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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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Warsh’s Opening Act at the Fed
Today00:12:29Summary readyOur Global Head of Macro Strategy Matthew Hornbach and our Chief U.S. Economist Michael Gapen discuss the signals investors will be seeking from the new Fed Chair leading his first monetary policy meeting and possible implications for markets.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: Today, markets are watching the Fed's next move. Are rate cuts delayed or could hikes possibly be back on the table? It's Tuesday, June 16th at 8:30am in New York. So, Mike, the FOMC meeting today and tomorrow is likely more about reading the signal rather than announcing a rate change. Markets will focus on inflation forecasts, the unemployment rate, and the growth outlook. But, of course, this will also be the first meeting after Powell ended his term as Fed chair in May. All eyes will be on Warsh. So, what are your thoughts before the press conference? Michael Gapen: A lot of thoughts, actually, before the press conference. I do think it's basically a foregone conclusion that the Fed will be changing its easing bias in favor of more neutral language. Seems clear the committee wants to do that, probably wanted to do that at the last meeting. And it does fit, I think, Warsh's preference for less communication, less guidance from the Fed. So, I do think that's largely a foregone conclusion, although obviously we need to see whether that happens and whether there are dissents. I think, as you noted, the forecasts will be important, but I think what's really important from my perspective – more than the modal outlook or the baseline that participants have – is their assessment of the balance of risks around the dual mandate. And I say that because obviously a year ago, the Fed eased policy when it felt that there were downside risks to the labor market that outweighed upside risk to inflation. This year, that seems to have flipped, where the labor market appears to have stabilized, labor demand has picked up a little bit, and it is inflation that looks persistent. So, if the Fed cut last year on downside risk to the labor market, I think the concern for markets is – maybe they hike in 2027 or later this year based on a changing balance of risks in the direction of firmer inflation. So, for me, that's really kind of key. In addition to what they're saying about growth inflation in the labor market, what is their assessment of the distribution of risks around that modal forecast? Matthew Hornbach: There's definitely going to be a lot of investor interest in the press conference itself. What exactly may result from the opening statement. Presumably, Chair Warsh will give an opening statement. How are you thinking about the back and forth between Warsh and the reporters that are asking questions? Are there certain questions that you would anticipate him getting asked, and how do you think he might respond? Michael Gapen: Well, I think certainly that if we are correct, and I think markets are correct, that they do change forward guidance in the statement to more neutral bias, that certainly opens up the possibility that the Fed will be hiking. So, the obvious first question is – is this the first step in the direction of hiking? What would get you to raise rates? Should investors be thinking about that? Is that the course of travel here? Now Warsh may not want to answer that if he, kind of, is consistent in the view of saying the Fed shouldn't give a lot of forward guidance. So maybe get some popcorn, Matt. It could be a situation where he gets asked questions about the future path of monetary policy, and maybe he decides, ‘I don't want to take that up right now. The data will tell us, and we'll do what's necessary.’ And second, I think as you're noting and getting to about the structure of the press conference and what he might say is; past Federal Reserve chairs, let's say from Bernanke on, have found the press conference – the press conference statement, the questions, the format, the venue – as a way to control the narrative. And I think what will be interesting is to see whether Warsh has the same design. The risk, of course, is perhaps that he doesn't and pulls back the amount of communication guidance that he wants to give. And then we'll see what fills that vacuum. What narrative fills that vacuum? And is he okay with that? So, it may be that there's a new sheriff in town, and he chooses that there's some questions I'll answer, others I won't. And so, I do think that interaction with the press corps will be interesting. Hard to know exactly where it's going to come down until we see it in real time. Matthew Hornbach: During Chair Warsh's testimony to Congress, he alluded to the idea that potentially the Fed may not do a press conference at every meeting going forward. How are you thinking about that in the context of this idea that if you leave a void, somebody else may fill it? Michael Gapen: Obviously, the Fed used to not have press conferences at all, and then they moved to having them quarterly or four times a year. And they found that that was a little suboptimal because it became harder to make decisions and changes in the off-press conference meetings [be]cause they didn't have a venue to explain what they were doing and what they were thinking. So, they migrated to eight meetings. So, I think it’s kind of twofold. Yes, it would mean that they speak less and therefore maybe their word doesn't carry as much weight. Or there's longer gaps for other narratives to come in. Like, do we lose forward guidance from the Fed, and is that replaced by forward guidance from the Treasury, for example? How do markets weigh those signals? And but then also I would say would that ultimately box in the Fed to only make decisions on quarterly meetings rather than eight times a year? Would the chair, for example… Let's assume that at some point in the future, the Fed decides it does want to raise interest rates. Historically, the Fed does not surprise on rate hikes. It's perfectly willing to surprise on rate cuts, when it comes to that. But if there is a world where the Fed does decide, ‘Hey, we do need to raise rates, but we don't have a press conference to explain our view.’ Would they take the decision at that meeting or would they wait? So, does it reduce their opportunity set? Matthew Hornbach: I think this issue would certainly be an interesting one for investors to think about, which is why I'm bringing it up with you. Because to the extent that the plan going forward is to hold a press conference only once a quarter, as you alluded to – investors may interpret that as the Fed not being willing to raise rates at every single meeting going forward, which would certainly affect the pricing in the very short end of the interest rate market. But more broadly, on communication strategy, do you think that that would be something that Chair Warsh would take upon himself? Or do you think it would be more likely for him to organize a committee to discuss communications? Michael Gapen: I think the right thing to do… Again, our job is to say what we think he will do – not what he should do. But I'm going to answer this one in the question of what I think he should do. I do think he should create, say, a subcommittee on communication and reevaluate what the Fed does. [Be]ause as chair, he has almost unilateral control over communications. But obviously you work within a committee, the committee operates with consensus. So, I do think it would make sense to, kind of, work through a committee and try and get as much consensus as you can. And, here, what I would hope where they, kind of, ultimately land is – Warsh has been critical in the past of the Fed's forecast, the forecast being incorrect, providing maybe incorrect forward guidance. And I would argue that it's not really the sole job of the SEPs – the Summary of Economic Projections – to provide a forecast. But what you get out of them is more than just a forecast. You get a hint of the committee's reaction function. That if data are above or below certain thresholds on growth, inflation, and unemplyment, then expect our policy path to look different. So, is there a way that he could review the communication strategy, tamp down the elements that are, say, a pure forecast, but keep the items that communicate to the market what a reaction function is? That's where I think a review committee could be useful in reforming or revamping what they do. Matthew Hornbach: Absolutely. In terms of the things that are really the purview of the committee, can you walk us through what those are in the context of Chair Warsh coming in having to ultimately make decisions on monetary policy – both interest rate policy as well as balance sheet policy? What are the purview of the committee itself? Michael Gapen: Yeah. The two main tools of monetary policy, in this case interest rate policy and balance sheet policy, is both of those are under the purview of the Federal Open Market Committee. So, to change interest rates, to reduce the size of the balan...
