is starting to slow down. So, it's a relevant question; but I'm personally less convinced that the fall in inflation we've seen over the past couple of months is really doing that much to tighten the stance of policy.Andrew Sheets: So, Seth, you know, bringing this all together, both your answers to these questions that are at the forefront of investors' minds, what we heard at the Jackson Hole Policy Conference and what we've heard from the latest FOMC minutes -- what does Morgan Stanley Economics think the Fed's policy path going forward is going to be?Seth Carpenter: Yeah. So, you know, it's funny. I always have to separate in my brain what I think should happen with policy -- and that used to be my job. But now we're talking about what I think will happen with policy. And our view is the Fed's about to start cutting interest rates.The market believes that now. The Fed seems from their communication to believe that. We've got written down a path of 25 basis point reduction in the policy rate in September, in November, in December. So, a string of these going all the way through to the middle of next year to really ease the stance of policy, to get away from being extremely restrictive, to being at best only moderately restrictive -- to try to extend this cycle.I will say though, that if we're wrong, and if the economy is a bit slower than we think, a 50 basis point cut has to be possible.And so let me turn the tables on you, Andrew, because we're expecting that string of 25 basis point cuts, but the market is pricing in about 100 basis points of cuts this year with only three meetings left. So that has to imply at least one of those meetings having a 50 basis point cut somewhere.So, is that a good thing? Would the market see a 50 basis point cut as the Fed catching up from being behind the curve? Or would the market worry that a bigger cut implies a greater recession risk that could spook risk assets?Andrew Sheets: Yeah, Seth, I think that's a great question because it's also one where I think views across investors in the market genuinely diverge. So, you know, I'll give you our view and others might have a different take.But I think what you have is a really interesting dynamic where kind of two things can be true. You know, on the one hand, I think if you talk to 50 investors and ask them, you know, would they rather for equities or credit have lower rates or higher rates, all else equal -- I think probably 50 would tell you they would rather have lower rates.And yet I think if you look back at history, and you look at the periods where the Federal Reserve has been cutting rates the most and cutting most aggressively, those have been some of the worst environments for credit and equities in the modern era. Things like 2001, 2008, you know, kind of February of 2020. And I think the reason for that is that the economic backdrop -- while the Fed is cutting -- matters enormously for how the market interprets it.And so, conditions where growth is weakening rapidly, and the Fed is cutting a lot to respond to that, are generally periods that the market does not like. Because they see the weaker data right now. They see the weakness that could affect earnings and credit quality immediately. And the help from those lower rates because policy works with lag may not arrive for six or nine or twelve months. It's a long time to wait for the cavalry.And so, you know, the way that we think about that is that it's really, I think the growth environment that's going to determine how markets view this rate cutting balance. And I think if we see better growth and somewhat fewer rate cuts, the base case that you and your team at Morgan Stanley Economics have -- which is a bit fewer cuts than the market, but growth holding up -- which we think is a very good combination for credit. A scenario where growth is weaker than expected and the Fed cuts more aggressively, I think history would suggest, that's more unfriendly and something we should be more worried about.So, I do think the growth data remains extremely important here. I think that's what the market will focus most on and I think it's a very much good is good regime that I think is going to determine how the market views cuts. And fewer is fine as long as the data holds up.Seth Carpenter: That make a lot of sense, and thanks for letting me turn the tables on you and ask questions. And for the listeners, thank you for listening. If you enjoy this show, leave us a review wherever you listen to podcast. And share Thoughts on the Market with a friend or a colleague today.

