Thoughts on the Market

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Short, thoughtful and regular takes on recent events in the markets from a variety of perspectives and voices within Morgan Stanley.

16 HR AGO

China’s Biotech Revolution

Our China Healthcare Analyst Jack Lin discusses how China’s biotech surge is reshaping healthcare, investment and innovation worldwide. Read more insights from Morgan Stanley. ----- Transcript ----- Jack Lin: Welcome to Thoughts on the Market. I'm Jack Lin, from Morgan Stanley's China Healthcare Team. Today, the boom in China biotech – and how it's not just a headline for China-focused investors, but a story that touches all of us. It is Friday, October 3rd at 2pm in Hong Kong. Many people might not realize this but some of the next generation healthcare innovation is being developed far from Silicon Valley and Wall Street. The medicines you rely on, treatment plans that could shape your family's future, even investment opportunity that can grow your savings. They are all increasingly influenced by China's rapidly evolving biotech sector, which is transitioning from traditional generics manufacturing into the global innovation ecosystem. In fact, China's biotech industry is set to become a major player in the global innovation ecosystem. By 2040, we project China's originated assets could represent about a third of U.S. FDA approvals – up dramatically from just 5 percent today. And the question isn't if China's biotech will matter, but how global patients could benefit; and how consumers and investors worldwide might engage with its impact. What's driving this transformation? Three key components are driving the globalization of China originated drug innovations: cost, accessibility, and innovation quality. Lower cost in China's biotech sector enables more efficient development. Clinical trial quality is improving with regulatory pathways becoming more streamlined, promoting accessibility of China innovation for global markets. Finally, innovation in China's biotech sector is gaining momentum with more regionally developed medicines now eyeing market approval from leading overseas agencies like the U.S. FDA and EMA. This is all to say China is on track to become a key force on the global biotech stage. That said, right now we're also at a crossroads moment as geopolitical tensions between U.S. and China pose potential risks to the flow of innovation. Despite these uncertainties, we see a likely outcome of co-opetition, a blend of competition and collaboration, as global pharma grapples with the dual imperatives of innovation and resilience. Of course, this rapid evolution brings both opportunities and challenges. It's prompting stakeholders around the world to rethink their strategies and collaborations in this shifting landscape of global medical innovation. As the China biotech industry evolves, the choices made by investors, policy makers, and healthcare communities, both within China and globally, will determine the therapies of the future. It is truly a dynamic space, and we'll continue to bring you updates. Thanks for listening to our thoughts on the market. If you enjoy the show, please leave us a review, wherever you listen and share Thoughts on the Market with a friend or colleagues today.

