Thoughts on the Market

Our Head of Digital Asset Strategy Amy Oldenburg joins Global Digital Asset Strategist Felix Stratmann discuss how tokenization, regulation, and the convergence of traditional and digital finance could reshape global markets.
Read more insights from Morgan Stanley.

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Felix Stratmann: Welcome to Thoughts on the Market. I'm Felix Stratmann, Global Digital Asset Strategist with Morgan Stanley Research.
Amy Oldenburg: And I'm Amy Oldenburg, Head of Digital Asset Strategy.
Felix Stratmann: Today, we're looking beyond crypto prices to explore how digital assets could transform the way financial markets operate.
It's Thursday, October 29th at 2pm in London.
Amy Oldenburg: And 10am in New York.
Felix Stratmann: So, we're used to being able to send money, shop, and access information anytime, anywhere online, right? But much of the financial system still operates on infrastructure built decades ago, with limited trading hours and transactions that can take days to settle.
Digital assets could fundamentally change that. Amy, your work focuses on how financial institutions put digital asset technology to use. When people hear digital assets, they still mainly think of Bitcoin. But what bigger shift in financial infrastructure are they missing?
Amy Oldenburg: One thing I would focus on is – while Bitcoin may have showcased the technology for us, there's a much bigger innovation story here that we need to focus on, and this is really what's going to create the future of efficiencies and new products for our clients. We've seen many other industries get disrupted by innovation and technology. And now it's coming for financial services. And we're really dealing with this in many different ways today.
Felix Stratmann: Yeah, and I guess as that infrastructure changes so could the competitive landscape, right? So which parts of the existing financial systems stand to benefit the most, and which could face the greatest disruption from your perspective?
Amy Oldenburg: Yeah, I think it's good to look at some of the different points we've seen in history. Even if we think about some of the parallels to the internet era. While many of those early activities were simpler in terms of what happened, just digitizing company information for the first time.
We're also seeing that simpler product design happening within digital assets. We're tokenizing equities and we're tokenizing treasuries. And that's simply to get them in digital form. It's really the future of programmability, really embedded in some of these products that will be the powerful force that we'll see in the future.
So I think areas where you have high friction and even a heavier administrative burden, that's areas where we may see some of the biggest transformations happen in this space.
So Felix, I'm looking at this sector from the strategy side. Curious from your research perspective, where are you seeing the clearest signs of tokenization moving from concept to real market activity today?
Felix Stratmann: So I mean, look, we are early in the tokenization game. You know tokenized real world assets are about [$] 30 to 40 billion today. But they're growing quickly. That number was essentially nothing just a couple of years ago. And recently we put out a forecast saying we expect them to reach [$] 2.3 trillion by 2030.
What’s driving that? A couple things I would say. Really it comes down to where traditional financial infrastructure has the most friction. One of those areas being collateral management. Getting your collateral where it needs to go, whether that be 24/7 or internationally, this is a big opportunity for tokenized assets.
And we're seeing growing interest in and demand for related products like tokenized money market funds or government securities, which are one of the fastest growing areas of tokenization. And again, these can potentially move more easily between institutions or be used as collateral. And this is especially important, I would say, as markets move towards 24/7, right?
One thing related to that where we're seeing increasing activity is tokenized stocks. You know, I would say they're not necessarily representing a more efficient state of the equity market yet, but they're an important step towards testing and demonstrating, you know, the benefits of tokenized assets in global distribution and also enhanced utility, right?
And then elsewhere, I think, we need to look at digital money as well. So, we've talked about the assets, but the cash side of the equation is equally as important. And that's also starting to operate at a larger scale. Still largely crypto focused, but stable coins are increasingly being used in real payment activity, right?
So, we see that growing, and approaching [$] 100 billion or so a month right now. And yeah, maybe changing gears here just a bit. This progress we've been discussing is happening against a backdrop of a bit of regulatory uncertainty, right? The CLARITY Act hasn't advanced as proponents had hoped. How do institutions balance that uncertainty against the need to keep investing in new infrastructure?
Amy Oldenburg: Felix, I have to say regulatory topics have been just the theme of 2026 this year. It's not only [the] CLARITY Act. You had highlighted digital money, which is also wrapped up in the Genius Act, which will go in force in January of 2027. And then we've seen innovation exemptions also come to market in the last few weeks.
You know, the future requires new tech, and how we're focused on this. We're not picking blockchain winners or even standards at this stage. We're really focused on building out the core infrastructures, because beyond regulation, there are certain non-negotiables that we just have to be ready for a future of 24/7 trading, real-time data, and the world ahead of us, which all of the regulations are really pointing towards a future of.
And Felix, I'll turn it back on you as we talk about regulatory uncertainty. It doesn't necessarily affect every part of the market the same way. Where do you think it could hold back adoption? And where do you see progress that may continue even under the existing frameworks?
Felix Stratmann: Yeah, so look, CLARITY specifically was primarily a crypto market infrastructure build, right. And it could have provided a framework for how crypto trading is regulated. And also what regulations are relevant to decentralized financial applications. But, really that’s only one part of this digital assets theme, right.
