Afleveringen
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Our Co-Heads of Securitized Products Research Jay Bacow and James Egan explain how mortgage rates, tariffs and stock market volatility are affecting the U.S. housing market.
Read more insights from Morgan Stanley.
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Jay Bacow: Welcome to Thoughts on the Market. I'm Jay Bacow, co-head of Securitized Products Research at Morgan Stanley.
James Egan: And I'm Jim Egan, the other co-head of Securitized Products Research at Morgan Stanley. And today we're here to talk about all of the headlines that we've been seeing and how they impact the U.S. housing market.
It's Thursday, April 24th at 9am in New York.
Jay Bacow: Jim, there are a lot of headlines right now. Mortgage rates have decreased about 60 basis points from the highs that we saw in January through the beginning of April. But since the tariff announcements, they've retraced about half of that move. Now, speaking of the tariffs, I would imagine that's going to increase the cost of building homes.
So, what does all of this mean for the U.S. housing market?
James Egan: On top of everything you just mentioned, the stock market is down over 15 per cent from recent peaks, so there is a lot going on these days. We think it all has implications for the U.S. housing market. Where do you want me to start?
Jay Bacow: I think it's hard to have a conversation these days without talking about tariffs, so let's start there.
James Egan: So, we worked on the impacts of tariffs on the U.S. housing market with our colleagues in economics research, and we did share some of the preliminary findings on another episode of this podcast a couple weeks ago. Since then, we have new estimates on tariffs, and that does raise our baseline expectation from about a 4 to 5 per cent increase in the cost of materials used to build a home to closer to 8 per cent right now.
Jay Bacow: Now I assume at least some of that 8 per cent is going to get pushed through into home prices, which presumably is then going to put more pressure on affordability. And given the – I don't know – couple hundred conversations that you and I have had over the past few years, I am pretty sure affordability's already under a lot of pressure.
James Egan: It is indeed. And this is also coming at a time when new home sales are playing their largest role in the U.S. housing market in decades. New home sales, as a percent of total, make up their largest share since 2006. New homes for sale – so now talking about the inventory piece of this – they’re making up their largest share of the homes that are listed for sale every month in the history of our data. And that's going back to the early 1980s.
Jay Bacow: And since presumably the cost of construction is much higher on a new home sale than an existing home sale, that's going to have an even bigger impact now than it has when we look to the history where new home sales were making up a much smaller portion of housing activity.
James Egan: Right, and we're already seeing this impact come through on the home builder side of this, specifically weighing on home builder sentiment and single unit building volumes. Through the first quarter of this year, single unit housing starts are down 6 per cent versus the first quarter of 2024.
Jay Bacow: All right. And we're experiencing a housing shortage already; but if building volumes are going to come down, then presumably that puts upward pressure on home prices. Now, Jim, you mentioned home builder sentiment. But there's got to be home buyer sentiment right now. And that can't feel very good given the sell off in equity markets and what that does with home buyer's ability to afford to put down money for down payment. So how does that all affect the housing market?
James Egan: Now that's a question that we've been getting a lot over the past couple weeks. And to answer it, we took a look at all of the times that the stock market has fallen by at least 20 per cent over the past few decades.
Jay Bacow: I assume when you looked at that, the answers weren't very good.
James Egan: You know, it depends on the question. We identified 10 instances of at least a 20 per cent drawdown in equity markets over the past few decades. For eight of them, we have sufficient home price data. Outside of the Global Financial Crisis (GFC), which you could argue was a housing led global recession, every other instance saw home prices actually climb during the equity market correction.
Jay Bacow: So, people were buying homes during a drawdown in the equity market?
James Egan: No home prices were climbing. But in every instance, and here we can go back a little bit further, sales declined during the drawdown. Now, once stock markets officially bottomed, sales climbed sharply in the following 12 months. But while stock prices were falling, so were sales.
And Jay, at the top of this podcast, you mentioned mortgage rate volatility. That matters a lot here…
Jay Bacow: Can you elaborate on why I said something so thoughtful?
James Egan: Well, it's because you're a very thoughtful person. But why mortgage rate volatility matters here? While sales volumes fall in all instances, the magnitude of that decrease falls into two distinct camps. There are four of these roughly 10 instances, where the decrease in sales volumes is large; it exceeds 10 per cent. And again, one of those was that GFC – housing led global recession. But the other three all had mortgage rates increased by at least 200 basis points alongside the equity market selloff.
Jay Bacow: So not only were people feeling less wealthy, but homes were getting more expensive. That just seems like a double whammy.
James Egan: Bingo. And there were more instances where rates did actually decrease amid the equity market selloff. And while that didn't stop sales from falling, it did contain the decrease. In each of these instances, sales were virtually flat to down low single digits. So, call it a 3 or 4 per cent drop.
Jay Bacow: All right, so that's a really good history lesson. What's going to happen now? We've been talking about the housing market being at almost trough turnover rates already for some time.
James Egan: Right, so when we think about the view forward, and you talk about trough turnover rates, I've said some version of this statement on this podcast a few times…
Jay Bacow [crosstalk]: You’re saying it again…
James Egan: … but there’s some level of housing activity that has to occur regardless of where rates and affordability are. And coming into this year, we really thought we were at those levels. I'm not saying we don't still think that we're there, but if mortgage rates were to stay elevated like they are today as we're recording this podcast, amid this broader equity market volatility, we do think that could introduce a little bit more downside to sales volumes.
Jay Bacow: All right, but if we've got this equity drawdown, then I feel like we've been getting other questions from homeowners’ ability to pay for these mortgages – and delinquencies in the pipeline. Do you have anything to highlight there?
James Egan: Yes, so I think one of the things we've also highlighted with respect to the unique situation that we're in in the US housing market is – just how low effective mortgage rates are on the outstanding universe versus the prevailing rate today.
We've talked about the implications of the lock-in effect. But if we take a closer look on just how much bifurcation that's led to in terms of household mortgage payments as a share of income, depending on when you bought your house. If you bought your house back in 2016, your income, if we at least look at median income growth, is up in the interim.
You probably refinanced in 2020 when mortgage rates came down. That monthly payment as a share of today's income, today's median household income, roughly 8.5 per cent. If you bought up the median priced home at prevailing rates in 2024, you're talking about a payment to income north of 26 per cent. When we look at performance from a mortgage perspective, we are seeing real delineations by vintage of mortgage origination – with mortgages before 2021, behaving a lot better than mortgages after 2021. So the 2022 to [20]24 vintages.
I would highlight that losses and foreclosures, those remain incredibly contained. We expect them to stay that way. But when we think about all of this on a go forward basis, we do think that mortgage rate volatility is going to be important for sales volumes next year. But everything we talked about should lead to continued support for home prices. They're growing at 4 per cent year-over-year now. By the end of the year, maybe 2 to 3 per cent growth. So, a little bit of deceleration, but still climbing home prices.
Jay Bacow: Interesting. So normally we talk about the housing market. It's location, location, location. But it sounds like the timing of when you bought is also going to impact things as well. Jim, always a pleasure talking to you.
James Egan: Pleasure talking to you too, Jay. And to our listeners, thanks for listening. 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.