3 min
1 DAY AGO

Opportunities From China’s Policy Shifts

Our Chief China Equity Strategist Laura Wang discusses how China’s new approach to economic development is transforming domestic industries and reshaping the global investment landscape. Read more insights from Morgan Stanley. ----- Transcript ----- Welcome to Thoughts on the Market. I’m Laura Wang, Morgan Stanley’s Chief China Equity Strategist. Today – a consequential shift in China's economic policy is set to reshape domestic markets and send ripples across the global economy. It’s Thursday, October 2nd at 2pm in Hong Kong. If you’re an investor, it’s important to understand China’s new approach to economic development. The government's policies to drive a recovery from an economic slump are changing the rules of competition, profitability and growth. This affects Chinese companies, and in turn global supply chains and investment flows. Let’s start with the term involution – what is it? In China, involution describes a cycle of excessive competition—think companies fighting for market share by slashing prices, ramping up production, and eroding profits, often to the point where nobody wins. The government’s anti-involution campaign is a direct response to this problem. What factors prompted the launch of this anti-involution initiative? Since 2021, China has faced mounting deflationary pressures—falling prices, a housing market slump, and a surge in manufacturing investment that led to overcapacity. The September 2024 policy pivot began to address these issues, and in mid-2025 the government launched a more targeted anti-involution campaign. This phase focuses on reducing excessive competition and restoring pricing power through market-based consolidation. As we assess the potential effectiveness of China’s anti-involution policy, our base case projects China’s return on equity (ROE) to reach 13.3 percent by 2030, up from a cycle low of 10 percent in May 2024 and 11.6 percent by July 2025. In a bullish scenario, decisive reforms and demand-side stimulus could push ROE as high as 16.3 percent. We also expect earnings growth to accelerate, with our base case showing an annual growth rate (CAGR) of 7.6 percent in 2025, rising to 11.1 percent by 2027. We forecast valuations to normalize towards 12–13x forward price-to-earnings, in line with emerging market peers, but this could re-rate higher if reforms succeed. In terms of investment opportunities, we believe the EV Batteries industry will benefit the most from the Chinese government’s anti-involution efforts. It’s got strong policy support, cutting-edge technology, and a market that’s consolidating fast—meaning the days of low-quality and excess capacity are fading. We’re seeing a shift toward long-term, sustainable growth. Steel and Cement are industries where the state has a strong hand and capacity controls are well established. These factors help stabilize the market and open the door for steady gains. Finally, Airlines. While the industry has faced persistent losses, there isn’t a[n] oversupply of seats, and regulatory coordination is strong. With the right reforms, Airlines could be poised for a significant turnaround. The sectors best positioned to benefit from China’s anti-involution strategy are more domestically oriented. But this policy is bound to have global implications. And the ripples will likely extend to global supply chains, especially in Materials, Chemicals and Autos. Looking ahead, the pace and success of anti-involution will depend on further structural reforms, demand-side support, and the ability to digest industrial credit risks gradually. The upcoming 15th Five-Year Plan could bring more clarity on tax, social welfare, and local government incentives. So, what should investors be paying attention to? China’s anti-involution campaign is more than a policy tweak—it’s a recalibration of how the country balances growth, innovation, and sustainability. The key is to track sector-level reforms, watch for signs of consolidation, and focus on companies with strong fundamentals and policy tailwinds. 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.

5 min
2 DAYS AGO

Will U.S. Inflation Slow in 2026?

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 noti

13 min
3 DAYS AGO

Tackling Economic Hurdles in Europe and Asia

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 Hong Seth 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'

13 min
4 DAYS AGO

Will the Fed End the Party?

Despite large deficits, booming capital expenditures and a looser regulatory environment, the Fed appears poised to cut rates further to support the slowing labor market. This could set the stage for a level of corporate risk-taking not seen since the 1990s. Read more insights from Morgan Stanley. ----- Transcript ----- Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley. Today, a look at the forces that could heat up corporate activity in 2026 – if the labor market can hold up. It's Monday, September 29th at 2pm in London. Bill Martin, a former chairman of the Federal Reserve in the 50’s and 60’s, famously joked that “it was the Fed's job to take away the punch bowl just when the party is getting good.” That quote seems relevant because a host of trends are pointing to a pretty lively scene over the next 12 months. First, the U.S. government is spending significantly more than it's taking in. This deficit running at about 6.5 percent of the size of the whole economy is providing stimulus. It's only been larger during the great financial crisis, COVID and World War II. It's punch. Next to the corporate sector. As you've heard us discuss on this podcast, we here at Morgan Stanley think that AI related spending could amount to one of the largest waves of investment ever recorded – dwarfing the shale boom of the 2010s and the telecommunication spending of the late 1990s. Importantly, we think this spending is ramping up right now. Morgan Stanley estimates that investments by large tech companies will increase by 70 percent this year, and between 2024 and 2027, we think this spending is going to go up by two and a half times. Note that this doesn't even account for the enormous amount of power and electricity infrastructure that's going to be need to be built to support all this. Hence more economic punch. Finally, there's a deregulatory push. My bank research colleagues believe that lower capital requirements for U.S. banks could boost their balance sheet capacity by an additional $1 trillion in risk weighted terms. And a more supportive regulatory environment for mergers should help activity there continue to grow. Again, more punch. Heavy government spending, heavy corporate spending, more bank lending and risk taking capacity. And what's next from the Federal Reserve? Well, they're not exactly taking the punch away. We think that the Fed is set to cut rates five more times to a midpoint of two and 7/8ths. The Fed's supportive efforts are based on a real fear that labor markets are already starting to slow, despite the other supportive factors mentioned previously. And a broad weakening of the economy would absolutely warrant such support from the Fed. But if growth doesn't slow – large deficits, booming capital expenditure, a looser regulatory environment, and now Fed rate cuts – would all support even more corporate risk taking possibly in a way that we haven't seen since the 1990s. For credit, that boom would be preferable to a sharp slowing of the economy, but it comes with its own risks. Expect talk of this scenario next year to grow if economic data does hold up. Thanks as always for listening. If you find Thoughts on the Market useful, let us know by leaving a review wherever you listen, and also tell a friend or colleague about us today.

