Have you ever wondered -- How much do I really need to retire early and am I on track? How do I balance all of my financial goals? How can I help my children be financially secure? Tune into Season 3 of What Should I Do With My Money, hosted by Morgan Stanley Wealth Management’s Jamie Roô to hear real-life stories about these and other big financial questions.

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.

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.

In the second of a two-part episode, Morgan Stanley’s chief economists talk about their near-term U.S. outlook based on tariffs, labor supply and the Fed’s response. They also discuss India’s path to strong economic growth. Read more insights from Morgan Stanley. ----- Transcript -----  Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist. Yesterday I sat down with my colleagues, Mike Gapen, Chetan Ahya and Jens Eisenschmidt, who cover the U.S., Asia, and Europe respectively. We talked about... Well, we didn't get to the U.S. We talked about Asia. We talked about Europe.  Today, we are going to focus on the U.S. and maybe one or two more economies around the world.  It's Wednesday, October 1st at 10am in New York.  Jens Eisenschmidt: And 4pm in Frankfurt.  Chetan Ahya: And 10 pm in Hong Kong.  All right, gentlemen. So yesterday we talked a lot about China, the anti-involution policy, and what's going on with deflation there. Talked a little bit about Japan and what the Bank of Japan is doing. We shifted over to Europe and what the ECB is doing there – there were lots of questions about deflation, disinflation, whether or not inflation might actually pick up in Japan. So, [that] was all about soft inflation.  Mike, let me put you on the spot here, because things are, well, things are a little bit different in the U.S. when it comes to inflation. A lot of attention on tariffs and whether or not tariffs are going to drive up inflation. Of course, inflation, the United States never got back to the Fed's target after the COVID surge of inflation.  So, where do you see inflation going? Is the effect of tariffs – has that fully run its course, or is there still more entrained? How do you see the outlook for inflation in the U.S.?  Michael Gapen: Yeah, certainly a key question for the outlook here. So, core PCE inflation is running around 2.9 percent. We think it can get towards 3, maybe a little above 3 by year end. We do not think that the economy has fully absorbed tariffs yet; we think more pass through is coming. The President just announced additional tariffs the other day. We had them factored into our baseline.  I think it's fair to say companies are still figuring out exactly how much they can pass through to consumers and when. So, I think the year-on-year rate of inflation will continue to move higher into year end. Hit 3 percent, maybe a little bit above. The key question then is what happens in 2026.  Is inflation driven by tariffs transitory – the famous T word; and the year-on-year rate of inflation will come back down? That's what the Fed's forecast thinks; we do as well. But as everyone knows, the Fed has started to ease policy to support the labor market. The economy has performed pretty well, so there's a risk maybe that inflation doesn't come down as much next year.  Seth Carpenter: Alright, so tariffs are clearly a key policy variable that can affect inflation. There's also been immigration restriction, to say the least, and what we saw coming out of COVID – when people were reluctant to go back to work, and businesses were reporting lots of shortages of workers – is that in certain services industries, we saw some pressure on prices. So, tariffs mostly affect consumer goods prices. Is there a contribution from immigration restriction onto overall inflation through services?  Michael Gapen: I think the answer is yes; and I hesitate there because it's hard to see it in real time. But it is fair to say the average immigrant in the U.S. is younger. They have higher rates of labor force participation. They tend to reside in lower income households. So, they're labor supply heavy in terms of their effect on the economy. And yes, they tend to have larger relative presence in construction and manufacturing.  But in terms of numbers, a lot of immigrants work in the service sector, as you note. And services inflation has been to the upside lately, right? So, the surprise has been that goods inflation maybe hasn't been as strong. The pass through from tariffs has been weaker. But in terms of upside surprises in inflation, it's common services and in many cases, non-housing related services.  So, I'd say there's maybe some nascent signs that immigration controls may be keeping services prices firmer than thought. But may be hard to tie that directly at the moment. So, it's easier to say I think immigration controls may prevent inflation from coming down as much next year. It's not altogether clear how much they're pushing services inflation up. I think there's some evidence to support that, and we'll have to see whether that continues.  Seth Carpenter: Alright, so we're seeing higher costs and higher prices from tariffs. We're seeing less labor supply when it comes to immigration. Those seem like a recipe for a big slowdown in growth, and I think that's been your forecast for quite some time – is that the U.S. was going to slow down a lot.  Are we seeing that in the data? Is the U.S. economy slowing down or is everything just fine?  How are you thinking about it? And what's the evidence that there's a slowdown and what are maybe the counterarguments that there's not that much of a slowdown?  Michael Gapen: Well, I think that the data doesn't support much of a slowdown. So yes, the economy did moderate in the first half of the year. I think the smart thing to do is average through Q1 and Q2 outcomes [be]cause there was a lot of volatility in trade and inventories. If you do that, the economy grew at about a 1.8 percent annualized rate in the first half of the year, down from about 2.5 percent last year. So, some moderation there, but not a lot.  We would argue that that probably isn't a tariff story. We would've expected tariffs and immigration policies to have greater downward pressure on growth in the second half of the year. But to your question, incoming data in the third quarter has been really strong, and we're tracking growth somewhere around 3 percent right now. So, there's not a lot of evidence in hand at present that tariffs are putting significant downward pressure on growth.  Seth Carpenter: So those growth numbers that you cite are on spending, which is normally the way we calculate things like GDP, consumption spending. But the labor market, I mean, non-farm payroll reports really have been quite weak. How do you reconcile that intellectual tension on the one hand spending holding up? On the other hand, that job creation [is] pretty, pretty weak.  Michael Gapen: Yeah. I think the way that we would reconcile it is when we look at the data for the non-financial corporate sector, what appears to be clear is that non-labor costs have risen and tariffs would reside in that. And the data does show that what would be called unit non-labor costs. So, the cost per unit of output attributable to everything other than labor that rose a lot. What corporates apparently did was they reduced labor costs. And they absorbed some of it in lower profitability. What they didn't do was push price a lot.  We'll see how long this tension can go on. It may be that corporates are in the early stages of passing through inflation, so we will see more inflation further out in a slowdown in spending. Or it may be that corporates are deciding that they will bear most of the burden of the tariffs, and cost control and efficiencies will be the order of the day. And maybe the Fed is right to be worried about downside risk to employment. So, I reconcile it that way. I think corporates have absorbed most of the tariff shock to date, and we're still in the early stages of seeing whether or not they will be able to pass it along to consumers.  Seth Carpenter: All right, so then let's think about the Fed, the central bank. Yesterday, I talked to Chetan about the Bank of Japan. There reflation is real. Talked to Jens yesterday about the ECB where inflation has come down. So, those other developed market economies, the prescriptions for monetary policy are pretty straightforward. The Fed, on the other hand, they're in a bit of a bind in that regard. What do you think the Fed is trying to achieve here? How would you describe their strategy?  Michael Gapen: I would describe their strategy as a recalibration, which is, I think, you know, technical monetary policy jargon for – where their policy stance is now; is not correct to balance risks to the economy. Earlier this year, the Fed thought that the primary risk was to persistent inflation. Boy, the effective tariff rate was rising quickly and that should pass due to inflation. We should be worried about upside risk to inflation. And then employment decelerated rapidly and has stayed low now for four consecutive months.  Yes, labor supply has come down, but there's also a lot of evidence that labor demand has come down. So, I think what the Fed is saying is the balance of risks have become more balanced. They need to worry about inflation, but now they also need to worry about the labor market. So having a restrictive policy stance in their mind doesn't make sense.  The Fed's not arguing – we need to get below neutral. We need to get easy. They're just saying we probably need to move in the direction of neutral. That will allow us to respond better if inflation stays firm or the labor market weakens. So, a recalibration meaning, you know, we think two more rate cuts into year end get a little bit closer to neutral, and that puts them in a better spot to respond to the evolving economic conditions.  Seth Carpenter: All right. That makes a lot of sense. We can't end a conversation this year about the Fed, though, without touching on the fact that the White House has been putting a lot of pressure on the Federal Reserve trying to get Chair Powell and his committee to push interest rates substantially lower than where they are now.  Michael Gapen: You've noticed?  Seth Carpenter: I've noticed. From my understanding, a lot of people in markets have noticed as well. There's been some turnover among policy makers. We have a new member of the Board of Governors of the Fed.  This discussion about Federal Reserve independence. How do you think about it? Is Chair Powell changing policy based on political pressure?  Michael Gapen: I don't think so. I think there's enough evidence in the labor market data to support the Fed's shift in stance. We have certainly highlighted immigration controls, what they would mean for the labor force. And how that means even a slowing, growing economy could keep the unemployment rate low.  But it's also fair to say labor demand has come down. If labor demand were still very strong, you might see job openings higher, you might see vacancies higher. You may even see faster wage growth. So, I think the Fed's right to look at the labor market and say, ‘Okay, on the surface, it looks like a no hire, no fire labor market. We can live with that, but there are some layoffs underneath. There are signs of weakness. Slack is getting created slowly.’  So, I think the Fed has solid ground to stand on in terms of shifting their view. But you're right, that looking forward into 2026 with the end of Powell's term as chair and likely turnover in other areas of the board. Whether the Fed maintains a conventional reaction function or one that's perhaps more politically driven remains an open question – and I think is a risk for investors.  Seth Carpenter:  I want to change things up a lot here. Chetan, yesterday you and I talked about China. We talked about Japan. Two really big economies that I think are well known to investors. Another economy in Asia that you cover is India. For a long time, we have said India was going to be the fastest growing major economy in the world. Do you still see it to be the case? That India's got a really bright growth outlook? And in the current circumstance with tariffs going on, how do you think India is fairing vis-a-vis U.S. tariffs?  Chetan Ahya: So yes, Seth, we are still optimistic about India's growth outlook. Having said that, you know, there are two issues that the economy has been going through. Number one is that the domestic demand had slowed down because of previous tightening of fiscal and monetary policies. And at the same time, we have now seen this trade tensions, which will slow global trade. But also, directly India will be affected by the fact that the U.S. has imposed 50 percent tariff on close to 60 percent of India's exports to the U.S.  So, both these issues are affecting the outlook in the near term. We still don't have clarity on what happens on trade tensions, but what we have seen is that the government has really worked quite hard to get the economy going from domestic demand perspective.  And so, they have taken up three sets of policy actions. They have reduced household income tax. The central bank has cut interest rates because inflation has been in control. And at the same time, they have now just recently announced reduction in Goods and Services Tax, which is akin to like consumption tax.  And so, these three policy actions together we think will drive domestic demand growth from the fourth quarter of this year itself. It will still be not back up to strong growth levels. And for that we still need that solution to trade policy uncertainty. But I think there will be a significant recovery coming up in the next few months.  Seth Carpenter: All right. Thanks for that, Chetan. It's such an interesting story going on there in India.  Well, Michael, Chetan,  thank the three of you for joining me today in this conversation. And to the listeners, thank you for listening. If you enjoy this show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or a colleague today.