SummaryThe Bull Case After the Pullback in Stocks
Yesterday00:04:58Summary readyOur CIO and Chief U.S. Equity Strategist Mike Wilson explains why the recent equity correction may be more reset than reversal and where investors may find the next opportunities.Read more insights from Morgan Stanley.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist. Today: Possible opportunities to look out for in the equity correction over the past few weeks.It's Monday, June 15th at 1:30pm in New York. So, let’s get after it.Sometimes the market changes direction or leadership not because the story has broken. Instead, it just needs to digest how quickly the story has evolved. Over the past few weeks, equities had their biggest correction since the important bottom in March. I don’t view this as the end of the bull market though. I view it as a pause after an unsustainable acceleration in two key factors driving stocks higher this year: earnings revisions and liquidity. In my view, the market wasn’t questioning the earnings bull market as much as it is questioning the speed at which earnings have been revised higher. These revisions have been particularly strong in leading sectors like semiconductors, which also corrected the most. When earnings revisions breadth gets north of 70 percent, it’s reasonable to ask whether the second derivative is about to slow. That doesn’t mean earnings estimates are going down. Instead, it means the rate of improvement is probably peaking, and in markets, it’s always about the second derivative in growth. Such decelerations create corrections, not crashes. That distinction is important. Earnings revisions breadth may pause or roll over from extreme levels, but the next twelve-month earnings estimates are still likely to rise as we move through the year and roll forward toward 2027 numbers. That’s why I remain convicted in our year-end S&P 500 target of 8000, even if the next few weeks remain choppy. Markets can correct while the earnings story remains intact. In fact, that’s often exactly how healthy bull markets reset.The second part of this adjustment is liquidity. Earlier this year, liquidity was flowing strongly through the system as a means of regaining financial stability. Between the Fed’s Reserve Management Program, reduced bank capital requirements, and Treasury buybacks, more than half a trillion dollars of liquidity was effectively added. But that pace is now slowing. The Reserve Management Program has fallen from roughly $40 billion a month in April to about $10 billion today; while Treasury buybacks have also slowed from the March and April highs. This rate of change slowdown matters at the margin, especially for crowded momentum trades that have been supported by abundant liquidity. Take note of these corrections in momentum because they often bring a change in leadership and that’s the real opportunity. We’ve already seen a few leadership rotations this year – from precious and base metals, to rare earths, to energy and finally to semiconductors. Now I think the market may be ready to broaden again, much like it did late last year and in the first six weeks of this year.Importantly, our preferred sectors of Consumer Discretionary Goods, Transports, and Regional Banks are all up more than 10 percent over the past month while the S&P 500 was down modestly. Yet, sentiment toward these areas is still muted. That’s exactly the kind of setup I like: improving fundamentals, better relative price action, and investors still skeptical.Another piece that should help this broadening. Macro variables that have been holding lower quality cyclicals back include interest rates, crude, and the dollar – they may all now be peaking. That fits nicely with the announced deal to reopen the Straits of Hormuz last night. If oil pressure eases and the bond market walks back the Fed hike it is currently pricing, interest rate sensitive groups should have room to extend their recent outperformance. Finally this week’s Fed meeting matters too because it’s Kevin Warsh’s first as the Chair. I’ll be watching less for the rate decision itself and more for how the bond market reacts. The key markers are still the same for me: 4.5 percent on the 10-year, while bond volatility and funding market stress need to remain calm. If the Iran deal holds, I think the Fed can lean less hawkish on rates – but I don’t expect a proactive pivot to add more liquidity.Bottom line, markets have been digesting the peak rate of change in growth acceleration and liquidity. But that’s far from the end of the cycle. The earnings driven bull market remains intact, but the leadership may be changing. As usual, the best opportunities may be hiding in the places investors don’t believe in, yet.Thanks for tuning in; I hope you found it informative and useful. Let us know what you think by leaving us a review. And if you find Thoughts on the Market worthwhile, tell a friend or colleague to try it out!
