Our Hong Kong/China Transportation & Infrastructure Analyst Qianlei Fan explores how a potential peace deal in Ukraine could reshape the global airline industry.

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Welcome to Thoughts on the Market. I’m Qianlei Fan, Morgan Stanley’s Hong Kong/China Transportation Analyst. Today’s topic is how a potential peace deal in Ukraine could affect global airlines. 

It’s Friday, February 21st, at 2pm in Hong Kong. 

The situation remains fluid, but we believe a potential peace deal in Ukraine could have broad implications for the global airline industry. From the reopening of Russian airspace to potential changes in fuel prices and flight routes, there are many variables at play. 

Russian airspace is currently off-limits due to the conflict, but a peace agreement could change that. The reopening of Russian airspace would be a significant catalyst for global airlines, reducing travel times and fuel consumption on routes between Europe, North America, and Asia. 

Fuel prices account for 20-40 per cent of airlines' costs, so any changes can have a significant impact on their bottom line. We believe a peace deal could lead to a moderate fall in fuel prices, benefiting all airlines, but particularly those with high-cost exposure and low margins. 

There could also be specific regional implications. The European air travel market could benefit significantly from an end to the Ukraine conflict. The reopening of Russian airspace would improve European airlines’ competitiveness on Asian routes, while a fall in fuel prices would reduce their operating costs. There would also be lower congestion in the intra-European market. 

Asian airlines, particularly Chinese ones, could experience a mixed impact. On the one hand, they could see an increase in wide-body utilization and passenger numbers if more direct flights to the U.S. are introduced. On the other hand, losing their advantage over European airlines of flying through Russian airspace would be negative. But, at the same time, Chinese airlines should remain competitive on pricing given meaningfully lower labor costs. 

U.S. airlines could also benefit in two significant ways. They could see a boost in revenues from adding back profitable routes such as U.S. to India or U.S. to South Korea that may have been suspended. Being able to fly directly over Russia would mean shorter, more direct flight paths resulting in less fuel burn and lower costs. U.S. airlines could also see a cost decrease from a moderate fall in jet fuel prices. 

Finally, Latin American carriers could also benefit from a peace deal. If global carriers reallocate capacity to China, it could tighten the market even further, creating an attractive capacity environment for the LatAm region. 

We’ll continue to bring you relevant updates on this evolving situation. 

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 Global Chief Economist Seth Carpenter explains the potential domino effect that President Trump’s reciprocal tariffs could have on the U.S. and global economies.

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Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist, and today I'm going to talk about downside risks to the U.S. economy, especially from tariffs.

It's Thursday, February 20th at 10am in New York.

Once again, tariffs are dominating headlines. The prospect of reciprocal tariffs is yet one more risk to our baseline forecast for the year. We have consistently said that the inflationary risk of tariffs gets its due attention in markets but the adverse growth implications that's an underappreciated risk.

But we, like many other forecasters, were surprised to the upside in 2023 and 2024. So maybe we should ask, are there some upside risks that we're missing?

The obvious upside risk to growth is a gain in productivity, and frequent readers of Morgan Stanley Research will know that we are bullish on AI. Indeed, the level of productivity is higher now than it was pre-COVID, and there is some tentative estimate that could point to faster growth for productivity as well.

Of course, a cyclically tight labor market probably contributes and there could be some measurement error. But gains from AI do appear to be happening faster than in prior tech cycles. So, we can't rule very much out. In our year ahead outlook, we penciled in about a-tenth percentage point of extra productivity growth this year from AI. And there is also a bit of a boost to GDP from AI CapEx spending.

Other upside risks, though, they're less clear. We don't have any boost in our GDP forecast from deregulation. And that view, I will say, is contrary to a lot of views in the market. Deregulation will likely boost profits for some sectors but probably will do very little to boost overall growth. Put differently, it helps the bottom line far more than it helps the top line. A notable exception here is probably the energy sector, especially natural gas.

Our baseline view on tariffs has been that tariffs on China will ramp up substantially over the year, while other tariffs will either not happen or be fleeting, being part of, say, broader negotiations. The news flow so far this year can't reject that baseline, but recently the discussion of broad reciprocal tariffs means that the risk is clearly rising.

But even in our baseline, we think the growth effects are underestimated. Somewhere in the neighborhood of two-thirds of imports from China are capital goods or inputs into U.S. manufacturing. The tariffs imposed before on China led to a sharp deterioration in industrial production. That slump went through the second half of 2018 and into and all the way through 2019 as a drag on the broader economy. Just as important, there was not a subsequent resurgence in industrial output.

Part of the undergraduate textbook argument for tariffs is to have more produced at home. That channel works in a two-economy model. But it doesn't work in the real world.

Now, the prospect of reciprocal tariffs broadens this downside risk. Free trade has divided production functions around the world, but it's also driven large trade imbalances, and it is precisely these imbalances that are at the center of the new administration's focus on tariffs. China, Canada, Mexico – they do stand out because of their imbalances in terms of trade with the U.S., but the underlying driving force is quite varied. More importantly, those imbalances were built over decades, so undoing them quickly is going to be disruptive, at least in the short run.