Recent market volatility has made headlines, but our Global Chief Economist explains why the numbers aren't as dire as they seem.----- Transcript -----Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist. Along with my colleagues, bringing you a variety of perspectives, today I'll be talking about central banks, the Bank of Japan, Federal Reserve, data and how it drove market volatility.It's Monday, August 12th at 10am in New York.You know, if life were a Greek tragedy, we might call it foreshadowing. But in reality, it was probably just an unfortunate coincidence. The BOJ's website temporarily went down when the policy announcement came out. As it turns out, expectations for the BOJ and the Fed drove the market last week. Going into the BOJ meeting consensus was for a September hike, but July was clearly in play.The market's initial reaction to the decision itself was relatively calm; but in the press conference following the decision, Governor Ueda surprised the markets by talking about future hikes. Some hiking was already priced in, and Ueda san's comments pushed the amount priced in up by another, call it 8 basis points, and it increased volatility.In the aftermath of that market volatility, Deputy Governor Yoshida shifted the narrative again, by stressing that the BOJ was attuned to market conditions and that there was no fundamental change in the BOJ's strategy. But this heightened attention on the BOJ's hiking cycle was a critical backdrop for the US non farm payrolls two days later.The market knew the BOJ would hike, and knew the Fed would cut, but Ueda san's tone and the downside surprise to payrolls ignited two separate but related market risks: A US growth slowdown and the yen carry trade.The Fed's July meeting was the same day as the BOJ decision, and Chair Powell guided markets to a September rate cut. Prior to July, the FOMC was much more focused on inflation after the upside surprises in the first quarter. But as inflation softened, the dual mandate came into a finer balance. The shift in focus to both growth and inflation was not missed by markets; and then payrolls at about 114, 000 in July. Well, that was far from disastrous; but because the print was a miss relative to expectations on the heel of a shift in that focus, the market reaction was outsized.Our baseline view remains a soft landing in the United States; and those details we discussed extensively in our monthly periodical. Now, markets usually trade inflections, but with this cycle, we have tried to stress that you have to look at not just changes, but also the level of the economy. Q2 GDP was at 2.6 per cent. Consumer spending grew at 2.3 per cent. And the three-month average for payrolls was at 170, 000 -- even after the disappointing July print.Those are not terribly frightening numbers. The unemployment rate at 4.3 per cent is still low for the United States. And 17 basis points of that two-tenths rise last month; well, that was an increase in labor force participation. That's hardly the stuff of a failing labor market.So, while these data are backward looking, they are far from recessionary. Markets will always be forward looking, of course; but the recent hard data cannot be ignored. We think the economy is on its way to a soft landing, but the market is on alert for any and all signs for more dramatic weakness.The data just don't indicate any accelerated deterioration in the economy, though. Our FX Strategy colleagues have long said that Fed cuts and BOJ hikes would lead to yen appreciation. But this recent move? It was rapid, to say the least. But if we think about it, the pair really has only come into rough alignment with the Morgan Stanley targets based on just interest rate differentials alone.We also want to stress the fundamentals here for the Bank of Japan as well. We retain our view for cautious rate hikes by the BOJ with the next one coming in January. That's not anything dramatic because over the whole forecast that means that real rates will stay negative all the way through the end of 2025.These themes -- the deterioration in the US growth situation and the appreciation of the yen -- they're not going away anytime soon. We're entering a few weeks of sparse US data, though, where second tier indicators like unemployment insurance claims, which are subject to lots of seasonality, and retail sales data, which tend to be volatile month to month and have had less correlation recently with aggregate spending, well, they're going to take center stage in the absence of other harder indicators.The normalization of inflation and rates in Japan will probably take years, not just months, to sort out. The pace of convergence between the Fed and the BOJ? It's going to continue to ebb and flow. But for now, and despite all the market volatility, we retain our outlook for both economies and both central banks. We see the economic fundamentals still in line with our baseline views.Thanks for listening. If you enjoy this show, please leave us a review wherever you listen to podcasts and share Thoughts on the Market with a friend or colleague today.