4 min
26 SEPT

Investors Monitor Washington’s Ticking Budget Clock

Our Global Head of Thematic and Fixed Income Research Michael Zezas and our U.S. Public Policy Strategist Ariana Salvatore unpack the market and economic implications of a looming government shutdown. 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. Ariana Salvatore: And I'm Ariana Salvatore, U.S. Public Policy Strategist. Michael Zezas: Today, our focus is once again on Washington – as the U.S. government fiscal year draws to a close and a potential government shutdown hangs in the balance. It's Friday, September 26th at noon in New York. Ariana we're just four days away from the end of the month. By October 1st, Congress needs to have a funding agreement in place, or we risk a potential shutdown. To that point, Democrats and Republicans seem far apart on the deal to avoid a shutdown. What's the state of play? Ariana Salvatore: Right now, Republicans are pushing for what's called a clean continuing resolution. That's a bill that would keep funding levels flat while putting more time on the clock for negotiators to hammer out full fiscal year appropriations. And the CR they're proposing lasts until November 21st. Democrats, conversely, are seeking to tie government funding to legislative compromise in other areas, including the enhanced Obamacare or ACA subsidies, and potential spending cuts to Medicaid from the One Big Beautiful Bill Act, which Republicans signed earlier this year. Remember, even though Republicans hold a majority in both chambers, this has to be a bipartisan agreement because of exactly how thin those margins of control are. But Mike, it seems as we get closer, investors are asking more infrequently whether or not a shutdown is happening – and are more interested in how long it could potentially last. What are we thinking there? Michael Zezas: So, it's hard to know. Shutdowns typically last a few days, but sometimes there are short as a few hours, sometimes as long as a few weeks. Historically, shutdowns tend to end when the economic risk, and therefore the attached political risk gets real. So, consider the 35-day shutdown under President Trump in this first term. The compromise that ended it came quickly after there was an air traffic stoppage at New York's LaGuardia Airport – when 10 air traffic controllers who weren't being paid failed to show up for work. So, we think the more relevant question for investors is what it all means for economic activity. Our economists have historically argued that a government shutdown takes something like 0.1 percent off of GDP every single week it's happening. However, once employees go back to work, a lot of times that effect fades pretty quickly. Now it's important to understand that this time around there could be a wrinkle. The Trump administration is talking about laying employees off on a durable basis during the shutdown. And that's something that maybe would have more of a lasting economic impact. It's hard to know how credible that potential is. There would almost certainly be court challenges, but it's something we have to keep our eye on that could create a more meaningful economic consequence. Ariana Salvatore: That's right. And there are also some really important indirect macroeconomic effects here. Like delayed data releases. Much of the federal workforce, to your point, will not be working through a shutdown – which could impede the collection and the release of some key data points that matter for markets like labor and inflation data, which come from BLS, the Bureau of Labor Statistics. So, assuming we're in this scenario with a longer-term shutdown. Obviously, we're going to see an increase in uncertainty, especially as investors are looking toward each data print for guidance on what the Fed's next move might be. What do we expect the market reaction to all of this to be? Michael Zezas: Well, the obvious risk here is that markets might have to price in some weaker growth potential. So, you could see treasury yields fall. You could see equity markets wobble; be a bit more volatile. It could be that those effects are temporary, though. And that volatility could easily be amplified by having to price risk in the market without the data you were talking about, Ariana. So, investors could overreact to anecdotal signals about the economy or underweight some real risks that they're not seeing. So, that's why even a short shutdown can have outsized market effects. Well, Ariana, thanks for taking the time to talk. Ariana Salvatore: Great speaking with you, Mike. Michael Zezas: And to our audience, thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you get this podcast and tell your friends about it. We want everyone to listen.