Tokenization, for example, you know, that could continue to progress because tokenizing existing security – that does not fundamentally change what that security is, right. Stock remains a stock; security is a security. Unit ownership is recorded in the blockchain.
So, there’s already scope to develop, you know, things like tokenized funds, payment infrastructure, and institutional settlement under existing legal frameworks. I would say that, you know, firms are still looking for clarification from regulators. But that’s rather than wholesale new regulation being necessary.
And look, to that point, we've already seen the SEC and CFTC very engaged in proposing rules and guidance post CLARITY. And then you also have the Genius Act, and the associated rulemaking from the relevant regulators. And that's paving a path for stablecoin usage and adoption.
So look, yes, progress can definitely continue, particularly for the financial use cases of digital asset technology, even without comprehensive legislation.
But you know, maybe let's think about what that means in practice, right? Even with the regulatory uncertainty, firms are still making decisions about when to modernize.
So Amy, from your perspective, what can previous shifts in financial technology, like electronic trading, maybe, teach us about the risks of waiting too long to invest?
Amy Oldenburg: Felix, I love your example of electronic trading, and there's so many periods in history where we lived through some of these transformations and impacts to financial services. Where we can take some of the lessons learned and really make sure we keep those in mind.
But I think there's another one that we really need to also keep in mind, and that's really on the execution and managing the internal culture and workforce shifts that we'll also see with some of this innovation that takes place.
These are critical because, you know, with many of these eras of transformation, you don't just flip a light switch to turn much of this on. We're living through many years of transformation, and I see digital assets being a multi-year transformation, just as we saw some of those other periods in history take many years to actually deploy over time.
Felix Stratmann: Yeah that modernization, kind of, brings us to another important theme. The convergence of traditional finance and digital assets. What does that actually mean in practice? Are we heading towards two financial systems operating side by side? Or one increasingly integrated system?
Amy Oldenburg: Oh, yeah. That's a really tough question, and I think one of the things we always love to try to determine a black-and-white outcome. But I think that one of the things that's pretty clear to us today is that for a number of years, we'll be living in and supporting a hybrid world as we work through the transformation that I even just talked about earlier.
There's definitely operational efficiencies and, and strong product design that we really need to stay focused on. And that will be hard for our clients and even our firms to ignore going forward. So I think just like, AI is gonna impact our future, we have to think about how this integration comes together.
And I think we may see not only integration or a unified system going forward. But we may even see financial services products distributed in different ways.
And Felix, I'm going to turn it back over to you. What is your research show in terms of the clearest evidence for traditional and digital finance coming together? Do you see established financial institutions adopting blockchain faster than maybe many people realize?
Felix Stratmann: Yeah absolutely, I mean we are early in the adoption of this technology. But the momentum is very much real, right. I looked through press releases from global financial companies and I found that roughly quarter by count, and some 60 percent by market cap, you know, had announced, piloted or launched digital assets initiatives.
So, institutions are seriously behind this. And then you also see opportunity in 24x7 follow-the-sun type of Treasury management, you know, that digital money enables. And that could be highly relevant, you know, for corporate treasuries.
So, yeah, I think absolutely firms are adopting this technology. And I think convergence is increasingly what we're seeing because these products are being issued on public blockchains. And firms are experimenting how to incorporate them into decentralized financial protocols. And yeah, I mean, it's very much a case of financial institutions using the technology while crypto native platforms are trying to figure out how to better cater towards regulatory compliance and privacy needs, right?
And while it's early, look, it’s not like the early days of crypto, entirely, right, which was very much trying to replace the financial system. Now I think we're increasingly seeing this convergence with the existing system to make it more efficient.
But maybe let's look ahead now. What needs to happen before digital assets become an everyday part of how financial markets operate?
Amy Oldenburg: To your point that you brought up earlier on building out blockchains, the entire industry right now is really trying to invest and build this infrastructure. But it's not only the infrastructure, it's redesigning workflows, it's upgrading policies, looking at the governance impacts of this future.
And that is a lot of work for many of our firms to take on, especially with so many competing innovation topics in the news right now. It may slow some of that adoption in the near term, I think what we'll see is suddenly – as much of this work is done and it starts to come to market, slowly, we will transition from not talking about the future of finance. But really that this will just become finance. And that's a path that we feel we're clearly on at this stage.
Felix Stratmann: Well, look Amy, I know we could sit here talking about this for hours. But I think that'll wrap us up for today. Amy, thanks very much for joining me.
Amy Oldenburg: Thanks, Felix.
Felix Stratmann: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.

Amy Oldenburg is a member of Morgan Stanley Firm Management. She is not a member of Morgan Stanley’s Research Department. Unless otherwise indicated, her views are her own and may differ from the views of the Morgan Stanley Research Department and from the views of others within Morgan Stanley.
Digital assets, sometimes known as cryptocurrency, are a digital representation of a value that function as a medium of exchange, a unit of account, or a store of value, but generally do not have legal tender status. Digital assets have no intrinsic value and there is no investment underlying digital assets. The value of digital assets is derived by market forces of supply and demand, and is therefore more volatile than traditional currencies’ value. Investing in digital assets is risky, and transacting in digital assets carries various risks, including but not limited to fraud, theft, market volatility, market manipulation, and cybersecurity failures—such as the risk of hacking, theft, programming bugs, and accidental loss. Additionally, there is no guarantee that any entity that currently accepts digital assets as payment will do so in the future. The volatility and unpredictability of the price of digital assets may lead to significant and immediate losses. It may not be possible to liquidate a digital assets position in a timely manner at a reasonable price.