SummaryIndia’s Next Market Phase
4d ago00:12:57Summary readyChief Asia Economist Chetan Ahya joins Head of India Research and Chief India Equity Strategist Ridham Desai to break down India’s macro outlook, capital flows and sector opportunities.Read more insights from Morgan Stanley.----- Transcript -----Chetan Ahya: Welcome to Thoughts on the Market. I'm Chetan Ahya, Morgan Stanley's Chief Asia Economist.Ridham Desai: And I'm Ridham Desai, Morgan Stanley's Head of India Research and Chief India Equity Strategist.Chetan Ahya: Today, the biggest takeaways from our India Investment Forum in Mumbai. From the shifting outlook for India's markets and flows to the sectors driving the next phase of corporate earnings and CapEx.It's Friday, June 12th at 7PM in Hong Kong.Ridham Desai: And 4:30PM in Mumbai.Chetan Ahya: Ridham, the Morgan Stanley's India Investment Forum took place in Mumbai last week, and I was there with you. These events are a great opportunity to speak with investors who come across from the globe to attend. Now that we have had a few days to process the conversations, what stood out to you? What was the biggest shift in investor sentiment that you picked on?Ridham Desai: So, Chetan, I think it's been the case of a continuing story about India. Domestic investors look that they are bullish, and foreign investors continue to stay rather cautious on the Indian markets. We could see that in the overall attendance. In contrast, I think domestic investors were looking for the next stock that they wanted to buy. They were seeking opportunities, and there was a lot of interest in meeting companies.Before we get into markets, let me turn back to you from a macro side. India's growth story remains strong, but relative growth appears to be cooling. This is in contrast to markets like Japan, Taiwan, Korea, and the US. How should investors think about India's macro positioning in that context?Chetan Ahya: So, Ridham, when I look at the macro data in India, they're all indicating a meaningful upside in the growth trend. So I'll just cite two key cyclically sensitive macro data points. One is the banking system credit growth, and number two is the auto sales, particularly the passenger vehicle. So bank credit growth is growing as of the last biweekly data point that we got. It's growing at seventeen point seven percent year-on-year, and car sales are growing at twenty-seven percent in the month of May.But as you were mentioning earlier, the relative growth opportunity is a challenge for India and to just share the numbers on the earnings growth for the first quarter that we saw across the region. So we saw Korea's earnings growth at one hundred and seventy percent. We saw Taiwan's earnings growth at forty-eight percent year on year. Japan at thirty-three percent. The US has seen a growth of about twenty-seven percent year on year.So in that context, when India is reporting thirteen percent growth, it's becoming a challenge for investors to look for opportunities in India relative to other markets. Either they are more focused on the other markets than India. So let me come back to you, Ridham. Staying with the investment implications, India projects stable valuations and strong corporate earnings, but its relative growth advantage has narrowed. How should investors reconcile this contradiction?Ridham Desai: If I go back thirty-five years, as long as we have the MSCI index series, and as far as I have been in this industry, this is the lowest relative multiple that India has traded at. And indeed, growth last year was weak. But if you see QOQ, we have started to accelerate. The broad market earnings growth trajectory has shown a doubling in the quarter that ended March over the quarter that ended December.But it underscores the point you made about the relative growth complex. It's clearly not in India's favor. And a lot of the capital in the world is short-term oriented, and it cares for what growth is gonna come in the next quarter or two. And that's the state of the market right now.However, what I would say is that equities is a quintessential long-duration asset class. In the long run, what matters is terminal growth. I don't really think India's terminal growth has moved much. It remains far superior to a lot of other countries around the world. And therefore, I think this does present itself as a great opportunity for a long-term investor while the markets are digesting this relative growth disadvantage that India seems to have over the next, say, three or four quarters.Chetan Ahya: And Ridham, another theme from the forum was policy action to attract capital. Policymakers announced a number of measures right as our conference ended and they aimed to withdraw withholding tax on debt investors, also providing banks with an incentive to take up more dollar borrowing. How central are these measures to sustaining foreign inflows into Indian markets?Ridham Desai: I think the measures taken by policymakers are very important, probably amongst the most important policy actions this year. The removal of taxation on debt investors will make a difference. The provision for hedging to external commercial borrowings as well as to foreign currency deposits will make a difference.It should boost flows into India over the next twelve months. That said, these measures may not help the equity flows because the equity flows, I think, are going to depend on the relative growth situation. Now, there's only that much India can do to lift its growth. It may accelerate to the high teens. So growth elsewhere needs to decelerate for equity investors to return. Or India needs to see the start of a major IPO cycle because in primary issuances, foreigners do come to buy, and that may change the net picture on FBI flows in the equity markets.But as far as the debt markets are concerned, I think the measures taken last week are going to prove to be quite potent, and India should see the benefits accruing over the next few weeks and months.Chetan, from your perspective, how important is the policy backdrop right now in determining whether India can keep attracting long-term global capital despite more competitive returns elsewhere in the short run?Chetan Ahya: So Ridham, I think the key focus for the policymakers had been with these measures to boost short-term capital inflows to stabilize the currency. There has been a balance of payment deficit. So from that perspective, the short-term capital inflow augmentation effort as you mentioned, has been the correct move. But from the long-term perspective, we think that the government needs to boost competitiveness of the Indian manufacturing. Because in the context in which AI could affect India's services exports, there is a need to augment more export receipts from the manufacturing sector. At the same time, if they improve the competitiveness of the manufacturing sector, it will help India to attract more capital inflows from long-term investors for the purpose of FDI.And the good news is that the government is on it. They are taking a number of measures to boost that competitiveness in the manufacturing. But we think that there is more action needed and hopefully in the intention to improve the balance of payment dynamics and exports from manufacturing sector, we will see more actions from the government in the coming months.Ridham Desai: Chetan, you've also written extensively about the structural capital spending cycle in Asia and India. Can you walk us through the key details here, especially in the Indian context?Chetan Ahya: I think the key story that we are observing, it's sort of more or less global, but definitely very clearly seen in Asia, that there seems to be a super cycle for CapEx as well as industrial activity. This CapEx cycle is effectively driven by spending in four key sectors, and that is AI and AI-related digital infrastructure, energy, defense, and industrial onshoring-related CapEx.Now, as far as India is concerned, we are seeing investments in all the four segments that I just mentioned. In fact, it's seeing a significant amount of activity in the space of energy. And, similarly, we are seeing a lot of policy measures, I mentioned earlier, in terms of boosting manufacturing competitiveness.But at the heart of it is government's effort to onshore industrial supply chain. So India's CapEx has also inflected higher. Having said that, the difference between India and, let's say, North Asia, which is Korea, Taiwan, Japan and China, is that they are also a big player in the export market for capital goods when there is global CapEx cycle upswing happening. Nevertheless, India will see the benefit of this CapEx cycle in terms of its own growth push, as well as improvement in productivity.So Ridham, how would you think about the sectoral opportunity within the Indian markets?Ridham Desai: We see a lot of interest in some of these sectors which you mentioned. But actually, I would like to start off with financials. I see the banks in a very sweet spot. Balance sheets are in pristine condition. The interest rate cycle has troughed, which means margins for the banks have also bottomed and credit growth is finally accelerating. If this CapEx cycle unfolds like the way you are describing it, I think financials will stand to gain the most.And interestingly, the valuations are quite good, both on an absolute as well as on ...