5 min
25 SEPT

When Will the U.S. Housing Market Reactivate?

Our Co-Head of Securitized Products Research James Egan joins our Chief Economic Strategist Ellen Zentner to discuss the recent challenges facing the U.S. housing market, and the path forward for home buyers and investors. Read more insights from Morgan Stanley. ----- Transcript ----- James Egan: Welcome to Thoughts on the Market. I'm James Egan, U.S. Housing Strategist and Co-Head of Securitized Products Research for Morgan Stanley. Ellen Zentner: And I'm Ellen Zentner, Chief Economic Strategist and Global Head of Thematic and Macro Investing at Morgan Stanley Wealth Management. James Egan: And today we dive into a topic that touches nearly every American household, quite literally. The future of the U.S. housing market. It's Thursday, September 25th at 10am in New York. So, Ellen, this conversation couldn't be timelier. Last week, the Fed cut interest rates by 25 basis points, and our chief U.S. Economist, Mike Gapen expects three more consecutive 25 basis point cuts through January of next year. And that's going to be followed by two more 25 basis point cuts in April and July. But mortgage rates, they're not tied to fed funds. So even if we do get 6.25 bps cuts by the end of 2026, that in and of itself we don't think is going to be sufficient to bring down mortgage rates, though other factors could get us there. Taking all that into account, the U.S. housing market appears to be a little stuck. The big question on investors' minds is – what's next for housing and what does that mean for the broader economy? Ellen Zentner: Well, I don't like the word stuck. There's no churn in the housing market. We want to see things moving and shaking. We want to see sellers out there. We want to see buyers out there. And we've got a lot of buyers – or would be buyers, right? But not a lot of sellers. And, you know, the economy does well when things are moving and shaking because there's a lot of home related spending that goes on when we're selling and buying homes. And so that helps boost consumer spending. Housing is also a really interest rate sensitive sector, so you know, I like to say as goes housing, so goes the business cycle. And so, you don't want to think that housing is sort of on the downhill slide or heading toward a downturn [be]cause it would mean that the entire economy is headed toward a downturn. So, we want to see housing improve here. We want to see it thaw out. I don't like, again, the word stuck, you know. I want to see some more churn. James Egan: As do we, and one of the reasons that I wanted to talk to you today is that you are observing all of these pressures on the U.S. housing market from your perspective in wealth management. And that means your job is to advise retail clients who sometimes can have a longer investment time horizon. So, Ellen, when you look at the next decade, how do you estimate the need for new housing units in the United States and what happens if we fall short of these estimated targets? Ellen Zentner: Yeah, so we always like to say demographics makes the world go round and especially it makes the housing market go round. And we know that if you just look at demographic drivers in the U.S. Of those young millennials and Gen Z that are aging into their first time home buying years – whether they're able to immediately or at some point purchase a home – they will want to buy homes. And if they can't afford the homes, then they will want to maybe rent those single-family homes. But either way, if you're just looking at the sheer need for housing in any way, shape, or form that it comes, we're going to need about 18 million units to meet all of that demand through 2030. And so, when I'm talking with our clients on the wealth management side, it's – Okay, short term here or over the next couple of years, there is a housing cycle. And affordability is creating pressures there. But if we look out beyond that, there are opportunities because of the demographic drivers – single family rentals, multi-family. We think modular housing can be something big here, as well. All of those solutions that can help everyone get into a home that wants to be. James Egan: Now, you hit on something there that I think is really important, kind of the implications of affordability challenges. One of the things that we've been seeing is it's been driving a shift toward rentership over ownership. How does that specific trend affect economic multipliers and long-term wealth creation? Ellen Zentner: In terms of whether you're going to buy a single-family home or you're going to rent a single-family home, it tends to be more square footage and there's more spending that goes on with it. But, of course, then relatively speaking, if you're buying that single family home versus renting, you're also going to probably spend a lot more time and care on that home while you're there, which means more money into the