Thoughts on the Market Podcast

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

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

Michael Zezas: Today, how are tariffs impacting the economy and what it means for bond markets?

It's Wednesday, August 13th at 10:30am in New York.

Michael, we've been talking about how the near-term uncertainty around tariff levels has come down. Tariff deals are, of course, still pending with some major U.S. trading partners like China; but agreements are starting to come together. And though there's lots of ways they could break over time, in the near-term, deals like the one with Europe signal that the U.S. might be happy for several months with what's been arranged. And so, the range of outcomes has shrunk.

The U.S.' current effective tariff rate of 16 percent is about where we thought we'd be at year end. But that's substantially higher than the roughly 3 percent we started the year with. So, not as bad as it looked like it could have been after tariffs were announced on April 2nd, but still substantially higher. Now's the time when investors should stay away from chasing tariff headlines and guessing what the President might do next; and instead focus on assessing the impact of what's been done.

With that as the backdrop, we got some relevant data yesterday, the Consumer Price Index for July. You were expecting that this would show some clear signs of tariffs pushing prices higher. Why was that?

Michael Gapen: Well, we did analysis on the 2018-2019 tariff episode. So, in looking at the input-output tables, economy andou an idea of how prices move through certain sectors of the economy, and applying that to the 2018 episode of tariffs – we got the result that you should see some tariff inflation in June, and then sequentially more as we move into the late summer and the early fall.

So, the short answer, Mike, is a model based plus history-based exercise – that said yes, we should start seeing the effects of tariffs on those categories, where the direct effect is high. So that'd be most of your goods categories. Over time, as we move into later this year or early next year, it'll be more important to think about indirect effects, if any.

Michael Zezas: Got it. So, the July CPI data that came out yesterday, then did it corroborate this view?

Michael Gapen: Yes and no. So, I'm an economist, so I have to do a two-handed view on this. So yes…

Michael Zezas: Always fair.

Michael Gapen: Always, yes. So, yes, core goods prices rose by two-tenths on the month, in June they also rose by two-tenths. Prior to this goods’ prices were largely flat with some of the big durables, items like autos being negative, right? So, we had all the give back following COVID. So, the prior trend was flat to negative. The last two months, they've shown two-tenths increases. And we've seen upward pressure on things like household furnishings, apparel. We saw a strong used car print this month, motor vehicle and repairs. So, all of that suggests that tariffs are starting to flow through.

Now, we didn’t – on the other hand – is we didn't get as much as we thought. New car prices were flat and maybe those price increases will be delayed until models – the 2026 models start hitting the lot. That would be September or later. And we didn't actually; I said apparel. Apparel was up stronger last month. It really wasn't up all that much this month. So, the CPI data for July corroborated the view that the inflation pass through is happening.

Where I think it didn't answer the question is how much of it are we going to get and should we expect a lot of it to be front loaded? Or is this going to be a longer process?

Michael Zezas: Got it. And then, does that mean that tariffs aren't having the sort of aggregate impact on the economy that many thought they would? Or is maybe the composition of that impact different? So, maybe prices aren't going up so much, but companies are managing those costs in other ways. How would you break that down?

Michael Gapen: We would say, and our view is that, yes, you know, we have written down a forecast. And we used our modeling in the 2018-20 19 episode to tell us what's a reasonable forecast for how quickly and to what degree these tariffs should show up in inflation.

But obviously, this has been a substantial move in tariffs. They didn't start all at once. They've come in different phases and there's a lot of lags here

So, I just think there's a wide range of potential outcomes here. So, I wouldn't conclude that tariffs are not having the effect we thought they would.

I think it's way too early and would be incorrect to conclude, just [be]cause we've had relatively modest tariff pressures in June and July, inflation that we can be sanguine and say it's not a big deal and we should just move on.

Michael Zezas: And even so, is it fair to say that there's still plenty of evidence that this is weighing on growth in the way you anticipated?