SummaryInflation Relief Ahead?
5d ago00:04:37Summary readyOur Global Head of Fixed Income Research Andrew Sheets explains our differentiated view of a potential benign outlook for inflation, despite the recent acceleration.Read more insights from Morgan Stanley.----- Transcript -----Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley.Today, why is everything still so expensive?It's Thursday, June 11th at 2pm in London.The Federal Reserve has a so-called dual mandate, tasked with keeping the labor market healthy and prices stable. It is currently having much more success with the former than the latter.Let's start with that good news.Last Friday saw solid data from the U.S. jobs market, reducing some of the fears from earlier this year that artificial intelligence and other factors would lead companies to make do with fewer workers. The U.S. unemployment rate sits at just 4.3 percent, a historically low level. Measures like initial jobless claims indicate no large uptick in firings.Yet the success within the U.S. labor market is mirrored by struggles with inflation. The Fed tries to keep inflation, the annual increase in a broad set of prices, to about 2 percent per year. Their preferred measure of these prices, so-called PCE inflation, well, it's been materially above this target over the last three months, six months, twelve months, and indeed, the last five years.As for another key measure of inflation that was reported yesterday, CPI, overall prices increased more than 4 percent. While that was close to expectations, it still represents prices that are rising much faster than the Fed would prefer.This leads to a dilemma. One diagnosis of what's going on is that elevated inflation is a sign that conditions are simply too loose and too accommodative at these levels of interest rates. Corporate capital expenditure and merger activity is surging, regulation is being eased, and the U.S. government is spending a lot more than it's taking in. All of these are consistent with a hot economic cycle, which in the past would've warranted higher interest rates to bring the economy back down to a more sustainable speed.But it might not be that simple.The surging spend that we're seeing on AI data centers feels pretty unique and almost insensitive to other dynamics. Indeed, we've seen a 700 percent increase in the price of memory over the last year. Yet it's done little to slow demand for this construction as the large, well-capitalized companies behind the AI buildout see it as so essential to their future success.U.S. consumers are also still spending, boosted perhaps by record levels of household wealth. As just one example of this, my colleagues in Equity Research note that the price of airline tickets has gone up 25 percent over the last year, yet there's been no sign of people flying less.Now, the positive story would be that while there are some high-profile categories like computer memory or airfare that are seeing these large price increases, the broader inflation picture is actually set to get better as the year goes on, and costs for things like housing and tariff-impacted goods moderate. That is our view at Morgan Stanley, where our economists think that inflation will ultimately be lower over the next twelve months – and lower than many in the market expect.But there's definitely uncertainty.This month, June, is one where central banks may appear to have a renewed commitment towards inflationary pressures; with the ECB hiking rates today and our expectation that the Bank of Japan will hike rates next week, while the Fed will remove their easing bias. And our more benign economic base case for inflation does assume that oil will start flowing through the Strait of Hormuz pretty soon. It may not, and that could also lead to more sustained inflationary pressure.The big story on inflation has not gone away. Our assumption that pressures could ease in the second half of the year is a key and differentiated input to our forecast for lower bond yields and higher stock prices in 12 months' time. But it does rely on a change of the status quo.As of now, inflation is still too high.Thank you, as always, for your time. 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.
SummaryWho Owns Travel Loyalty?