Morgan Stanley’s chief economists discuss how policymakers in China, Japan and the European Union are addressing slower growth, deflation or the return of inflationary pressures. Read more insights from Morgan Stanley. ----- Transcript -----  Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist. Well, a lot has changed since the second quarter and the last time we did one of these around the world economics roundtable. After an extended pause, the United States Federal Reserve started cutting rates again. Europe's recovery is showing, well, some mixed signals. And in Asia, there's once again increasing reliance on policy support to keep growth on track. Today for the first part of a two-part conversation, I'm going to engage with Chetan Ahya, our Chief Asia economist, and Jens Eisenschmidt, our Chief Europe economist, to really get into a conversation about what's going on in the economy around the world. It's Tuesday, September 30th at 10am in New York. Jens Eisenschmidt: And 4pm in Frankfurt. Chetan Ahya: And 10pm in 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're looking for? How do you see those two economies evolving in terms of fiscal policy? Jens Eisenschmidt: Yeah, it's of course neither black or white, as you know. I think here we really look into the German case specifically, as the clear case where fiscal stimulus will happen. It may just not happen as quickly, and it's a very trade open economy. So, it's very much exposed to the current headwinds coming out of China for one. Or also U.S. tariffs. So, from that we conclude our net-net is actually, yes, there is textbook fiscal stimulus. So, basically domestic demand replacing less foreign demand. So that's fine, but just not enough. We see essentially better growth in Germany, but that's more cyclically driven. But it was; it just would not be enough for what you would normally think given the size of the fiscal stimulus, which is enormous. But it will also take some time, this fiscal stimulus to unfold. On the other side in France, as you rightly ask, how much consolidation are we going to get? I think the answer has to be very likely less than what the last – or the previous Prime Minister has had planned. So, all in all, that gets us into a situation of a country that lacks a clear economic policy structure, a clear governance structure; tries to – on a very fragile parliamentary majority – tries to consolidate the budget. Probably gets less consolidation going forward than what would be desirable. And, you know, here is sort of – not really... It's been muddling through a little bit. This is probably a good description of the approach here in France, and we actually have on the lack of a clear economic policy agenda and still some fiscal consolidation. We have actually lackluster growth in France for this year and next. Seth Carpenter: Okay, so what I'm hearing you saying is inflation seems likely to come down and probably undershoot their target causing President Lagarde and the ECB to reconsider how many cuts they're going to do. And then growth probably isn't going to be as stimulated by fiscal policy as I think lots of people in markets are hoping for. Chetan, Jens, thanks for joining us. And to the listeners, thank you for listening. Be sure to turn in tomorrow where I'm going to put Michael Gapen, Morgan Stanley’s Chief U.S. Economist on the hot seat, talk about the U.S. and maybe one or two more economies around the world. And if you enjoy this show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or a colleague today. 

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.

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.

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 today.  We think there will be a little bit response to the move in mortgage rates we've already seen. Again, it's the lowest that rates have been this year, and there have been some…  Ellen Zentner: Are those fence sitters; what we call fence sitters? People that say, ‘Oh gosh, it's coming down. Let me go ahead and jump in here.’  James Egan: Absolutely. We'll see some of that. And then from just other parts of the housing infrastructure, we'll see refinance rates pick up, right?  Like there are borrowers who've seen originations over the course of the past couple years whose rates are higher than this. Morgan Stanley actually publishes a truly refinanceable index that measures what percentage of the housing market has at least a 25 basis point incentive to refinance. Housing market holistically after this move? 17 percent? Mortgages originated in the last two years, 61 percent of them have that incentive. So, I think you'll see a little bit more purchase activity. Again, we need to get to 5.5 percent for us to believe that will be sustainable. But you'll also see some refinance activity as well, right?  Ellen Zentner: Right, it doesn't mean you get absolutely nothing and then all of a sudden the spigot opens when you get to 5.5 percent.  Anecdotal evidence, I have a 2.7 percent 30-year mortgage and I've told my husband, I'm going to die in this apartment. I'm not moving anywhere. So, I'm part of the problem, Jim.  James Egan: Well, congratulations to you on the mortgage…  Ellen Zentner: Thank you. I wasn't trying to brag, But yes, it feels like, you know, your point on perspective folks that are younger buyers, you know, are looking at the prevailing mortgage rate right now and saying, ‘My gosh, that's really high.’ But some of us that have been around for a lot longer are saying, ‘Really, this is fine.’ But it's all relative speaking.  James Egan: When you have over 60 percent of the mortgage market that has a rate below 4.5 percent, below 4 percent, yes, on a long-term basis, mortgage rates don't look particularly high. They're very high relative to the past 15 years, and to your point on a 2.7 percent mortgage rate, there's no incentive for you... Or there's limited incentive for you to sell that home, pay off that 2.7 percent mortgage rate, buy a new home at higher prices, at a much higher mortgage rate. That has – I know you don't like the word stuck – but it has been what's gotten this housing market kind of mired in its current situation.  Price is very protective. Activity pretty low.  Ellen Zentner: Jim, we've been talking about all the affordability issues and so let's set mortgage rates aside and talk about policy proposals. Are there specific policies that could also help on the affordability front?  James Egan: So, there's a number of things that we get questions about on a pretty regular basis. Things like GSE reform, first time home buyer tax credits, things that could potentially spur supply. And look, the devil is in the details here. My colleague, Jay Bacow, has done a lot of work on GSE reform and what we're really focusing on there is the nature of the guarantee as well as the future of regulation and capital charges.  For instance, U.S. banks own approximately one-third of the agency mortgage-backed securities market. Any changes to regulatory capital as a result of GSE reform, that could have implications for their demand, and that's going to have implications on mortgage rates, right? First time home buyer tax credits. We have seen those before – the spring of 2008 to 2010, and if we use that as a case study, we did see a temporary rise in home sales and a pause in the pace with which home prices were falling.  But the effects there were temporary. Sales and prices wouldn't hit their post housing crisis lows until after those programs expired.  Ellen Zentner: Right. So, you were incentivized to buy the house. You get the credit; you buy the house. But then unbeknownst to any economist out there, housing valuations continued to fall.  James Egan: You could argue that it maybe pulled some demand forward. And so, you saw a lot of it concentrated and then the absence of that demand afterwards. And then on the supply side, there are a number of different programs we have touched on, some of them in these podcasts in the past. And then some of those questions become what needs to go through Congress, what is more kind of local municipality versus federal government.  But look, the devil's in the details. It's an incredibly interesting housing market. Probably one that's going to be the source of many podcasts to come.  So, Ellen, given all these challenges facing the U.S. housing market. Where do you see the biggest opportunities for retail investors?  Ellen Zentner: So, in our recent note  Housing in the Next Decade, we took a look at single family renting; you and I have talked about how that's likely to still be in favor for some time.  REITs with exposure to select U.S. rental markets; what about senior housing? That is something that you've done deep research on, as well. Senior and affordable housing providers, home construction and materials companies.  What about building more sustainable homes with a good deal of the climate change that we're seeing. And financial technology firms that offer flexible financing solutions.  So, these are some of the things that we think could be in play as we think about housing over the long term.  James Egan: Ellen, thank you for all your insights. It's been a pleasure to have you on the podcast. And I guess there's a key takeaway for investors here. Housing isn't just about where we live, it's about where the economy is headed.  Ellen Zentner: Exactly. Always a pleasure to be on the show. Thanks, Jim.  James Egan: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.

Our 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.