Regulation of digital assets continues to develop globally and, as such, federal, state, or foreign governments may restrict the use and exchange of any or all digital assets, further contributing to their volatility. Digital assets stored online are not insured and do not have the same protections or safeguards of bank deposits in the US or other jurisdictions. Digital assets can be exchanged for US dollars or other currencies, but are not generally backed nor supported by any government or central bank.
Before purchasing, investors should note that risks applicable to one digital asset may not be the same risks applicable to other forms of digital assets. Markets and exchanges for digital assets are not currently regulated in the same manner and do not provide the customer protections available in equities, fixed income, options, futures, commodities or foreign exchange markets.
Morgan Stanley and its affiliates do business that may relate to some of the digital assets or other related products discussed in Morgan Stanley Research. These could include market making, providing liquidity, fund management, commercial banking, extension of credit, investment services and investment banking.

With Election Day a week away, our Head of U.S. Public Policy Research Ariana Salvatore and Wealth Management's Monica Guerra explain why the aftermath of the midterms may matter more to markets than who wins.
Read more insights from Morgan Stanley.

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Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Head of U.S. Public Policy Research at Morgan Stanley.
Monica Guerra: And I'm Monica Guerra, Head of Policy and Geopolitical Strategy for Morgan Stanley Wealth Management.
Ariana Salvatore: Today we're going to be talking about the upcoming midterm elections and what investors should be watching from both an institutional and individual investor perspective.
It's Wednesday, October 28th, at 10am in New York.
Well, Election Day is just about a week away. Investors are obviously increasingly focused on what a potential change in congressional control could mean for markets. And Monica, you and I are kind of grappling with this question through slightly different lenses. And that's why I thought it'd make sense to bring you in today.
We both agree that what happens after the election is probably more important than the outcome itself. But let's start with the election backdrop. Your team has developed a Midterm Signal Monitor. What are the indicators telling us?
Monica Guerra: Well, Ariana, affordability has really emerged as the defining issue for voters this cycle. Our monitor tracks four indicators positively correlated with midterm election outcomes: the generic congressional ballot, presidential approval, consumer sentiment, and gasoline prices.
Democrats lead the generic ballot by about eight points, and presidential approval is 38.8 percent, just below the 40 percent historical reference point when the opposition political party tends to gain momentum.
Now, consumer sentiment in October is the lowest of any October before a midterm election in the University of Michigan survey's entire history. And gasoline prices in September were up 37.6 percent from a year ago.
So taken together, these signals point to a challenging environment for the incumbent party, really driven by affordability. Persistent inflation, elevated borrowing costs, and renewed energy price pressures tied to the conflict with Iran are all weighing on household purchasing power. But importantly, these are directional indicators, not necessarily a forecast of the election outcome itself.
Now, Ariana, when you're looking at the potential outcomes from your perspective, how much do you actually expect to change?
Ariana Salvatore: Well, I think that's the key question, right? Because our view has been that the midterms are unlikely to fundamentally change the direction of U.S. policy. And that's because a lot of the uncertainty that markets have dealt with since the beginning of 2025 has come from the executive branch rather than Congress.
So, regardless of the outcome, we think things like tariffs, deregulation, immigration, geopolitics, export controls – all of those variables will remain important sources of policy uncertainty. Where congressional control matters more is on fiscal policy.
So, a divided government would make new legislation harder to pass, and that could mean more contentious negotiations over things like government funding, the debt limit, and defense spending.
So, for institutional investors, it's a little bit less about which party wins and more about what the composition of Congress means for the policy agenda going forward. As well as leadership's ability to really organize and corral different members of the caucus to effectively use their leverage around some of these negotiations.
So, Monica, I imagine the questions that you're getting from individual investors may be a little bit different. Talk us through some of those.
Monica Guerra: Yeah, they are. I think the biggest question is what the election can mean for an individual's portfolio. And history does offer us some interesting perspective here.
So, the S&P 500 has averaged about a 14 percent return in the calendar year following a midterm election, compared with roughly just 3 percent in the midterm year itself. And this year, as we all know, the index has already outperformed that typical second-year trajectory, which could heighten risks and opportunities for sectors sensitive to policy decisions.
For example, recent strength in technology and energy combined with the narrow market breadth could amplify policy-related volatility, particularly in industries facing heightened scrutiny under the new Congress.
Of course, that's not a forecast, and we caution against making portfolio decisions based on historical election patterns or political headlines alone; as the business cycle, corporate earnings, inflation, interest rates, and the AI investment cycle are likely to matter much, much more over the long run.
But one area where I do think our perspectives really intersect is the growing focus on electricity costs and data centers.
Ariana Salvatore: That's right, and it's actually one of the policy themes that we've been highlighting the most into the election. Our view is that the AI infrastructure build-out is unlikely to face broad federal prohibition, and that's regardless of who controls Congress.