The prospect of reciprocity globally forces us as well to widen the lens. The risks aren't just for the U.S., but around the world. For Latin America and Asia in particular, key economies have higher tariff supply to U.S. goods than vice versa.

So, we can't ignore the potential global effects of a reciprocal tariff.

Ultimately, though, we are retaining our baseline view that only tariffs on China will prove to be durable and that the delayed implementation we've seen so far is consistent with that view. Nevertheless, the broad risks are clear.

Thanks for listening. And if you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Our co-heads of Securitized Products Research, James Egan and Jay Bacow, explain how the increase in home prices, a tight market supply and steady mortgage rates are affecting home sales.

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James Egan: Welcome to Thoughts on the Market. I'm Jim Egan, co-head of Securitized Products Research at Morgan Stanley.

Jay Bacow: And I'm Jay Bacow, the other co-head of Securitized Products Research at Morgan Stanley.

Today, a look at the latest trends in the mortgage and housing market.

It's Wednesday, February 19th, at 11am in New York.

Now, Jim, there's been a lot of headlines to kick off the year. How is the housing market looking here? Mortgage rates are about 80 basis points higher than the local lows in September. That can't be helping affordability very much.

James Egan: No, it is not helping affordability. But let's zoom out a little bit here when talking about affordability. The monthly payment on the medium-priced home had fallen about $225 from the fourth quarter of 2023 to local troughs in September. About a 10 percent decrease. Since that low, the payment has increased about $150; so, it's given back most of its gains.

Importantly, affordability is a three-pronged equation. It's not just that payment. Home prices, mortgage rates, and incomes. And incomes are up about 5 percent over the past year. So, affordability has improved more than those numbers would suggest, but those improvements have certainly been muted as a result of this recent rate move. 

Jay Bacow: Alright. Affordability is up, then it’s down. It’s wrong, then it’s right. It sounds like a Katy Perry song. So, how have home sales evolved through this rollercoaster?

James Egan: Well, you and I came on this podcast several times last year to talk about the fact that home sales volumes weren't really increasing despite the improvement in affordability. One point that we made over and over again was that it normally takes 9 to 12 months for sales volumes to increase when you get this kind of affordability improvement. And that would make the fourth quarter of 2024 the potential inflection point that we were looking for. And despite this move in mortgage rates, that does appear to have been the case. Existing home sales had a very strong finish to last year. And in the fourth quarter, they were up 8 percent versus the fourth quarter of 2023. That's the first year-over-year increase since the second quarter of 2021.

Jay Bacow: All right. So that's pretty meaningful. And if looking backward, home sales seem to be inflecting, what does that mean for 2025?

James Egan: So, there's a number of different considerations there. For one thing, supply – the number of homes that are actually for sale – is still very tight, but it is increasing. It may sound a little too simplistic, but there do need to be homes for sale for homes to sell, and listings have reacted faster than sales. That strong fourth quarter in existing home sales that I just mentioned, that brought total sales volumes for the year to 1 percent above their 2023 levels. For sale inventory finished the year up 14 percent.

Jay Bacow: Alright, that makes sense. So, more people are willing to sell their home, which means there's a little bit more transaction volume. But is that good for home prices?

James Egan: Not exactly. And it is those higher listings and our expectation that listings are going to continue to climb that's been the main factor behind our call for home price growth to continue to slow. Ultimately, we think that you see home sales up in the context of about 5 percent in 2025 versus 2024.

Our leading indicators of demand have softened, a little, in December and January, which may be a result of this sharp increase in rates. But ultimately, when we look at turnover in the housing market, and we're talking about existing sales as a share of the outstanding homes in the U.S. housing market, we think that we're kind of at the basement right now. If we're wrong in our sales volume call, I would think it's more likely that there are more sales than we think. Not less.

Jay Bacow: Let me ask you another easy question. How far would rates have to fall to really incentivize more supply and/or demand in the housing market?

James Egan: That's the $45 trillion question. We think the current housing market presents a fascinating case study in behavioral economics. Even if mortgage rates were to decline to 4.5 percent, only 35 percent of people would be in the money. And that's still over 200 basis points from where we are today.

That being said, we think it's unlikely that mortgage rates need to fall all the way to that level to unlock the housing market. While the lack of any historical precedent makes it difficult for us to identify a specific threshold at which activity could increase meaningfully, we recently turned to Morgan Stanley's AlphaWise to conduct a consumer pulse survey to get a better sense of how people were feeling about their housing options.

Jay Bacow: I like data. How are those people feeling?

James Egan: All right, so 31 percent of people anticipate buying a home over the next two years, and almost half are considering buying over the next five. Interestingly, only 21 percent are considering selling their home over the next two years. In other words, perceived demand is about 50 percent greater than marginal supply, at least in the immediate future, which we think could be a representation of that lock-in effect.