Our experts discuss how high prices for auto insurance have been driving inflation, and the implications for consumers and the Fed now that price increases are due to slow.----- Transcript -----Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist.Diego Anzoategui: I'm Diego Anzoategui from the US Economics team.Bob Huang: And I'm Bob Huang, the US Life and Property Casualty Insurance Analyst.Seth Carpenter: And on this episode, we're going to talk about a topic that -- I would have guessed -- historically we weren't going to think about too often in a macro setting; but over the past couple of years it's been a critical part of the whole story on inflation, and probably affects most of our listeners.It's auto insurance and why we think we're reaching a turning point.It's Thursday, July 18th at 10am in New York.All right, let's get started.If you drive a car in the United States, you almost surely have been hit by a big increase in your auto insurance prices. Over the past couple of years, everyone has been talking about inflation, how much consumer prices have been going up. But one of the components that lots of people see that's really gone up dramatically recently has been auto insurance.So that's why I wanted to come in and sit down with my colleagues, Diego and Bob, and talk through just what's going on here with auto insurance and how does it matter.Diego, I'm going to start with you.One thing that is remarkable is that the inflation that we're seeing now and that we've seen over the past several months is not related to the current state of the economy.But we know in markets that everyone's looking at the Fed, and the Fed is looking at the CPI data that's coming out. We just got the June CPI data for the US recently. How does this phenomenon of auto insurance fit into that reading on the data?Diego Anzoategui: Auto insurance is a relatively small component of CPI. It only represents just below 3 per cent of the CPI basket. But it has become a key driver because of the very high inflation rates has been showing. You know, the key aggregate the Fed watches carefully is core services ex-housing inflation. And the general perception is that inflation in these services is a lagged reflection of labor market tightness. But the main component driving this aggregate, at least in CPI, since 2022 has been auto insurance.So the main story behind core services ex-housing inflation in CPI is just the lagged effect of a cost shock to insurance companies.Seth Carpenter: Wait, let me stop you there. Did I understand you right? That if we're thinking about core services inflation, if you exclude housing; that is, I think, what a lot of people think is inflation that comes from a tight labor market, inflation that comes from an overheated economy. And you're saying that a lot of the movement in the past year or two is really coming from this auto insurance phenomenon.Diego Anzoategui: Yes, that's exactly true. It is the main component explaining core services ex-housing inflation.Seth: What's caused this big acceleration in auto insurance over the past few years? And just how big a deal is it for an economist like us?Diego Anzoategui: Yeah, so believe it or not, today's auto insurance inflation is related to COVID and the supply chain issues we faced in 2021 and 2022. Key cost components such as used cars, parts and equipment, and repair cost increased significantly, creating cost pressures to insurance companies. But the reaction in terms of pricing was sluggish. Some companies reacted slowly; but perhaps more importantly, regulators in key states didn't approve price increases quickly.Remember that this is a regulated industry, and insurance companies need approvals from regulators to update premiums. And, of course, losses increased as a result of this sluggish response in pricing, and several insurance started to scale back businesses, creating supply demand imbalances.And it is when these imbalances became evident that regulators started to approve large rate increases, boosting car insurance inflation rapidly from the second half of 2022 until today.Seth Carpenter: Okay, so if that's the case, what should we think about as key predictors, then, of auto insurance prices going forward? What should investors be aware of? What should consumers be aware of? Diego Anzoategui: So in terms of predictors, it is always a good idea to keep track of cost related variables. And these are leading indicators that we both Bob and I would follow closely.Used car prices, repair costs, which are also CPI components, are leading indicators of auto insurance inflation. And both of them are decelerating. Used car prices are actually falling. So there is deflation in that component. But I think rate filings are a key indicator to identify the turning point we are expecting this cycle.Seth Carpenter: Can you walk through what that means -- rate filings? Just for our listeners who might not be familiar?Diego Anzoategui: So, rate filings basically summarize how much insurers are asking to regulators to increase their premiums. And we actually have access to this data at a monthly frequency. Filings from January to May this year -- they are broadly running in line with what happened in 2023. But we are expecting deceleration in the coming months.If filings start to come down, that will be a confirmation of our view of a turning point coming and a strong sign of future deceleration in car insurance inflation.Seth Carpenter: So Bob, let me turn to you. Diego outlines with the macro considerations here. You're an analyst, you cover insurers, you cover the equity prices for those insurance, you're very much in the weeds. Are we reaching a turning point? Walk us through what actually has happened.Bob Huang: Yeah, so we certainly are reaching a turning point. And then, similar to what Diego said before, right, losses have been very high; and then that consequently resulted in ultimately regulators allowing insurance companies to increase price, and then that price increase really is what's impacting this.Now, going forward, as insurers are slowly achieving profitability in the personal auto space, personal auto insurers are aiming to grow their business. And then, if we believe that the personal auto insurance is more or less a somewhat commoditized product, and then the biggest lever that the insurance companies have really is on the pricing side. And as insurers achieve profitability, aim for growth, and that will consequently cost some more increased pricing competition.So, yes, we'll see pricing deceleration, and that's what I'm expecting for the second half of the year. And then perhaps even further out, and that could even intensify further. But we'll have to see down the road.Seth Carpenter: Is there any chance that we actually see decreases in those premiums? Or is the best we can hope for is that they just stopped rising as rapidly as they have been?Bob Huang: I think the most likely scenario is that the pricing will stabilize. For price to decrease to before COVID level, that losses have to really come down and stabilize as well. There are only a handful of insurers right now that are making what we call an underwriting profit. Some other folks are still trying to make up for the losses from before.So, from that perspective, I think, when we think about competition, when we think about pricing, stabilization of pricing will be the first point. Can price slightly decrease from here? It's possible depending on how intensive the competition is. But is it going to go back to pre-COVID level? I think that's a hard ask for the entire industry.Seth Carpenter: You were talking a lot about competition and how competition might drive pricing, but Diego reminded all of us at the beginning that this industry is a regulated industry. So can you walk us through a little bit about how we should think about this going forward?What's the interaction between competition on the one hand and regulation on the other? How big a deal is regulation? And, is any of that up for grabs given that we've got an election in November?Bob Huang: Usually what an insurer will have to do in general is that for some states -- well actually, in most cases they would have to ask for rate filings, depending on how severe those rate filings are. Regulators may have to step in and approve those rate filings.Now, as we believe that competition will gradually intensify, especially with some of the more successful carriers, what they can do is simply just not ask for price increase. And in that case, regulators don't really need to be involved. And then also implies that if you're not asking for a rate increase, then that also means that you're not really getting that pricing -- like upward pricing pressure on the variety of components that we're looking at.Seth Carpenter: To summarize, what I'm hearing from Bob at the micro level is those rate increases are probably slowing down and probably come to a halt and we'll have a stabilization. But don't get too excited, consumers. It's not clear that car insurance premiums are actually going to fall, at least not by a sizable margin.And Diego, from you, what I'm hearing is this component of inflation has really mattered when it comes to the aggregate measure of inflation, especially for services. It's been coming down. We expect it to come down further. And so, your team's forecast, the US economics team forecast, for the Fed to cut three times this year on the back of continued falls of inflation -- this is just another reason to be in that situation.So, thanks to both of you being on this. It was great for me to be able to talk to you, and hopefully our listeners enjoyed it too.Bob Huang: Thank you for having me here.Diego Anzoategui: Always a pleasure.Seth Carpenter: To the listeners, thank you for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen; and share this podcast with a friend or a colleague today.