Michael Gapen: I think so. I mean, it's clear the economy has moderated. If we kind of strip out the volatility and trade and inventories, final sales to domestic purchasers 1.5 in the first quarter. It was 1.1 in the second quarter, and a lot of that slowdown was related to spending by the consumer. And a slowdown in business spending. So that that could be a little more, maybe about policy uncertainty and not knowing exactly what to do and how to plan.

But it also we think is reflected in a slowdown, in the pace of hiring. So, I would say, you got the policy uncertainty shock first. That also came through the effect of the April 2nd Liberation Day tariffs, which probably caused a freeze in hiring and spending activity for a bit. And now I would say we're moving into the part of the world where the actual increase in tariffs are going to happen. So, we'll know whether or not firms can pass these prices along or not. If they can't, we'll probably get a weaker labor market. If they can, we'll continue to see it in inflation.

But Mike, let me ask you a question now. You've had all the fun. Let me turn the table.

Michael Zezas: Fair enough.

Michael Gapen: How much does it matter for you or your team, whether or not these tariffs are pushing prices higher? And/or delaying cuts from the Fed. How do you think about that on your side?

Michael Zezas: Yeah, so this question of composition and lags is really interesting. I think though that if the end state here is as you forecast – that we'll end up with weaker growth, and as a consequence, the Fed will embark on a substantial rate cutting program. Then the direction of travel for bond yields from here is still lower. So, if that's the case, then obviously this would be a favorable backdrop for owners of U.S. treasury bonds.

It's probably also good news for owners of corporate credit, but the story's a bit trickier here. If yields move lower on weaker growth, but we ultimately avoid a recession, this might be the sweet spot for corporate credit. You've got fundamental strength holding that limits credit risk, and so you get performance from all in yields declining – both the yield expressed by the risk-free rate, as well as the credit spread.

But if we tipped into recession, then naturally we'd expect there to be a repricing of all risk in the market. You'd expect there to be some expression of fundamental weakness and credit spreads would widen. So, government bonds would've been a better product to own in that environment.

But, of course, Michael, we have to consider alternative outcomes where yields go higher, and this would turn into a bad environment for bond returns that would appear to be most likely in the scenario where U.S. growth actually ticks higher, resetting expectations for monetary policy in a more hawkish direction.

So, what do you think investors should watch for that would lead to that outcome? Is it something like an AI productivity boom or maybe something else that's not on our radar?

Michael Gapen: Yeah, so I think that is something investors do have to think about; and let me frame one way to think about that – where ex-post any easing by the Fed as early as September might be retroactively viewed as a policy mistake, right? So, we can say, yes, tariffs should slow down growth and maybe that happens in the second half of this year.

The Fed maybe eases rates as a pre-emptive measure or risk management approach to avoid too much weakness in the labor market. So even though the Fed is seeing firming inflation now, which it is. It could ease in September, maybe again in December [be]cause it's worried about the labor market. So maybe that's what dominates 2025. And, and like you said, perhaps in the very near term, continues to pull bond prices lower.

But what if we get into 2026 and the tariff effect or the tariff drag on growth fades, and the consumer begins to accelerate. So, we don't have a recession, we just get a bit of a divot in growth and then the economy recovers. Then fiscal policy kicks in, right?

We don't think the One Big, Beautiful Bill act will provide a lot of stimulus, but we could be wrong. It could kickstart animal spirits and bring forward a lot of business spending. And then maybe AI, as you said; that could be a combining factor and financial conditions would be very easy in that world, in part – given that the Fed has eased, right?

So that that could be a world where, you know, growth is modest, but it's firming. Inflation that's moved up to about 3 percent or maybe a little bit higher later this year kind of stays there. And then retroactively, the problem is the Fed eased financial conditions into that and inflation's kind of stuck around 3 percent. Bond yields – at least the long end – would probably react negatively in that world.

Michael Zezas: Yeah, that makes perfect sense to us. Well, Michael, thanks for taking the time to talk with me.