Current homeowners’ expectations of near-term listings are depressed because of how low their mortgage rate is. But we did ask: What if mortgage rates were to fall from 6.8 percent today to 5. 5 percent? In that world, 85 to 90 percent of the people planning to buy a home in the next two years stated that they would be more likely to execute on that purchase.

So, we think it's safe to say that a decline in mortgage rates could accelerate purchase decisions. But Jay, are we going to see that decline?

Jay Bacow: Well, our interest rate strategists do think that rates are going to rally from here. They've updated their 10-year forecast to expect the tenure note ends 2025 at 4 percent. If the tenure note's at 4 percent, mortgage rate should come down from here, but not to that 4.5 percent, or probably even that 5.5 percent level that you quoted. You know, honestly, you don't really want to stay, you don't really want to go. We're probably talking about like a 6 percent mortgage rate. Not quite that level.

But Jim, this is a national level, a national mortgage rate, and housing markets about location and location and location. Are there geographical nuances to your forecast?

James Egan: People all over the country are asking, should they stay or should they go now, and that answer is different depending on where you live, right? If you look at the top 100 MSAs in the country, 8 of the top 11 markets showing the largest increases in inventory over the past year can be found in Florida.

So, we would expect Florida to be a little bit softer than our national numbers. On the other hand, inventory growth has been most subdued in the Northeast and the Midwest, with several markets continuing to see inventory declines.

Jay Bacow: All right, well selfishly, as somebody that lives in the Northeast, I am a little bit happy to hear that. But otherwise, Jim, it's always a pleasure listening to you.

James Egan: Pleasure talking to you too, Jay. Thanks for listening, and if you enjoy this podcast, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

DISCLAIMER

Jay Bacow: So, Jim, the lock-in effect is: You don’t really want to stay. No. But you don’t really want to go.

James Egan: That is exactly; that is perfect! Wow. That is the whole issue with the housing market.

Our CIO and Chief U.S. Equity Strategy Mike Wilson suggests that stock, factor and sector selection remain key to portfolio performance.

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Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief US Equity Strategist. Today on the podcast I’ll be discussing equities in the context of higher rates and weaker earnings revisions. 

It's Tuesday, Feb 18th at 11:30am in New York. 

So let’s get after it.

Since early December, the S&P 500 has made little headway. The almost unimpeded run from the summer was halted by a few things but none as important as the rise in 10-year Treasury yields, in my view. In December, we cited 4 to 4.5 percent as the sweet spot for equity multiples assuming growth and earnings remained on track. We viewed 4.5 percent as a key level for equity valuations. And sure enough, when the Fed leaned less dovish at its December meeting, yields crossed that 4.5 percent threshold; and correlations between stocks and yields settled firmly in negative territory, where they remain. In other words, yields are no longer supportive of higher valuations—a key driver of returns the past few years. 

Instead, earnings are now the primary driver of returns and that is likely to remain the case for the foreseeable future. While the Fed was already increasingly less dovish, the uncertainty on tariffs and last week’s inflation data could further that shift with the bond market moving to just one cut for the rest of the year. Our official call is in line with that view with our economists now just looking for just one cut–in June. It depends on how the inflation and growth data roll in. 

Our strategy has shifted, too. With the S&P 500 reaching our tactical target of 6100 in December and earnings revision breadth now rolling over for the index, we have been more focused on sectors and factors. In particular, we’ve favored areas of the market showing strong earnings revisions on an absolute or relative basis.

Financials, Media and Entertainment, Software over Semiconductors and Consumer Services over Goods continue to fit that bill. Within Defensives, we have favored Utilities over Staples, REITs and Healthcare. While we’ve seen outperformance in all these trades, we are sticking with them, for now. We maintain an overriding preference for Large-cap quality unless 10-year Treasury yields fall sustainably below 4.5 percent without a meaningful degradation in growth. The key component of 10-year yields to watch for equity valuations remains the term premium – which has come down, but is still elevated compared to the past few years. 

Other macro developments driving stock prices include the very active policy announcements from the White House including tariffs, immigration enforcement, and cost cutting efforts by the Department of Government Efficiency, also known as DOGE. For tariffs, we believe they will be more of an idiosyncratic event for equity markets. However, if tariffs were to be imposed and maintained on China, Mexico and Canada through 2026, the impact to earnings-per-share would be roughly 5-7 percent for the S&P 500. That’s not an insignificant reduction and likely one of the reasons why guidance this past quarter was more muted than fourth quarter results. 

Industries facing greater headwinds from China tariffs include consumer discretionary goods and electronics. Lower immigration flow and stock is more likely to affect aggregate demand than to be a wage cost headwind, at least for public companies. Finally, skepticism remains high as it relates to DOGE’s ability to cut Federal spending meaningfully. I remain more optimistic on that front, but realize greater success also presents a headwind to growth before it provides a tailwind via lower fiscal deficits and less crowding out of the private economy—things that could lead to more Fed cuts and lower long-term interest rates as term premium falls. 

