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Searching for Signals in U.S. Policy Noise
Our Global Head of Fixed Income Research and Public Policy Strategy explains why conflicting news on tariffs and government spending may point to a case for bonds.----- Transcript -----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 discussing recent U.S. public policy headline noise and the signal within that for investors.It’s Friday, February 28th, at 12:30 pm in New York.For investors paying attention to events in Washington, D.C., the past few weeks have been disorienting. Tariff announcements have continued, but with shifting details on timing and magnitude. And Congress passed a bill to enable substantial spending cuts, but subsequent media reports made clear the votes to actually enact these cuts later this year may not be there. Our recent client conversations have revealed that investors’ confusion has reached new heights, and there’s little consensus, or conviction, about whether U.S. policy choices are set to help or hurt the economy and markets. Net-net, it's a lot of policy noise, and very little signal. That said, here’s what we think investors can anchor to. For all the headlines on potential new tariffs for China, Mexico, Canada and on products like copper, actual tariff actions have followed a graduated pace, in line with our base case of ‘fast announcement, slow implementation’ – where tariffs on China start and continue to climb, but tariffs on the rest of world move slowly and are more subject to negotiation. Tariffs on Mexico and Canada appear, in our view, likely to be pushed out once again given progress in negotiation on harmonizing trade policy and progress in reduced border crossings. On the other hand, tariffs on China, already raised an incremental 10 percent a few weeks back, seem likely to step up again as there are much bigger disagreements that the two nations don’t appear close to resolving. But even if tariffs move according to the pace that we expect, that doesn’t mean they come without cost. The U.S.’s goal is to bring more investment onshore, with an aim toward increasing goods production, thereby reducing trade deficits, securing important supply chains, and growing industrial jobs. The theory is that higher tariff barriers might incentivize more direct investment into the U.S., as companies build supply chains in the U.S. to avoid the higher tariff costs. But even if that theory plays out, there’s a cost to that transition. In a recent blue paper, my colleague Rajeev Sibal led a team through an analysis demonstrating that the next phase of supply chain realignment would be considerably costlier to companies, given the complexity of production that must be shifted. So either way, companies take on new costs – tariffs, CapEx, or both. That challenges corporate margins, and economic growth, at least for a time. And there’s plenty of execution risk along the way. So what’s an investor to do? Our cross asset and interest rate strategy teams think it's time to lean more heavily into bonds. Equity markets may do just fine here, with investors looking through these near term costs, but the risk of something going wrong with, for example, tariffs escalation or broader geopolitical conflict, may keep a ceiling on investors’ risk appetite. Conversely, a growth slowdown presents a clearer case for owning bonds, particularly since it wasn’t that long ago that better economic data helped the Treasury market price out most of the expected monetary policy cuts for 2025. 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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3:44
Shaky U.S. Consumer Confidence May Be a Leading Signal
Two recent surveys indicate that U.S. consumer confidence has shown a notable decline amid talks about inflation and potential tariff. Our Head of Corporate Credit Research Andrew Sheets discusses the market implications.----- Transcript -----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 consumer side of the confidence debate. It’s Thursday, February 27th at 2pm in London. Two weeks ago on this program I discussed signs that uncertainty in U.S. government policy might be hitting corporate confidence, as evidenced by an unusually slow start to the year for dealmaking. That development is a mixed bag. Less confidence and more conservatism in companies holds back investment and reduces the odds of the type of animal spirits that can drive large gains. But it can be a good thing for lenders, who generally prefer companies to be more cautious and more risk-averse. But this question of confidence is also relevant for consumers. And today, I want to discuss what some of the early surveys suggest and how it can impact our view.To start with something that may sound obvious but is nonetheless important, Confidence is an extremely powerful psychological force in the economy and financial markets. If you feel good enough about the future, you’ll buy a stock or a car with little regard to the price or how the economy might feel at the moment. And if you’re worried, you won’t buy those same things, even if your current conditions are still ok, or if the prices are even cheaper. Confidence, you could say, can trump almost everything else. And so this might help explain the market’s intense focus on two key surveys over the last week that suggested that US consumer confidence has been deteriorating sharply.First, a monthly survey by the University of Michigan showed a drop in consumer confidence and a rise in expected inflation. And then a few days later, on Tuesday, a similar survey from the Conference Board showed a similar pattern, with consumers significantly more worried about the future, even if they felt the current conditions hadn't much changed. While different factors could be at play, there is at least circumstantial evidence that the flurry of recent U.S. policy actions may be playing a role. This drop in confidence, for example, was new, and has only really showed up in the last month or two. And the University of Michigan survey actually asks its respondents how news of Government Economic policy is impacting their level of confidence. And that response, over the last month, showed a precipitous decline. These confidence surveys are often called ‘soft’ data, as opposed to the hard economic numbers like the actual sales of cars or heavy equipment. But the reason they matter, and the reason investors listened to them this week, is that they potentially do something that