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Morgan Stanley’s Head of European Consumer Staples, Sarah Simon, discusses why aging populations, wellness trends and Gen Z’s moderation are putting pressure on the long-term outlook for alcoholic beverages.
Read more insights from Morgan Stanley.
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Welcome to Thoughts on the Market. I’m Sarah Simon, Head of the European Consumer Staples team. Today’s topic: Is America sobering up? Recent trends point to a national decline in alcohol use.
It's Wednesday, April 23rd, at 2pm in London.
Picture this: It's Friday night, and you're at a bar with friends. The drinks menu offers many options. A cold beer or glass of wine, sure. But how about a Phony Negroni. And your friends nod approvingly.
This isn't just a passing trend – we believe it's a structural shift that's set to reshape the beverage industry.
Overall alcohol consumption in volume terms has been relatively flat over the last decade in the U.S. - with spirits growing mid single digits in value terms and beer growing low single digits. But both categories are currently declining. The big debate is whether it’s cyclical or structural. We acknowledge that the consumer is under pressure right now, but we equally see long term structural pressures that are starting to play out. There are three key factors behind this trend: increased moderation by younger drinkers, an ageing population, and then broader health and wellness trends.
So let’s talk first about Gen Z – those born between 1997 and 2012. They're drinking notably less than previous generations of the same age. In fact, today’s 18-34 year-olds drink 30 per cent less than the same age group 20 years ago. And we think it’s pretty unlikely they will catch up as they get older. This isn't a temporary blip caused by the after-effects of COVID-19 lockdowns or economic pressures. It's a long-term trend that predates both of these factors. And importantly this isn’t the case of abstinence – as in the case of tobacco – but moderation. Younger generations are simply drinking less alcohol and allocating more of their beverage spending towards soft drinks.
Secondly, developed market populations are ageing. If we look at population data, we see it’s today’s 45-55 year old age group that drinks the most alcohol; and has exhibited the highest growth in consumption and spending over the last 20 years. However, over the next 20 years, this cohort is likely to cut back on drinking due to physiological reasons as they age. The body simply becomes less able to metabolize alcohol, and there’s much higher usage of prescription medication in the over 65 age group.
And in just the same way that this cohort was growing faster than the population overall over the last 20 years – because of the higher birth rate in the late 60s and 70s – in future, the aging of these GenX-ers will drive outsized growth in the number of people aged over 75, who consume much less alcohol. And so, the result is a disproportionate impact on overall alcohol consumption. And on top of this, there’s increased adoption of GLP-1 weight loss drugs that we’ve talked about previously. And increasingly negative perceptions of the health implications of alcohol – as the broader health and wellness trend takes hold.
On the flip side, there's also a growing acceptance of non-alcoholic beverages, driven by better products and broader distribution. We expect low- and zero-alcohol alternatives to gain a larger share of the market as a result. And we think beer looks particularly well-positioned; it already accounts for about 85 per cent of the non-alcoholic market overall. And this year in the U.S., non-alcoholic beer has nearly doubled its share of U.S. beer retail sales, compared to where it was in 2021. Now it’s still small, but the growth rate in the well over 20 per cent range, suggests that share gain will continue.
Meanwhile, we’re seeing more mocktails on menus and zero-alcohol beer on draft in pubs. All of this is further contributing to less stigma associated with not drinking alcohol. And all these trends add up to one conclusion, we think: earnings pressures on alcohol makers are not simply cyclical but structural. They have been underway even prior to COVID. And looking to the future, we think they’re here to stay.
So now, many more people can say cheers to that.
Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us wherever you listen to podcasts. And tell your friends about us too.
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Zijn er afleveringen die ontbreken?
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Our Chief Cross-Asset Strategist Serena Tang discusses the market’s shifting perception of risk and what’s behind some unusual patterns in fund flows among asset classes.
Read more insights from Morgan Stanley.
No investment recommendation is made with respect to any of the ETFs or mutual funds referenced herein. Investors should not rely on the information included in making investment decisions with respect to those funds.
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Welcome to Thoughts on the Market. I’m Serena Tang, Morgan Stanley’s Chief Cross-Asset Strategist. Today I want to look at how investors are playing defense amid elevated macro uncertainty.
It’s Tuesday, April 22, at 10am in New York.
So, the last three weeks have brought intense volatility to global markets, and investors have had to reexamine their relationship with risk. Typically, in times like these, mutual fund and ETF flows from stocks into bonds serve as a clear gauge of investor defensiveness. But this pattern hasn’t really been informative this time around.
Instead, flows to gold – rather than bonds – have been the clearest evidence of flight-to-quality most recently. Between April 3rd and 11th almost US$5 billion went into gold ETFs globally, one of the strongest seven-day net flow stretches ever. There's been US$22 billion of net inflows to gold ETFs with assets under management totaling about US$250 billion year-to-date. Of the 10 days of the highest net inflows to gold ETFs over the last 20 years, three occurred in the last month.
Cash also benefited from the dash to defensives, with over US$100bn flowing into money market funds year-to-date. And we expect that reallocating to cash will be a theme for the rest of the year for many reasons. For one, our U.S. economists expect no Fed cuts in 2025 and back-loaded cuts in 2026 following a projected surge in core PCE inflation from tariffs. This means that money market fund yields should stay higher for longer. And with investors seeing the wild gyrations in safe government bonds in recent weeks, money market funds’ low volatility offer a strong risk/reward argument over holding Treasuries. For another, let's say our economists' base case is incorrect, and we do get steep cuts from the Fed sooner rather than later. That probably means we're on the brink of a recession; and in that situation, cash is king.
You know what's been particularly surprising in the middle of this recent flight to quality? Outflows from high-grade US fixed income. These outflows are notable because U.S. Treasuries, Agency mortgages, and investment grade credit are usually seen as low-beta and defensives. But U.S. high-grade bonds saw net outflows of approximately US$1.4bn during the week of April 7th. These are the largest outflows since the pandemic; and we think that this trend can continue.
So we need to ask ourselves if this is the end of American exceptionalism. And are we seeing a rotation from U.S. assets into rest-of-the-world?
The answer may surprise you, but despite the outflows in U.S. bonds, there hasn’t really been a persistent rotation out of U.S. risk assets and into rest-of-world markets. At least not a lot of evidence in the data yet. U.S. equity investors still have a strong home bias, and we've seen continued net buying from Japanese and euro area investors of foreign equities – at least some of which are U.S. equities.
We think investors should stay defensive amid the current uncertainty. But figuring out what's actually defensive has been challenging. This recent turmoil in the global markets suggests that the investors’ shifting idea of what's risky is a risk in itself.
Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.
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Can the U.S. equity market break out of its expected range? Our CIO and Chief U.S. Equity Strategist Mike Wilson looks at whether the Trump administration’s shifting tariff policy and Fed uncertainty will continue weighing down stocks.
Read more insights from Morgan Stanley.
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Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist. Today, I will discuss what it will take for the US equity market to break out of the 5000-5500 range.
It's Monday, April 21st at 11:30am in New York.
So, let’s get after it.