Our Head of India Research Ridham Desai and leaders from Morgan Stanley Investment Management Arjun Saigal and Jitania Kandhari discuss how India’s promising macroeconomic trajectory and robust capital markets are attracting more interest from global investors.   Read more insights from Morgan Stanley. ----- Transcript -----  Ridham Desai: Welcome to Thoughts on the Market. I'm Ridham Desai, Morgan Stanley’s Head of India Equity Research and Chief India Equity Strategist.  Today, the once in a generation investment opportunities Morgan Stanley sees in India.  Joining me in the studio, Arjun Saigal, Co-Head of Morgan Stanley Investment Management at India Private Equity, and Jitania Khandari, Morgan Stanley Investment Management, Head of Macros and Thematic Research for EM Public Equity.  It’s Tuesday, September 23rd at 4pm in Mumbai.  Jitania Kandhari: And 6:30am in New York.  Ridham Desai: Right now, India is already the world's fourth largest economy, and we believe it's on track to becoming the third largest by the end of this decade.  If you've been following our coverage, you know, Morgan Stanley has been optimistic about India's future for quite some time. It's really a perfect storm – in a good way.  India has got a growing young workforce, steady inflation, and is benefiting from some big shifts in the global landscape. When you put all of that together, you get a country that's set up for long-term growth. Of course, India is also facing pressure from escalating tariffs with the U.S., which makes this conversation even more timely.  Jitania, Arjun, what are the biggest public and private investment opportunities in India that you'd highlight.  Jitania Kandhari: I'd say in public equities there are five broad thematic opportunities in India. Financialization of savings and structurally lower credit costs; consumption with an aspirational consumer and a growing middle-class; localization and supply chain benefits as a China +1 destination; digitization with the India stack that is helping to revolutionize digital services across industries; and CapEx revivals in real estate and industrials, especially defense and electrification.  Arjun Saigal: I will just break down the private markets into three segments. The first being the venture capital segment. Here, it's generally been a bit of hit or miss; some great success stories, but there've also been a lot of challenges with scale and liquidity.  Coming to the large cap segment, this is the hundred million dollars plus ticket size, which attracts the large U.S. buyout funds and sovereign wealth funds. Here target companies tend to be market leaders with scale, deep management strength, and can be pretty easily IPO-ed. And we have seen a host of successful PE-backed IPOs in the space. However, it has become extremely crowded given the number of new entrants into the space and the fact that regional Asia funds are allocating more of their dollars towards India as they shift away from China.  The third space, which is the mid-market segment, the $50- to $100 million ticket size is where we believe lies the best risk reward. Here you're able to find mid-size assets that are profitable and have achieved market leadership in a region or product. These companies have obvious growth drivers, so it's pretty clear that your capital's able to help accelerate a company's growth path.  In addition, the sourcing for these deals tends to be less process driven, creating the ability to have extended engagement periods, and not having to compete only on price. In general, it's not overly competitive, especially when it comes to control transactions. Overall, valuations are more reasonable versus the public markets and the large cap segment. There are multiple exit routes available through IPO or sale to large cap funds.  We're obviously a bit biased given our mid-market strategy, but this is where we feel you find the best risk reward.  Ridham Desai: Jitania, how do these India specific opportunities compare to other Emerging Markets and the developed world?  Jitania Kandhari: I will answer this question from two perspectives. The macro and the markets. From a macro perspective, India, as you said, has better demographics, low GDP per capita with catchup potential, low external vulnerability, and relatively better fiscal dynamics than many other parts of the world. It is a domestic driven story with a domestic liquidity cycle to support that growth story. India has less export dependency compared to many other parts of the emerging and developed world, and is a net oil importer, which has been under pressure actually positively impacting commodity importers. Reforms beginning in 2017 from demonetization, GST, RERA and other measures to formalize the economy is another big difference.  From a market standpoint, it is a sectorally diversified market. The top three sectors constitute 50 percent in India versus around 90 percent in Taiwan, 66 percent in Brazil, and 57 percent overall in EM. Aided by a long tail of sectors, India screens as a less concentrated market when compared to many emerging and developed markets.  Ridham Desai: And how do tariffs play into all this?  Jitania Kandhari: About 50 percent of exports to the U.S. are under the 50 percent tariff rate. Net-net, this could impact 30 to 80 basis points of GDP growth.Most impacted are labor intensive sectors like apparel, leather, gems and jewelry. And through tax cuts like GST and monetary policy, government is going to be able to counter the first order impacts.  But having said that, India and U.S. are natural partners, and hence this could drag on and have second order impacts.  So can't see how this really eases in the short term because neither party is too impacted by the first order impacts. U.S. can easily replace Indian imports, and India can take that 30 basis point to 50 basis points GDP impact. So, this is very unlike other trade deals where one party would have been severely impacted and thus parts were created for reversals.  Ridham Desai: What other global themes are resonating strongly for India? And conversely, are there themes that are not relevant for investing in India?  Jitania Kandhari: I think broadly three themes globally are resonating in India. One is demographics with the growing cohort of millennials and Gen Z, leading to their aspirations and consumption patterns. India is a large, young urbanizing population with a large share in these demographic cohorts. Supply chain diversification, friend-shoring, especially in areas like electronics, technology, defense, India is an integral part of that ecosystem. And industrials globally are seeing a revival, especially in areas like electrification with the increased usage of renewables. And India is also part of that story given its own energy demands.  What are the themes not relevant for investing in India is the aging population, which is one of the key themes in markets like North Asia and Eastern Europe, where a lot of the aging population drivers are leading to investment and consumption patterns. And with the AI tech revolution, India has not really been part of the AI picks and shovels theme like other markets in North Asia, like Korea, Taiwan, and even the Chinese hardware and internet names. Globally, in selected markets, utilities are doing well, especially those that are linked to the AI data center energy demand; whereas in India, this sector is overregulated and under-indexed to growth.  Ridham Desai: Arjun, how does India's macro backdrop impact the private equity market in particular?  Arjun Saigal: So, today India has scale, growth, attractive return on capital and robust capital markets. And frankly, all of these are required for a conducive investment environment. I also note that from a risk lens, given India being a large, stable democracy with a reform-oriented government, this provides extra comfort of the country being an attractive place to invest. You know, we have about $3 billion of domestic money coming into the stock market each month through systematic investment plans. This tends to be very stable money, versus previously where we relied on foreign flows, which were a lot more volatile in nature. This, in turn, makes for some very attractive PE exits into the public markets.  Ridham Desai: Are there some significant intersections between the public and private equity markets?  Arjun Saigal: You know, it tends to be quite limited, but we do see two areas. The first being pre-IPO rounds, which have been taking place recently in India, where we do see listed public funds coming into these pre-IPO rounds in order to ensure a certain minimum allocation in a company. And secondly, we do see that in certain cases, PE investors have been selectively making pipe investments in sectors like financial services, which have multiple decade tailwinds and require regular capital for growth.  Unlike developed markets, we've not seen too many take private deals being executed in India due to the complex regulatory framework. This is perhaps an area which can open up more in the future if the process is simplified.  Ridham Desai: Finally, as a wrap up, what do you both think are the key developments and catalysts in India that investors should watch closely?  Arjun Saigal: We believe there are a couple of factors, one being repeat depreciation. Historically this has been at 2.5 to 3 percent, and unfortunately, it's been quite expensive to hedge the repeat. So, the way to address this is to sort of price it in.  The second is full valuations. India has never been a cheap market, but in certain pockets, valuations of listed players are becoming quite concerning and those valuations in turn immediately push up prices in the large ticket private market space. And lastly, I would just mention tariffs, which is an evolving situation.  Jitania Kandhari: I would add a couple more things. Macro equilibrium in India should be sustained – as India has been in one of the best positions from a macroeconomic standpoint. Private sector CapEx is key to drive the next leg of growth higher. Opportunities for the youth to get productively employed is critical in development of an economy. And India has always been in a geopolitical sweet spot in the last few years, and with the tariff situation that needs some resolution and close monitoring.  All of this is important for nominal growth, which ultimately drives nominal earnings growth in India that are needed to justify the high valuations.  Ridham Desai: Arjun, Jitania, thank you both for your insights.  Arjun Saigal: Great speaking with you Ridham.  Jitania Kandhari: Thank you for having us on the show.  Ridham Desai: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.

Our CIO Mike Wilson joins U.S. Equity strategist Andrew Pauker to answer frequently asked questions about their latest economic outlook, including how U.S. equities are transitioning to a new bull market.  Read more insights from Morgan Stanley. ----- Transcript -----  Mike Wilson: Welcome to Thoughts on the Market. I'm Mike Wilson. Morgan Stanley’s CIO and Chief U.S. Equity Strategist.  Today we're going to try something a little different. I have my colleague, Andrew Pauker from the U.S. Equity Strategy Team here to discuss some of the client questions and feedback to our views.  It's Monday, September 22nd at 11:30am in New York.  So, let's get after it.  Andrew, we constantly deal with client questions on our views. More recently, the questions have been focused on our view that we've transitioned from a rolling recession to a rolling recovery in a new bull market. Secondarily, it's about the tension between the equity market's need for speed and how fast the Fed will actually cut rates. Finally, why is accelerating inflation potentially good for equities?  Where do you want to start?  Andrew Pauker: Mike, in my conversations with clients, the main debate seems to be around whether the labor cycle and earnings recession are behind us or in front of us. Walk us through our take here and why we think the rolling recession ended with Liberation Day and that we're now transitioning to an early cycle backdrop.  Mike Wilson:  So, just to kind of level set, you know, we've had this view that – and starting in 2022 with the payback and the COVID demand. And from the pull forward – that began, what we call, a rolling recession. It started with the technology sector and consumer goods, where the demand was most extreme during the lockdowns.  And then of course we've had recessions in housing, manufacturing, and other areas in commodities. Transportation. It's been very anemic growth, if any growth at all, as the economy has been sort of languishing. And what's been strong has been AI CapEx, consumer services, and government. And what we noticed in the first quarter, and we actually called for this almost a year ago.  We said now what we need is a government recession as part of the finishing move. And in fact, Doge was the catalyst for that. We highlighted that back in January, but we didn't know exactly how many jobs were lost from Doge's efforts in the first quarter. But we got that data recently. And we  saw  an extreme spike, and it actually sort of finished the rolling recession.  Even AI CapEx had a deceleration starting in the summer of 2024. Something else that we've been highlighting and now we're seeing pockets of weakness even in consumer services.  So, we feel like the rolling recession has rolled through effectively the entire economy. In addition to the labor data that now is confirming – that we've had a pretty extreme reduction in jobs, and of course the revisions are furthering that. But what we saw in the private sector is also confirming our suspicions that the rolling recession’s over. The number one being earnings revision breath, something we've written about extensively. And we've rarely seen this kind of a V-shaped recovery coming out of Liberation Day, which of course was the final blow to the earnings revisions lower because that made companies very negative and that fed through to earnings revisions.  The other things that have happened, of course, is that Doge, you know, did not continue laying people off. And also, we saw the weaker dollar and the AI CapEx cycle bottom in April. And those have also affected kind of a more positive backdrop for earnings growth.  And like I said before, this is a very rare occurrence to see this kind of a V-shape recovery and earnings revision breaths. The private economy, in fact, is finally coming out of its earnings recession, which has been in now for three years.  Andrew Pauker: And I would just add a couple of other variables as well in terms of evidence that we're seeing the rolling recovery take hold, and that Liberation Day was kind of the punctuation or the culmination of the rolling recession, and we're now transitioning to an early cycle backdrop.  So, number one, positive operating leverage is causing our earnings models to inflect sharply higher here. Median stock EPS growth, which had been negative for a lot of the 2022 to 2024 period is now actually turning positive. It's currently positive 6 percent now. The rolling correlation between equity returns and inflation break evens is also now significantly positive.  That's classic early cycle. That's something we saw, you know, post COVID, post GFC And then lastly, just in terms of the market internals and kind of what, you know, under the surface, the equity market is telling us. So, the cyclical defensive ratio was down about 50 percent into the April lows. That's now up 50 percent from Liberation Day and is kind of breaking the downtrend that began in April of 2024. So, in addition to the earnings revisions V-shaped recovery that you mentioned, Mike. Those are a couple of other variables as well that are confirming that we're moving towards an early cycle backdrop and that the ruling recovery is commencing.  Okay. So, we had the FOMC meeting.  As expected the Fed delivered a 25 basis point cut. Mike, what's your read on the meeting as it relates to equities and the reaction function?  Mike Wilson: Yeah, I mean this is really what we expected along with the consensus. We didn't have a different view that the Fed would give us 50. They gave us 25, and some people have characterized this as sort of a hawkish cut and very different than what we saw a year ago when the Fed kicked off that part of the rate cutting cycle with 50 basis points because they probably were worried a bit more about the labor market than they were about inflation.  But you know, ultimately we think the labor data is going to get worse or the payroll data will prove to be worse because of the delay between the Doge layoffs and when those folks can file for unemployment insurance, which should be in October. And it's that delayed data that will then get the Fed cutting in earnest, which is what's necessary for the full rotation to kind of the lower quality parts of the market. So, while you're right that we've seen cyclicals perform, they haven't performed in the same way that we've seen prior cycles, like in 2020 or [20]08-[20]09, because the Fed hasn't cut. They're very far behind the curve.  If you buy into our thesis that, you know, we had a rolling recession, we had an employment cycle, and they should be much more generous here. So that tension between the Fed's delay to get ahead of the curve and the market's need for speed to get there sooner and more deliberately – is where we think that, you know, we have to wait for that to occur to get the full rotation to the lower quality, kind of really cyclical parts of the market.  Andrew Pauker: Okay, so let's talk about the back end of the yield curve a little bit and why that's important for stocks. In my dialogue with investors, there's a lot of focus here, just given what happened last fall when the Fed cut at the front end and the back end of the yield curve move higher.  How should market participants think about this dynamic?  Mike Wilson: Yeah, I mean, I think this is an unknown known, if you will, because we saw this last fall. Where the Fed cut 100 basis points and the back end of the 10-year and 30-year Treasury market sold off. That’s the first time we've ever seen that in history, where the Fed cuts that aggressively and the backend moves out.  And this is a function of just all the fiscal imbalances and the debt issues that we face. And this is not a new issue. So, I think it remains to be seen if the bond market is going to be comfortable with the Fed not ignoring the 2 percent target – but you know, letting it run hot. As we've said, we think ultimately, they will have to let it run hot and they will, because that's what we need to have a chance at getting out of the debt problem.  And so that sort of risk is still out in the future. I have less concern about that more recently because of the way the backend of the bond market has traded. But it's something that we need to keep in the back of our mind. If yields were to go back to 4.50, which is our key level, then that would be a problem as long as we're below, you know, sort of 4.50 and we're well below that now we're close to 4, I don't think this is a problem at all.  Andrew Pauker: Yeah. One of the points that our colleague in rate strategy Matt Hornbach has highlighted is that the difference between now and the fourth quarter of last year when we saw that dynamic play out was that, you know, the bond market was very focused on the uncertainty around the fiscal situation. You know, we were going into an election, there was a fair amount of uncertainty around what Trump would do from a fiscal standpoint. And now, that is a known known, you know. We have the One Big Beautiful Bill signed into law. We know what the deficit impact is, so there is more clarity for the bond market on that front. So that is one key difference now versus last fall and why we may not see the same kind of reaction in the rates market.  Mike, you brought up, kind of, run it hot, which was the title of our note from a couple of weeks ago. I just wanted to get your take on why some inflation coming back is actually a positive for equities and why actually the deceleration that we've seen in inflation over the last couple years is one reason why earnings for small cap indices, for instance, have deteriorated so much. And so, for in this environment where the Fed is perhaps a bit more tolerant of inflation in 2026, why that's actually a positive for equities.  Mike Wilson: This is just an underappreciated sort of factoid that we actually identified back in 2020 and [20]21 as well. That when inflation is accelerating, that's a sign that pricing power is pretty good. And we actually see broader earnings. In fact, the best year for earnings, not just small caps, but the – call it the equal weighted S&P 500 was 2021. And that was the year where obviously inflation was really getting out of control.  That was just pure profit for a lot of these businesses. And so – earnings will be better. Our call over the next 12 months is not about multiples or the Fed so much, but that we think earnings are going to end up being better than people expect because (a) we've been through this three-year earnings recession. There's a ton of pent-up demand. Okay? And now inflation is reaccelerating as demand comes back. And that is actually going to fall to the bottom line. So not only is that good for stocks, okay, but it's actually, it's also why the equity risk premium can be lower. Because if you want to hedge that risk of inflation moving higher, well then you should be willing to accept a lower equity risk premium relative to what is actually a pretty good base rate for 10-year yields, close to 2 percent on a real basis.  So, you know, that's why the equity risk premium can stay low and why stocks can accrue at a, you know, pretty high PE multiple as these earnings come through better than expected. And one of the reasons is that inflation actually is accelerating in some of these areas where it's been deflationary.  Andrew Pauker:  Lastly, Mike, you know, you brought this up briefly. I want to address rotations under the surface of the market. We took off our large cap buys a few weeks ago, and as you mentioned, kind of signaled our intention – to get more constructive on small caps later this year in the fourth quarter. Can you specifically kind of walk through the signpost that we're waiting for before pressing the long, small cap trade here?  Mike Wilson: Yeah, I mean, we've probably… This is probably one of the areas we've done a really good job of just, you know, staying away from the fray. Meaning that, you know, we've been underweight small caps for really four years, and they've underperformed that entire time. I think the thing that we've been really patient about is just waiting for the Fed to lower rates to a level that's more conducive for these businesses that (a) need to obviously recap themselves, but then  the cost of capital is just too high. So that's number one. But , at the end of the day, I mean, that should translate into better earnings revisions and that also has lagged.  So, it's a combination of the two. The Fed getting ahead of the curve, which I would define as fed funds at least equal to two-year Treasury yields, but hopefully below two-year Treasury yields. Right now, we're about 60-65 basis points still above two-year yields . And then the second one is this ‘earnings your vision breadth on a relative basis. Small over large. It is trying to turn up now. It's been in a straight downtrend really for the last, you know, four years. And so those two together will affect a more robust relative outperformance. And just to be clear, small caps have done really well since Liberation Day, okay.  So, in absolute terms, it's been great. It's just the relative trade has not really worked yet.  That's where we're going to leave this conversation. Thanks for speaking with me, Andrew, to explain some of the thinking behind our calls.  To our listeners, thanks for tuning in. I hope you found it informative and useful, and let us know what you think by leaving us a review. If you think Thoughts on the Market is worthwhile, tell a friend or colleague to try it out.