6d ago00:13:21Summary readyMorgan Stanley analysts Ravi Shanker and Jeff Adelson take a look at what the fight for affluent, loyal travelers could mean for banks and airlines. Read more insights from Morgan Stanley.----- Transcript -----Ravi Shanker: Welcome to Thoughts on the Market. I'm Ravi Shanker, Morgan Stanley's North American Airlines analyst. Jeff Adelson: And I'm Jeff Adelson, Morgan Stanley's U.S. Consumer Finance analyst. Ravi Shanker: Today, who really owns your travel loyalty? The airline, the bank, the rewards platform, or you? It's Wednesday, June 10th at 7am in New York. Jeff Adelson: So, Ravi, you just came from your annual travel conference, and I'm about to head into the second day of Morgan Stanley's 17th Annual Financials Conference here in New York, where we're hosting roughly 135 corporates.A lot of themes are coming up there: retail engagement, product innovation, regulatory change, AI digital assets, capital markets recovery, and so on. All of these connect back to a bigger question. Who owns the customer relationship? Ravi Shanker: And that's exactly where travel co-branded cards come in. They sit at the crossroads of premium consumer spending, loyalty, and the competition for wallet share. They've become a more important revenue stream across travel, banking, and hospitality.But it's not as simple as more travel means more co-brand growth. Most customers still want flexibility, cashback, and low fees. Premium travelers and loyal airline customers behave differently. Let's start with the cardholder. Most consumers have a credit card, but travel co-branded cards are still a much smaller piece of the overall wallet. So, how big is the opportunity here, and how hard is it to get consumers to switch? Jeff Adelson: So, what's actually interesting, Ravi, is that travel co-branded cards are still relatively under-penetrated. In our survey, about 90 percent of cardholders have a general purpose card, while only about 22 percent have an airline card, and 12 percent have an hotel co-brand card. So, on the surface, the runway for growth does look significant. The upshot is also that once you get these consumers in the door, they are much higher spending and drive a ton of volume and incremental card economics for both the banks and their co-brand travel partners. The challenge is that consumers are pretty loyal to their cards or airlines that they already use, so most people aren't actively looking to switch. They tend to add a new card only when the value proposition is compelling enough. And sometimes given these one-time nature of the signup bonuses, it results in some churning without keeping the customer for the long term. So ultimately, what this all means is issuers and travel brands aren't just competing with each other, they're competing against habit. So, to win, they need to offer something that's meaningfully better than what's already in the consumer's wallet. Ravi Shanker: Got it. So, consumers seem to care most about value, fees, rates, and reward. Cashback still leads by a wide margin. So where do travel-specific rewards fit in? Jeff Adelson: The nuance here matters. Travel rewards don't need to win with everybody to be valuable. What makes them so powerful is they resonate with a specific group of customers, specifically the ones who are traveling – the frequent travelers, the ones who spend more, and those who engage more deeply with loyalty airline programs, for instance. For those consumers, lounge access, status benefits, upgrades, and airline or hotel points can create a level of engagement that's difficult for just a basic cashback card to replicate. The nuance here matters. Travel rewards don't need to win with everybody to be valuable. What makes them so powerful is they resonate with a specific group of customers, specifically the ones who are traveling – the frequent travelers, the ones who spend more, and those who engage more deeply with loyalty airline programs, for instance. For those consumers, lounge access, status benefits, upgrades, and airline or hotel points can create a level of engagement that's difficult for just a basic cashback card to replicate. Ravi Shanker: So, the premium consumer looks different. Why is that customer so important to card issuers? Jeff Adelson: So, higher income consumers frankly just spend a lot more. They're more loyal, they carry more cards, and they're more willing to pay a higher annual fee if they feel like they're getting the value from the card back after they pay that fee. In our survey, consumers earning over [$]150,000 per year of income spent roughly twice the amount on their primary card, and they were willing to pay almost twice the annual fee as other income cohorts. They're also attractive from a credit standpoint, from a, you know, delinquency perspective. These customers are more likely to pay their balances in full each month, and as a result, have lower credit risk. And often they keep long-standing relationships with their banks or their airline partner. That's why premium card and travel partnerships remain such an important customer acquisition tool for a bank. It has a really long lifetime value. The battle isn't really for the average card holder; it's for the affluent consumer who's driving a disproportionate share of spend in the U.S. economy.Ravi Shanker: Got it. So, the banks and travel brands are partners today. But they're also starting to potentially compete more directly for the same customer. What should investors watch to see whether this stays a partnership or becomes more of a tug-of-war? Jeff Adelson: So historically, this has been a successful partnership, especially in recent years as high-income consumer spending pie has grown in the U.S. How this works is airlines provide loyalty and travel experiences. Banks provide the card issuance, distribution scale, and share back those card economics to the airlines. Everybody wins when the travel spend grows. But we're starting to see some things overlap. Banks are building their own premium travel ecosystems. That includes things like flexible rewards points with the ability to transfer to any airline you want, proprietary lounges away from the airlines, and travel benefits that increasingly compete with airline loyalty programs. So, what investors should watch from here, in our view, are two things. Number one, is the high-income consumer and the travel pie continuing to grow? That's really what's held everything up and frankly, driven the airlines that you cover to realize that they hold this golden ticket. They hold the access to that consumer, so they've begun negotiating for more of the economics away from the card issuers. The second thing we think that you need to watch out for is whether consumers really continue to value these airline-specific rewards enough to justify the existing partnership model. Our survey indicated that most consumers still prefer flexible rewards over points tied to a single airline. But among frequent travelers and airline loyalists, the airline ecosystem does remain powerful. So, the future does seem to depend in part on whether these travel brands can continue to deliver on experiences that the consumers really can't get elsewhere. So, Ravi, maybe switching to you. For the airlines, the question I have for you is a little different. How do you turn loyalty into a durable, profitable revenue stream without losing sight of the core travel product? Ravi Shanker: That's exactly it. Kind of you referenced the strength of the travel ecosystem in your previous response, and I think that's exactly what the airlines need to focus on. I think the takeaways for the airlines from the survey is very clear. You cannot have a co-brand revenue opportunity in isolation. It is just a layer on top of your core revenues. You cannot build an incredible loyalty or co-brand franchise without having a very strong core airline product. The analogy we use in our report is that it's sort of like the restaurant business.Most restaurants usually make the bulk of their profitability off of the wine menu or the liquor menu, even though you're going there primarily for the food and the ambiance and the service. If you don't have really good food and ambiance and service, you can't make money off of the wine menu. Similarly, we think the airlines need to continue to focus on their core product, whether it's their network or their reliability, their safety, where they fly, the quality of the product in the sky, the lounges, as you mentioned. And once you get all of that in order, then you can tap into the co-brand revenue opportunity over time. Jeff Adelson: So maybe just running with that analogy on, you know, co-branded revenues becoming a more meaningful part of the airline business. Why are they so strategically important in your view? Why should the consumer pay for that bottle of wine that they can get? Ravi Shanker: Look, we, we don't have a full disclosure from the airlines just yet, but we have some nuggets that tell you that this is a very attractive revenue opportunity, right? So, look at some of the numbers we do have. We think that this business has bee...