Michael Gapen: Thanks for having me on, Mike.

Michael Zezas: And to our audience, thanks for listening. If you enjoy Thoughts on the Market, please leave us a review and tell your friends about the podcast. We want everyone to listen.

Arunima Sinha: Welcome to Thoughts on the Market. I'm Arunima Sinha, Global Economist at Morgan Stanley.

Today I'm going to talk about how inflation targets of central banks matter for market participants and economic activity.

It's Tuesday, August 12th at 10am in New York.

Tariff driven inflation is at the center of financial market debates right now. The received wisdom is that a central bank should look through one-off increases in prices if – and it is an important if – inflation expectations are anchored low enough. Inflation targets, inflation expectations, and central bank credibility have been debated for decades.

The Fed's much criticized view that COVID inflation would be  transitory was based on the assumption that anchored inflation expectations would pull inflation down. The Fed is more cautious now after four years of above target inflation. Can a central bank simply announce an inflation target and get everyone to believe it?

Far away from the U.S., the South Africa Reserve Bank, SARB, is providing a real time experiment. The SARB’s inflation target was originally a range of 3 to 6 per cent, with an intention to shift to 2 to 4 percent over time. At its last meeting, the SARB announced that it was going to target the bottom end of the range, de facto shifting to a 3 percent target. A decision by the Ministry of Finance in the coming months is likely necessary to formalise the outcome, but the SARB has succeeded in pulling inflation down. It has established credibility, but we suspect that more work is needed to anchor inflation expectations firmly at 3 percent.

Key to the SARS challenge, as the Fed’s – the central bank cannot control all the drivers of inflation in the short run. For South Africa, fiscal targets and exchange rate movements are prime examples. The experience in Brazil offers insight for South Africa. The BCB adopted an inflation target in 1999 following the end of the currency peg that helps the transition away from hyperinflation. The target was initially set at 8 percent, lowered to 4.5 percent in 2005, and then lowered again to 3 percent in 2024.Fiscal outcomes, market expectations, and currency volatility have been hard to contain. The lessons apply to South Africa and also the Fed. Successful inflation targeting relies on a clear framework, but also on institutional strength and political consensus.

For South Africa, as inflation falls ex-ante real interest rates will rise. That outcome will be necessary to restrain the economy enough to make sure that the path to 3 percent is achieved. For an open EM economy, there likely needs to be consistency by both monetary and fiscal authorities with regard to short-term pressures, both internal and external.

While we ultimately expect the SARB to be able to anchor inflation expectations, the journey may not be a quick one; and that journey will likely depend on keeping real interest rates on the higher side to ensure the convergence.

We take the experiences of South Africa and Brazil to be informative globally. Simply announcing an inflation target likely does not solve the problem. The Fed, for example, spent much of the 2010s hoping to get inflation up to target – while now ironically, inflation in the US has run above target for almost half a decade.

Whether the lingering effects of the COVID inflation has affected the price setting mechanism is unclear, as is whether tariff driven inflation will exacerbate the situation. Our read of the evidence is that inflation expectations and central bank credibility come from hitting the target, not from announcing it.

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. 

Welcome to Thoughts on the Market. I’m Cesar Medina, Morgan Stanley’s Latin America Technology, Media, and Telecom Analyst. Today – we discuss what’s driving the digital revolution in global sports. And what it means for fans as well as investors.

It’s Monday, August 11th, at 10am in New York.

These days, watching a sporting event at home usually means streaming the big game on a large 4K HDR screen. Maybe even 8K for premium events. You might access real time stats from a supporting app or social media on a secondary device. Maybe even have a group chat with friends.

But imagine a game with real-time personalized stats. Immersive alternate camera angles. Or even experiencing the match from a player's perspective—all powered by AI. These innovations are already being tested and rolled out in select leagues.

Global sports generates half a trillion dollars in annual revenues. Despite all that cash, until very recently the industry was slow to embrace digital technology, lagging behind movies and music.  Now that’s changing – and fast.