Bottom line, higher backend rates and growth headwinds from the stronger dollar and the initial policy changes suggest equity multiples are capped for now. That means stock, factor and sector selection remains key to performance rather than simply adding beta to one’s portfolio. On that score, we continue to favor earnings revision breadth, quality, and size factors alongside financials, software, media/entertainment and consumer services at the industry level.  

Thanks for listening. If you enjoy the podcast, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Our Global Head of Fixed Income and Public Policy Research, Michael Zezas, joins our Chief U.S. Economist, Michael Gapen, to discuss the possible outcomes for President Trump’s immigration policies and their effect on the U.S. economy.

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Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Global Head of Fixed Income and Public Policy Research.

Michael Gapen: And I'm Michael Gapen, Chief U.S. Economist for Morgan Stanley.

Michael Zezas: Our topic today: President Trump's immigration policy and its economic ramifications.

It's Friday, February 14th at 10am in New York.

Michael, migration has always been considered an important feature of the global economy. In fact, you believe that strong immigration flows were an important element in the supply side rebound that set the stage for a U.S. soft landing. If we think back to the time before President Trump took office almost a month ago, how would you categorize immigration trends then?

Michael Gapen: So, we saw a very sharp increase in immigration coming out of the pandemic. I would say, if you look at longer term averages, say the 20 years leading up to the pandemic, normally we'd get about a million and a half immigrants, per year into the United States. A lot of variation around that number, but that was the long-term average.

In 2022 through 2024, we saw immigration surge to about 3 million per year. So about twice as fast as we saw normally. And that happened at a very important time. It allowed for very significant and rapid growth in the labor force, just at a time when the economy was emerging from the pandemic and demand for labor was quite high.

So, it filled that labor demand. It allowed the economy to grow rapidly, while at the same time helping to keep wages lower and inflation starting to come down. So, I do think it was a major underpinning force in the ability of the U.S. economy to soft land after several years of above target inflation.

Michael Zezas: Got it. And so now, with a second President Trump term, are we set up for a reversal of this immigration driven boost to the economy?

Michael Gapen: Yeah, I think that's the key question for the outlook, and our answer is yes. That if we are going to significantly restrict immigration flows, the risk here is that we reverse the trends that we've just seen in the previous year.

So, I certainly believe one of the main goals of the Trump administration is to harden the border and initiate greater deportations. And these steps in my mind come on the back of steps that the Biden administration already took around the middle of last year that began to slow immigration flows.

So yes, I do think we should look for a reversal of the immigration driven boost to the economy. But Mike, I would actually throw this question back to you and say on the first day of his presidency, Trump issued a series of executive orders pertaining to immigration. Where are we now in that process after these initial announcements? And what do you expect in terms of policy implementation?

Michael Zezas: Well, I think you hit on it. There's two levers here. There's stepped up deportations and removals and there's working with Mexico on border enforcement. Things like the remain in Mexico policy where Mexico agrees to keep those seeking asylum on their side of the border; and to facilitate that, they've stepped up their military presence to do that.

Those are really kind of the two levers that the U.S. is pushing on to try and reduce the flow of migrants coming into the U.S. Still to be determined how much these actually have an impact, but I think that's the direction of policy travel.

Michael Gapen: And are there any catalysts specifically that you're watching for? I mean, recently the administration proposed tariffs on Mexico and Canada around border control, but those have been delayed. Is there anything on the horizon we should look for this time around?

Michael Zezas: Yeah. So obviously the president tied the potential for tariffs on Mexico and Canada to the idea that there should be some improvement on border enforcement. It's going to be difficult for investors, I think, to assess in real time how much progress has been made there. Mostly it's a data challenge here. There are official government statistics which have a good amount of detail about removals and folks stopped at the border and demographics in terms of age and, and whether or not they were working. That might really kind of help us piece together the story in terms of whether or not there's going to be future tariffs – and Michael, probably for you, to what extent there's an impact on the economy if folks are already in the labor force.

But that data is on a lag, it'll be really difficult to tell what's happening now for at least several months. Maybe we're going to get some hints about what's going on for comments coming in earnings calls, for example, from companies that deal in construction and food service and hospitality. But I don't know that those anecdotes would be sufficient to really draw substantial conclusions. So, I think we're a bit in a fog for the next couple months on exactly what's happening.

But based on all this, Michael, what's your outlook for immigration this year and beyond?

Michael Gapen: Yeah, so we, as I mentioned, we were getting about 3 million immigrants per year between 2022 and 2024; long run averages before the pandemic were more like a million and a half a year. Our outlook is that immigration flows should slow below pre- COVID averages to about 1 million this year and about 500,000 in 2026. And again, that would be the well below the long run average of about a million and a half per year.

Now, as you mentioned, understanding these flows in real time is hard and there's a lot of uncertainty around this and how effective policies may be. So, I think people should consider ranges around this baseline, if you will. On one hand, we could see a reduction in unauthorized immigration replaced by more authorized immigration. So maybe there's a benign scenario where immigration slows back to its one and a half million per year. But it's more through legal and formal channels than unauthorized channels.