There's a bipartisan recognition right now in D.C. – of AI as a strategic priority, particularly given competition with China. But at the same time, we are seeing growing political resistance at the state and local levels, where concerns around electricity prices, water usage, and infrastructure costs are becoming increasingly important.
So, where that all nets out, what we've been describing is a base case of a conditional build-out. The investment cycle continues, but both the pace and the geographic distribution of new projects could become more dependent on local policy decisions. And that distinction matters for investors exposed to utilities, power generation, and the broader AI infrastructure supply chain.
So, Monica, how are you thinking about that issue specifically for wealth management clients?
Monica Guerra: I think it's a really good example of how a national political issue can have very local investment implications. For individuals, the concern often begins at home with the electricity bill. But it can also have implications for local issuers and the municipal bond market – dependent on whether a community and local government captures the benefits of new investment or absorbs the infrastructure costs.
And that's why we've been emphasizing the importance of following what state and local governments are actually doing rather than just reacting to every move out of Washington. The same applies for taxes, which is another area where we're getting a lot of questions.
Ariana Salvatore: Yeah, let's talk about that because taxes are probably the clearest example of how the near-term and longer-term implications can differ. [Of] course, at the federal level, we don't expect a change in congressional composition to meaningfully reverse the tax policies enacted last year through the OBBA.
The president will remain in the Oval Office for the next two years. That means that he retains veto authority, which from a mechanical perspective just creates a significant hurdle to major legislative changes. But at the same time, the midterms could start to lay the groundwork for a different tax debate heading into 2028 and [20]29, specifically around AI and the build-out.
For markets, expectations can start changing well before legislation actually arrives.
Monica Guerra: Exactly. And for individual investors, there's also a very important state level dimension. We're watching proposals involving wealth taxes, property taxes, and state income taxes, all of which could have implications for household financial planning and the muni[cipal] bond market.
So even if federal tax policy remains relatively stable – which we think it will – investors still need to be attentive to potential changes that are closer to home.
And I want to come back to that broader market implications for a moment and really dig into that with you, Ariana. Are there particular areas where you think investors could be underestimating the impact of the election?
Ariana Salvatore: I think the biggest risk is actually assuming that [a] divided government automatically means less policy volatility. Typically, the blueprint here is divided government means gridlock. That constraint is actually clarity for markets, which can be a good thing. But in this case, of course, even if a change in congressional control occurs, you might see additional oversight investigations and political scrutiny – but executive action can continue.
And that could matter at the margin for sectors like technology and energy, which we've highlighted in terms of both the antitrust angle and deregulation more broadly. But I'd also distinguish between headline risk and actual changes to earnings or the macro-outlook.
Not every political development is going to translate to a meaningful market impact, which is why we see this election as more of a micro than a macro catalyst.
Monica Guerra: I agree, and from the wealth management perspective, that's why we really emphasize discipline. And lean into the idea that negative policy headlines often doesn't equal negative fundamentals.
Election outcomes can change the policy backdrop and create sector-specific opportunities or risks. That individual investors should be careful about allowing short-term political developments to drive long-term asset allocation decisions.
Ariana Salvatore: So maybe to wrap up, Monica, what's one thing that you'd encourage individual investors to watch after November 3rd?
Monica Guerra: Yeah. I'd focus on the policy decisions that actually affect households and portfolios, especially energy costs and state and local developments. And I'd encourage investors to work with their advisors distinguishing meaningful policy change from that political noise.
How about you?
Ariana Salvatore: Well, from my perspective, I think there's a lot to watch in this lame duck period. Of course, the fiscal calendar, so government funding, potentially addressing the debt limit. We've got the NDAA, that's the bill that funds the Pentagon, coming due in December. You've got potential U.S.-China meetings.
So, plenty to watch, I'd say, between now and the end of the year.
But maybe just to kind of put a through line through all this, our broader takeaway is that the midterms probably won't alter fundamentally the direction of U.S. policy. But they could change where risks emerge and how quickly certain priorities can move forward.
So, for investors, the important question isn't just who wins in November, it's actually what changes as a result.
Monica, thanks for joining me.
Monica Guerra: Thanks, Ariana. Great speaking with you.
Ariana Salvatore: 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.

Monica Guerra is a member of Morgan Stanley’s Wealth Management Division. She is not a member of Morgan Stanley’s Research Department. Unless otherwise indicated, her views are her own and may differ from the views of the Morgan Stanley Research Department and from the views of others within Morgan Stanley.

Our Global Head of Macro Strategy Matthew Hornbach and Chief U.S. Economist Michael Gapen look at what could speed up tightening, what’s next for Treasury yields, and how the Fed can skip a hike now while signaling that more are coming.
Read more insights from Morgan Stanley.

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Matthew Hornbach: Welcome to Thoughts on the Market. I'm Matthew Hornbach, Global Head of Macro Strategy at Morgan Stanley.
Michael Gapen: And I'm Michael Gapen, Chief U.S. Economist.
Matthew Hornbach: Today, the challenge facing the Fed: to not hike rates while still convincing investors that you think rate hikes are coming.
It's Tuesday, October 27th at 11am in New York.