With this week’s announcement of a rate cut and further cuts in the offing, the Fed seems willing to let the U.S. economy run a little hot. Our Head of Corporate Credit explain why this could give an unexpected boost to the European bond market.  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 Fed that looks willing to let the economy run hot, and why this could help the case for credit overseas.  It's Friday, September 19th at 2pm in London.  Earlier this week, the Federal Reserve lowered its target rate by a quarter of a percent, and signaled more cuts are on the way. Yet as my colleagues Michael Gapen and Matt Hornbach discussed on this program yesterday, this story is far from straightforward. The Fed is lowering interest rates to support the economy despite currently low unemployment and elevated inflation.  The justification for this in the Fed's view is a risk that the job market may be set to weaken going forward. And so, it's better to err on the side of providing more support now; even if that support raises the chances that inflation could stay somewhat higher for somewhat longer. Indeed, the Fed's own economic projections bear out this willingness to err on the side of letting the economy run a bit hot. Relative to where they were previously, the Fed's latest assessment sees future economic growth higher, inflation higher, and unemployment lower. And yet, in spite of all this, they also see themselves lowering interest rates faster.  If the labor market is really set to weaken – and soon – the Fed's shift to provide more near-term support is going to be more than justified. But if growth holds up, well, just think of the backdrop. At present, we have bank loan growth accelerating, inflation that's elevated, government borrowing that's large, stock valuations near 30-year highs, and credit spreads near 30-year lows. And now the Fed's going to lower interest rates in quick succession? That seems like a recipe for things to heat up pretty quickly.  It's also notable that the Fed's strategy is not necessarily shared by its cross-Atlantic peers. Both the United Kingdom and the Euro area also face slowing labor markets and above target inflation. But their central banks are proceeding a lot more cautiously and are keeping rates on hold, at least for the time being.  A Fed that's more tolerant of inflation is bad for the U.S. dollar in our view, and my colleagues expect it to weaken substantially against the euro, the pound, and the yen over the next 12 months. And for credit, an asset that likes moderation, a U.S. economy increasingly poised between scenarios that look either too hot or too cold is problematic.  So, just maybe we can put the two together. What if a U.S. investor simply buys a European bond?  The European market would seem less inclined to these greater risks of conditions being too hot or too cold. It gives exposure to currencies backed by central banks that are proceeding more cautiously when faced with inflation. With roughly 3 percent yields on European investment grade bonds, and Morgan Stanley's forecast that the euro will rise about 7 percent versus the dollar over the next year, this seemingly sleeping market has a chance to produce dollar equivalent returns of close to 10 percent.  For U.S. investors, just make sure to keep the currency exposure unhedged.  Thank you as always for listening. If you find Thoughts to the Market useful, let us know by leaving a review wherever you listen. And also tell a friend or colleague about us today.

On Wednesday, the Fed announced its first rate cut in nine months. While the reduction was widely expected, our Global Head of Macro Strategy Matthew Hornbach and Chief U.S. Economist Michael Gapen explain the data that markets and the Fed are watching. Read more insights from Morgan Stanley. ----- Transcript -----    Matthew Hornbach: Welcome to Thoughts on the Market. I'm Matthew Hornbach, Global Head of Macro Strategy. Michael Gapen: And I'm Michael Gapen, Morgan Stanley's Chief U.S. Economist. Matthew Hornbach: Our topic today is the Fed's first quarter percent rate cut in 2025. We're here to discuss the implications and the path forward. It's Thursday, September 18th at 10am in New York. So, Mike, the Fed concluded its meeting on Wednesday. What was the high-level takeaway from your perspective? Michael Gapen: So, I think there's two main points here. There's certainly more that we can discuss, but two main takeaways for me are obviously the Fed is moving because it sees downside risk in the labor market. So, the August employment data revealed that the hiring rate took a large step down and stayed down, right. And the Fed is saying – it's a curious balance in the labor market. We're not quite sure how to assess it, but when employment growth slows this much, we think we need to take notice. So, they're adjusting their view. We'll call it risk management 'cause that's what Powell said. And saying there's more risk of worse outcomes in the labor market, keeping a restricted policy stance is inappropriate, we should cut. So that's part one. I think he previewed all of that in Jackson Hole. So, it was largely the same, but it's important to know why the Fed's cutting. The second thing that was interesting to me is as much as he, Powell in this case, tried to avoid the idea that we're on a preset path. That, you know, policy is always data dependent and it's always the meeting-to-meeting decision – we know that. But it does feel like if you're recalibrating your policy stance because you see more downside risk to the labor market, they're not prepared to just do once and go, ‘Well, maybe; maybe we'll go again; maybe we won't.’ The dot plots clearly indicate a series of moves here. And when pressed on, well, what's a 25 basis point rate cut going to do to help the labor market, Powell responded by, well, nothing. 25 basis points won't really affect the macro outcome, but it's the path that that matters. So, I do think; and I use the word recalibration; Powell didn't want to use that. I do think we're in for a series of cuts here. The median dot would say three, but maybe two; two to three, 75 basis points by year end. And then we'll see how the world evolves. Matthew Hornbach: So, speaking of the summary of economic projections, what struck you as being interesting about the set of projections that we got on Wednesday? And how does the Fed's idea of the path into 2026 differ from yours? Michael Gapen: Yeah. Well, it was a lot about downside risk to the labor market. But what did they do? They revised up growth. They have the unemployment rate path lower in the outer years of their forecast than they did before, so they didn't revise down this year. But they revised down subsequent years, and they revised inflation higher in 2026. That may seem at odds with what they're doing with the policy rate currently. But my interpretation of that is, you know, the main point to your question is – they're more tolerant of inflation as the cost or the byproduct of needing to lower rates to support the labor market. So, if this all works, the outlook is a little stronger from the Fed's perspective. And so, what's key to me is that they are… You know, the median of the forecast, to the extent that they align in a coherent message, are saying, we're going to have to pay a price for this in the form of stronger inflation next year to support the labor market this year. So that means in their forecast – cuts this year, but fewer cuts in 2026 and [20]27. And how that differs from our forecast is we're not quite as optimistic on the Fed, as the Fed is on the economy. We do think the labor market weakens a little bit further into 2026. So, you get four consecutive rate cuts upfront, again, inclusive of the one we got on Wednesday. And then you get two additional cuts by the middle of 2026. So, we're not quite as optimistic. We think the labor market's a little softer. And we think the Fed will have to get closer to neutral, right? Powell said we're moving “in the direction of neutral.” So, he's not committing to go all the way to neutral. And we're just saying we think the Fed ultimately will have to do that, although they're not prepared to communicate that now. Matthew Hornbach: One of the things that struck me as interesting about the summary of economic projections was the unemployment rate projection for the end of this year. So, the way that the Fed delivers these projections is they give you a number on the unemployment rate that represents the average unemployment rate in the fourth quarter of the specified year. And in this case, the median FOMC participant is projecting that the unemployment rate will average 4.5 percent. And that's what we're forecasting as well, I believe. And so, what struck me as interesting is that with an average unemployment rate of 4.5 percent in the fourth quarter of the year, which is up about 0.2 percent from today's unemployment rate of 4.3 – the Fed is only projecting one additional rate cut in 2026. And I'm curious, do you think that if we in fact get to the end of this year, and it looks like the unemployment rate has averaged about 4.5 percent – do you expect the Fed to continue to forecast only one rate cut in 2026? Michael Gapen: Yeah, I think that's… Um. The short answer is no. I think that's a challenging position to be in. And by that, I mean, in addition to that unemployment rate forecast where it's 4.5 percent for the average of the fourth quarter, which could mean December's as high as 4.6; we don't know what their monthly forecast is. But that would mean the unemployment rate's risen about a half a percentage point from its lows a few months ago. And they have inflation rising to 3 percent. Core PCE is already 2.9. So, inflation is about where it is today; [it’s] a touch firmer. But the unemployment rate has moved higher. And so, what I would say is they haven't seen a lot of evidence by December that inflation's coming back down, and the labor market has stabilized. So, this is why we think they will be more likely to get to a neutral-ish or something closer to neutral in 2026 than they're prepared to communicate now. So, I think that's a good point. So, Matt, if I could turn it back to you, I would just like first to ask you about the general market reaction. The 25 basis point cut was universally expected. So really all the potentially new news was then about the forward path from here. So how did markets reply to this? Yields did initially sell off a bit, but they generally came back. What’s your assessment of how the market took the decision? Matthew Hornbach: Yeah, so the initial five, 10 minutes after the statement and summary of economic projections is released, everybody's digesting all of the new information. And generally speaking, investors tend to see what they want to see initially in all of the materials. So initially we had yields coming down a bit, the yield curve steepened a bit. But then about half an hour later, it became clear – just right before the press conference had started; it became clear to people that actually this delivery in the documentation was a bit more moderate in terms of the forward look. That it was a fairly balanced assessment of where things are and where things may be heading. And that in the end, the Fed, while it does want to bring interest rates lower, at least in the modal case, that it is still not particularly concerned about downside risks to activity, I should say, than it is concerned about upside risks to inflation. It very much seems a balanced assessment of the risks. And I think as a result, the market balanced out its initial euphoria about lower rates with a moderation of that view. So, interest rates ended up moving slightly higher towards the end of the day. But then, the next day they came back a bit. So, I think, it was a bit more of a steady as they go assessment from markets in the end. Michael Gapen: And do you see markets as maybe changing their views on whether you know, it is a recalibration in the stance, therefore we should expect consecutive cuts? Or is the market now thinking, ‘Hey, maybe it is meeting by meeting.’ And what about the Fed’s forecast of its terminal rate versus the market's forecast of the terminal rate. So, what happened there? Matthew Hornbach: Indeed. Yeah. So, in terms of how market prices are incorporating the idea that the Fed may cut at consecutive meetings through the end of the year, I think markets are generally priced for an outcome about in line with that idea. But of course, markets, and investors who trade markets, have to take into consideration the upcoming dataset and with the Fed so data dependent; so, meeting by meeting in terms of their decisions – it could certainly be the case that the next employment report and/or the next inflation report could dissuade the committee from lowering rates again, at the end of October when the Fed next meets. So, I think the markets are, as you can expect, not going to fully price in everything that the Fed is suggesting. Both because the Fed may not end up delivering what it is suggesting; it might, or it may deliver more. So, the markets are clearly going to be data dependent as well.   In terms of how the market is pricing the trough policy rate for the Fed – it does expect that the Fed will take its policy rate below where the summary of economic projections is suggesting. But that market pricing is more representative I think of a risk premium to the expectations of investors, which generally are in line or end up moving in line with the summary of economic projections over time. So, given that the Fed has changed the economic projections and the forecast for policy rates, investors probably also end up shifting a bit in terms of their own expectations. So, with that, Mike, I will bid you adieu until we speak again next time – around the time of the October FOMC meeting. So, thanks for taking the time to talk. Michael Gapen: Great speaking with you, 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.