Alternatively, it could be the case that some of the policies, you mentioned in terms of, say, stepped up deportations or other measures, and maybe there's a chilling effect. That there's just like an externality on immigration behavior. And in fact, we slow maybe to about 500,000 this year and see a decline in about 250,000 next year.

So, I think there's a lot of uncertainty about it. We think immigration slows below its longer run averages, which would represent a major shift from what we've seen over the last three years.

Michael Zezas: Got it. So, lots of crosscurrents here, about how the actual labour supply is impacted. But bottom line, if we do arrive at a point where there’s a significant reduction in immigration, what’s the expectation about what that means for the U.S. economy?

Michael Gapen: Yeah, so a lot of cross currents here. Number one, I think with a high degree of confidence, we can say reduced immigration should lead to slower potential growth, right? So, a slower growth in the labor force should mean slower growth in trend hours, right? Potential GDP is really only the sum of growth in trend hours and trend productivity.

So, the surge in immigration we saw really boosted potential growth up to 2.5 per cent to 3 per cent in recent years. So, if we reduce immigration, potential growth should slow. I think back towards, say, 2 per cent this year, maybe even 1 to 1.5 per cent next year. So, you slow down growth in the labor force, potential should moderate.

Second, and I think the more difficult question is, well, okay, if you also reduce growth in the labor force, you're going to get less employment, and that's a demand side effect. So, which dominates here, the supply side or the demand side? And here, I think to go back to your first question – yeah, I do think we're going to get a reversal of the outcome that we just saw.

So, I think it'll moderate both potential and actual growth. So, I think actual growth slows. The amount of employment we see should decline and soften. We're not saying the level of employment will decline, but the growth rate of employment should slow. But it should coincide with a low unemployment rate, so it's going to be a very different labor market. A lot less employment growth, but still a tight labor market in terms of low unemployment.

That should keep wages firm, particularly in the service sector where a lot of immigrants work, and we think it'll also help keep inflation firm. So, it could keep the Fed on the sideline for a significant period of time, for example.

And I'd just like to close, Mike, by saying I think this is an underappreciated risk for financial markets. I think investors have digested trade policy uncertainty, but I'm not convinced that risks around immigration and their effect on the economy are well understood.

Michael Zezas: Got it. Well Michael, thanks for taking the time to talk.

Michael Gapen: Thank you.

Michael Zezas: Thanks for listening. If you enjoy the show, leave us a review wherever you listen to podcasts and share Thoughts on the Market with a friend or colleague today.

Our Head of Foreign Exchange & Emerging Markets Strategy James Lord discusses how much tariff-driven volatility investors can expect in currency markets this year.

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Welcome to Thoughts on the Market. I’m James Lord, Morgan Stanley’s Head of Foreign Exchange & Emerging Markets Strategy. 

Today – the implications of tariffs for volatility on foreign exchange markets. 

It’s Thursday, February 13th, at 3pm in London. 

Foreign exchange markets are following President Trump’s tariff proposals with bated breath. A little over a week ago investors faced significant uncertainty over proposed tariffs on Mexico, Canada, and China. In the end, the U.S. reached a deal with Canada and Mexico, but a 10 per cent tariff on Chinese imports went into effect. Currencies experienced heightened volatility during the negotiations, but the net impacts at the end of the negotiations were small. Announced tariffs on steel and aluminum have had a muted impact too, but the prospect of reciprocal tariffs are keeping investors on edge. 

We believe there are three key lessons investors can take away from this recent period of tariff tension. First of all, we need to distinguish between two different types of tariffs. The first type is proposed with the intention to negotiate; to reach a deal with affected countries on key issues. The second type of tariff serves a broader purpose. Imposing them might reduce the U.S. trade deficit or protect key domestic industries.

There may also be examples where these two distinct approaches to tariffs meld, such as the reciprocal tariffs that President Trump has also discussed. 

The market impacts of these different tariffs vary significantly. In cases where the ultimate objective is to make a deal on a separate issue, any currency volatility experienced during the tariff negotiations will very likely reverse – if a deal is made. However, if the tariffs are part of a broader economic strategy, then investors should consider more seriously whether currency impacts are going to be more long-lasting. For instance, we believe that tariffs on imports from China should be considered in this context. As a result, we do see sustained dollar/renminbi upside, with that currency pair likely to hit 7.6 in the second half of 2025. 

A second key issue for investors is going to be the timing of tariffs. April 1st is very likely going to be a key date for Foreign Exchange markets as more details around the America First Trade Policy are likely revealed. We could see the U.S. dollar strengthen in the days leading up to this date, and investors are likely to consider where subsequently there will be a more significant push to enact tariffs. 

A final question for investors to ponder is going to be whether foreign exchange volatility would move to a structurally higher plane, or simply rise episodically. Many investors currently assume that FX volatility will be higher this year, thanks to the uncertainty created by trade policy. However, so far, the evidence doesn’t really support this conclusion. Indicators that track the level of uncertainty around global trade policy did rise during President Trump's first term, specifically around the period of escalating tariffs on China. And while this was associated with a stronger [U.S.] dollar, it did not lead to rising levels of FX volatility. 