So Mike, how do you think the Fed and Chairman Warsh in particular is going to deal with this challenge?
Michael Gapen: Well, I think the way that he can do it is to say, ‘Obviously we already did hike. So, we've started a process. You know we're serious about bringing inflation down in a timelier fashion. So essentially the question is: Do we want to raise rates at every meeting or do we want to take an action, assess incoming data and take a different action?’
So I do think the message here can be balanced in a way that says, ‘We didn't hike rates today. We didn't feel a tremendous sense of urgency to raise rates today. But we think more work is needed.’
So I'm not sure that there's urgency to raise rates every meeting. But you can still suggest that rates are going to go higher.
You can see I'm having trouble articulating the story as well. Warsh may have some of the same difficulty, but I think that's the basic message is – taking an action, assessing its effect, deciding to take another action.
Matthew Hornbach: At the Jackson Hole Symposium in August, Chairman Warsh gave a speech, and in the speech, he invoked this imagery of going on a hike around the mountains of Jackson Hole.
And he told us that there were, in essence, two types of hikes that one could go on around Jackson Hole. A more leisurely hike and a more aggressive hike around the mountains. Presumably because we don't think the Fed will hike rates at this meeting. Presumably the idea that he has in his head today is to go on a leisurely hike.
But if that's the case, how long does a leisurely hike last? How…
Michael Gapen: They can both be the same.
Matthew Hornbach: … long will the hike be.
Michael Gapen: Yes. So I think that I would interpret the leisurely hike also as the difference between, I think, what economists euphemistically call a recalibration of the policy stance – as opposed to a more aggressive tightening cycle.
So one's kind of leaning against the wind while the other one is trying to change the course of the economy. So I think you're right. And he called the leisurely hike the Ben Bernanke hike and as opposed to the Don Kohn aggressive hike. That's inside Fed speak if you know your former Fed staff.
And I think what the data is telling the Fed, on one hand growth is certainly resilient, and inflation is sticky. But the labor market doesn't look like it's overheating. We're only adding about 50,000 jobs a month. The unemployment rate is low, that's true. But wage growth is actually decelerating.
So from my perspective, and I think their perspective, even with the AI investment boom, there's not a lot of evidence the broader economy is overheating. And that's where I think the urgency story fits in. Are they behind? Do they need to get on top of something?
I think the answer to that is no. So you end up with this measured recalibration: Hey, we cut 75 basis points last year to support the labor market, should probably reverse those. That's what we should be thinking. We're not thinking we need to go all the way back to 2023 highs, which would be the more aggressive tightening cycle.
That's the way I split it out.
Matthew Hornbach: So what would have to happen with the weather in Jackson Hole to change the mind of the committee to go on a more aggressive hike? Maybe to get back into the lodge before the weather really turns inclement? What would have to happen in the economic data, do you think, to change their mind?
Michael Gapen: Well, I think that the most likely story there. I mean, what macro data would make them do that sooner than later would just be inflation has a lot more momentum than they think. Rather than being flat or decelerating slowly, it actually starts to firm.
So, the actual data that they have in hand, they wouldn't even have to decide where it's coming from. But if inflation's firming, they have to get on top of it. That could certainly shift them to hikes every meeting. So, I'll put that down as the most likely.
The other would be just what I said about the labor market. You would need evidence that says, "Wow, look at that labor market. Employment growth is picking up, the unemployment rate's moving lower, and wage growth is turning and starting to firm."
So that would tell you what was kind of a narrow business spending story is now a broad-based overheating story. That's likely to be a much-more-slower-moving train. But certainly that could get the Fed to more rate hikes in 2027 than we're thinking.
Matthew Hornbach: On the inflation point that you're raising here. One of the statistical quirks in how the Bureau of Labor Statistics and the Bureau of Economic Analysis put together the inflation data is that in the first month or two of the year, you typically have seen the seasonally adjusted inflation data come in much stronger. And then in the final couple of months of the year, you've tended to see inflation data come in lower than what you might otherwise expect – because these statistical agencies have had difficulty properly seasonally adjusting the data.
So presumably, because this has been going on for a couple of decades, we'll see this “residual seasonality" again in 2027. Of course, we may not. But if we do, how do you think the Fed will deal with that? Because that could very well show us that inflation is picking back up…
Michael Gapen: That residual seasonality, you're correct, it's still present in the data. There are many firms in different industries that raise their prices once a year. It varies over time. That's why the seasonal adjustment process doesn't capture it.
So we get big, kind of, one-off annual increases in January and February. The Fed knows this, you know this, I know this. But the point is to decide either to stop raising rates, or maybe even at some point to cut rates, you have to ascertain where the underlying trend is. So this makes it harder for them to know what the underlying trend is.
So in our view, it actually means you still get one additional rate hike in March, then after that, it only starts to become clear that inflation is decelerating and the Fed stops hiking.
So in my view, I think the way that they deal with it is they have to wait and get more data to decide that inflation's either going in the direction they want or it's not going in the direction they want.
So Matt, I'd like to turn it back to you if I can. We've seen a lot of volatility in the Treasury market. As you know, for many months yields were backing up. The 10-year Treasury yield peaked above 5.25. It's now back down to about 5 percent. How do you read what's happening in the Treasury market today?