Last week, we focused on our view that the S&P 500 was likely to remain in a 5000-5500 range in the near term given the constraints on both the upside and the downside. First, on the upside, we think it will be challenging for the index to break through prior support of 5500 given the recent acceleration lower in earnings revisions, uncertainty on how tariff negotiations will progress and the notion that the Fed appears to be on hold until it has more clarity on the inflationary and growth impacts of tariffs and other factors. At the same time, we also believe the equity market has been contemplating all of these challenges for much longer than the consensus acknowledges. Nowhere is this evidence clearer than in the ratio of Cyclical versus Defensive stocks as discussed on this podcast many times. In fact, the ratio peaked a year ago and is now down more than 40 per cent.
Coming into the year, we had a more skeptical view on growth than the consensus for the first half due to expectations that appeared too rosy in the context of policy sequencing that was likely to be mostly growth negative to start. Things like immigration enforcement, DOGE, and tariffs. Based on our industry analysts' forecasts, we were also expecting AI Capex growth to decelerate, particularly in the first half of the year when growth rate comparisons are most challenging. Recall the Deep Seek announcement in January that further heightened investor concerns on this factor. And given the importance of AI Capex to the overall growth expectations of the economy, this dynamic remains a major consideration for investors.
A key point of today’s episode is that just as many were overly optimistic on growth coming into the year, they may be getting too pessimistic now, especially at the stock level. As the breakdown in cyclical stocks indicate, this correction is well advanced both in price and time, having started nearly a year ago. Now, with the S&P 500 closing last week very close to the middle of our range, the index appears to be struggling with the uncertainty of how this will all play out.
Equities trade in the future as they try to discount what will be happening in six months, not today. Predicting the future path is very difficult in any environment and that is arguably more difficult today than usual, which explains the high volatility in equity prices. The good news is that stocks have discounted quite a bit of slowing at this point. It’s worth remembering the factors that many were optimistic about four-to-give months ago—things like de-regulation, lower interest rates, AI productivity and a more efficient government—are still on the table as potential future positive catalysts. And markets have a way of discounting them before it's obvious.
However, there is also a greater risk of a recession now, which is a different kind of slowdown that has not been fully priced at the index level, in our view. So as long as that risk remains elevated, we need to remain balanced with our short-term views even if we believe the odds of a positive outcome for growth and equities are more likely than consensus does over the intermediate term. Hence, we will continue to range trade.
Further clouding the picture is the fact that companies face more uncertainty than they have since the early days of the pandemic. As a result, earnings revisions breadth is now at levels rarely witnessed and approaching downside extremes assuming we avoid a recession. Keep in mind that these revisions peaked almost a year ago, well before the S&P 500 topped, further supporting our view that this correction is much more advanced than acknowledged by the consensus. This is why we are now more interested in looking at stocks and sectors that may have already discounted a mild recession even if the broader index has not.
Bottom line, if a recession is averted, markets likely made their lows two weeks ago. If not, the S&P 500 will likely take those lows out. There are other factors that could take us below 4800 in a bear case outcome, too. For example, the Fed decides to raise rates due to tariff-driven inflation; or the term premium blows out, taking 10-year Treasury yields above 5 per cent without any growth improvement.
Nevertheless, we think recession probability is the wildcard now that markets are wrestling with. In S&P terms, we think 5000-5500 is the appropriate range until this risk is either confirmed or refuted by the hard data – with labor being the most important. In the meantime, stay up the quality curve with your equity portfolio.
Thanks for listening. If you enjoy the podcast, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.
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Our analysts Michael Zezas and Erik Woodring discuss the ways tariffs are rewiring the tech hardware industry and how companies can mitigate the impact of the new U.S. trade policy.
Read more insights from Morgan Stanley.
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Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Global Head of Fixed Income and Public Policy Research.
Erik Woodring: And I'm Erik Woodring, Head of the U.S. IT Hardware team.
Michael Zezas: Today, we continue our tariff coverage with a closer look at the impact on tech hardware. Products such as your smartphone, computers, and other personal devices.
It's Thursday, April 17th at 10am in New York.
President Trump's reciprocal tariffs announcements, followed by a 90 day pause and exemptions have created a lot of turmoil in the tech hardware space. People started panic buying smartphones, worried about rising costs, only to find out that smartphones may or may not be exempted.
As I pointed out on this podcast before, these tariffs are also significantly accelerating the transition to a multipolar world. This process was already well underway before President Trump's second term, but it's gathering steam as trade pressures escalate. Which is why I wanted to talk to you, Erik, given your expertise.
In the multipolar world, IT hardware has followed a China+1 strategy. What is the strategy, and does it help mitigate the impact from tariffs?
Erik Woodring: Historically, most IT hardware products have been manufactured in China. Starting in 2018, during the first Trump administration, there was an effort by my universe to diversify production outside of China to countries friendly with China – including Vietnam, Indonesia, Malaysia, India, and Thailand. This has ultimately helped to protect from some tariffs, but this does not make really any of these countries immune from tariffs given what was announced on April 2nd.
Michael Zezas: And what do the current tariffs – recognizing, of course, that they could change – what do those current tariffs mean for device costs and the underlying stocks that you cover?
Erik Woodring: In short, device costs are going up, and as it relates to my stocks, there's plenty of uncertainty. If I maybe dig one level deeper, when the first round of tariffs were announced on April 2nd, the cumulative cost that my companies were facing from tariffs was over $50 billion. The weighted average tariff rate was about 25 per cent. Today, after some incremental announcements and some exemptions, the ultimate cumulative tariff cost that my universe faces is about $7 billion. That is equivalent to an average tariff rate of about 7 per cent. And what that means is that device costs on average will go up about 5 per cent.
Of course, there are some that won't be raised at all. There are some device costs that might go up by 20 to 30 per cent. But ultimately, we do expect prices to go up and as a result, that creates a lot of uncertainties with IT hardware stocks.
Michael Zezas: Okay, so let's make this real for our listeners. Suppose they're buying a new device, a smartphone, or maybe a new laptop. How would these new tariffs affect the consumer price?
Erik Woodring: Sure. Let's use the example of a smartphone. $1000 smartphone typically will be imported for a cost of maybe $500. In this current tariff regime, that would mean cost would go up about $50. So, $1000 smartphone would be $1,050.
You could use the same equivalent for a laptop; and then on the enterprise side, you could use the equivalent of a server, an AI server, or storage – much more expensive. Meaning while the percentage increase in the cost will be the same, the ultimate dollar expense will go up significantly more.
Michael Zezas: And so, what are some of the mitigation strategies that companies might be able to use to lessen the impact of tariffs?
Erik Woodring: If we start in the short term, there's two primary mitigation strategies. One is pulling forward inventory and imports ahead of the tariff deadline to ultimately mitigate those tariff costs. The second one would be to share in the cost of these tariffs with your suppliers. For IT hardware, there's hundreds of suppliers and ultimately billions of dollars of incremental tariff costs can be somewhat shared amongst these hundreds of companies.
Longer term, there are a few other mitigation strategies. First moving your production out of China or out of even some of these China+1 countries to more favorable tariff locations, perhaps such as Mexico. Many products which come from Mexico in my universe are exempted because of the USMCA compliance. So that is a kind of a medium-term strategy that my companies can use.