Rising rents and mortgage payments have been at the center of the inflation discussion. Our Global Chief Economist assesses whether monetary policy can effectively blunt those figures. ----- Transcript -----Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about the housing market, inflation, growth and monetary policy. It's Monday, July 1st, at 11am in New York. Housing is at the center of many macro debates from growth to inflation. And when you put those two together – monetary policy. House prices have continued to rise despite high interest rates, which gives the impression to some of stalled deflation and forces consumers at times to make some really difficult choices. And in some economies, there's a seeming lack of responsiveness of housing to higher interest rates. All of which tends to prompt questions about the efficacy of monetary policy. So where are we? We think monetary policy is still working through housing as it usually does, but supply shortages, or in some places just idiosyncratic factors like buildable lands or permitting, that's supported home prices. And as has been the case across several sectors in this business cycle, there really are some factors about housing that's just different in this cycle than in previous ones. For the U.S., a key part of the housing story has been the mortgage lock in for homeowners. Our strategists have noted that the gap between the current new mortgage rate and the average effective mortgage rate is at historical highs. And the share of 30 year fixed rate mortgages is at its highest in a decade. Consequently, the inventory of existing houses has remained low because homeowners who have those really low mortgages are reluctant to move unless they have to. The market has become thinner with less available supply; and then if we think more broadly for the economy, there's a risk of labor market frictions if that mortgage lock in also reduces labor mobility. Now, there will be a decline in mortgage rates if we get the modest easing cycle from the Fed that we expect. But that decline will be similarly modest so that gap in rates will not be fully closed even if it narrows. And so there might be some uplift to supply of housing, but it might not be huge. That decline in mortgage rates can also supply demand, so then we have to think about the net of this shift in demand and the shift in supply. And ultimately what we think is going to happen is that there'll be a moderation in home price appreciation, but not an outright decline in home prices.First, the choice of housing for a lot of households is do you buy or do you rent? If you've got high home prices and high mortgages, buying is much less affordable and so it pushes people into renting, which could push up rents. That phenomenon is partly responsible for the surge in rents that we've seen over the past few years. In the longer run, there should be a sort of arbitrage condition between home prices and rents. And while rising home prices can impinge the spending power for first time homebuyers, rising house prices can actually boost sentiment and consumption for existing homeowners. And that mortgage lock in that I talked about before? Well, that can actually support aggregate consumption to some degree because now there's predictability of cash flows and the monthly payment is pretty low. So what do we do when we take all of this together? The housing market might be telling us that monetary policy is working a bit less effectively than historically, but not that monetary policy is not working. Home price appreciation is moderating. Housing starts have slowed, as usual, following those big rate increases. But that slowing? It's actually been a bit inconsistent because mortgage lock has meant that new supply is the only supply. Existing home sales, by contrast, are just plain weak. They're about as weak as they were around the financial crisis. We do not think the housing market overall is at risk of collapse, but monetary policy is restraining activity in a very familiar way. Thanks for listening, and if you enjoy this podcast, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

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

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

Our Global Chief Economist takes stock of recent elections in India, Mexico and South Africa -- and what they suggest about the market implications of the upcoming UK and US elections.----- Transcript -----Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about recent elections and upcoming elections and what they mean for the economy.It's Tuesday, June 11th at 10am in New York.Markets usually prefer simple narratives, but this week it's shown us that simplicity can be elusive. In particular, for elections, legislative outcomes can be more complicated but are consequential. Here in the US, clients often ask about the economic implications of a Trump vs. Biden presidency -- but we immediately have to flag that the congressional outcome has to be a big part of the conversation.Indeed, three important elections in the past weeks have emphasized the importance of a legislative focus. But the surprise was not in who won -- rather, in how big the legislative decisions were. In India, Prime Minister Modi was re-elected, but his BJP party lost its outright majority. Exit polls on June 1st had predicted a resounding victory for the BJP, prompting a rally in the lead up to the final results.The results surprised markets and caused a reversal. Markets have since recovered to roughly where they were before the exit polls,We expect policy predictability with the continued focus on macro stability. This focus implies moderate inflation, smaller primary deficits, along with support for domestic manufacturing and infrastructure in upcoming years. Those have been the core of our view that the Indian economy is set for continued expansion.The Mexican election was almost the reverse, where the winning candidate's party won far more votes than was expected. In response to the news, equity markets sold off and the Mexican peso depreciated. Scheinbaum was largely expected to win after the endorsement of Obrador; but by winning a supermajority, the market focus turned to Mexican fiscal discipline based on a view that there may be less restraint on government spending.Fiscal policy has been in focus for us because for the first time in recent years the government there ran a fiscal deficit. While the party has sought to reassure markets, concern has mounted regarding the risks of fiscal slippage without a more balanced legislature.Compared to India and Mexico, The South African market reaction to the election was modest, though not for a lack of surprise in the legislature. The ANC lost more of its majority than polls had predicted, which narrows the options for a coalition. The market now expects a more reform-oriented coalition to take power and support a continued improvement in the economy. For example, frequent power outages had impeded the economy for a long time, but the energy sector now appears to be more stable, and those sorts of reforms can help catalyze an improved economic outlook.Examples of India, Mexico, and South Africa have reinforced why we've remained focused on the upcoming general elections in the UK, and also the congressional outcomes in the US. In the UK, a change in government is predicted by the polls, and fiscal considerations will be in focus.So back here in the US, the fiscal outcome will largely be determined by the congressional results. To meaningfully change federal tax or spending requires legislation. And our colleagues in public policy research have flagged that under a Republican sweep, they expect lower taxes and higher spending; contrasted with a Democratic sweep that might bring somewhat higher spending, but also higher taxes leading to a narrower deficit.A split government, where the party in the White House not the same as the party controlling each of the Houses of Congress, however, probably implies more muted outcomes. While we should focus on the legislative outcomes, there are important authorities, of course, that the President can exercise independently of the Congress.So, when we highlight the importance of the legislative outcomes, we are not denying the criticality of the presidency.Thanks for listening. If you enjoy the show, please leave us a review wherever you listen to podcasts and share Thoughts on the Market with a friend or colleague.