Matthew Hornbach: So the biggest explanatory factor in the sell-off in the Treasury market since, really since the beginning of March, has been a combination of what has happened with energy prices. Both outside of the country and within the country. And then, how the central bank ended up shifting its perspective on rate policy as a result of the effects of these higher energy prices on underlying inflation.
And so, as the Fed transitioned from easing monetary policy in 2025 to now tightening monetary policy in 2026, and on your forecasts into 2027, the bond market had to reprice. And this is a typical behavioral response to a big change in monetary policy expectations.
The more recent price action in the Treasury market, where the 10-year yield went from 5 percent up to 5.25 percent, we think was driven much more by technical flows related to a very large fixed income marketplace that includes more than just U.S. Treasury securities.
Of course, we have agency mortgage-backed securities. There's a huge corporate bond market as well. And so, we see the last 25 basis points as more of a technical dynamic that was driving yields to those peak levels. And once those technical flows stopped, then we saw yields settle back down to a level that was more aligned with fair value, given how the Fed is expected to behave with monetary policy.
But what that means, though, is that as the data come in over the course of the next several quarters, how the market thinks about the path of Fed policy over the course of 2027 will become an increasingly important factor in the Treasury market once again.
So if the investor base decides that maybe the Fed, after having delivered these rate hikes that you're expecting, is comfortable keeping rate policy where it is. And as the disinflationary process resumes, might even consider reversing some of these rate hikes that they have put into place, I would expect 10-year Treasury yields to fall alongside – of those expectations for monetary policy.
So ultimately, we have had a big move in the U.S. Treasury market this year. It has been very much aligned with how investors have thought about the changing narrative around Fed policy. And so 2027 will likely hold more of the same.
As we make our mind up about where the Fed is heading with monetary policy, we will very likely see the bond market move in sympathy with that. And I guess we'll keep an eye on inflation, the labor market, as well as the Treasury market as we look forward towards the next FOMC meeting in early December. And considering the question again: hike or no hike?
Thanks for this, Mike.
Michael Gapen: Thanks for having me on, Matt.
Matthew Hornbach: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.

Is the end of the correction in sight? Our CIO and Chief U.S. Equity Strategist Mike Wilson looks at what could bring this pullback to an end.
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.
Is the end of this equity market correction in sight? Today on the podcast, I’ll share what I think could turn the tide.
It's Monday, October 26th at 11:30 am in New York.
So, let’s get after it
The correction that began in June is now well advanced beneath the surface. But I believe the high-quality S&P 500 index may still have some unfinished business. Until that plays out, I don’t think we can say the adjustment is complete.
The real question to ask: how bad does it have to get before it gets better?
We have described this correction as a classic mid-cycle transition. The peak rate of change in earnings revisions arrived right on schedule, about a year after the recession troughed. And the market responded the way that it usually does: early-cycle leaders with more operating and financial leverage started to underperform, while higher-quality, asset-light, services-oriented businesses moved to the front.
This quality rotation is now well understood though, and positioning has followed it. Ironically, the final step is usually a convergence between the resilient high quality S&P 500 index and the weaker breadth beneath. We may already be seeing the beginning of that meeting in the middle. If the index does move lower, I believe 7100-7200 on the S&P 500 is where the correction should find material support.
The reason I believe we will ultimately have a positive resolution to this transition is that a lot of damage has already occurred. Roughly 60 percent of Russell 3000 stocks are down more than 20 percent since June. And the hit has been even more severe in early-cycle areas like Semiconductors, Autos, Consumer Cyclicals, and Capital Goods.
At the same time, hedge-fund positioning has come down meaningfully leaving us near the lows for the past 12 months. That is encouraging, but sentiment overall is not yet at the kind of extreme that typically marks a durable low. I think we are close but we’re not quite there.
So, what gets us there? I see three clearing events ahead.
The first is AI. Investors are questioning the eventual return on capital, the cost of capital, and whether credit markets can fund all the spending that has been promised. Over the next few weeks, the market will need to absorb more supply, and lower-quality players may continue to see wider spreads and even lower stock prices.
I view the supply as the event itself. Once it clears, the risk should begin to fade. Semiconductors remain at the center of this concern, and may offer a good benchmark to monitor for the broader market correction. Specifically, I see another 10 to 15 percent lower for the Semiconductor index into mid-November.
The second clearing event is the midterm elections. Markets dislike uncertainty, and this election has plenty. A blue wave is not a surprise anymore though. The larger overhang is what may happen after the vote, including the possibility of a renewed military escalation in Iran.
I have no special edge in forecasting geopolitics. But I do know that these kinds of shocks often create very good buying opportunities. Historically, post-midterm returns have been very strong, so I would be ready to embrace a sharp downdraft in stocks in the days and weeks around election day.
The third, and most important, clearing event is liquidity. Financial conditions have tightened sharply through a combination of higher rates, slower balance-sheet growth, stronger demand for capital, and higher energy prices.