So, what’s driving this transformation?

Three powerful forces are closing this digital gap. One – younger, tech-savvy audiences demanding more immersive and personalized experiences. Two – new distribution models, with digital platforms stepping into the arena.  And three – institutional investment, bringing capital and a push for modernization.

You might ask – what does this all mean for fans, investors, and the future of entertainment?

Let’s start with fans. Today’s sports fans aren’t just watching—they’re interacting, betting, gaming, and sharing. And younger fans are leading the charge. They are spending more time online and expect hyper-personalized content. They're more interested in individual athletes than teams, and they engage through social media, fantasy sports, and interactive platforms.

Surveys show that fans under 35 are significantly more likely to spend money on sports if the experience is digital-first. Some leagues have seen viewership jump by 40 percent after introducing interactive features. Others are using AI to personalize content, boosting engagement and revenue.

Digital transformation isn’t just about watching games though—it’s about reimagining the entire ecosystem. When it comes to live events, smart venues are using AI to adjust ticket prices based on weather, opposing team, and demand. Some are even using facial recognition for faster entry and purchases. Streaming platforms are making broadcasts more interactive, while combating piracy with predictive tech. As for engagement, fantasy sports, esports, and betting are booming. AI-driven platforms are helping fans make smarter picks—and spend more.

Altogether, these innovations could boost global sports revenues by over 25 percent, adding more than $130 billion in value.

While North America leads in monetization, Emerging Markets are catching up fast. In India, Brazil, and the Middle East, for example, sports franchises are seeing double-digit growth in value—sometimes outpacing traditional media.

And here’s the kicker: many of these regions have younger populations and faster-growing digital adoption. That’s a recipe for serious growth. Meanwhile, niche sports and women’s leagues are also gaining global traction, expanding the definition of mainstream entertainment.

Of course, this transformation of the sports industry faces real hurdles—technical expertise, budget constraints, and cultural resistance among coaches and athletes. But the incentives are clear. And as more capital flows into sports—from private equity to sovereign wealth funds—digital transformation is becoming a strategic priority.

So, what’s the biggest takeaway?

Global sports is no longer just about what happens on the field. It’s about how fans experience it—on their phones, in their homes, and in the stadiums of the future. So whether you’re an investor, a fan, or just someone who loves a good underdog story, this is a game worth watching.

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.

Michelle Weaver: Welcome to Thoughts on the Market. I’m Michelle Weaver, Morgan Stanley’s U.S. Thematic and Equity Strategist here at Morgan Stanley.

Today -- we're going back to school! A look at the second biggest shopping season in the U.S.. And what it can tell us about the broader market.

It’s Friday, August 8th, at 10am in New York.

It's that time of the year again. With parents, caregivers and students making shopping lists for back-to-school supplies. And it’s not just limited to school supplies and backpacks. It probably also includes laptops or tablets, smart phones and, of course, the latest clothes. For investors, understanding how consumers are feeling—and spending—right now is critical. Why? Because back-to-school spending tells us a lot about consumer sentiment. And this month’s data has been sending some mixed but meaningful signals.

Let’s start with the mood on Main Street. According to our latest proprietary consumer survey, confidence in the economy is sliding. Just under one-third of consumers think the economy will improve over the next six months—which is down from 37 percent last month and 44 percent in January. And that’s a pretty big drop from the start of the year. Meanwhile, half of all consumers expect the economy to get worse.

Household finances are also feeling the squeeze. While around 40 percent expect their financial situation to improve, closer to 30 percent expect it to worsen. The net score is still positive, but down from last month and even more so from January.

The takeaway? Consumers are feeling the pinch—and inflation remains their number one concern.

We did see a bit of a brighter picture though around tariff fears. And tariffs are definitely still a worry, but we’re past that point of peak fear. This month, over a third of consumers said they’re “very concerned” about tariffs—down from 43 percent in April, post Liberation Day. And fewer people are planning to cut back on spending because of them: that number is just 30 percent now, compared to over 40 percent a few months ago.