We can see again, at the start of Trump's second term, that rising uncertainty over trade policy has been consistent with a stronger U.S. dollar. And while FX volatility has increased a bit, so far the impact has been relatively muted – and implied volatility is still well below the highs that we’ve seen in the past ten years. FX volatility is likely to rise around key dates and periods of escalation; and while structurally higher levels of FX volatility could still occur, the odds of that happening would increase if tariffs resulted in more substantial macro economic consequences for the U.S. economy.

Thanks for listening. If you enjoy the show, leave us a review wherever you listen. And share Thoughts on the Market with a friend or a colleague today.

The down-to-the-deadline nature of Trump’s trade policy has created market uncertainty. Our Head of Corporate Credit Research Andrew Sheets points out a silver lining. 

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Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley. Today I’m going to talk about a potential silver lining to the significant uptick in uncertainty around U.S. trade policy. 

It's Wednesday, February 12th at 2pm in London. 

One of the nuances of our market view is that we think credit spreads remain tight despite rising levels of corporate confidence and activity. We think these things can co-exist, at least temporarily, because the level of corporate activity is still so low, and so it could rise quite a bit and still only be in-line with the long-term trend. And so while more corporate activity and aggression is usually a negative for lenders and drives credit spreads wider, we don’t think it’s quite one yet. 

But maybe there is even less tension in these views than we initially thought. 

The first four weeks of the new U.S. Administration have seen a flurry of policy announcements on tariffs. This has meant a lot for investors to digest and discuss, but it’s meant a lot less to actual market prices. Since the inauguration, U.S. stocks and yields are roughly unchanged. 

That muted reaction may be because investors assume that, in many cases, these policies will be delayed, reversed or modified. For example, announced tariffs on Mexico and Canada have been delayed. A key provision concerning smaller shipments from China has been paused. So far, this pattern actually looks very consistent with the framework laid out by my colleagues Michael Zezas and Ariana Salvatore from the Morgan Stanley Public Policy team: fast announcements of action, but then much slower ultimate implementation. 

Yet while markets may be dismissing these headlines for now, there are signs that businesses are taking them more seriously. Per news reports, U.S. Merger and Acquisition activity in January just suffered its lowest level of activity since 2015. Many factors could be at play. But it seems at least plausible that the “will they, won’t they” down-to-the-deadline nature of trade policy has increased uncertainty, something businesses generally don’t like when they’re contemplating big transformative action. 

And for lenders maybe that’s the silver lining. We’ve been thinking that credit in 2025 would be a story of timing this steadily rising wave of corporate aggression. But if that wave is delayed, debt levels could end up being lower, bond issuance could be lower, and spread levels – all else equal – could be a bit tighter. 

Corporate caution isn’t everywhere. In sectors that are seen as multi-year secular trends, such as AI data centers, investment plans continue to rise rapidly, with our colleagues in Equity Research tracking over $320bn of investment in 2025. But for activity that is more economically sensitive, uncertainty around trade policy may be putting companies on the back foot. That isn’t great for business; but, temporarily, it could mean a better supply/demand balance for those that lend to them. 

Thanks for listening. If you enjoy the podcast, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Our Chief Asia Economist Chetan Ahya discusses the potential impact of reciprocal U.S. tariffs on Asian economies, highlighting the key markets at risk.

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Welcome to Thoughts on the Market. I’m Chetan Ahya, Morgan Stanley’s Chief Asia Economist. Today: the possibilities of reciprocal tariffs between the U.S. and Asian economies. 

It’s Tuesday, February 11, at 2pm in Singapore.

President Trump’s recent tariff actions have already been far more aggressive than in 2018 and 2019. And this time around, multiple trade partners are simultaneously facing broad-based tariffs, and tariffs are coming at a much faster pace. The risk of trade tensions escalating has risen, and the latest developments may have kicked that risk up another notch. 

The U.S. president is pushing a sweeping tariff of 25 per cent on all foreign steel and aluminum products. Trump has also indicated that he would propose reciprocal tariffs on multiple countries – to match the tariffs levied by each country on U.S. imports. This potential reciprocal tariff proposal suggests that Asia ex China may be more exposed to possible tariff hikes. As of now, Asia’s tariffs on US imports are, for the most part, slightly higher than US tariffs on Asian imports. And based on [the] latest available data, six economies in Asia do impose [a] higher weighted average tariff on the U.S. than the U.S. does on individual Asia economies. 

The tariff differentials are most pronounced for India, Thailand, and Korea. These three economies may face a risk of a hike in tariffs by 4 to 6 percentage points on a weighted average basis, if the U.S. imposes reciprocal tariffs. Individual products may yet face higher tariffs rates but we think [the] overall impact from steel, aluminum and reciprocal tariffs will be manageable. 