The tightening is beginning to resemble 2018, and it is not far from what we experienced in 2022 despite very modest tightening from the Fed so far. In fact, the market may be doing the Fed’s tightening for it; and if that tightening begins to create funding stress or destabilizes credit markets, the Fed and Treasury have tools to respond. The question is whether conditions need to deteriorate further before they act.
Bottom line, I think the correction in equity markets that began in June is in the final stages, but the final stage can be very uncomfortable. We may still need one more index-level drawdown and bout of volatility. Or one more moment when investors conclude that something has broken. That may be exactly what clears the path for the Fed to pivot and the next leg higher for stocks.
For now, I want to stay with quality stocks that have already corrected more than the index in areas like capital goods. More importantly, if these clearing events create a sharp downdraft, I would view it less as a reason to run from risk and more as the opportunity we have been waiting for to buy. So be ready.
Thanks for tuning in; I hope you found it informative and useful. Let us know what you think by leaving us a review. And if you find Thoughts on the Market worthwhile, tell a friend or colleague to try it out!

The energy shock is global, but the policy response isn’t uniform. In the second of our two-part roundtable, our economists unpack the forces shaping interest rates across the U.S., Europe and Asia.
Read more insights from Morgan Stanley.

----- Transcript -----

Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist and Head of Macro Research.
Michael Gapen: I'm Michael Gapen, Chief U.S. Economist.
Jens Eisenschmidt: I'm Jens Eisenschmidt, Chief Europe Economist.
Chetan Ahya: And I’m Chetan Ahya, Chief Asia Economist.
Seth Carpenter: Yesterday, we talked about why global growth is continuing to power on, why investment is playing a larger role, and how that investment cycle is spreading across regions.
Today, we're going to take a deeper dive and think about monetary policy and what's going on.
It's Friday, October 23rd, at 10am New York.
Jens Eisenschmidt: 4pm in Frankfurt.
Chetan Ahya: And 10pm in Hong Kong.
Seth Carpenter: When I look around the world and think about especially developed market central banks, well, they're kind of all tightening at the same time – but maybe for somewhat different reasons.
Let's start with just a really broad policy question. Why are the Fed, the ECB, the Bank of England, and the Bank of Japan all tightening policy when their economies look so different?
Mike, I'm going to start with you back here in the U.S. with the Fed. How are you thinking about what the Fed is doing right now?
Are they just recalibrating the stance of policy? Or is this a fundamental change where they're trying to rein in growth in the economy?
Michael Gapen: The way I look at it is this is a story about persistent inflation, and I would look at it as a recalibration of policy. I think the majority of participants on the FOMC know the Fed can't pump more oil or get, you know, oil through the Strait of Hormuz. So, it's about leaning against second-round effects.
Inflation is gradually moving lower. They've characterized this as dissatisfaction with the speed of convergence to the target.
So, I think the Fed is tightening based on persistent inflation, and it appears to me to be more about a recalibration than it is about meaningfully tightening policy and leaning into demand.
Seth Carpenter: All right, Jens. Same question coming to you, and I have to say the energy shock is a global shock. So how do you think about what's going on with the tightening of the ECB and the Bank of England?
Jens Eisenschmidt: Yeah. No, I mean, first of all, if you sort of talk about both central banks – and here again, I guess the Fed comparison also matters. The starting point is important. The ECB was the only central bank that got inflation back to target, and so was already well advanced in its sort of rate normalization cycle, had cut back rates to 2 percent – which by most measures is sort of neutral, maybe leaning a little bit towards expansionary side of things.
And so, it was probably easiest for that central bank, when the supply shock came to tighten again, simply by getting a little bit towards the restrictive end of the neutral range, say. I think that is probably what has happened here, more than anything else.
And for the Bank of England, of course, the discussion is a different one. They were running for a long time a relatively restrictive monetary policy. And so there was more scope to wait it out, essentially. A little bit like the Fed, essentially. This is where the similarities come in.
Now, if you look ahead, essentially, it becomes a question of how strong is your economy holding up? And, you know, the strength of that holding up in the face of a certain given energy shock will determine how much of the inflation that you experience today will be inflation of tomorrow, carried to the next period through stronger wage agreements.
I think that's basically the policy problem facing both central banks here. And I guess that in the end results in essentially a resolve to at least gradually further tighten the stance. I think that has to be the expectation. And so, from that perspective, this is where we arrive at essentially a current positioning that is not super hawkish, if you think about it.
So, it's not like we have to gung ho every sequential meeting increase rates. But we see a gradual increase in rates. And so, for instance, for the ECB, we have a meeting around the corner next week. We don't think there will be an increase. But the risks have sort of stacked up and are really to the upside for inflation.
So, it will be very hard to avoid a tightening for the ECB in the December meeting. So that's the gradual pace I was just referring to.
Seth Carpenter: Got it. Ok, Chetan, the developed market central bank in Asia that most people are staring at is the Bank of Japan. So big change there. 25 years of essentially stagnant nominal in GDP growth to now we're on a clear hiking path.
How far do you think the Bank of Japan is likely to go? What's driving it? And how important is this global energy shock to the Bank of Japan's plans?