other data cannot. One of the biggest challenges that investors face when looking at economic data is that financial markets often anticipate, and move ahead of turns in the underlying hard economic numbers. And so if expectations are predictive of the future, they may provide that important, more leading signal. One weak set of consumer confidence isn’t enough to change the overall picture, but it certainly has our attention. Our U.S. economists generally agree with these respondents in expecting somewhat slower growth and stickier inflation over the next 18 months; and Morgan Stanley continues to forecast lower bond yields across the U.S. and Europe on the expectation that uncertainties around growth will persist. For credit investors, less confidence remains a double-edged sword, and credit markets have been somewhat more stable than other assets. But we would view further deterioration in confidence as a negative – given the implications for growth, even if it meant a somewhat easier policy path. 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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4:01
The Impact of Shifting Immigration Policy
Our Chief U.S. Economist Michael Gapen discusses the possible economic implications of restrictive immigration policies in the U.S., highlighting their potential effect on growth, inflation and labor markets.----- Transcript -----Welcome to Thoughts on the Market. I’m Michael Gapen, Morgan Stanley’s Chief U.S. Economist. Today I’ll talk about the way restrictive immigration policies could potentially slow U.S. economic growth, push up inflation, and impact labor markets.It’s Wednesday, February 26th, at 2pm in New York.Lately, investors have been focused on the twists and turns of Trump’s tariffs. Several of my colleagues have discussed the issue of tariffs from various angles on this show. But we think the new administration’s immigration policy deserves more attention. Immigration is more than just the entry of foreign citizens into the U.S. for residency. It's a complex process with significant implications for our economy. According to the Bureau of Labor Statistics, as of June 2024, 19 per cent of the US workforce was made up of immigrants – which is over 32 million people. This is a significant increase from 1994, when only about 10 per cent of the workforce was foreign-born. Immigrants tend to be employed in sectors like agriculture, construction and manufacturing, but also in face-to-face services sectors like retail, restaurants, hotels and healthcare. Immigration surged to about 3 million per year after the pandemic. In fact, immigration rates in 2022 to 2024 were more than twice the historical run rate. This surge helped the US economy to "soft land" following a period of high inflation. It boosted both the supply side and the demand side of the U.S. economy. Labor force growth outpaced employment, which helped to moderate wage and price pressures. However, Trump’s policymakers are changing the rules rapidly and reversing the immigration narrative. Already by the second half of 2024, border flows were slowing significantly based on the lagged effects of steps previously taken by the Biden administration. Under the new administration, news reports suggest immigration has slowed to near zero in recent weeks.In our 2025 year-ahead outlook, we noted that restrictive immigration policies were a key factor in our prediction for slower growth and firmer inflation. We estimate that immigration will slow from 2.7 million last year to about 1 million this year and 500,000 next year. The recent data suggests immigration may slow every more forcefully than we expect.If immigration slows broadly in line as we predict, the result will be that population growth in 2025 will be about 4/10ths of 1 per cent. That’s less than half of what the U.S. economy saw in 2024. The impact of slower immigration on labor force measures should be visible over time. For the moment though, there is enough noise in monthly payrolls and the unemployment rate to mask some of the labor force effects. But over three or six months, the impact of slower immigration should become clearer.In terms of economic growth, if immigration falls back to 1 million this year and 500,000 next year, this could reduce the rate of GDP growth by about a-half a percentage point this year and maybe even more next year, and put upward pressure on inflation, particularly in services, and to some extent overall wages. Slower immigration could pull short-run potential GDP growth down from the 2.5-3.0 per cent that we saw in recent years to 2 per cent this year, and 1-1.5 per cent next year. On the other hand, the unemployment rate might fall modestly as immigration controls reduce the number of households with high participation rates and low spending capacity. This could lead to tighter labor markets, moderately faster wage growth, and upward pressure on inflation. So we think we are looking at a two-speed labor market. Slower employment growth will feel soft and sluggish. But a low unemployment rate suggests the labour market itself is still tight. Given all of this, we think more restrictive immigration policies could lead to tighter monetary policy and keep the Fed on its currently restrictive stance for longer. All of this supports our expectation of just one cut this year and further rate cuts only next year after growth slows.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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4:45
Cruises Set Sail for Private Islands