economy. In terms of wealth creation, we'd love to get the single-family home ownership rate as high as possible. It's the key way that households build intergenerational wealth. And the average American, or the average household has four times the wealth in their home than they do in the stock market. And so that's why it's very important that we've always created wealth that way through housing; and we want people to own, and they want to own. And that's good news. James Egan: These affordability challenges. Another thing that you've been highlighting is that they've led to an internal migration trend. People moving from high cost to lower cost metro areas. How is this playing out and what are the economic consequences of this migration? Ellen Zentner: Well, I think, first of all, I think to the wonderful work that Mark Schmidt does on the Munis team at MS and Co. It matters a great deal, ownership rates in various regions because it can tell you something about the health of the metropolitan area where they are. Buying those homes and paying those property taxes. It can create imbalances across the U.S. where you've got excess supply maybe in some areas, but very tight housing supply in others. And eventually to balance that out, you might even have some people that, say, post-COVID or during COVID moved to some parts of the country that have now become very expensive. And so, they leave those places and then go back to either try another locale or back to the locale they had moved from. So, understanding those flows within the U.S. can help communities understand the needs of their community, the costs associated with filling those needs, and also associated revenues that might be coming in. So, Jim, I mentioned a couple of times here about single family renting, and so from your perch, given that growing number of single-family rentals, how is that going to influence housing strategy and pricing? James Egan: It is certainly another piece of the puzzle when we look at like single family home ownership, multi-unit rentership, multi-unit home ownership, and then single family rentership. Over the past 15 years, this has been the fastest growing way in which kind of U.S. households exist. And when we take a step back looking at the housing market more holistically – something you hit on earlier – supply has been low, and that's played a key role in keeping prices high and affordability under pressure. On top of that, credit availability has been constrained. It's one of the pillars that we use when evaluating home prices and housing activity that we do think gets overlooked. And so even if you can find a home to buy in these tight inventory environments, it's pretty difficult to qualify for a mortgage. Those lending standards have been tight, that's pushed the home ownership rate down to 65 percent. Now, it was a little bit lower than this, after the Great Financial Crisis, but prior to that point, this is the lowest that home ownership rates have been since 1995. And so, we do think that single family rentership, it becomes another outlet and will continue to be an important pillar for the U.S. housing market on a go forward basis. So, the economic implications of that, that you highlighted earlier, we think that's going to continue to be something that we're living with – pun only half intended – in the U.S. housing market. Ellen Zentner: Only half intended. But let me take you back to something that you said at the beginning of the podcast. And you talked about Gapen’s expectation for rate cuts and that that's going to bring fed funds rate down. Those are interest rates, though that don't impact mortgage rates. So how do mortgage rates price? And then, how do you see those persistently higher mortgage rates continuing to weigh on affordability. Or, I guess, really, what we all want to know is – when are mortgage rates going to get to a point where housing does become affordable again? James Egan: In our prior podcast, my Co-Head of Securitized Products Research, Jay Bacow and myself talked about how cutting fed funds wasn't necessarily sufficient to bring down mortgage rates. But the other piece of this is going to be how much lower do mortgage rates need to go? And one of the things we highlighted there, a data point that we do think is important. Mortgage rates have come down recently, right? Like we're at our lowest point of the year, but the effective rate on the outstanding market is still below 4.25 percent. Mortgage rates are still above 6.25 percent, so the market's 200 basis points out of the money. One of the things that we've been trying to do, looking at changes to affordability historically. What we think you really need to see a sustainable growth in housing activity is about a 10 percent improvement in affordability. How do we get there? It's about a 5.5 percent mortgage rate as opposed to the 6 1/8th to 6.25 where we were when we walked into this recording studio t