In fact, almost 30 percent of consumers actually plan to spend more despite tariffs. That’s a sign of resilience—and perhaps necessity—as families prepare for the school year.

And that brings us back to back-to-school shopping, which is a relative bright spot.

Nearly half of U.S. consumers have already shopped or are planning to shop for the school year—right in line with what we saw in previous years. Among those shoppers, 47 percent are spending more than last year, while only 14 percent plan to spend less. That’s a significant net positive at 34 percent.

What’s in the cart? More than 90 percent of shoppers are buying apparel, footwear, and school supplies. Apparel leads, followed by footwear, followed by supplies.

If we look beyond the classroom at other things people are spending on, travel is still a priority. Around 60 percent of consumers plan to travel over the next six months, with visiting friends and family as the top reason. That’s consistent with where we were a year ago and shows that experiences still matter—even in uncertain times.

The big takeaway from all this data: Consumer sentiment is cooling, but spending—especially spending for seasonal needs—is holding up. Back-to-school categories like apparel and footwear are outperforming, making them potential bright spots for retailers.

As we head into fall, keep your eyes on U.S. consumers. They’re not just shopping for school—they’re also signaling where the market could be headed next.

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.

Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley.

Today – how a tricky two months could feel a lot like stagflation, and a lot different from what we’ve had so far this year.

It’s Thursday, August 7th, at 2pm in London.

For all the sound and fury around tariffs in 2025, financial markets have been resilient. Stocks are higher, bond yields are lower, credit spreads are near 20-year tights, and market volatility last month plummeted.

Indeed, we sense increasing comfort with the idea that markets were tested by tariffs – after all we’ve been talking about them since February – and weathered the storm. So far this year, growth has generally held up, inflation has generally come down, and corporate earnings have generally been fine.

Yet we think this might be a bit like a wide receiver celebrating on the 5-yard line. The tricky impact of tariffs? Well, it might be starting to show up in the data right now, with more to come over the next several months.

When thinking about the supposed risk from tariffs, it’s always been two fold: higher prices and then also less activity, given more uncertainty for businesses, and thus weaker growth.

And what did we see last week? Well, so-called core-PCE inflation, the Fed’s preferred inflation measure, showed that prices were once again rising and at a faster rate. A key report on the health of the U.S. jobs market showed weak jobs growth. And key surveys from the Institute of Supply Management, which are followed because the respondents are real people in the middle of real supply chains, cited lower levels of new orders, and higher prices being paid.

In short, higher prices and slower growth. An unpleasant combo often summarized as stagflation.

Now, maybe this was just one bad week. But it matters because it is coming right about the time that Morgan Stanley economists think we’ll see more data like it. On their forecasts, U.S. growth will look a lot slower in the second half of the year than the first. And specifically, it is in the next three months, which should show higher rates of month-over-month inflation, while also seeing slower activity.

This would be a different pattern of data that we’ve seen so far this year. And so if these forecasts are correct, it’s not that markets have already passed the test. It's that the teacher is only now handing it out. 

For credit, we think this could make the next several months uncomfortable and drive some modest spread widening. Credit still has many things going for it, including attractive yields and generally good corporate performance. But this mix of slower growth and higher inflation, well, it’s new. It’s coming during an August/September period, which is often somewhat more challenging for credit. And all this leads us to think that a strong market will take a breather.

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.

Vishy Tirupattur: Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist.

Vishwas Patkar: And I'm Vishwas Patkar, Head of U.S. Credit Strategy at Morgan Stanley.

Vishy Tirupattur: Today we want to talk about the opportunities and challenges in the credit markets, in the context of AI and data center financing.

It's Wednesday, August 6th at 3pm in New York.

Vishy Tirupattur: So, Vishwas spending on AI and data centers is really not new. It's been going on for a while. How has this CapEx been financed so far predominantly? What has changed now? And why do we need greater involvement of credit markets of different stripes?