Chetan Ahya: We expect the BOJ to hike its policy rate twice, first in December and then again in March next year. This compares with market pricing of three more rate hikes. So, what explains our dovish forecast? Well, we think that Japan's inflation has been largely driven by FX weakness and higher commodity prices and not due to demand-side pressures. To elaborate, Japan's real consumption is still one percent below pre-COVID levels. Hence, we think BoJ will avoid taking up more aggressive policy tightening.
Seth Carpenter: So, Mike, let me come back to you for the U.S. We have seen globally a rise in interest rates. The long end of the curve has sold off everywhere. Some of that is being driven by energy prices. We've seen credit spreads in the U.S. start to widen.
Some of that's being driven by hyperscaler debt issuance, among other factors. But I guess what's important is when Chair Warsh first took over the helm of the Fed, his characterization of how restrictive monetary policy and financial conditions were – was not particularly forceful, right? He said it's hard-pressed to say that it's uniformly restrictive.
But the world feels a little bit different now than it did when Chair Warsh took over. So how does the Fed need to react to the fact that longer-term interest rates have sold off and that credit spreads are starting to widen?
Michael Gapen: Financial conditions have tightened. We would characterize financial conditions as, let's call it moderately restrictive.
So, I think the Fed needs to look at that and then ask itself essentially, "Where is this inflation coming from? What inflation are we trying to stop?" I don't think there's a tremendous amount of evidence that points to an overheating labor market. Rates have risen, but long-run inflation expectations remain stable.
So, I still think the right answer is to lean against potential second-round effects from the energy price shock. And here, I think that would show up in airfares, apparel, new and used cars, motor vehicles and parts.
We got some evidence in the September inflation report that these other goods prices were firm. We'll see if that continues, and this is an early sign of energy pass-through into other parts of core. But with financial conditions already moderately restrictive, it doesn't suggest they have a tremendous amount of work to do unless there's evidence that AI spending is broadening out to greater labor demand and higher wages. Then it would be a different story.
For now, I think a few more rate hikes – we have two more rate hikes penciled in, and 75 basis points of rate hikes in total – is probably where we think the Fed will be going by March of next year.
Seth Carpenter: Jens, let me turn that to you as well because rates in Europe have also gone up. And importantly, we've seen spreads for French sovereign debt over German debt widen a lot. So, OAT spreads are pretty high. How much has the tightening in financial conditions done the work of the ECB for it?
And as a result, is that a reason to maybe expect less in the way of rate hiking than what the market has priced in?
Jens Eisenschmidt: I think that's exactly the debate that I would expect to be raging in the governing council next week. We have already seen indications in the accounts in September that it was brought up.
Since then, it hasn't gotten better. So, there is tightening. We had seen Philip Lane coming out essentially saying in very simplistic ways, ‘Well, this is AI. This is good for the U.S. It's not so clear it's as good for Europe. But, you know, rates have increased here too, and so we need to be super careful.’ That this is not representing us with much more tightening than we actually can stomach.
So, to your point, indeed, I think the market is pricing too many rate hikes. We have one more at this stage in December, and that's it.
We have to acknowledge that since we made that change in call, we have seen more inflation and probably also more resiliency than we had thought. So that would push us at the margin to maybe one more in March.
But then again, we have seen the tightening at the long end. If that continues, we may very well end up being right with that call without any need to change it. Again, that has to be closely watched. It will very likely depend on the growth outlook in the end.
But yeah, long story short, the market currently prices 3/25. I still think this is too much from the ECB here.
Seth Carpenter: So, Chetan, maybe I’ll wrap up with you because we focused on some of the bigger central banks of the bigger economies. But there are different outcomes across different central banks. Here in the Americas, for example, down south, the Brazilian Central Bank, the BCB, is still easing, albeit gradually. Banxico in Mexico is holding rates, not hiking.
So, when you think about other central banks, across Asia, like say maybe Korea and India, where we're still seeing some strong domestic growth. Are they conforming to the same stories we've talked about for these major DM central banks?
Chetan Ahya: Yeah, the situation in Asia is somewhat different. They don't have a big inflation problem, but we are seeing strength in growth coming in because of exports. And so, for most central banks, we are expecting them to take up rate hikes. But those will be more countercyclical in nature.
As such, core inflation, except for Australia and Korea is pretty much in the central bank's comfort zone. And so, we don't expect them to react to higher inflation. But to the extent to which, you know, U.S. rates are going up, growth is strong, most central banks will take up countercyclical rate hikes in the coming quarters.
Seth Carpenter: That's super helpful, and that helps make, I guess, a key observation or theme about what's going on. Inflation is a global phenomenon. We are seeing somewhat resilient growth, and major central banks generally are tightening. But it is not a uniform story in every single place. And so, there are some interesting nuances in all of the details here.
That point also means that the endpoint for hiking cycles at different central banks might not be fully synchronized either. And it will depend, I suspect, in different jurisdictions on the specific evidence that each central bank is looking at – be it inflation itself, wage dynamics, what's going on in labor markets, domestic demand, foreign demand, external demand for exports, depending on the economy. And of course, as we touched on a bit, what's going on in financial conditions.
Well, Mike, Jens, Chetan, thank you so much for helping us connect all of those dots. And to the listener, thank you for listening. And if you enjoy this show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or a colleague today.