15 min
24 SEPT

Capital Markets Pick Up as U.S. Policy Settles

Our Global Head of Fixed Income Research and Public Policy Strategy, Michael Zezas, examines growth in IPOs and M&A amid greater certainty around trade, immigration and regulation. Read more insights from Morgan Stanley. ----- Transcript ----- Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income Research and Public Policy Strategy. Today, let’s talk about how changes in U.S. policy are shaping the markets in 2025—and why we’re seeing a pickup in capital markets activity. It’s Wednesday, September 24th at 10:30am in New York. At the start of this year, one thing investors agreed on was that with President Trump back in office, U.S. policy would shift in big ways. But there was less agreement about what those changes would mean for the economy and markets. Our team built a framework to help investors track changes in trade, fiscal, immigration, and regulatory policy – focusing on the sequencing and severity of these choices. That lens remains useful. But now, 250 days into the administration, we think it’s more valuable to look at the impacts of those shifts, the durable policy signals, and how markets are pricing it all. Let’s start with policy uncertainty. It is still high, but it’s come down from the peaks we saw earlier this year. For example, the White House has made deals with key trading partners, which means tariff escalation is on pause for now. Of course, things could change if those partners don’t meet their commitments, but any fallout may take a while to show up. Even if courts challenge new tariffs, the administration has ways to bring them back. And with Congress divided, most big policy moves are coming from the executive branch, not lawmakers. With policy changes slowing down, it’s worth reflecting on a new durable consensus in Washington. For years, both parties mostly agreed on lowering trade barriers and keeping the government out of private business. But it seems that’s changed. Industrial policy—where the government takes a more active role in shaping industries—is now a key part of U.S. strategy. Tariffs that started under Trump stayed under Biden, and even current critics focus more on how tariffs are applied than whether they should exist at all. You see this shift in areas like healthcare, energy, and especially technology. Take semiconductors. The CHIPS act under Biden aimed to build a secure domestic supply chain while Trump's approach includes licensing fees on exports to China and considering more government stakes in companies. So, why is capital markets activity picking up then? There are several drivers. First, less uncertainty about policy means companies feel more confident making big decisions. Earlier this year, activity like IPOs and mergers was unusually low compared to the size of the economy. But corporate balance sheets are strong—companies have plenty of cash, and private investors are looking to put money to work. Add in new needs for investment driven by artificial intelligence and technology upgrades, and you get a recipe for more deals. Our corporate clients have told us that having a smaller range of possible policy outcomes helped them move forward with strategic plans. Now, we’re seeing the results: IPOs are up 68 percent year-on-year, and M&A is up 35 percent. Those numbers are coming off low levels, so the pace may slow, but we expect growth to continue for a while. This all syncs up with other trends in the market. For example, we continue to see steeper yield curves and a weaker dollar. Why? Well, trade policy is likely to stay restrictive. The fiscal policy trajectory appears locked in as the President and Congress have already made the fiscal choices that they prefer. And the Federal Reserve appears willing to tolerate more inflation risk in order to support growth. That means the dollar could keep falling and longer maturity bond yields could be sticky, even as shorter maturity yields decline to reflect the more dovish Fed. As always, it's important to watch how these trends interact with the broader economy, and that will be important to how we start deliberating on our outlook for 2026. We'll keep analyzing and share more with you as we go. Thanks for listening. If you enjoy Thoughts on the Market, please leave us a review and tell your friends about the podcast. We want everyone to listen.

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Welcome to Thoughts on the Market

A quick preview of what you'll hear on the Thoughts On The Market podcast, which features short, thoughtful and regular takes on recent events in the markets from a variety of perspectives and voices within Morgan Stanley.

20/12/2021

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1 min