SummaryAsia’s Race to Power AI
1w ago00:04:56Summary readyAs AI demand surges, our Asia Energy Analyst Mayank Maheshwari discusses the new multi-trillion-dollar investment cycle to secure the power, fuels, grids and storage that keep modern life running.Read more insights from Morgan Stanley.----- Transcript -----Welcome to Thoughts on the Market. I’m Mayank Maheshwari, Morgan Stanley’s Asia Energy analyst. Today: how AI’s rapid growth is forcing Asia into a massive energy buildout across power grids, fuels, storage and dependable energy and power generation. It’s Tuesday, June 9th at 8am in Singapore. Every time you ask AI to draft a note, summarize a file, plan a trip or generate an image, the response feels instant and easy. But behind it sits a very physical system: data centers, electricity, cooling, fuel, metals, power lines, storage tanks and ships. There is no AI without energy. And in Asia, the power and energy needs could get much bigger. And right now, we are at a critical inflection point where energy, AI, and security converge into [a] once-in-a-generation investment cycle. We see a super cycle with $5 trillion plus in new investments in energy over next five years, almost double of what we have seen in the past decade. And this has global implications as Asia consumes almost half of the world's energy needs – but produces only about a third of it at home. Energy markets may be global, but energy insecurity is local. It shows up in electricity prices, fuel shortages, factory delays, food supply pressure and household budgets. By 2030, Asia’s energy use could rise by about 38 exajoules. That increase is roughly equal to all the energy the Middle East consumes today. Power demand alone could reach about 19 trillion units a year when expressed in kilowatt-hours. That is around four trillion more units of electricity usage than in 2025, driven by data centers, industry, and onshoring of businesses. AI is now part of that demand story. By 2030, data centers could use roughly one-sixth of all new power units in Asia. That makes AI a major new load on the power system. Meeting this demand requires a major investment cycle. Asia’s annual energy investment could rise to roughly US$1.1 trillion a year over the next five years. Much of that spending goes into the power system itself: generation, grids, storage and the equipment needed to connect everything. Grids may be the biggest bottleneck. Think of [the] grid as the highway system for electricity. You can build more power plants, but if the roads clog up, the power does not reach homes, factories or data centers. Asia’s grid investment needs could reach close to about US$1 trillion by 2030. Transformer lead times have stretched to years in some cases, which shows how tight the equipment supply chain has become. The hardest part is keeping the lights on every hour of the day. Baseload power means electricity that can run around the clock. Asia is adding a large amount of renewable power to its energy infrastructure. But that source depends on when the sun shines or the wind blows. That is why coal, gas and nuclear remain part of the conversation. Storage also moves from useful to essential. Batteries help smooth out renewable power demand when supply rises and falls during the day. Global energy storage installations could rise from about 500 gigawatt hours in 2025 to around 3,000 gigawatt hours in 2030. Powering AI also reaches beyond electricity. Data centers need power, but the system around them needs dependable fuels, grids, batteries, metals, refining, storage and shipping. Electricity has to be generated, moved, backed up and supplied through physical infrastructure. That is why this story pulls in copper and aluminum for grids, fuel refining for transport and petrochemical supply chains, and fertilizers because energy security also connects to food security. The future may look digital, but it will be powered by something far more physical: the largest energy buildout Asia has seen in decades. 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.
SummaryThe High Cost of AI Memory
1w ago00:04:32Summary readyThe Head of our Europe and Asia Technology Team, Shawn Kim, explains how AI’s appetite for memory chips is boosting the cost of everything from data centers to smartphones, with consequences that may reach far beyond the tech industry.Read more insights from Morgan Stanley.----- Transcript -----Shawn Kim: Welcome to Thoughts on the Market. I’m Shawn Kim, Head of Morgan Stanley’s Europe and Asia Technology Team. Today, we’re talking about chipflation – when memory chips stop getting cheaper over time, and become more expensive and even harder to find. It’s Monday, June 8th, at 3pm in London.Memory chips are easy to ignore, until your laptop slows down, your phone costs more, or your cloud bill jumps. Memory is the computer’s workspace. It holds whatever the machine needs at that moment, whether that is a web search, a video, a spreadsheet, or an AI model answering a question. DRAM is the fast memory inside servers, PCs and phones. NAND is what stores files in solid-state drives. And HBM, or high bandwidth memory, is the high-performance version sitting right next to the AI chip, helping them move huge amounts of data quickly. That last one – HBM – is key because AI has become intensely memory hungry. Memory prices have risen more than six-fold over the last year, a sharp break from decades when the cost of DRAM generally kept falling. The pressure is coming from AI infrastructure buildouts. We see servers accounting for 59 percent of DRAM demand by 2028, up from 37 percent in 2023. We also see enterprise solid-state drives reaching 65 percent of NAND demand, up from 18 percent. And simply put, data centers are taking a much bigger share of the memory pie. AI memory use is climbing fast, and at every scale. A newer AI chip uses 7.2 times more HBM than earlier generations. A full system uses about 65 times more. Across an entire AI data center buildout, the jump gets even bigger. HBM has gone from roughly 10 terabytes in 2020 to about 18 petabytes in 2026, orders of magnitude more. This demand is running into a supply chain that cannot respond quickly. New memory capacity takes years to build, qualify and ramp up. Supply relief is a process, not a switch. And that creates a two-tier market. Large AI and cloud buyers can sign long-term agreements, prepay and secure priority access. Traditional buyers, including PC makers, smartphone makers and industrial hardware companies, must compete for what remains. This impacts everyday products. In 2027, we see PC memory demand potentially facing a 15 percent shortfall, equivalent to about 58 million PCs. Smartphones could face a 12 percent shortfall, equivalent to about 134 million units. Companies may have to raise prices, cut specifications, delay launches, and accept lower profits. The dollar numbers are striking. We see the memory market growing from about $220 USD billion in 2025 to about $890 billion in 2026. Expectations for 2026 memory revenue rose 71 percent in just three months. That implies roughly $600 USD billion of incremental memory revenue in 2026, more than the annual market for smartphones, PCs, or servers, each taken on its own. The broader economy may not see a significant direct inflation shock. We estimate the direct impact on headline CPI at about 0.1 percent in 2026. But pressure is showing up in producer prices, in corporate margins, cloud costs, capital spending plans and delayed technology upgrades. AI has turned memory from the cheapest part of the digital economy into one of its most contested resources. These tiny chips most people never think of may now decide what gets built or delayed, and how much we all end up paying. 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.