Original Release Date: August 21, 2025 From China’s rapid electric vehicle adoption to the rise of robotaxis, humanoids, and flying vehicles, our analysts Adam Jonas and Tim Hsiao discuss how AI is revolutionizing the global auto industry. Read more insights from Morgan Stanley. ----- Transcript -----   Adam Jonas: Welcome to Thoughts on the Market. I'm Adam Jonas. I lead Morgan Stanley's Research Department's efforts on embodied AI and humanoid robots.  Tim Hsiao: And I'm Tim Hsiao, Greater China Auto Analyst.  Adam Jonas: Today – how the global auto industry is evolving from horsepower to brainpower with the help of AI.  It's Thursday, August 21st at 9am in New York.  Tim Hsiao: And 9pm in Hong Kong.  Adam Jonas: From Detroit to Stuttgart to Shanghai, automakers are making big investments in AI. In fact, AI is the engine behind what we think will be a $200 billion self-driving vehicle market by 2030. Tim, you believe that nearly 30 percent of vehicles sold globally by 2030 will be equipped with Level 2+ smart driving features that can control steering, acceleration, braking, and even some hands-off driving. We expect China to account for 60 percent of these vehicles by 2030.  What's driving this rapid adoption in China and how does it compare to the rest of the world?  Tim Hsiao: China has the largest EV market globally, and the country’s EV sales are not only making up over 50 percent of the new car sales locally in China but also accounting for over 50 percent of the global EV sales. As a result, the market is experiencing intense competition. And the car makers are keen to differentiate with the technological innovation, to which smart driving serve[s] as the most effective means. This together with the AI breakthrough enables China to aggressively roll out Level 2+ urban navigation on autopilot. In the meantime, Chinese government support, and cost competitive supply chains also helps.  So, we are looking for China's the adoption of Level 2+ smart driving on passenger vehicle to reach 25 percent by end of this year, and 60 percent by 2030 versus 6 percent and 17 percent for the rest of the world during the same period.  Adam Jonas: How is China balancing an aggressive rollout with safety and compliance, especially as it moves towards even greater vehicle automation going forward?  Tim Hsiao: Right. That's a great and a relevant question because over the years, China has made significant strides in developing a comprehensive regulatory framework for autonomous vehicles. For example, China was already implementing its strategies for innovation and the development of autonomous vehicles in 2022 and had proved several auto OEM to roll out Level 3 pilot programs in 2023.  Although China has been implementing stricter requirements since early this year; for example, banning terms like autonomous driving in advertisement and requiring stricter testing, we still believe more detailed industry standard and regulatory measures will facilitate development and adoption of Level 2+ Smart driving. And this is important to prevent, you know, the bad money from driving out goods.  Adam Jonas: One way people might encounter this technology is through robotaxis. Now, robotaxis are gaining traction in China's major cities, as you've been reporting. What's the outlook for Level 4 adoption and how would this reshape urban mobility?  Tim Hsiao: The size of Level 4+ robotaxi fleet stays small at the moment in China, with less than 1 percent penetration rate. But we've started seeing accelerating roll out of robotaxi operation in major cities since early this year. So, by 2030, we are looking for Level 4+ robotaxis to account for 8 percent of China's total taxi and ride sharing fleet size by 2030. So, this adoption is facilitated by robust regulatory frameworks, including designated test zones and the clear safety guidance. We believe the proliferation of a Level 4 robotaxi will eventually reshape the urban mobility by meaningfully reducing transportation costs, alleviating traffic congestion through optimized routing and potentially reducing accidents.  So, Adam, that's the outlook for China. But looking at the global trends beyond China, what are the biggest global revenue opportunities in your view? Is that going to be hardware, software, or something else?  Adam Jonas: We are entering a new scientific era where the AI world, the software world is coming into far greater mental contact, and physical contact, with the hardware world and the physical world of manufacturing. And it's being driven by corporate rivalry amongst not just the terra cap, you know, super large cap companies, but also between public and private companies and competition. And then it's being also fueled by geopolitical rivalry and social issues as well, on a global scale. So, we're actually creating an entirely new species. This robotic species that yes, is expressed in many ways on our roads in China and globally – but it's just the beginning.  In terms of whether it's hardware, software, or something else – it’s all the above. What we've done with a across 40 sectors at Morgan Stanley is to divide the robot, whether it flies, drives, walks, crawls, whatever – we divide it into the brain and the body. And the brain can be divided into sensors and memory and compute and foundational models and simulation. The body can be broken up into actuators, the kind of motor neuron capability, the connective tissue, the batteries. And then there's integrators, that kind of do it all – the hardware, the software, the integration, the training, the data, the compute, the energy, the infrastructure. And so, what's so exciting about this opportunity for our clients is there's no one way to do it. There's no one region to do it.  So, stick with us folks. There's a lot of – not just revenue opportunities – but alpha-generating opportunities as well.  Tim Hsiao: We are seeing OEMs pivot from cars to humanoids and the electric vertical takeoff in the landing vehicles or EVOTL. Our listeners may have seen videos of these vehicles, which are like helicopters and are designed for urban air mobility. How realistic is this transition and what's the timeline for commercialization in your view?  Adam Jonas: Anything that can be electrified will be electrified. Anything that can be automated will be automated. And the advancement of the state of the art in robotaxis and Level 2, Level 3, Level 4+ autonomy is directly transferrable to aviation.  There's obviously different regulatory and safety aspects of aviation, the air traffic control and the FAA and the equivalent regulatory bodies in Europe and in China that we will have to navigate, pun intended. But we will get there. We will get there ultimately because taking these technologies of automation and electronic and software defined technology into the low altitude economy will be a superior experience and a vastly cheaper experience. Point to point, on a per person, per passenger, per ton, per mile basis.  So the Wright brothers can finally get excited that their invention from 1903, quite a long time ago, could finally, really change how humans live and move around the surface of the earth; even beyond, few tens of thousands of commercial and private aircraft that exist today.  Tim Hsiao: The other key questions or key focus for investors is about the business model. So, until now, the auto industry has centered on the car ownership model. But with this new technology, we've been hearing a new model, as you just mentioned, the shared mobility and the autonomous driving fleet. Experts say it could be major disruptor in this sector. So, what's your take on how this will evolve in developed and emerging markets?  Adam Jonas: Well, we think when you take autonomous and shared and electric mobility all the way – that transportation starts to resemble a utility like electricity or water or telecom; where the incremental mile traveled is maybe not quite free, but very, very, very low cost. Maybe only; the marginal cost of the mile traveled may only just be the energy required to deliver that mile, whether it's a renewable or non-renewable energy source.  And the relationship with a car will change a lot. Individual vehicle ownership may go the way of horse ownership. There will be some, but it'll be seen as a nostalgic privilege, if you will, to own our own car. Others would say, I don't want to own my own car. This is crazy. Why would anyone want to do that?  So, it's going to really transform the business model. It will, I think, change the structure of the industry in terms of the number of participants and what they do. Not everybody will win. Some of the existing players can win. But they might have to make some uncomfortable trade-offs for survival. And for others, the car – let’s say terrestrial vehicle modality may just be a small part of a broader robotics and then physical embodiment of AI that they're propagating; where auto will just be a really, really just one tendril of many, many dozens of different tendrils. So again, it's beginning now. This process will take decades to play out. But investors with even, you know, two-to-three or three-to-five-year view can take steps today to adjust their portfolios and position themselves.  Tim Hsiao: The other key focus of the investor over the market would definitely be the geopolitical dynamics. So, Morgan Stanley expects to see a lot of what you call coopetition between global OEMs and the Chinese suppliers. What do you mean by coopetition and how do you see this dynamic playing out, especially in terms of the tech deflation?  Adam Jonas: In order to reduce the United States dependency on China, we need to work with China. So, there's the irony here. Look, in my former life of being an auto analyst, every auto CEO I speak to does not believe that tariffs will limit Chinese involvement in the global auto industry, including onshore in the United States.  Many are actively seeking to work with the Chinese through various structures to give them an on-ramp to move onshore to produce their, in many cases, superior products, but in U.S. factories on U.S. shores with American workers. That might lead to some, again, trade-offs.  But our view within Morgan Stanley and working with you is we do think that there are on-ramps for Chinese hardware, Chinese knowhow, and Chinese electrical vehicle architecture, but while still being sensitive to the dual-purpose AI sensitivities around software and the AI networks that, for national security reasons, nations want to have more control over. And I actually am hopeful and seeing some signs already that that's going to happen and play out over the next six to 12 months.  Tim Hsiao: I would say it's clear that the road ahead isn't just smarter; it’s faster, more connected, and increasingly autonomous.  Adam Jonas: That's correct, Tim. I could not agree more. Thanks for joining me on the show today.  Tim Hsiao: Thanks, Adam. Always a pleasure.  Adam Jonas: And to our listeners, thanks for listening. Until next time, stay human and keep driving forward. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today. 