A shift to private destinations for cruise lines could affect both operators and guests by 2030. Our Europe Leisure & Travel analyst Jamie Rollo explains.----- Transcript -----Welcome to Thoughts on the Market. I’m Jamie Rollo, Morgan Stanley’s Europe Leisure & Travel Analyst. And today I’ll talk about an intriguing trend – the cruise lines’ accelerating expansion into private islands. It’s Tuesday, February the 25th, at 2 PM in London.Now the lure of a private island cruise is simple. You get almost exclusive access to a tropical retreat. You can lounge or snorkel on a pristine beach, you can enjoy a meal in a private cabana, you can even book a massage or a yoga class. The only other people around are fellow passengers on your vacation. So this isn't just the stuff of popular TV shows. It’s potentially the future of cruising. Cruise lines have actually been offering private islands for more than a decade. So it’s hardly a new phenomenon. In fact, in 2019, we estimate the majority of Caribbean cruise passengers visited a private island. As it happens, the Caribbean is the world's largest cruise destination. About saw 36 million cruise calls were there last year; that’s about 40 percent of global passenger capacity. And that’s surpassing the second largest region, the Mediterranean, at about 17 percent. Of course, the Caribbean’s proximity to North America and its year-round tropical climate make it a prime location for cruising. But despite these advantages, historically the Caribbean’s been seen as more of a lower-yielding market compared to regions like Europe or Alaska, which arguably have even more amazing scenery or historic sites. Interestingly, recent trends suggest that reputation might be changing. And new private islands over the last few years have reinvigorated the Caribbean cruise market. So what’s a private destinations or islands offer? For your guests, they get a seamless integration with the cruise experience. There’s no transfer required to a destination. There’s no external visitors coming into the resort. No-hassle, no-traffic, and very low crime. And for the cruise lines, well, they get greater control over the customer experience. They create superior customer satisfaction, which generates more repeat business. In addition, they can get that on-island spend that the guest would have spent with external vendors. And they can charge premium rates for exclusive areas. On top of that, many of these islands are quote close to the U.S. mainland, so you’re saving on fuel because the ship doesn’t have to steam so far; and on port fees. And then finally, proximity to the U.S. also can increase the short cruise duration market, which widens the addressable market for new-to-cruise passengers. And also can limit anti-tourism or anti-cruise sentiment because it moves guests out of congested areas and prevents unwanted visitors. All in all, the private island model offers a very high return on invested capital and may well be the future of the cruise line industry. In fact, if we add up the expansion plans of the biggest listed cruise lines, we think their private island guest count will double over the next few years. And that could add over 10 per cent to top line sales and 30 per cent earnings-per-share for the fastest growing cruise lines. So very considerable financials, but also it’s a private paradise within reach … and an idea we can all set sail to. 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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4:17
What’s Behind the Recent Stock Tumble?
Our CIO and Chief U.S. Equity Strategist Mike Wilson explains the challenges to growth for U.S. stocks and why some investors are looking to China and Europe.----- Transcript -----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 new headwinds for growth and what that means for equities. It's Monday, Feb 24th at 11:30am in New York. So let’s get after it. Until this past Friday’s sharp sell off in stocks, the correlation between bond yields and stocks had been in negative territory since December. This inverse correlation strengthened further into year-end as the 10-year U.S. Treasury yield definitively breached 4.5 per cent on the upside for the first time since April of 2024. In November, we had identified this as an important yield threshold for stock valuations. This view was based on prior rate sensitivity equities showed in April of 2024 and the fall of 2023 as the 10-year yield pushed above this same level. In our view, the equity market has been signaling that yields above this point have a higher likelihood of weighing on growth. Supporting our view, interest rate sensitive companies like homebuilders have underperformed materially. This is why we have consistently recommended the quality factor and industries that are less vulnerable to these headwinds.In our year ahead outlook, we suggested the first half of 2025 would be choppier for stocks than what we experienced last fall. We cited several reasons including the upside in yields and a stronger U.S. dollar. Since rates broke above 4.5 per cent in mid-December, the S&P 500 has made no progress. Specifically, the 6,100 resistance level that we identified in the fall has proven to be formidable for the time being. In addition to higher rates, softer growth prospects alongside a less dovish Fed are also holding back many stocks. As we have also discussed, falling rates won’t help if it’s accompanied by falling growth expectations as Friday’s sharp selloff in the face of lower rates illustrated. Beyond rates and a stronger US dollar, there are several other reasons why growth expectations are coming down. First, the immediate policy changes from the new administration, led by immigration enforcement and tariffs, are likely to weigh on growth while providing little relief on inflation in the short term. Second, the Dept of Govt Efficiency, or DOGE, is off to an aggressive start and this is another headwind to growth, initially.Third, there appears to have been a modest pull-forward of goods demand at the end of last year ahead of the tariffs, and that impulse may now be fading. Fourth, consumers are still feeling the affordability pinch of higher rates and elevated price levels which weighed on last month's retail sales data. Finally, difficult comparisons, broader awareness of Deep Seek, and the debate around AI [CapEx] deceleration are weighing on the earnings revisions of some of the largest companies in the major indices.All of these items are causing some investors to consider cheaper foreign stocks for the first time in quite a while – with China and Europe doing the best. In the case of China, it’s mostly related to the news around DeepSeek and perhaps stimulus for the consumer finally arriving this year. The European rally is predicated on hopes for peace in Ukraine and the German election results that may lead to the loosening of fiscal constraints. Of the two, China appears to have more legs to the story, in my opinion. Our Equity Strategy in the U.S. remains the same. We see limited upside at the index level in the first half of the year but plenty of opportunity at the stock, sector and factor levels. We continue to favor Financials, Software over Semiconductors, Media/Entertainment and Consumer Services over Goods. We also maintain an overriding penchant for quality across all size cohorts.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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4:15