Ultimately, the medium-term strategy that's going to be most popular is raising prices, as we talked about. But some of my companies will also leverage affordability tools to make the cost ultimately borne out over a longer period of time. Meaning today, if you buy a smartphone over two-year of an installment plan, they could extend this installment plan to three years. That means that your monthly cost will go down by 33 per cent, even if the price of your smartphone is rising.
And then longer term, ultimately, the mitigation tool will be whether you decide to go and follow the process of onshoring. Or if you decide to continue to follow China+1 or nearshoring, but to a greater extent.
Michael Zezas: Right. So, then what about onshoring – that is moving production capacity to the U.S.? Is this a realistic scenario for IT hardware companies?
Erik Woodring: In reality, no. There is some small volume production of IT hardware projects that is done in the United States. But the majority of the IT hardware ecosystem outside of the United States has been done for a specific reason. And that is for decades, my companies have leveraged skilled workers, skilled in tooling expertise. And that has developed over time, that is extremely important. Tech CEOs have said that the reason hardware production has been concentrated in China is not about the cost of labor in the country, but instead about the number of skilled workers and the proximity of those skilled workers in one location.
There's also the benefit of having a number of companies that can aggregate tens of thousands, if not hundreds of thousands of workers, in a specific factory space. That just makes it much more difficult to do in the United States. So, the headwinds to onshoring would be just the cost of building facilities in the United States. It would be finding the skilled labor. It would be finding resources available for building these facilities. It would also be the decision whether to use skilled labor or humanoids or robots.
Longer term, I think the decision most of my companies will have to face is the cost and time of moving your supply chain, which will take longer than three years versus, you know, the current presidential term, which will last another, call it three and a half years.
Michael Zezas: Okay. And so how does all of this impact demand for tech hardware, and what's your outlook for the industry in the second half of this year?
Erik Woodring: There's two impacts that we're seeing right now. In some cases, more mission critical products are being pulled forward, meaning companies or consumers are going and buying their latest and greatest device because they're concerned about a future pricing increase.
The other impact is going to be generally lower demand. What we're most concerned about is that a pull forward in the second quarter ultimately leads to weaker demand in the second half – because generally speaking, uncertainty, whether that's policy or macro more broadly, leads to more concerns with hardware spending and ultimately a lower level of spending. So any 2Q pull forward could mean an even weaker second half of the year.
Michael Zezas: Alright, Erik, thanks for taking the time to talk.
Erik Woodring: Great. Thanks for speaking, Mike.
Michael Zezas: And thanks for listening. If you enjoy the podcast, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.
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The ever-evolving nature of the U.S. administration’s trade policy has triggered market uncertainty, impacting corporate and consumer confidence. But our Head of Corporate Credit Research Andrew Sheets explains why he believes this volatility could present a silver lining for credit investors.
Read more insights from Morgan Stanley.
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Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley. Today I’m going to talk about how high uncertainty can be a risk for credit, and also an opportunity.
It's Wednesday, April 16th at 9am in New York.
Markets year-to-date have been dominated by questions of U.S. trade policy. At the center of this debate is a puzzle: What, exactly, the goal of this policy is?
Currently, there are two competing theories of what the U.S. administration is trying to achieve. In one, aggressive tariffs are a negotiating tactic, an aggressive opening move designed to be bargained down into something much, much lower for an ultimate deal.
And in the other interpretation, aggressive tariffs are a new industrial policy. Large tariffs, for a long period of time, are necessary to encourage manufacturers to relocate operations to the U.S. over the long term.
Both of these theories are plausible. Both have been discussed by senior U.S. administration officials. But they are also mutually exclusive. They can’t both prevail.
The uncertainty of which of these camps wins out is not new. Market strength back in early February could be linked to optimism that tariffs would be more of that first negotiating tool. Weakness in March and April was linked to signs that they would be more permanent. And the more recent bounce, including an almost 10 percent one-day rally last week, were linked to hopes that the pendulum was once again swinging back.
This back and forth is uncertain. But in some sense, it gives investors a rubric: signs of more aggressive tariffs would be more challenging to the market, signs of more flexibility more positive. But is it that simple? Do signs of a more lasting tariff pause solve the story?
The important question, we think, is whether all of that back and forth has done lasting damage to corporate and consumer confidence. Even if all of the tariffs were paused, would companies and consumers believe it? Would they be willing to invest and spend over the coming quarters at similar levels to before – given all of the recent volatility?
This question is more than hypothetical. Across a wide range of surveys, the so-called soft data, U.S. corporate and consumer confidence has plunged. Merger activity has slowed sharply. We expect intense investor focus on these measures of confidence over the coming months.
For credit, lower confidence is a doubled edged sword. To some extent, it is good, keeping companies more conservative and better able to service their debt. But if it weakens the overall economy – and historically, weaker confidence surveys like we’ve seen recently have indicated much weaker growth in the future; that’s a risk. With overall spread levels about average, we do not see valuations as clearly attractive enough to be outright positive, yet.
But maybe there is one silver lining. Long term Investment grade corporate debt now yields over 6 percent. As corporate confidence has soured, and these yields have risen, we think companies will find it unattractive to lock in high costs for long-term borrowing. Fewer bonds for sale, and attractive all-in yields for investors could help this part of the market outperform, in our view.
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.
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As gold prices reach new all-time highs, Metals & Mining Commodity Strategist Amy Gower discusses whether the rally is sustainable.
Read more insights from Morgan Stanley.
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Welcome to Thoughts on the Market. I’m Amy Gower, Morgan Stanley’s Metals & Mining Commodity Strategist. Today I’m going to talk about the steady rise we’ve had in gold prices in recent months and whether or not this rally can continue.
It’s Tuesday, April 15th, at 2pm in London.
So gold breached $3000/oz for the first time ever on 17th of March this year, and has continued to rise since then; but we would argue it still has room to run.
First of all, let’s look back at how we got here. So, gold already rallied 25 percent in 2024, which was driven largely by strong central bank demand as well as the start of the US Fed rate cutting cycle, and strong demand for bars and coins as geopolitical risk remained elevated.
And arguably, these trends have continued in 2025, with gold up another 22 percent, and now rising tariff uncertainty also contributing. This comes in two ways – first, demand for gold as a safe haven asset against this current macro uncertainty. And second as an inflation hedge. Gold has historically been viewed by investors as a hedge against the impact of inflation. So, with the U.S. tariffs raising inflation risks, gold is seeing additional demand here too.
But, of course, the question is: can this gold rally keep going? We think the answer is yes, but would caveat that in big market moves -- like the ones we have seen in recent weeks -- gold can also initially fall alongside other asset classes, as it is often used to provide liquidity. But this is often short-lived and already gold has been rebounding. We would expect this to continue with the price of gold to rise further to around $3500/oz by the third quarter of this year.
There are three key drivers behind this projection:
First, we see still strong physical demand for gold, both from central banks and from the return of exchange-traded funds or ETFs. Central banks saw what looks like a structural shift in their gold purchases in 2022, which has continued now for three consecutive years. And ETF inflows are returning after four years of outflows, adding a significant amount year-to-date, but still well below their 2020 highs, suggesting there’s arguably much more room to go here.