But look, trade tensions may still rise further given that 7 out of 10 economies with the largest trade surplus with the U.S. are in Asia. Against this backdrop, policy makers may have to look for ways to address the demands from the U.S. administration. 

For instance, Japan’s Prime Minister Ishiba has committed to increasing investment in the U.S. and is looking to raise energy imports from the U.S. This is seen as a positive step to reduce the U.S. trade deficit with Japan. Meanwhile, ahead of the meeting between President Trump and India’s Prime Minister Modi later this week, India has already taken steps to lower tariffs on the U.S., and may propose [an] increase in imports of oil and gas, defense equipments and aircrafts to narrow its trade surplus with the U.S. 

However, as regards China is concerned, the wide scope of issues in the bilateral relationship suggests that [the] U.S. administration would cite a variety of reasons for expanding tariffs. As things stand, China has been the only economy so far where tariff hikes have stayed in place. Indeed, the recent 10 percent increase in tariffs has already matched the increase in the weighted average tariffs that transpired in 2018 and 2019. And we still expect that tariffs on imports from China will continue to rise over the course of 2025. 

To sum it up, there has been a constant stream of tariff threats from the U.S. administration. While the direct effects of [the] tariffs appear manageable, the bigger concern for us has been that this policy uncertainty will potentially weigh on corporate sector confidence, CapEx and growth cycle.

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.

Global Head of Fixed Income and Public Policy Research Michael Zezas and Head of Global Evaluation, Accounting and Tax Todd Castagno discuss the market and economic implications of proposed tax extensions and tax cuts.

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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.

Todd Castagno: And I'm Todd Castagno, Head of Global Evaluation, Accounting and Tax.

Michael Zezas: Today, we'll focus on taxes under the new Trump administration.

It's Monday, February 10th, at 10am in New York.

Recently, at the annual meeting of the World Economic Forum in Davos, President Trump stated his administration will pass the largest tax cut in American history, including substantial tax cuts for workers and families. He was short on the details, but tax policies were a significant focus of his election campaign.

Todd, can you give us a better sense of the tax cuts that Trump's been vocal about so far?

Todd Castagno: Well, there's tax cuts and tax extensions. So, I think that's an important place to set the baseline. The Tax Cuts and Jobs Act (TCJA), under his first administration, starts to expire in 2025. And so, what we view is, the most likelihood is, an extension of those policies going forward. However, there's some new ideas, some new contours as well. So, for instance, a lower corporate rate that gets you in the 15 per cent ballpark can be through domestic tax credits, new incentives.

I think there's other items on the individual side of the code that could be explored as well. But we also have to kind of step back and creating new policy is very challenging. So again, that baseline is an extension of kind of the tax world we live in today.

So, Michael, looking at the broader macro picture and from conversations with our economist, how would these tax cuts impact GDP and macro in general?

Michael Zezas: Well, if you're talking about extension of current policy, which is most of our expectation about what happens with taxes at the end of the year, the way our economists have been looking at this is to say that there's no net new impulse for households or companies to behave differently.

That might be true on a sector-by-sector basis, but in the aggregate for the economy, there's no reason to look at this policy and think that it is going to provide a definitive uplift to the growth forecast that they have for 2026. Now, there may be some other provisions that could add in there that are incremental that we'd have to consider.

But still, they would probably take time to play out or their measurable impact would be very hard to define. Things like raising the cap on the state and local tax deduction, that tends to impact higher income households who already aren't constrained from a spending perspective. And things like a domestic manufacturing tax credit for companies, that could take several years to play out before it actually manifests into spending.

Todd Castagno: And you’re kind of seeing that with the prior administration's tax law, the Inflation Reduction Act. A lot of this takes years in order to actually play through the economy. So that's something that investors should consider.

Michael Zezas: Yeah, these things certainly take time; and you know back in 2018 it had been a long ambition, particularly of Republican lawmakers, to reduce the corporate tax rate. They succeeded in doing that, getting it down to 21 per cent in Trump's first term. Now, Trump's talked about getting corporate tax rates lower again here. If he's able to do that, how do you think he would do that? And would that affect how you're thinking about investment and hiring?

Todd Castagno: So, there's the corporate rate itself, and it's at 21 per cent currently. There is a view to change that rate, lower it. However, there's other ways you can reduce that effective tax burden through what we've just discussed. So enhanced corporate deductions, timing differences, companies can benefit from a tax system that ultimately gets them a lower effective rate, even if the corporate rate doesn't move much.

Michael Zezas: And so, what sorts of companies and what sorts of sectors of the market would benefit the most from that type of reduction in the corporate tax burden?

Todd Castagno: So, if you think they're mosaic of all these items, it's going to accrue to domestic companies. That might sound kind of obvious, but if you look at our economy, we have large multinationals and we have domestic companies and we have small businesses. The policies that are being articulated, I think, mostly orient towards domestic companies, industrials, for instance, R&D incentives, again powering our AI plants, energy, et cetera.

Michael Zezas: Got it. And is there any read through on if a company does better under this policy – if they're big relative to being small?