Our Global Cross-Asset Strategist and Global Chief Economist discuss the state of asset markets at the midway point of 2024, and why the current backdrop suggests positive directions for several key markets.----- Transcript -----Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist.Serena Tang: And I'm Serena Tang, Morgan Stanley's Chief Global Cross Asset Strategist.Seth Carpenter: And yesterday, Serena, you and I discussed Morgan Stanley's global economic mid-year outlook. And today, I'm going to turn the tables on you, and we'll talk about asset markets.It's Tuesday, May 21st, at 10am in New York.Okay, so yesterday we talked about all sorts of different parts of the macro environment. Disinflation, inflation, central bank policy, growth. But when you think about all of that -- that macro backdrop -- what does it mean to you for markets across the world?Serena Tang: Right, I think the outlook laid out by your team of stable growth, disinflation, rate cuts. That is a great backdrop for risk assets, one of the reasons why we got overweight in global equities. Now, there will likely be low visibility and uncertainty beyond year end, and why we recommend investors should focus on the triple C's of cheap optionality, convexity, and carry.That very benign backdrop suggests more bullish possibilities. Your team has noted several times now that the patterns we're seeing now and what we expect have parallels to what happened in the mid 1990s -- when the Fed cut in small increments, US growth was sustained at high levels, and the labor market was strong. And now I'm not suggesting that this is 1990s and we should party like it. But just that the last time we found ourselves in this kind of benign macro environment, risk assets -- actually most markets did really well.Seth Carpenter: So, I will say the 1990s was a pretty good decade for me. However, you mentioned some uncertainty ahead, low visibility. We titled our macroeconomic outlook ‘Are we there yet?' Because I agree, we do feel like we're on a path to something pretty good, but we're not out of the woods yet. So, when you say there's some low visibility about where asset markets are going, maybe beyond year end, what do you mean by that?Serena Tang: I think there's less visibility going into 2025. And specifically, I'm talking about the US elections. When I think about the range of possible outcomes, all I can confidently say is that it's wide, which I think you can see reflected in our strategist's latest forecast. Most teams actually have relatively constructive forecast returns for their assets in the base case, but there's an unusually wide gap between their bull and bear cases for bond and equity markets.Seth Carpenter: Let me narrow it down a little bit because equity markets have actually performed pretty well during the first half of the year. So what do you think is going to happen specifically with equities going forward? How should we be thinking about equity markets per se?Serena Tang: Equities have rallied a lot, but we've actually gotten more bullish. I talked about the three Cs of cheap optionality, convexity, and carry earlier, and I think European and Japanese equities really tick these boxes. Both of these markets also have above average dividend yields, especially for a dollar-based FX hedge investor.Serena Tang: Where we think there might be some underperformance is really in EM equities, but it's a bit nuanced. Our China equity strategy team thinks that consensus mid-teens earnings growth expectation for this year will still likely to disappoint given the Chinese growth forecast that you talked about yesterday.Seth Carpenter: Alright, in that case. Let me flip over to fixed income. A lot of that is often driven by central banks. Around the world, you just mentioned EM equities may be struggling a little bit. A lot of EM central banks are either cutting a little bit ahead of the Fed, but being cautious, worrying about not getting too far ahead of the Fed. So, if that's what's going on with policy rates at the very front end of the curve, what's happening in fixed income more broadly?Serena Tang: We generally see government bond yields lower over the forecast horizon for two reasons. On your team's forecast of central banks cutting rates and also in the US, an optical rise in the unemployment rate, our macro strategy team forecasts for the 10 year U.S. Treasury yields to fall to just above 4 per cent by the end of this year. And because government bond yields will be coming down, we also expect yields for spread products like agency MBS, investment grade, etc. to also come down. But