Second, macro drivers are also contributing to this gold price outlook. A falling U.S. dollar is usually a tailwind for commodities in general, as it makes them cheaper for non-dollar holders; while a stagflation scenario, where growth expectations are skewed down and inflation risks are skewed up, would also be a set-up where gold would perform well.
And third, continued demand for gold as a safe-haven asset amid rising inflation and growth risks is also likely to keep that bar and coin segment well supported.
And what would be the bullish risks to this gold outlook? Well, as prices rise, you tend to start ask questions about demand destruction. And this is no different for gold, particularly in the jewelry segment where consumers would go with usually a budget in mind, rather than a quantity of gold. And so demand can be quite price sensitive. Annual jewelry demand is roughly twice the size of that central bank buying and we already saw this fall around 11 percent year-on-year in 2024. So, we would expect a bit of weakness here. But offset by the other factors that I mentioned.
So, all in all, a combination of physical buying, macro factors and uncertainty should be driving safe haven demand for gold, keeping prices on a rising trajectory from here.
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Our CIO and Chief U.S. Equity Strategist Mike Wilson probes whether market confidence can return soon as long as tariff policy remains in a state of flux.
Read more insights from Morgan Stanley.
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Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist. Today on the podcast I’ll be discussing last week’s volatility and what to expect going forward.
It's Monday, April 14th at 11:30am in New York.
So, let’s get after it.
What a month for equity markets, and it's only halfway done! Entering April, we were much more focused on growth risks than inflation risks given the headwinds from AI Capex growth deceleration, fiscal slowing, DOGE and immigration enforcement. Tariffs were the final headwind to face, and while most investors' confidence was low about how Liberation Day would play out, positioning skewed more toward potential relief than disappointment.
That combination proved to be problematic when the details of the reciprocal tariffs were announced on April 2nd. From that afternoon's highs, S&P 500 futures plunged by 16.5 per cent into Monday morning. Remarkably, no circuit breakers were triggered, and markets functioned very well during this extreme stress. However, we did observe some forced selling as Treasuries, gold and defensive stocks were all down last Monday.
In my view, Monday was a classic capitulation day on heavy volume. In fact, I would go as far as to say that Monday will likely prove to be the momentum low for this correction that began back in December for most stocks; and as far back as a year ago for many cyclicals. This also means that we likely retest or break last week's price lows for the major indices even if some individual stocks have bottomed. We suspect a more durable low will come as early as next month or over the summer as earnings are adjusted lower, and multiples remain volatile with a downward bias given the Fed's apprehension to cut rates – or provide additional liquidity unless credit or funding markets become unstable.
As discussed last week, markets are now contemplating a much higher risk of recession than normal – with tariffs acting as another blow to an economy that was already weakening from the numerous headwinds; not to mention the fact that most of the private economy has been struggling for the better part of two years. In my view, there have been three factors supporting headline GDP growth and labor markets: government spending, consumer services and AI Capex – and all three are now slowing.
The tricky thing here is that the tariff impact is a moving target. The question is whether the damage to confidence can recover. As already noted, markets moved ahead of the fundamentals; and markets have once again done a better job than the consensus in predicting the slowdown that is now appearing in the data.
While everyone can see the deterioration in the S&P 500 and other popular indices, the internals of the equity market have been even clearer. First, small caps versus large caps have been in a distinct downtrend for the past four years. This is the quality trade in a nutshell which has worked so well for reasons we have been citing for years — things like the k-economy and crowding out by government spending that has kept the headline economic statistics higher than they would have been otherwise. This strength has encouraged the Fed to maintain interest rates higher than the weaker cohorts of the economy need to recover.
Therefore, until interest rates come down, this bifurcated economy and equity markets are likely to persist. This also explains why we had a brief, yet powerful rally last fall in low quality cyclicals when the Fed was cutting rates, and why it quickly failed when the Fed paused in December. The dramatic correction in cyclical stocks and small caps is well advanced not only in price, but also in time. While many have only recently become concerned about the growth slowdown, the market began pricing it a year ago.
Looking at the drawdown of stocks more broadly also paints a picture that suggests the market correction is well advanced, but probably not complete if we end up in a recession or the fear of one gets more fully priced. This remains the key question for stock investors, in my view, and why the S&P 500 is likely to remain in a range of 5000-5500 and volatile – until we have a more definitive answer to this specific question around recession, or the Fed decides to circumvent the growth risks more aggressively, like last fall.
With the Fed saying it is constrained by inflation risks, it appears likely to err on the side of remaining on hold despite elevated recession risk. It's a similar performance story at the sector and industry level, with many cohorts experiencing a drawdown equal to 2022. Bottom line, we've experienced a lot of price damage, but it's too early to conclude that the durable lows are in – with policy uncertainty persisting, earnings revisions in a downtrend, the Fed on hold and back-end rates elevated. While it’s too late to sell many individual stocks at this point, focus on adding risk over the next month or two as markets likely re-test last week’s lows.
Thanks for listening. If you enjoy the podcast, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.
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Our Head of Corporate Credit Research analyzes the market response to President Trump’s tariff reversal and explains why rallies do not always indicate an improvement in the overall environment.
Read more insights from Morgan Stanley.
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Welcome to Thoughts on the Market. I'm Andrew Sheets, head of Corporate Credit Research at Morgan Stanley. Today I’m going to talk about the historic gains we saw this week in markets, and what they may or may not tell us.
It's Friday April 11th at 2pm in London.
Wednesday saw the S&P 500 gain 9.5 percent. It was the 10th best day for the U.S. equity market in the last century. Which raises a reasonable question: Is that a good thing? Do large one-day gains suggest further strength ahead – or something else?
This is the type of Research question we love digging into. Pulling together the data, it’s pretty straightforward to sort through those other banner days in stock market history going back to 1925. And what they show is notable.
I’m now going to read to you when those large gains occurred, in order of the gains themselves.
The best day in market history, March 15th 1933, when stocks soared over 16 per cent? It happened during the Great Depression. The 2nd best day, Oct 30th 1929. During the Great Depression. The 3rd best day – Great Depression. The fourth best – the first trading day after Germany invaded Poland in 1939 and World War 2 began. The 5th best day – Great Depression. The 6th Best – October 2008, during the Financial Crisis. The 7th Best – also during the Financial Crisis. The 8th best. The Great Depression again. The 9th best – The Great Depression. And 10th best? Well, that was Wednesday.
We are in interesting company, to say the least. Incidentally, we stop here in the interest of brevity; this is a podcast known for being sharp and to the point. But if we kept moving further down the list, the next best 20 days in history all happen during either COVID, the 1987 Crash, a Recession, or a Depression.
So why would that be? Why, factually, have some of the best days in market history occurred during some of the very worst of possible backdrops.
In some cases, it really was a sign of a buying opportunity. As terrible as the Great Depression was – and as the grandson of a South Dakota farmer I heard the tales – stocks were very cheap at this time, and there were some very large rallies in 1932, 1933, or even 1929. During COVID, the gains on March 24th of 2020, which were associated with major stimulus, represented the major market low.
