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Thoughts on the Market

Thoughts on the Market

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

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Episodios
  • Will U.S. Inflation Slow in 2026?

    Will U.S. Inflation Slow in 2026?
    Oct 1 2025
    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 ...
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    13 m
  • Tackling Economic Hurdles in Europe and Asia

    Tackling Economic Hurdles in Europe and Asia
    Sep 30 2025
    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 HongSeth 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...
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    13 m
  • Will the Fed End the Party?

    Will the Fed End the Party?
    Sep 29 2025

    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.
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    4 m
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