SummaryWhat New Tariffs Mean for Investors
2w ago00:04:12Summary readyTrade policy is once again in the news with the announcement of new tariffs. Our Head of Public Policy Research Ariana Salvatore digs into why tariffs may not be a disruptive factor for markets this time.Read more insights from Morgan Stanley.----- Transcript -----Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Head of Public Policy Research for Morgan Stanley. Today, I'll be talking about how investors should be digesting the latest tariff headlines and what they could mean for the broader economic and market outlook. It's Friday, June 5th at 10am in New York. Tariffs are back in focus as the U.S. administration has proposed new levies following Section 301 investigations into more than 60 of our trading partners. At the same time, USMCA negotiations appear to have begun in earnest, with recent headlines focused on autos, including the possibility of raising regional content requirements for vehicles and auto parts. Now, at first glance, these developments sound like a meaningful escalation in trade policy. But we think these headlines are best understood as a continuation of the existing tariff regime rather than a new and more disruptive phase. Let's start with Section 301. Listeners may recall that the administration replaced the IEEPA tariffs with Section 122 following the Supreme Court's decision back in February. However, that was done under a temporary authority that expires in the end of July. It's been our view that as we approach that deadline, the administration would seek to replace the existing regime under a new authority. The conclusion of the Section 301 investigations is really a step in that direction; or said differently, a continuation of existing policy. We see the administration preserving the current tariff regime come July, but without a larger inflation or growth shock. The second issue is the USMCA. Raising regional content rules may be part of the negotiation now, and those changes could create sector-level friction. Similarly, we think it's possible we see escalation ahead of the July deadline as all three countries work to improve the existing trade deal. Now that being said, we're still constructive on the longer-term trade alignment between the U.S., Mexico, and Canada, and we see structural and procedural constraints that are going to limit the downside risk to something like a potential withdrawal from the agreement. We still expect the USMCA carve-out to remain in place even for Section 301 goods on a range of trading partners. That's because we think the administration sees value in maintaining supply chain integration within North America across a number of sectors. In general, we actually think the recent pattern on tariffs has been toward less, not more, trade pressure at the margin. Recent months have come with several carve-outs, exemptions, and delays on broad-based and sectoral tariffs. That suggests that the administration is still sensitive to the downstream cost impact of tariffs, and of course, affordability matters politically heading into the midterm elections in November. That view also fits with our broader U.S. economics outlook. Our economists continue to see a relatively benign macro backdrop. Growth is expected to remain trend-like, with consumer spending slowing but not collapsing, and strong AI-led CapEx offsetting some of the drag from higher energy prices and policy uncertainty. On inflation, tariffs remain part of the story, but much of the pass-through appears to be already in the data. That pairs with a more constructive outlook for equity markets as well, as our strategists there see a strong earnings story supported by things like positive operating leverage, AI adoption, improving pricing power, and a broadening out in earnings growth. So, the key message for investors is this: tariff policy is still noisy, and it will remain a source of headline risk. But in our base case, the administration is moving toward a more durable version of the current tariff regime, not a materially more disruptive or restrictive one. Section 301 replaces Section 122, the USMCA carve-out stays in place, and selective exemptions continue where the affordability or supply chain costs are too high. Thanks for listening. As a reminder, if you enjoy Thoughts on the Market, please take a moment to rate and review us wherever you listen, and share the podcast with a friend or colleague today.