But it can also be the case that during difficult environments, investors are cautious. And they are ultimately right to be cautious. But because of that fear, any good news – any spark of hope – can cause an outsized reaction. But it also sometimes doesn't change that overall challenging picture. And then reverses. Those two large rallies that happened in October of 2008 during the Global Financial Crisis, well they both happened around hopes of government and central bank support. And that temporarily lifted the market – but it didn’t shift the overall picture.
What does this mean for investors? On average, markets are roughly unchanged in the three months following some of these largest historical gains. But the range of what happens next is very wide. It is a sign, we think, that these are not normal times, and that the range of outcomes, unfortunately, has become larger.
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.
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Our analysts Vishy Tirupattur and Martin Tobias explain how the announcement of new tariffs and the subsequent pause in their implementation affected the bond market.
Read more insights from Morgan Stanley.
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Vishy Tirupattur: Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's, Chief Fixed Income Strategist.
Martin Tobias: And I'm Martin Tobias, from the U.S. Interest Rate Strategy Team.
Vishy Tirupattur: Yesterday the U.S. stock market shot up quite dramatically after President Trump paused most tariffs for 90 days. But before that, there were some stresses in the funding markets. So today we will dig into what those stresses were, and what transpired, and what investors can expect going forward.
It's Thursday, April 10th at 11:30am in New York.
President Trump's Liberation Day tariff announcements led to a steep sell off in the global stock markets. Marty, before we dig into that, can you give us some Funding Markets 101? We hear a lot about terms like SOFR, effective fed funds rate, the spread between the two. What are these things and why should we care about this?
Martin Tobias: For starters, SOFR is the secured overnight financing rate, and the effective fed funds rate – EFFR – are both at the heart of funding markets.
Let's start with what our listeners are most likely familiar with – the effective fed funds rate. It's the main policy rate of the Federal Reserve. It's calculated as a volume weighted median of overnight unsecured loans in the Fed funds market. But volume in the Fed funds market has only averaged [$]95 billion per day over the past year.
SOFR is the most important reference rate for market participants. It's a broad measure of the cost to borrow cash overnight, collateralized by Treasury securities. It's calculated as a volume weighted median that covers three segments of the repo market. Now SOFR volumes have averaged 2.2 trillion per day over the past year.
Vishy Tirupattur: So, what you're telling me, Marty, is that the, the difference between these two rates really reflects how much liquidity stress is there, or the expectations of the uncertainty of funding uncertainty that exists in the market. Is that fair?
Martin Tobias: That's correct. And to do this, investors look at futures contracts on fed funds and SOFR.
Now fed funds futures reflect market expectations for the Fed's policy rate, SOFR futures reflect market expectations for the Fed policy rate, and market expectations for funding conditions. So, the difference or basis between the two contracts, isolates market expectations for funding conditions.
Vishy Tirupattur: So, this basis that you just described. What is the normal sense of this? Where [or] how many basis points is the typical basis? Is it positive? Is it negative?
Martin Tobias: In a normal environment over the past three years when reserves were in Abundancy, the three-month SOFR Fed funds Futures basis was positive 2 basis points. This reflected SOFR to set 2 basis points below fed funds on average over the next three months.
Vishy Tirupattur: So, what happened earlier this week is – SOFR was setting above effective hedge advance rate, implying…
Martin Tobias: Implying tighter funding conditions.
Vishy Tirupattur: So, Marty, what actually changed yesterday? How bad did it get and why did it get so bad?
Martin Tobias: So, three months SOR Fed funds tightened all the way to -4 basis points. And we think this was a reflection of investors’ increased demand for cash; whether it was lending more securities outright in repo to raise cash, or selling securities outright, or even not lending excess cash in repo. This caused dealer balance sheets [to] become more congested and contributed to higher SOFR rates.
Vishy Tirupattur: So, let's give some context to our listeners. So, this is clearly not the first time we've experienced stress in the funding markets. So, in previous episodes – how far did it get and gimme some context.
Martin Tobias: Funding conditions did indeed tighten this week, but the environment was far from true funding stress like in 2019 and certain periods in 2020. Now, in 2019 when funding markets seized, and the Fed had to intervene and inject liquidity, three months SOFR fed funds basis averaged -9 basis points. And that compares to -4 basis points during the peak macro uncertainty this week.
Vishy Tirupattur: So, Marty, what is your assessment of the state of the funding markets right now?
Martin Tobias: Right. Funding conditions have tightened, but I think the environment is far from true funding stress. Thus far, the repricing has occurred because of a higher floor for funding rates and not a scarcity of reserves in the banking system.
Vishy Tirupattur: So, to summarize, so the funding stress has been quite a bit earlier this week. Not as bad as the worst conditions we saw say in 2019 or during the peak COVID periods in 2020. but still pretty bad. And relative to how bad it got, today we are slightly better than what we were two days ago. Is that a fair description?
Martin Tobias: Yes. That's good. Now, Vishy, what is your view on why the longer end of the bond market sold off.
Vishy Tirupattur: So longer end bond markets, as you know, Marty, while safe from a credit risk perspective, do have interest rate sensitivity. So, the longer the bonds, the greater the interest rate sensitivity. So, in periods of uncertainty, such as the ones we are in now, investors prefer to be in ultra short-term funds or cash – to minimize that interest rate sensitivity of their portfolios. So, what we saw happening in some sense, we can call it dash for cash.
I think we both agree that this demand for safety will persist, and we will continue to see inflows into money market funds, which you covered in your research. So, your insights Marty will be very helpful to clients as we navigate these choppy waters going forward.
Thanks a lot, Marty, for joining this webcast today.
Martin Tobias: Great speaking with you, Vishy,
Vishy Tirupattur: And thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.
Disclaimer
Vishy Tirupattur: Yesterday all my troubles were so far away. I believe in yesterday.
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Earlier today, President Trump announced a pause on reciprocal tariffs for 90 days. Our Global Head of Fixed Income Research and Public Policy Strategy Michael Zezas looks at the fallout.
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Welcome to Thoughts on the Market. I’m Michael Zezas, Morgan Stanley’s Global Head of Fixed Income Research and Public Policy Strategy.
Today – possible outcomes of President Trump's sudden pause on reciprocal tariffs.
It’s Wednesday, April 9th, at 10pm in New York.
We’d actually planned a different episode for release today where my colleague Global Chief Economist Seth Carpenter and I laid out developments in the market thus far and looked at different sets of potential outcomes. Needless to say, all of that changed after President Trump announced a 90-day pause on most tariffs that were set to rise. And so, we needed to update our thinking.
It's been a truly unprecedented week for financial markets. The volatility started on April 2, with President Trump’s announcement that new, reciprocal tariffs would take effect on April 9. When added to already announced tariffs, and later adding even more tariffs in for China, it all added up to a promise by the US to raise its average tariffs to levels not seen in 100 years.
Understandably, equity markets sold off in a volatile fashion, reflecting investor concerns that the US was committed to retrenching from global trade – inviting recession and an economic future with less potential growth. The bond market also showed signs of considerable strain. Instead of yields falling to reflect growth concerns, they started rising and market liquidity weakened. The exact rationale is still hard to pin down, but needless to say the combined equity and bond market behavior was not a healthy situation.