Our strategists Michelle Weaver and Adam Jonas join analyst Christopher Snyder to discuss the most important themes that emerged from the Morgan Stanley Annual Industrials Conference in Laguna Beach. Michelle Weaver: Welcome to Thoughts on the Market. I'm Michelle Weaver, Morgan Stanley's U.S. Thematic Strategist. Christopher Snyder: I'm Chris Snyder, Morgan Stanley's U.S. Multi-Industry Analyst. Adam Jonas: And I'm Adam Jonas, Morgan Stanley's Embodied AI Strategist. Michelle Weaver: We recently concluded Morgan Stanley's annual industrials conference in Laguna Beach, California, and wanted to share some of the biggest takeaways. It's Tuesday, September 16th at 10am in New York. I want to set the stage for our conversation. The overall tone at the conference was fairly similar to last year with many companies waiting for a broader pickup. And I'd flag three different themes that really emerged from the conference. So first, AI. AI is incredibly important. It appeared in the vast majority of fireside conversations. And companies were talking about AI from both the adopter and the enabler angle. Second theme on the macro, overall companies remain in search of a reacceleration. They pointed to consistently expansionary PMIs or a PMI above 50, a more favorable interest rate environment and greater clarity on tariffs as the key macro conditions for renewed momentum. And then the last thing that came up repeatedly was how are companies going to react to tariffs? And I would say companies overall were fairly constructive on their ability to mitigate the margin impact of tariffs with many talking about both leveraging pricing power and supply chain shifts to offset those impacts.  So, Chris, considering all this, the wait for an inflection came up across a number of companies. What were some of your key takeaways on multis, on the macro front? Christopher Snyder: The commentary was stable to modestly improving, and that was really consistent across all of these companies. There are, you know, specific verticals where things are getting better. I would call out data center as one. Non-res construction, as another one, implant manufacturing as one. And there were certain categories where we are seeing deterioration – residential HVAC, energy markets, and agriculture. But we came away more constructive on the cycle because things are stable, if not modestly improving into a rate cut cycle. The concern going in was that we would hear about deteriorating trends and a rate cut would be needed just to stabilize the market. So, we do think that this backdrop is supportive for better industrial growth into 2026. We have been positive on the project or CapEx side of the house. It feels like strength there is improving. We've been more cautious on the short cycle production side of the house. But we are starting to see signs of rate of change. So, when we look into [20]26 and [20]27, we think U.S. industrials are poised for decade high growth.  Michelle Weaver: You've had a thesis for a while now that U.S. reshoring is going to be incredibly important and that it's a $10 trillion opportunity. Can you unpack that number? What are some recent data points supporting that and what did you learn at the conference?   Christopher Snyder: Some of the recent data points that support this view is U.S. manufacturing construction starts are up 3x post Liberation Day. So, we're seeing companies invest. This is also coming through in commercial industrial lending data, which continues to push higher almost every week and is currently at now record high levels. So, there's a lot of reasons for companies not to invest right now. There's a lot of uncertainty around policy.  But seeing that willingness to invest through all of the uncertainty is a big positive because as that uncertainty lifts, we think more projects will come off the sidelines and be unlocked. So, we see positive rate of change on that.   What I think is often lost in the reassuring conversation is that this has been happening for the last five years. The U.S. lost share of global CapEx from 2000 when China entered the World Trade Organization almost every year till 2019 when Trump implemented his first wave of tariffs. Since then, the U.S. has taken about 300 basis points of global CapEx share over the last five years, and that's a lot on a $30 trillion CapEx base.  So, I think the debate here should be: Can this continue? And when I look at Trump policy, both the tariffs making imports more expensive, but also the incentives lowering the cost of domestic production – we do think these trends are stable. And I always want to stress that this is a game of increments. It's not that the U.S. is going to get every factory. But we simply believe the U.S. is better positioned to get the incremental factory over the next 20 years relative to the prior 20. And the best point is that the baseline growth here is effectively zero. Michelle Weaver: And how does power play into the reshoring story? AI and data centers are generating huge demand for power that well outstrip supply. Is there a risk that companies that want to reshore are not able to do so because of the power constraints? Christopher Snyder: It's a great question. I think it's part of the reason that this is moving more slowly. The companies that sell this power equipment tend to prioritize the data center customers given their scale in magnitude of buying. But ultimately, we think this is coming and it's a big opportunity for U.S. power to extend the upcycle. Manufacturing accounts for 26 percent of the electricity in the country. Data center accounts for about 5 percent. So, if the industrial economy returns to growth, there will be a huge pull on the grid; and I view it as a competitive advantage. If you think about the future of U.S. manufacturing, we're simply taking labor out and replacing it with electricity. That is a phenomenal trade off for the U.S. And a not as positive trade off for a lot of low-cost regions who essentially export labor to the world. I'm sure Adam will have more to say about that. Michelle Weaver: And Adam, I want to bring robotics and humanoid specifically into this conversation as the U.S.' technological edge is a big part of the reshoring story. So how do humanoids fit into reshoring? How much would they cost to use and how could they make American manufacturing more attractive? Adam Jonas: Humanoid robots – we're talking age agentic robots that make decisions from themselves autonomously due to the dual purpose in the military. You know, dual purpose aspect of it makes it absolutely necessary to onshore the technologies. At the same time, humanoid robots actually make it possible to onshore those technologies. Meaning you need; we're not going to be able to replicate manufacturing and onshore manufacturing the way it's currently done in China with their environmental practices and their labor – availability of affordable cheap human labor. Autonomous robots are both the cause of onshoring. And the effect of onshoring at the same time, and it's going to transform every industry. The question isn't so much as which industry will autonomous robots, including humanoids impact? It's what will it not. And we have not yet been able to find anything that it would. When you think about cost to use – we think by 2040 we get to a point where to Chris's point, the marginal cost of work will be some factor of electricity, energy, and some depreciation of that physical plant, or the physical robot itself. And we come up with a, a range of scenarios where centered on around $5 per hour. If that can replace two human workers at $25 an hour, that can NPV to around $200,000 of NPV per humanoid. That's discounting back 15 years from 2040. Michelle, there's 160 million people in the U.S. labor market, so if you just substituted 1 percent of that or 1.6 million people out of the U.S. Labor pool. 1.6 million times $200,000 NPV; that's $320 billion of value, which is worth, well, quite a lot. Quite a lot of money to a lot of companies that are working on this. So, when we get asked, what are we watching, well, in terms of the bleeding edge of the robot revolution, we're watching the Sino-U.S. competition. And I prefer to call it competition. And we're also watching the terra cap companies, the Mag 7 type companies that are quite suddenly and recently and very, very significantly going after physical AI and robotics talent. And increasingly even manufacturing talent. So again, to circle back to Chris's point, if you want evidence of reshoring and manufacturing and advanced manufacturing in this country, look at some of these TMT and tech and AI companies in California. And look at, go on their hiring website and watch all the manufacturing and robotics people that they're trying to hire; and pay a lot of money to do so. And that might be an interesting indicator of where we're going. Michelle Weaver: I want to dig in a little bit more there. We're seeing a lot of the cutting-edge tech coming out of China. Is the U.S. going to be able to catch up? Adam Jonas: Uh, I don't know. I don't know. But I would say what's our alternative. We either catch up enough to compete or we're up for grabs. OK? I would say from our reading and working closely with our team in China, that in many aspects of supply chain, manufacturing, physical AI, China is ahead. And with the passage of time, they are increasingly ahead. We estimate, and we can't be precise here, that China's lead on the U.S. would not only last three to five years, but might even widen three to five years from now. May even widen at an accelerating rate three to five years from now. And so, it brings into play is what kind of environment and what kind of regulatory, and policy decisions we made to help kind of level the playing field and encourage the right kind of manufacturing. We don't want to encourage trailing edge, Victorian era manufacturing in the U.S. We want to encourage, you know, to skate to where the puck is going technology that can help improve our world and create a sustainable abundance rather than an unsustainable one. And so, we're watching China very, very closely. It makes us a little bit; makes me a little bit kind of nervous when we – if we see the government put the thumb on the scale too much. But it's invariably going to happen. You're going to have increased involvement of whichever administration it is in order to kind of set policies that can encourage innovation, education of our young people, repurposing of labor, you know. All these people making machines in this country now. They might get, there may be a displacement over a number of years, if not a generation. But we need those human bodies to do other things in this economy as well. So, we; I don't want to give the impression at all in our scenarios that we don't need people anymore. Michelle Weaver: What are the opportunities and the risks that you see for investors as robotics converges with this broader U.S. manufacturing story? Adam Jonas: Well, Michelle, we see both opportunities and risks. There are the opportunities that you can measure in terms of what portion of global GDP of [$]115 trillion could you look at. I mean, labor alone is $40 trillion. And if you really make humanoid that can do the work of two workers, guess what? You're not going to stop at [$]40 trillion. You're going to go beyond that. You might go multiple beyond that. Talking about the world before AI, robotics and humanoid is like talking about the world before electricity. Or talking about business before the internet. We don't think we're exaggerating, but the proof will be in the capital formation.  And that's where we hope we can be of assistance to our clients working together on a variety of investment ideas. But the risks will come and it is our professional responsibility, if not our moral responsibility, to work with our partners across research to talk about those risks. Michelle, if we have labor displacement, go too quickly, there’s serious problems. And if you don't, if you don't believe me, go look at, look at you know, the French Revolution or the Industrial Revolution, or Age of Enlightenments. Ages of scientific enlightenment frequently cohabitate times of great social and political turmoil as well. And so, we think that these risks must be seen in parallel if we want to bring forth technologies that can make us more human rather than less human. I'm sorry if I'm coming across as a little preachy, but if you studied robots and labor all day long, it does have that effect on you. So, Michelle, how do you see innovation priorities changing for industrials and investors in this environment? Michelle Weaver: I think it's huge as we're seeing AI and technology broadly diffuse across different segments of the market, it's only becoming more important. About two-thirds of companies at the conference mentioned AI in some way, shape, or form. We know that from transcripts. And we're seeing them continue to integrate AI into their businesses. They're trying to go beyond what we've just seen at the initial edge. So, for example, if I think about what was going on within AI adoption a couple years ago, it was largely adding a chat bot to your website that's then able to handle a lot of customer service inquiries. Maybe you could reduce the labor there a little bit. Now we're starting to see a lot more business specific use cases. So, for example, with an airline, an airline company is using AI to most optimally gate different planes as they're landing to try and reduce connection times. They know which staff needs to go to another flight to connect, which passengers need to move to another flight. They're able to do that much more efficiently. You're seeing a lot on AI being adopted within manufacturing to make manufacturing processes a lot more seamless. So, I think innovation is only going to continue to become more important to not only industrials, but broadly the entire market as well. Clearly the industry is being shaped by adaptability, collaboration, and a focus on innovation. So, Chris, Adam, thank you both for taking the time to talk. Adam Jonas: Always a pleasure. Michelle. Christopher Snyder: Thank you for having us on. Michelle Weaver: And to our listeners, thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen to the show and share the podcast with a friend or colleague today.