SummaryWhy Oil Supply May Stay Tight for Months
2w ago00:04:52Summary readyOur Global Commodities Strategist Martijn Rats discusses why the restart of oil flows through the Strait of Hormuz may be slower and tighter than the market expects.Read more insights from Morgan Stanley.----- Transcript -----Welcome to Thoughts on the Market. I’m Martijn Rats, Morgan Stanley’s Global Commodities Strategist. Today – how fast can Middle East production return?It is Thursday, June the 4th, at 3pm in London.Every time you pull into a gas station, those prices are staring back at you. What you see at the pump is just the front end of a global system we’ve been watching for months: tankers, storage, insurance, and shipping lanes, all still constrained by the Strait of Hormuz. But while prices at the pump are still high, Brent has actually fallen back to around about $92 a barrel.In inflation-adjusted terms, today’s Brent price is actually right at the 50th percentile of the last 20 years – suggesting that the market is assuming a clean, near-term recovery in supply. Yet the disruption continues to be extraordinary. Roughly 11 million barrels per day of Gulf crude remains offline, close to half the region’s pre-conflict output.We think the market may be too optimistic. Our working assumption is now that meaningful export recovery through the strait begins only in the second half of July. Even then, normal does not return with the flip of a switch.First, ships need to be willing to sail. Owners and insurers need confidence that the waterway is safe. If mines remain in traditional shipping lanes, the strait can be technically open but still operate at reduced capacity. Clearing that risk can take weeks, and potentially several months.Second, the tanker fleet is in the wrong place. When ships cannot work in the Gulf, they move elsewhere. Bringing enough empty tankers back to lift crude takes time.Third, storage is a limiting factor. Oilfields cannot restart if export tanks are full. For producers that rely heavily on seaborne exports, empty tankers are therefore essential.Last, oilfields themselves need restarting. Before the closure, around 36,000 wells were active across six Gulf producers. Roughly 10,000 of those are currently offline. After a shut-in of nearly five months, about 4,000 to 5,000 wells could face restart constraints. Reservoir pressure can decline, equipment can fail after sitting idle, and flowlines need cleaning and safety checks.All told, around 75 percent of lost supply can probably come back within four months after flows through the Strait of Hormuz resume. But the final 25 percent may take well into 2027.So why have prices not moved more? The market began this shock with buffers. Inventories were elevated, oil-on-water was high, and emergency relief releases helped. The U.S. increased seaborne net exports of crude oil and refined products from roughly 5 million barrels a day to 9 million barrels a day. At the same time, China’s seaborne net oil imports fell from around 13 million barrels a day a year ago to just over 7.5 million a day over the last 30 days.But these cushions are thinning. Strategic reserve releases are scheduled to drop from about 2.5 million barrels per day in April through June to about 0.7 million in July and August. U.S. gasoline and diesel inventories are already well below five-year seasonal lows. China is already on track for five consecutive months of unusually low crude buying for April through August delivery. But that starts to raise the probability that Chinese buyers return for September barrels. Buying for September typically starts mid to late June.Now, oil is trading like the disruption is nearly over. But at the same time, the physical system is telling a slower story. Prices may look calm on the screen, but the bottleneck is in tankers, storage tanks, wells, and crews.Our Brent forecasts remain $110 per barrel for the second quarter and about $100 a barrel for the third quarter. We recently raised our estimates for the fourth quarter to $95 and the first quarter of 2027 to $85 a barrel, and expect a return to $80 eventually thereafter.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.
SummaryAI Borrowing Creates a New Credit Playbook
2w ago00:05:06Summary readyChief Fixed Income Strategist Vishy Tirupattur takes a look at how credit markets are adapting to fund the new phase of AI capex.Read more insights from Morgan Stanley.----- Transcript ----- Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley’s Chief Fixed Income Strategist. Today – The critical question behind the AI-driven capex cycle that is front and center for markets year to date. How is credit market financing this ecosystem evolving? It’s Wednesday June 3rd at 2 pm in New York. When we first discussed the role of credit markets in financing the AI and data center build-out around the middle of last year, the direction of travel was clear. Realizing the transformative potential of AI requires unprecedented levels of capex. What has really surprised us since is the scale and speed of that spending, both of which have exceeded our expectations by a wide margin. The upward revision to capex expectations has been dramatic. A year ago, we projected the combined capex of the five large hyperscalers at roughly $450 billion in both 2026 and 2027. After the first quarter earnings reports, Morgan Stanley’s internet equity analysts, led by Brian Nowak, now expect hyperscaler capex of roughly $800 billion in 2026 and $1.2 trillion in 2027. One data point really captures the surge in the underlying demand for compute. According to OpenRouter, the global weekly token usage, which is a key proxy for compute, has risen by roughly 350 percent since early January, increasing from about 6 trillion tokens to 28 trillion tokens. Credit channels for financing this capex have not only been broader and deeper than we anticipated, spanning public and private markets, but have seen remarkable in the structural innovation that is blurring the lines between public and private markets. Over $200bn of public AI-related issuance across the different credit channels has happened just in the first five months of this year. We had previously assumed unsecured issuance would be limited by the scale of the largest non-financial issuers, confined to investment grade credit only, and largely USD denominated. Instead, some hyperscaler issuance has now far exceeded even the largest telecom names; funding has expanded well beyond USD into EUR, GBP, CHF, JPY and CAD markets. The issuer base has also broadened to include data center REITs and neoclouds, particularly in the high-yield market. The scope of financing has also widened beyond the data center shells themselves. GPU financing, which we assumed would be funded entirely through equity capital, has begun to migrate into credit markets. Funding is now coming through broadly syndicated loans and asset based financing, with ABS structures not far behind. Structural innovation illustrates how rapidly the credit ecosystem is adapting to the complexities of demands of AI-driven capex. Financings that combine elements of project finance, tranching, and residual value guarantees, along with high-yield issuance backed by hyperscaler guaranteed leases – these are innovations that we have never seen before. These structures have expanded the investor base, reduced the funding frictions, and further blurred traditional boundaries – between both corporate and project finance, and public and private credit markets. At the same time, physical, operational, and political constraints are beginning to shape the pace and the composition of the AI infrastructure build-out – and, by extension, the demand for financing. Grid access, power generation equipment, skilled labor, and permitting delays are emerging as significant constraints. These are compounded by political and regulatory frictions at the local, national, and international level. As power availability becomes a gating factor, the AI build-out is likely to pull energy infrastructure financing more tightly into the orbit of AI infrastructure financing. The clear takeaway is this. The capex requirements underpinning AI infrastructure are expanding exponentially, and with them the role of credit markets in financing this build-out. Along the way, there will be winners and losers, periods of adjustment, and a range of physical, financial, and political constraints that shape outcomes on the margin. But the broader trajectory is certain. The scale, duration, and strategic importance of AI infrastructure investment mean that financing of this will remain a defining theme for credit markets and credit investors for years to come. Thanks for listening. If you enjoy the podcast, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.
Summary