Then, a reprieve. President Trump announced he would delay the implementation of most new tariffs by 90 days to allow negotiations to progress. And though he would keep China tariffs at levels over 100 per cent, the announcement was enough to boost equity markets, with S&P gaining around 9 per cent on the day.
So, what does it all mean? We’re still sorting it out for ourselves, but here’s some initial takeaways and questions we think will be important to answer in the coming days.
First, there's still plenty of lingering uncertainties to deal with, and so investors can’t put US policy risk behind them. Will this 90 day reprieve hold? Or just delay inevitable tariff escalation? And even if the reprieve holds, do markets still need to price in slower economic growth and higher recession risk? After all, US tariff levels are still considerably higher than they were a week ago. And the experience of this market selloff and rapid shifts in economic policy may have impacted consumer and business confidence. In my travels this week I spent considerable time with corporate leaders who were struggling to figure out how to make strategic decisions amidst this uncertainty. So we’ll need to watch measures of confidence carefully in the coming weeks.
One signal amidst the noise is about China, specifically that the US’ desire to improve supply chain security and reduce goods trade deficit would make for difficult negotiation with China and, ultimately, higher tariffs that would stay on for longer relative to other countries. That appears to be playing out here, albeit faster and more severely than we anticipated. So even if tariff relief is durable for the rest of the world, the trade relationship with China should be strained. And that will continue to weigh on markets, where costs to rewire supply chains around this situation could weigh on key sectors like tech hardware and consumer goods.
Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.
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Our CIO and Chief U.S. Equity Strategist explains why the new tariffs added momentum to a correction that was already underway, and what could ease the fallout in equity markets.
Read more insights from Morgan Stanley.
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Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist. Today on the podcast I’ll be discussing equity market reactions to the tariffs and what to expect from here.
It's Tuesday, April 8th at 11:30am in New York.
So, let's get after it.
From our perspective, last week's Liberation Day was more like the cherry on top for a market that had been dealing with multiple headwinds to growth all year, rather than the beginning. While the magnitude of the tariffs turned out to be worse than our public policy team's base line expectations, the price reaction appears capitulatory to us given that many stocks were already down 30 to 40 percent before the announcement on Wednesday. As discussed in last week’s podcast, our 5500 first half support level on the S&P 500 quickly gave way given this worse than expected outcome for tariffs. The price action since then has forced us to consider new technical support levels which could be as low as the 200-week moving average. And that would be 4700 on the S&P 500.
I think it’s worth highlighting that cyclical stocks started underperforming in April of last year and are now down more than 40 percent relative to defensive stocks. In other words, markets have been telling us for almost a year that growth was going to slow, and since January, it's been telling us it's going to slow significantly. In fact, cyclicals have underperformed defensives to a degree only seen during a recession, not prior to them. This fits very nicely with our long-standing view that most of the private economy has been much weaker than the headline numbers suggest – thanks to unprecedented fiscal spending, AI capex and wealthy consumers spending their gains from asset prices.
With the exceptional fourth quarter surge in U.S. fiscal spending likely to decline even without DOGE's efforts, global growth impulses will suffer too. Hence, foreign stocks are unlikely to provide much of a safe haven if the U.S. goes on a diet or detox from fiscal spending. Markets began to contemplate such an outcome with last week’s announcements. Therefore, I remain of the view we discussed two weeks ago that U.S. equities should trade better than foreign ones going forward. That is especially the case with China, Europe and Japan all which run big current account surpluses and are more vulnerable to weaker trade.
Meanwhile, the headline numbers on employment and GDP have been flattered by government related jobs and the hiring of immigrants at below market wages. This is one reason the Fed has kept rates higher than many businesses and consumers need and why we remain in an economy of haves and have-nots. Our long standing thesis is that the government has been crowding out much of the economy since COVID, and arguably since the Great Financial Crisis. It's also why large cap quality has been such a consistent outperformer since the end of 2021 and why we have continued to have high conviction and our recommendation are overweight these factors despite short periods of outperformance by low quality cyclicals or small caps – like last fall when the Fed was cutting rates and we pivoted briefly to a more pro-cyclical recommendation.
Bottom line, equity markets are discounting machines and they trade six months in advance of the headlines. With most stocks topping in December of last year and cyclicals’ relative performance peaking almost a year ago, this correction is well advanced, and this is not the time to be selling. However, it's fair to say that the tariff announcements last week have taken us to an area with greater tail risk that includes a recession or financial contagion that must be taken into consideration when thinking about levels and adding risk.
I see three specific scenarios that could put in a durable floor more quickly:
1. President Trump delays the effective date for the implementation of the additional tariffs beyond the initial 10 percent that went into effect this weekend
2. The Fed offers support for markets, either explicitly or verbally
3. A number of nations come to the table and negotiate on favorable terms to the United States.
In short, get ready for another bumpy week and remember markets are looking much further ahead than today’s headline. I remain optimistic that the second half will be better than the first as these growth negative policies morph into growth positive ones via de-regulation, a better fiscal trajectory, lower interest rates and taxes and maybe even higher wages for the American consumer.
Thanks for listening. If you enjoy the podcast, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.
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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.
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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.
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As markets continue reacting to the Trump administration’s tariffs, Michael Zezas, our Global Head of Fixed Income Research and Public Policy Strategy, lists the expected impacts for investors across equity sectors and asset classes.
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Welcome to Thoughts on the Market. I’m Michael Zezas, Morgan Stanley’s Global Head of Fixed Income Research and Public Policy Strategy. Today we’ll be talking about the market impacts of the recently announced tariff increases.
It’s Friday, April 4th, at 1pm in New York.
This week, as planned, President Trump unveiled tariff increases. These reciprocal tariffs were hiked with the stated goal of reducing the U.S.’s goods trade deficit with other countries. We’ve long anticipated that higher tariffs on a broad range of imports would be a fixture of U.S. policy in a second Trump term. And that whatever you thought of the goals tariffs were driving towards, their enactment would come at an economic cost along the way. That cost is what helped drive our team’s preference for fixed income over more economically-sensitive equities.
But this week’s announcement underscored that we actually underestimated the speed and severity of implementation. Following this week’s reciprocal tariff announcement, tariffs on imports from China are approaching 60 per cent, a level we didn’t anticipate would be reached until 2026. And while we expected a number of product-specific tariffs would be levied, we did not anticipate the broad-based import tariffs announced this week. All totaled, the U.S. effective tariff rate is now around 22 per cent, having started the year at 3 per cent.
So what’s next? Our colleagues across Morgan Stanley Research have detailed their expected impacts across equity sectors and asset classes and here are some key takeaways to keep in mind.
First, we do think there’s a possibility that negotiation will lower some of these tariffs, particularly for traditional U.S. allies like Japan and Europe, giving some relief to markets and the economic outlook.
However, successful negotiation may not arrive quickly, as it's not yet clear what the U.S. would deem sufficient concessions from its trading partners. Lower tariff levels and higher asset purchases might be part of the mix, but we’re still in discovery mode on this. And even if tariff reductions succeed, it's still likely that tariff levels would be meaningfully higher than previously anticipated.