For investors looking to make sense of housing-related assets amidst changes in Fed policy stance, our co-heads of Securitized Product Research Jay Bacow and James Egan offer their perspective on mortgage rates and the market. Read more insights from Morgan Stanley. ----- Transcript -----    James Egan: Welcome to Thoughts on the Market. I'm Jim Egan, co-head of Securitized Products Research at Morgan Stanley. Jay Bacow: I'm Jay Bacow, the other co-head of Securitized Products Research at Morgan Stanley. Today we're talking about the Fed, mortgage rates and the implications to the housing market. It's Monday, September 15th at 11:30am in New York. Now Jim, the Fed is meeting on Wednesday, and both our economists and the market are expecting them to cut rates in this meeting – and continue to cut rates at least probably two more times in 2025, and multiple times in 2026. We've talked a lot about the challenges and the affordability in the U.S. homeowners’ market, in the U.S. mortgage market. Before we get into what this could help [with] the affordability challenges, how bad is that affordability right now? James Egan: Sure. And as we've discussed on this podcast in the past, one of the biggest issues with the affordability challenges in the U.S. housing market specifically is how it's fed through to supply issues as the lock-in effect has kept homeowners with low 30-year mortgage rates from listing their homes. But just how locked in does the market remain today? The effective rate on the outstanding mortgage market, kind of the average of the mortgages outstanding, is below 4.25 percent. The prevailing rate for 30-year mortgages today is still over 6.25 percent, so we're talking about two full percentage points, 200 basis points outta the money. Jay Bacow: And that seems like a lot. Has it been that way in the past? James Egan: If we look at roughly 40 years of data ending in 2022, the market was only 100 basis points outta the money for eight individual quarters. The most it was ever out of the money was 135 basis points. We have now been more than 200 basis points out of the the money for three entire years, 12 consecutive quarters. So, this is very unprecedented in the past several decades. But Jay, our economists are calling for Fed cuts, the market's pricing in Fed cuts. How much lower is the mortgage rate going for these affordability equations? Jay Bacow: We actually don't think that the Fed cutting rates necessarily is going to cause the mortgage rate to come down at all. And one way we can think about this is if we look at it, the Fed has already cut rates 100 basis points over the past year, and since the Fed has cut rates 100 basis points in the past year, the mortgage rate is 25 basis points higher. James Egan: Okay, so if I'm not going to be looking at Fed funds for the path of mortgage rates going forward, I have two questions for you. One, what part of the Treasury term structure should I be looking at? And two, you talked about the market pricing in Fed cuts from here. What is the market saying about where those rates will be in the future? Jay Bacow: So, mortgage rates are much more sensitive to the belly of the Treasury curve. Call it the 5- and 10-year portions than Fed funds. They have a little bit of sensitivity to the third year note as well. And when we think about what the market is expecting those portions of the Treasury curve to do, I apologize, I'm going to have to nerd out. Fortunately, being a nerd comes very naturally to me. If you look at the spread between the 5- and the 10-year portion of the treasury curve, 10 years yield about 50 basis points more than the 5-year note. So, you think about it, an investor could buy a 10-year note now. Or they could buy a 5-year note now and then another 5-year note in five years, and they should expect to get the same return if they do either one. So, if they buy the 10-year note right now at 50 basis points above where the 5-year note is. Or they buy the 5-year note, right now, the 5-year note in five years would have to yield 100 basis points above to get the average to be the same. Well, if the 5-year note in five years is 100 basis points above where the 5-year note is right now, mortgage rates are also probably going to be higher in five years. James Egan: Okay, so that's not helping the affordability issues. What can be done to lower mortgage rates from here? Jay Bacow: Well, going back to my inner nerd, if you brought the 5- and 10-year Treasury yields down, that would certainly be helpful. But mortgage rates aren't just predicated on where the Treasury yields are. There's also a risk premium on top of that. And so, if the mortgage originators can sell those loans to other investors at a tighter spread, that would also help bring the rate down. And there are things that can be done on that front. So, for instance, if the capital requirements for investors to own those mortgages go down, that would certainly be helpful. You could try to incentivize investors in a number of different ways, that's one front. But in reality, a lot of these fees are already sort of stuck in place. So, there's only so much that can be done. Now, Jim, let's suppose. I am wrong. I've been wrong in the past. A lot of times with you. I thought the Patriots were gonna beat the Giants in both Super Bowls. Somehow Eli Manning proved me wrong. However, if the mortgage rate does come down, how much does it have to come down for housing activity to start picking up? James Egan: So, this is a question we get asked roughly six to seven times a day… Jay Bacow: How did Eli Manning beat the Patriots? James Egan: How far mortgage rates have to come down in order to really get housing sales started again. And because of the backdrop of today's housing and mortgage markets that we laid out at the top of this podcast, it's really difficult to empirically point to a mortgage rate and calculate this is where rates have to fall to. So, what we have been doing instead is looking at historic periods of affordability improvement, and seeing how much do we need to get that affordability ratio down to get a sustainable growth in sales volumes from here. Jay Bacow: All right. And how much do we have to get that affordability ratio down? James Egan: So, a sustainable increase; historically, we've needed about a 10 percent improvement in the affordability ratio… Jay Bacow: Alright, help me out here. I think about mortgage payments as more of a function of the rate level. So, if we're in the context of like 6.25, 6.5 right now, how far does the mortgage rate need to drop to get a 10 percent improvement? Assuming that there's no change in borrower's income or home prices. James Egan: In that world, we think you need about 100 basis point move. It would take the 30-year mortgage rate to call it, 5.5 percent. Jay Bacow: All right, so if mortgage rates go to 5.5 percent, then we're going to immediately see housing activity pickup. James Egan: That is not exactly what we're saying. What we've seen is the 10 percent improvement is enough to get sustainable growth in sales volumes. A year after you start to see that real improvement, the contemporaneous moves can be up, they can be down. Given what our economists are saying for the labor market going forward, what they're saying for growth in the United States, we do think you can see a little bit of contemporaneous growth. If you start to see that 100 basis point move in mortgage rates now, we think you'll get about a 5 percent increase in purchase volumes as we move through 2026 with the potential for upward inflection in 2027 from that 5 percent growth number – again, if we get that move in mortgage rates. Jay Bacow: Alright, so we expect the Fed to cut rates about 150 basis points over the next year and a half. It doesn't necessarily have to bring the mortgage rate down. But if the mortgage rate does go down to in the context of 5.5 percent, we should start to get a pickup in housing activity maybe the year after that. Jim, always a pleasure talking to you. James Egan: Pleasure talking to you too, Jay. And to all of you regularly hearing us out, thank you for listening to another episode of Thoughts on the Market. Jay Bacow: Please leave us a review or a like wherever you get this podcast and share your Thoughts on the Market with a friend or colleague today. James Egan: Go smash that subscribe button.

Online crime is accelerating, making cybersecurity a fast-growing and resilient investment opportunity. Our Cybersecurity and Network and Equipment analyst Meta Marshall discusses the key trends driving this market shift. Read more insights from Morgan Stanley. ----- Transcript -----  Welcome to Thoughts on the Market. I’m Meta Marshall, Morgan Stanley’s Cybersecurity and Network and Equipment Analyst. Today – the future of digital defense against cybercrime.  It’s Friday, September 12th, at 10am in New York. Imagine waking up to find your bank account drained, your business operations frozen, or your personal data exposed – all because of a cyberattack. Today, cybersecurity isn't an esoteric tech issue. It impacts all of us, both as consumers and investors.  As the digital landscape grows increasingly complex, the scale and severity of cybercrime expand in tandem. This means that even as companies spend more, the risks are multiplying even faster. For investors, this is both a warning and an opportunity. Cybersecurity is now a $270 billion market. And we expect it to grow at 12 percent per year through 2028. That's one of the fastest growth rates across software.  And here's another number worth noting: Chief Information Officers we surveyed expect cybersecurity spending to grow 50 percent faster than software spending as a whole. This makes cybersecurity the most defensive area of IT budgets—meaning it’s least likely to be cut, even in tough times. This hasn’t been lost on investors. Security software has outperformed the broader market, and over the past three years, security stocks have delivered a 58 percent return, compared to just 22 percent for software overall and 79 percent for the NASDAQ. We expect this outperformance against software to continue as AI expands the number of ways hackers can get in and the ways those threats are evolving. Looking ahead, we see a handful of interconnected mega themes driving investment opportunities in cybersecurity. One of the biggest is platformization – consolidating security tools into a unified platform. Today, major companies juggle on average 130 different cyber security tools. This approach often creates complexity, not clarity, and can leave dangerous gaps in protection particularly as the rise of connected devices like robots and drones is making unified security platforms more important than ever. And something else to keep in mind: right now, security investments make up only 1 percent of overall AI spending, compared to 6 percent of total IT budgets—so there’s a lot of room to grow as AI becomes ever more central to business operations.   In today’s cybersecurity race, it’s not enough to simply pile on more tools or chase the latest buzzwords. We think some of the biggest potential winners are cybersecurity providers who can turn chaos into clarity. In addition to growing revenue and free cash flow, these businesses are weaving together fragmented defenses into unified, easy-to-manage platforms. They want to get smarter, faster, and more resilient – not just bigger. They understand that it’s key to cut through the noise, make systems work seamlessly together, and adapt on a dime as new threats emerge. In cybersecurity, complexity is the enemy—and simplicity is the new superpower.  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.