Todd Castagno: There are a lot of small business elements as well. So, I mentioned that timing difference, being able to deduct a piece of machinery day one versus over seven years. So, there's a lot of benefits that are not in the rate itself that can accrue through smaller businesses.

Michael Zezas: YAnd what about for individual taxpayers, particularly the middle class? What particular tax cuts are on the table there?

Todd Castagno: So, first and foremost is the child tax care credit. So, it’s current policy, but after COVID, it was enhanced. A higher dollar amount, different mechanism for receiving funds. And so, there is bipartisan support and President Trump as well, bringing back a version of an enhanced credit. Now, the policy is a little bit tricky, but I would say there's very good odds that that comes back. You know, you mentioned the state and local tax deduction, right? The politics are also tricky, but there could be a rate of change where that reverts back to pre-TCJA.

But one of the things, Michael, is all these policies are very expensive. So, I'm just curious, in your mind, how do we balance the price tag versus the outcome?

Michael Zezas: Well, I think the main constraint here to consider is that Republicans have a very slim majority in the House of Representatives and the Senate, and they're unlikely to get Democratic representatives crossing the aisle to vote with them on a tax package this large. So, they'll really need complete consensus on whatever tax items they extend and the deficit impact that it causes this is the type of thing that ultimately will constrain the package to be smaller than perhaps some of the president's stated ambitions.

So, for example, items like making the interest payments on auto loans tax deductible, we think there might not be sufficient support for that and the budget costs that it would create. So ultimately, we think you get back to a package that's mostly about extending current cuts, adding in a couple more items like that domestic manufacturing tax credit, which is also very closely tied to Republicans larger trade ambition. And you might also see Republicans do some things to reduce the price tag, like, for example, only extend the tax cuts for a few years, as opposed to five or 10 years.

Todd Castagno: Right.

Michael Zezas: Todd, thanks for taking the time to talk.

Todd Castagno: Great speaking with you, Mike.

Michael Zezas: Thanks for listening. If you enjoy the podcast, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Our Chief Fixed Income Strategist Vishy Tirupattur thinks that efficiency gains from Chinese AI startup DeepSeek may drive incremental demand for AI.

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Welcome to Thoughts on the Market. I’m Vishy Tirupattur, Morgan Stanley’s Chief Fixed Income Strategist. Today I’ll be talking about the macro implications of the DeepSeek development.

It's Friday February 7th at 9 am, and I’m on the road in Riyadh, Saudi Arabia.

Recently we learned that DeepSeek, a Chinese AI startup, has developed two open-source large language models – LLMs – that can perform at levels comparable to models from American counterparts at a substantially lower cost. This news set off shockwaves in the equity markets that wiped out nearly a trillion dollars in the market cap of listed US technology companies on January 27. While the market has recouped some of these losses, their magnitude raises questions for investors about AI. My equity research colleagues have addressed a range of stock-specific issues in their work. Today we step back and consider the broader implications for the economy in terms of productivity growth and investment spending on AI infrastructure.

First thing. While this is an important milestone and a significant development in the evolution of LLMs, it doesn’t come entirely as a shock. The history of computing is replete with examples of dramatic efficiency gains. The DeepSeek development is precisely that – a dramatic efficiency improvement which, in our view, drives incremental demand for AI. Rapid declines in the cost of computing during the 1990s provide a useful parallel to what we are seeing now. As Michael Gapen, our US chief economist, has noted, the investment boom during the 1990s was really driven by the pace at which firms replaced depreciated capital and a sharp and persistent decline in the price of computing capital relative to the price of output. If efficiency gains from DeepSeek reflect a similar phenomenon, we may be seeing early signs [that] the cost of AI capital is coming down – and coming down rapidly. In turn, that should support the outlook for business spending pertaining to AI.

In the last few weeks, we have heard a lot of reference to the Jevons paradox – which really dates from 1865 – and it states that as technological advancements reduce the cost of using a resource, the overall demand for the resource increases, causing the total resource consumption to rise. In other words, cheaper and more ubiquitous technology will increase its consumption. This enables AI to transition from innovators to more generalized adoption and opens the door for faster LLM-enabled product innovation. That means wider and faster consumer and enterprise adoption. Over time, this should result in greater increases in productivity and faster realization of AI’s transformational promise.

From a micro perspective, our equity research colleagues, who are experts in covering stocks in these sectors, come to a very similar conclusion. They think it’s unlikely that the DeepSeek development will meaningfully reduce CapEx related to AI infrastructure. From a macroeconomic perspective, there is a good case to be made for higher business spending related to AI, as well as productivity growth from AI.

Obviously, it is still early days, and we will see leaders and laggards at the stock level. But the economy as a whole we think will emerge as a winner. DeepSeek illustrates the potential for efficiency gains, which in turn foster greater competition and drive wider adoption of AI. With that premise, we remain constructive on AI’s transformational promise.

Thanks for listening. If you enjoy the podcast, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

DISCLAIMER

In the last few weeks… (Laughs) It’s almost like the birds are waiting for me to start speaking.