Vishwas Patkar: You're right, Vishy. So, CapEx on AI is certainly not new. So last year the hyperscalers alone spent more than $200 billion on AI related CapEx. What changes from here on, to your question, is the numbers just ramp up sharply. So, if you look at Morgan Stanley's estimates leveraging work done by our colleague Stephen Byrd over the next four years, there's about [$]2.9 trillion of CapEx that needs to be spent across hardware and data center bills.

So what changes is, while CapEx so far has been largely self-funded by hyperscalers, we think that will not be the case going forward. So, when we leverage the work that has been done by our equity research colleagues around how much the hyperscalers can spend, we've identified a [$]1.5 trillion financing gap that has to be met by external capital. And we think credit would play a big role in that.

Vishy Tirupattur: A financing gap of [$]1.5 trillion. Wow. That's a big number, by any measure. You talked about multiple credit channels that would need to be involved. Can you talk about rough sizing of these channels?

Vishwas Patkar: Yep. So, we looked at four broad channels in the report that went out a few weeks ago. So, that [$]1.5 trillion gap breaks out into roughly [$]800 billion across private credit, which we think will be led by asset-based finance. Another [$]200 billion we think will come from Investment Grade rated bond issuance from the large tech names. Another [$]150 billion comes through securitized credit issuance via data center ABS and CMBS. And then finally there is a [$]350 billion plug that we've used. It's a catchall term for all other forms of financing that can cover sovereign spend, PE (private equity), VC among others,

Vishy Tirupattur: The technology sector is fairly small within the context of corporate grade markets. You are estimating something like [$]200 billion of financing to come from this channel. Why not more?

Vishwas Patkar: So, I think it comes down to really willingness versus ability. And, you know, you raise a good point. Tech names certainly have a lot of capacity to issue debt. And when I look at some of the work done by my colleague Lindsay Tyler in this report, the big four hyperscalers alone could issue over [$]600 billion of incremental debt without hurting their credit ratings.

That said, our assumption is that early in the CapEx cycle, companies will be a little hesitant to do significantly debt funded investments as that might be seen as a suboptimal outcome for shareholder returns. And that's why we have reduced the magnitude of how much debt issuance could be vis-a-vis the actual capacity some of these companies have.

So, Vishy, I talked about private credit meeting about half of the investment gap that we've identified and within that asset-based finance being a very important channel. So, what is ABF and why do you expect it to play such a big role in financing AI and data centers?

Vishy Tirupattur: So, ABF is a very broad term for financing arrangements within the context of private credit. These are financing arrangements that are secured by loans and contractual cash flows such as leases – either with hard assets or without hard assets. So, the underlying concept itself is pretty widely used in securitizations.

So, the difference between ABF structures and ABS structures is that the ABF structures are highly bespoke. They enable lots of customization to fit the specific needs of the investors and issuers in terms of risk tolerance, ratings, returns, duration, term, et cetera.

So, ABS structures, on the other hand, are pretty standardized structures, you know, driven mainly by rating agencies – often requiring fairly stabilized cash flows with very strict requirements of lessee characteristics and sometimes residual value guarantees, in cases where hard assets are actually part of the collateral package.

So, ABF opens up a wider range of possible structures and financing options to include assets that are on different stages of development. Remember, this is a very nascent industry. So, there are data centers that are fully stabilized cash flows, and there are data centers that are in very early stages of building with just land, or land and power access just being established.

So, ABF structures can really do it in the form of a single asset or single facility financing or could include a portfolio of multiple assets and facilities that are in different stages of development.

So, put all these things together, the nascent nature and the bespoke needs of data center financing call for a solution like ABF.

Vishwas Patkar: And then taking a step back. So, as you said, the [$]1.5 trillion financing gap; I mean, that's a big number. That's larger than the size of the high yield market and the leveraged loan market.