Our Chief Asia Economist Chetan Ahya discusses how the evolving trade relationship between India and China could redefine global supply chains and unlock new investment opportunities. Read more insights from Morgan Stanley. ----- Transcript -----  Welcome to Thoughts on the Market. I’m Chetan Ahya, Morgan Stanley’s Chief Asia Economist.  Today – one of the most important economic relationships of our time: India and China. And what the future may hold.  It’s Thursday, September 11th at 2 pm in Hong Kong. Trade dynamics between India and China are evolving rapidly. They are not just shaping their own futures. They are influencing global supply chains and investment flows.  India’s trade with China has nearly doubled in the last decade. India’s bilateral trade deficit with China is its largest—currently at U.S. $120 billion. On the flip side, China’s trade surplus with India is the biggest among all Asian economies.   We expect this trade relationship to deepen given economic imperatives. India needs support on tech know-how, capital goods and critical inputs; and China needs to capitalize on growth opportunities in the second largest and fastest growing EM. Let’s explore these issues in turn.  India needs to integrate itself into the global value chain. And to do that, India needs Foreign Direct Investment from China, much like how China’s rise was fueled by Foreign Direct Investment from the U.S., Europe, Japan, and Korea, which brought the technology and expertise. For India, easing restrictions on Chinese FDI could be a game-changer, enabling the transfer of tech know-how and boosting manufacturing competitiveness.  Now, China is the world’s manufacturing powerhouse. It accounts for more than 40 percent of the global value chain—far ahead of the U.S. at 13 percent and India at just 4 percent. The global goods trade is increasingly focused on products higher up the value chain—think semiconductors, EVs, EV batteries, and solar panels. And China is the top global exporter in six of eight key manufacturing sectors. To put it quite simply, any economy that is looking to increase its participation in global value chains will have to increase its trade with China.  For India, this means that it must rely on Chinese imports to meet its increasing demand for capital goods as well as critical inputs that are necessary for its industrialization. In fact, this is already happening. More than half of India’s imports from China and Hong Kong are capital goods—i.e. machinery and equipment needed for manufacturing and infrastructure investment. Industrial supplies make [up] another third of the imports, highlighting India’s dependence on China for critical inputs.  From China’s perspective, India is the second largest and fastest-growing emerging market. And with U.S.-China trade tensions persisting, China is diversifying its exports markets, and India represents a significant opportunity. One way Chinese companies can capture this growth opportunity is to invest in and serve the domestic market. Chinese mobile phone companies have already been doing this and whether this can broaden to other sectors will depend on the opening up of India’s markets.  To sum up, India can leverage on China’s strengths in manufacturing and technology while China can utilize India’s vast market for exports and investment. However, there’s a caveat: geopolitics. While economic imperatives point to deeper trade and investment ties, political developments could slow progress. Investors should watch this space closely and we will keep you updated on key developments.  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.

Our Metals & Mining Commodity Strategist Amy Gower discusses her bullish outlook for gold and what the metal’s rally in 2025 says about inflation, central banks, and global risk. Read more insights from Morgan Stanley. ----- Transcript ----- Welcome to Thoughts on the Market. I’m Amy Gower, Morgan Stanley’s Metals & Mining Commodity Strategist.  Today, we’re talking about gold, a metal that’s more than just a safe haven for investors, and what it tells us about the global economy and markets right now. It’s Wednesday, September 10th, at 3pm in London.  Gold has always been the go-to asset in times of uncertainty. But in 2025, its role is evolving. Investors are watching gold not just as a hedge against inflation, but as a barometer for everything from central bank policy to geopolitical risk. When gold prices move, it’s often a sign that something big is happening beneath the surface. Gold and silver have both already clocked up hefty year-to-date gains of 39 and 42 percent respectively. So, what’s been driving this rally?  Well, several factors stand out. For one, central banks are on track for another year of strong buying, with gold now representing a bigger share of central bank reserves than treasuries for the first time since 1996. This is a strong vote of confidence in gold’s long-term value. Also, gold-backed Exchange-Traded Funds, or ETFs, saw inflows of $5 billion in August alone, with the year-to-date inflows the highest on record outside of 2020, signaling renewed interest from institutional investors too. With inflation still above target in many major economies, gold’s appeal has been surprisingly resilient despite being a non-yielding asset. And investors are betting that central banks may soon have to cut rates, which could further boost gold prices.    In fact, from here we see around 5 percent further upside to gold by year end to $3800/oz which would be a new all-time high.  But there is one important wrinkle to consider. Keep in mind that while precious metals, especially gold, are primarily seen as a hedge and safe haven in times of macro uncertainty, jewelry is a big chunk of the overall precious metals market. It accounts for 40 percent of gold demand and 34 percent of silver demand. And right now how jewelry demand will evolve remains an unknown. In fact, jewelry demand is already showing signs of weakness. Second-quarter gold jewelry demand was the worst since the third quarter of 2020 as consumers reacted to high prices. Nonetheless, gold was able to hold onto its January-April gains, and silver continued to grind higher, supported by strong demand from the solar industry as well. However, until recently, the two metals were lacking catalysts for further gains.  Now though this is changing, with both gold and silver poised to benefit from expected Fed rate cuts. Our economists expect the Fed to cut rates at the September meeting, for the first time since December 2024. And if we look back to the 1990s, on average gold and silver prices have risen 6 and 4 percent respectively in the 60 days following the start of a Fed rate-cutting cycle as lower yields make it easier for non-yielding assets to compete.  Our FX strategists also expect further dollar weakness, which should ease some of the price pressures for holders of non-USD currencies, while India’s imports of gold and silver already showed signs of improvement in July. The country is looking also to reform its Goods and Services tax, which could free up purchasing power for gold and silver ahead of festival and wedding season.  Gold does tend to outperform after Fed rate cuts, and we would keep the preference for gold over silver, but our outlook for both metals remains positive.  Of course, precious metals are not risk-free. Prices can be volatile, and if central banks surprise the market with higher interest rates, gold in particular could lose some of its luster. But for now, both gold and silver should continue to shine.  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.

Many Americans struggle with the rising cost of healthcare. Analysts Terence Flynn and Erin Wright explain how AI might bend the cost curve, from Morgan Stanley’s 23rd annual Global Healthcare Conference in New York. Read more insights from Morgan Stanley. ----- Transcript ----- Terence Flynn: Welcome to Thoughts on the Market. I'm Terence Flynn, Morgan Stanley's U.S. Biopharma Analyst. Erin Wright: And I'm Erin Wright, U.S. Healthcare Services Analyst. Terence Flynn: Thanks for joining us. We're actually in the midst of the second day of Morgan Stanley's annual Global Healthcare Conference, where we hosted over 400 companies. And there are a number of important themes that we discussed, including healthcare policy and capital allocation. Now, today on the show, we're going to discuss one of these themes, healthcare spending, which is one of the most pressing challenges facing the U.S. economy today. It is Tuesday, September 9th at 8am in New York. Imagine getting a bill for a routine doctor's visit and seeing a number that makes you do a double take. Maybe it's $300 for a quick checkup or thousands of dollars for a simple procedure. For many Americans, those moments of sticker shock aren't rare. They are the reality. Now with healthcare costs in the U.S. higher than many other peer countries on a percentage of GDP basis, it's no wonder that everyone – not just investors – is asking; not just, ‘Why is this happening?’ But ‘How can we fix it?’ And that's why we're talking about AI today. Could it be the breakthrough needed to help rein in those costs and reshape how care is delivered? Now I'm going to go over to you, Erin. Why is U.S. healthcare spending growing so rapidly compared to peer countries? Erin Wright: Clearly, the aging population in the U.S. and rising chronic disease burden here are clearly driving up demand for healthcare. We're seeing escalating demand across the senior population, for instance. It's coinciding with greater utilization of more sophisticated therapeutics and services. Overall, it's straining the healthcare system. We are seeing burnout in labor constraints at hospitals and broader health systems overall. Net-net, the U.S. spent 18 percent of GDP on healthcare in 2023, and that's compared to only 11 percent for peer countries. And it's projected to reach 25 to 30 percent of GDP by 2050. So, the costs are clearly escalating here. Terence Flynn: Thanks, Erin. That's a great way to frame the problem. Now, as we think about AI, where does that come in to help potentially bend the cost curve? Erin Wright: We think AI can drive meaningful efficiencies across healthcare delivery, with estimated savings of about [$]300 to [$]900 billion by 2050. So, the focus areas include here: staffing, supply chain, scheduling, adherence. These are where AI tools can really address some of these inefficiencies in care and ultimately drive health outcomes. There are implementation costs and risks for hospitals, but we do think the savings here can be substantial. Terence Flynn: Great. Well, let's unpack that a little bit more now. So, if you think about the biggest cost buckets in hospitals, where can AI help out? Erin Wright: The biggest cost bucket for a hospital today clearly is labor. It represents about half of spend for a hospital. AI can optimize staffing, reduce burnout with a new scribe and some of these scribe technologies that are out there, and more efficient healthcare record keeping. I mean, this can really help to drive meaningful cost savings. Just to add another discouraging data point for you, there's estimated to be a shortage of about 10,000 critical healthcare workers in 2028. So, AI can help to address that. AI tools can be used across administrative functions as well. That accounts for about 15 to 20 percent of spend for a hospital. So, we see substantial savings as well across drugs, supplies, lab testing, where AI can reduce waste and improve adherence overall. Terence Flynn: Great. Maybe we'll pivot over to the managed care and value-based care side now. How is AI being used in these verticals, Erin? Erin Wright: For a healthcare insurer – and they're facing many challenges right now as well – AI can help personalize care plans. And they can support better predictive analytics and ultimately help to optimize utilization trends. And it can also help to facilitate value-based care arrangements, which can ultimately drive better health outcomes and bend the cost curve. And ultimately that's the key theme that we're trying to focus on here. So, I'll turn it over to you, Terence, now. While hospitals and payers could see notable benefits from AI, the biopharma side of the equation is just as critical here. Especially when it comes to long-term cost containment. You've been closely tracking how AI is transforming drug development. What exactly are you seeing? Terence Flynn: Yeah, a number of key constituents are leaning in here on AI in a number of different ways. I'd say the most meaningful way that could help bend the cost curve is on R&D productivity. As many people probably know, it can take a very long time for a drug to reach the market anywhere from eight to 10 years. And if AI can be used to improve that cycle time or boost the probability of success, the probability of a drug reaching the market – that could have a meaningful benefit on costs. And so, we think AI has the potential to increase drug approvals by 10 to 40 percent. And if that happens, you can ultimately drive cost savings of anywhere from [$]100 billion to [$]600 billion by 2050. Erin Wright: Yeah, that sounds meaningful. How do you think additional drug approvals lead to meaningful cost savings in the healthcare system? Terence Flynn: Look, I mean, high level medicines at their best cure disease or prevent people from being admitted to a hospital or seeking care to doctor's office. Equally important medicines can get people out of the hospital quicker and back to contributing or participating in society. And there's data out there in the literature showing that new drugs can reduce hospital stays by anywhere from 11 to 16 percent. And so, if you think about keeping people out of hospitals or physician offices or reducing hospital stays, that really can result in meaningful savings. And that would be the result of more or better drugs reaching the market over the next decades. Erin Wright: And how is the FDA now supporting or even helping to endorse AI driven drug development? Terence Flynn: If companies are applying for more drug approvals here as a result of AI discovery capabilities without modernization, the FDA could actually become the bottleneck and limit the number of drugs approved each year. And so, in June, the agency rolled out an AI tool called Elsa that's looking to improve the drug review timelines. Now, Elsa has the potential to accelerate these timelines for new therapies. It can take anywhere from six to 10 months for the FDA to actually approve a drug. And so, these AI tools could potentially help decrease those timelines. Erin Wright: And are you actually seeing some of these biopharma companies actually investing in AI talent? Terence Flynn: Yes, definitely. I mean, AI related job postings in our sector have doubled since 2021. Companies are increasingly hiring across the board for a number of different, parts of their workflow, including discovery, which we just talked about. But also, clinical trials, marketing, regulatory – a whole host of different job descriptions. Erin Wright: So, whether it's optimizing hospital operations or accelerating drug discovery, AI is emerging as a powerful lever here – to bend the healthcare cost curve. Terence Flynn: Exactly. The challenge is adoption, but the potential is transformative. Erin, thanks so much for taking the time to talk with us. Erin Wright: Great speaking with you, Terence. Terence Flynn: And thanks everyone 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.