I think for these spread products, returns can be positive beyond that duration piece.Serena Tang: So, credit loves moderation, and I think the mild growth backdrop your team is forecasting for is exactly that. US fixed income more generally should also see renewed flows from Japanese investors as FX hedging costs come down over the next six months. All of this supports tighter than average spreads.Seth Carpenter: Okay, so we talked about equities, we talked about fixed income. Big asset class that we haven't talked about yet are commodities. How bullish are you going into the summer? What do you think is going to go on and can that bullish view that you guys have last even longer?Serena Tang: So for crude oil, our strategists see market tightness over the summer, which could drive Brent to about $90 per barrel. You have demand coming in stronger than expected, and of course OPEC has extended its production agreement.But we also don't really expect prices to hold over the medium term. Non-OPEC supply should meet most of the global demand growth later this year and into 2025, which sort of leaves very little room for OPEC to unwind production cuts. We expect Brent to revert back steadily to its long-term anchor, which is probably somewhere around $80 per barrel.Serena Tang: For copper, it's actually our metal strategist's top pick right now, and it's very much driven by, I think, tightening supply and demand balance. You've had significant mine supply disruptions, but also better than expected demand and new drivers such as -- we've talked about AI a lot, data centers and increasing participation.Serena Tang: And on gold, in our view, pricing is likely to remain pretty choppy as investors have to weigh inflation risk, incoming data, and the Fed path. But historically, that first rate cut tends to be a very positive catalyst for gold. And we see risks more skewed to our bull case at the moment.Seth Carpenter: Okay, so talked about equities, talked about fixed income, talked about commodities. These are global markets, and often when investors are looking around the world and thinking about what it means for them, currencies come into it, and everybody's always going to be looking at the dollar. So why don't you run us through the Morgan Stanley view on where the US dollar is going to go over the rest of this year, and maybe over the next 12 months.Serena Tang: The short answer is we see the dollar staying stronger for longer. Yes, we expect central banks to begin cutting this year. But the pace of cuts and ultimate destinations are likely to vary widely. Now another potential dollar tailwind is an increased risk premium being priced for the 2024 US elections. We think that investors may begin to price in material risks to dollar positive changes in US foreign and trade policy as the election approaches, which we assume will sort of begin ramping up in the third quarter.Seth Carpenter: All right, let's step back from the details. I want you to bring us home now. Give me some strategy. So where should people lean in, where should we be looking for the best returns and where do we need to be super cautious?Serena Tang: In our asset allocation recommendation, we recommend overweight in global equities, overweight in spread products, equal weight in commodities, and underweight in cash.We really like European and Japanese equities on the back of pretty strong earnings revision, attractive relative valuations, and good carry for a dollar based investor. We like spread products. Not so much that our strategists are not expecting duration to do well. We are still expecting yields to come down.Serena Tang: Where we are most cautious on, really, continues to be EM equities. From a very top down perspective, the outlook we have is constructive stable growth, continued disinflation, rate cuts. These make for a good environment for risk assets. But uncertainties beyond year end, that really argues for investors to look for assets which have those triple Cs, cheap optionality, convexity, and carry.And we think Japanese and European equities and spread products within fixed income take those boxes.Seth Carpenter: Alright, looking at the clock, I'm going to have to cut you off there. I could talk to you all day. Thank you for coming in and letting me turn the tables relative to yesterday when you were asking me all the questions.Serena Tang: Great speaking with you, Seth. And yes, I know we can go on forever.Seth Carpenter: And thank you for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you get your podcasts. And share this episode with a friend or a colleague today.