So for investors, we think that means there’s more room to go for markets to price in a weaker U.S. growth outlook. In U.S. equities, for example, our strategists argue that first-order impacts of higher tariffs may be mostly priced at this point, but second-order effects – such as knock-on effects of further hits to consumer and corporate confidence – could push the S&P 500 below the 5000 level.
In credit markets, weakness has been, and may continue to be, more acute in key sectors where tariff costs are substantial; and may not be able to pass on to price, such as the consumer retail sector. These are companies whose costs are driven by overseas imports.
So what happens from here? Are there positive catalysts to watch for?
It's going to depend on market valuations. If we get to a point where a recession is more clearly in the price, then U.S. policy catalysts might help the stock market. That could include negotiations that result in smaller tariff increases than those just announced or a fiscal policy response, such as bigger than anticipated tax cuts.
Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.
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Our Thematics and Public Policy analysts Michelle Weaver and Ariana Salvatore discuss the top five strategies for companies to mitigate the effects of U.S. tariffs.
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Our analysts Paul Walsh, Mike Wilson and Marina Zavolock debate the relative merits of U.S. and European stocks in this very dynamic market moment.
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Our analysts Arunima Sinha, Heather Berger and James Egan discuss the resilience of U.S. consumer spending, credit use and homeownership in light of the Trump administration’s policies.
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Policy questions and growth risks are likely to persist in the aftermath of the Trump administration’s upcoming tariffs. Our CIO and Chief U.S. Equity Strategist Mike Wilson outlines how to seek investments that might mitigate the fallout.
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Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist. Today on the podcast – our views on tariffs and the implications for equity markets.
It's Monday, March 31st at 11:30am in New York.
So let’s get after it.
Over the past few weeks, tariffs have moved front and center for equity investors. While the reciprocal tariff announcement expected on April 2nd should offer some incremental clarity on tariff rates and countries or products in scope, we view it as a maximalist starting point ahead of bilateral negotiations as opposed to a clearing event. This means policy uncertainty and growth risks are likely to persist for at least several more months, even if it marks a short-term low for sentiment and stock prices.
In the baseline for April 2nd, our policy strategists see the administration focusing on a continued ramp higher in the tariff rate on China – while product-specific tariffs on Europe, Mexico and Canada could see some de-escalation based on the USMCA signed during Trump’s first term. Additional tariffs on multiple Asia economies and products are also possible. Timing is another consideration. The administration has said it plans to announce some tariffs for implementation on April 2nd, while others are to be implemented later, signaling a path for negotiations. However, this is a low conviction view given the amount of latitude the President has on this issue.
We don't think this baseline scenario prevents upside progress at the index level – as an "off ramp" for Mexico and Canada would help to counter some of the risk from moderately higher China tariffs. Furthermore, product level tariffs on the EU and certain Asia economies, like Vietnam, are likely to be more impactful on a sector basis.
Having said that, the S&P 500 upside is likely capped at 5800-5900 in the near term – even if we get a less onerous than expected announcement. Such an outcome would likely bring no immediate additional increase in the tariff rate on China; more modest or targeted tariffs on EU products than our base case; an extended USMCA exemption for Mexico and Canada; and very narrow tariffs on other Asia economies.
No matter what the outcome is on Wednesday, we think new highs for the S&P 500 are out of the question in the first half of the year; unless there is a clear reacceleration in earnings revisions breadth, something we believe is very unlikely until the third or fourth quarter.
Conversely, to get a sustained break of the low end of our first half range, we would need to see a more severe April 2nd tariff outcome than our base case and a meaningful deterioration in the hard economic data, especially labor markets. This is perhaps the outcome the market was starting to price on Friday and this morning.
Looking at the stock level, companies that can mitigate the risk of tariffs are likely to outperform. Key strategies here include the ability to raise price, currency hedging, redirecting products to markets without tariffs, inventory stockpiling and diversifying supply chains geographically. All these strategies involve trade-offs or costs, but those companies that can do it effectively should see better performance. In short, it’s typically companies with scale and strong negotiating power with its suppliers and customers. This all leads us back to large cap quality as the key factor to focus on when picking stocks.
At the sector level, Capital Goods is well positioned given its stronger pricing power; while consumer discretionary goods appears to be in the weakest position.
Bottom line, stay up the quality and size curve with a bias toward companies with good mitigation strategies. And see our research for more details.
Thanks for listening. If you enjoy the podcast, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.
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As credit resilience weakens with a worsening fundamental backdrop, our Head of Corporate Credit Research Andrew Sheets suggests investors reconsider their portfolio quality.
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Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley. Today I’m going to talk about why we think near term improvement may be temporary, and thus an opportunity to improve credit quality.
It's Friday March 28th at 2pm in London.
In volatile markets, it is always hard to parse how much is emotion, and how much is real change. As you would have heard earlier this week from my colleague Mike Wilson, Morgan Stanley’s Chief U.S. Equity Strategist, we see a window for short-term relief in U.S. stock markets, as a number of indicators suggest that markets may have been oversold.
But for credit, we think this relief will be temporary. Fundamentals around the medium-term story are on the wrong track, with both growth and inflation moving in the wrong direction. Credit investors should use this respite to improve portfolio quality.
Taking a step back, our original thinking entering 2025 was that the future presented a much wider range of economic scenarios, not a great outcome for credit per se, and some real slowing of U.S. growth into 2026, again not a particularly attractive outcome.
Yet we also thought it would take time for these risks to arrive. For the economy, it entered 2025 with some pretty decent momentum. We thought it would take time for any changes in policy to both materialize and change the real economic trajectory.
Meanwhile, credit had several tailwinds, including attractive yields, strong demand and stable balance sheet metrics. And so we initially thought that credit would remain quite resilient, even if other asset classes showed more volatility.
But our conviction in that resilience from credit is weakening as the fundamental backdrop is getting worse. Changes to U.S. policy have been more aggressive, and happened more quickly than we previously expected. And partly as a result, Morgan Stanley's forecasts for growth, inflation and policy rates are all moving in the wrong direction – with forecasts showing now weaker growth, higher inflation and fewer rate cuts from the Federal Reserve than we thought at the start of this year. And it’s not just us. The Federal Reserve's latest Summary of Economic Projections, recently released, show a similar expectation for lower growth and higher inflation relative to the Fed’s prior forecast path.
In short, Morgan Stanley’s economic forecasts point to rising odds of a scenario we think is challenging: weaker growth, and yet a central bank that may be hesitant to cut rates to support the economy, given persistent inflation.
The rising risks of a scenario of weaker growth, higher inflation and less help from central bank policy temper our enthusiasm to buy the so-called dip – and add exposure given some modest recent weakness. Our U.S. credit strategy team, led by Vishwas Patkar, thinks that U.S. investment grade spreads are only 'fair', given these changing conditions, while spreads for U.S. high yield and U.S. loans should actually now be modestly wider through year-end – given the rising risks.
In short, credit investors should try to keep powder dry, resist the urge to buy the dip, and look to improve portfolio quality.
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.
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Our global economists Seth Carpenter and Rajeev Sibal discuss how global trade will need to realign in response to escalating U.S. tariff policy.
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