So, the question is, who are the investors in these structures, and where do you think the money ultimately comes from?

Vishy Tirupattur: So, there is really a favorable alignment here of significant and substantial dry powder across different credit markets. And they're looking for attractive yields with appeal to a sticky investor base. This end investor base consists of investors such as insurance companies, sovereign wealth funds, pension funds, endowments, and high net worth retail individuals.

Vishy Tirupattur: These are looking for scalable high quality asset exposures that can provide diversification benefits. And what we are talking about in terms of AI and data center financing precisely fall into that kind of investment. And we think this alignment of the need for capital and need for investments, that bridges this gap for [$]1.5 trillion that we're talking about here.

So, my final question to you, Vishwas, is this. Where could we be wrong in our assessment of the financing through the various credit market channels?

Vishwas Patkar: With the caveat that there are a lot of assumptions and moving parts in the framework that we build, I would flag really two risks. One macro, one micro.

The macro one I would talk about in the context of credit market capacity. A lot of the favorable dynamics that you talked about come from where the level of rates are. So, if the economy slows and yields were to drop sharply, then I think the demand that credit markets are seeing could come into question, could see a slowdown over the coming years.

The more micro risks, I think really come from how quickly or how slowly AI gets monetized by the big tech names. So, while we are quite optimistic about revenue generation a few years out, if in reality revenues are stronger than expected, then you could see more reliance on the public markets.

So, for instance, the 200 billion of corporate bond issuance is likely going to be skewed higher in a more optimistic scenario. On the flip side, if there is mmuch ore uncertainty around the path to revenue generation, and if you see hyperscalers pulling back a bit on CapEx – then at the margin that could push more financing to the way of credit markets. In which case the overall [$]1.5 trillion number could also be biased higher.

So those are the two big risks in my view.

Vishy Tirupattur: So, Vishwas, any way you look at it, these numbers are big. And whether you are involved in AI or whether you're thinking about credit markets, these are numbers and developments that you cannot ignore.

So, Vishwas, thanks so much for joining.

Vishwas Patkar: Thank you for having me on Vishy.

Vishy Tirupattur: And thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

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 – a look back at last week’s meeting of the Federal Open Market Committee or FOMC, and the path for rates from here.

It's Tuesday, August 5th at 10am in New York.

Mike, last week the Fed met for the fifth time this year. The committee didn't provide a summary of their economic projections, but they did update their official policy statement. And of course, Chair Powell spoke at the press conference. How would you characterize the tone of both?

Michael Gapen: Yeah, at first the statement I thought took on a slightly dovish tone for two reasons. One, unexpected; the other expected. So, the committee did revise down their assessment of growth and economic activity. They had previously described the economy as growing at a quote, ‘solid pace,’ and now they said, you know, the incoming data suggests that growth and economic activity moderated.

So that's true. That's actually our view as well. We think the data points to that.

The second reason the statement looked a little dovish, and this was expected is the Fed received two dissents. So, Governors Bowman and Waller both dissented in favor of a 25 basis point rate cut at the July meeting.

But then the press conference started. And I would characterize that as Powell having at least some renewed concerns around persistence of inflation. So, he did recognize or acknowledge that the June inflation data showed a tariff impulse.

But I'd say the more hawkish overtones really came in his description of the labor market, which I know were going to get into.

And we've been kind of wondering and, you know, asking implicitly – is the Fed ever going to take a stand on what constitutes a healthy and/or weak labor market? And Powell, I think put down a lot of markers in the direction; that said, it's not so much about employment growth, it's about a low unemployment rate. 

And he kept describing the labor market as solid, and in healthy condition, and at full employment. So, the combination of that suggests it's a higher bar, in our mind, for the Fed to cut in September.

Matthew Hornbach: And on the labor market, if we could dig a little bit deeper on that point. It did seem to me certainly that Powell was channeling your views on the labor market.

Michael Gapen: Well, I wish I had that power but thank you.

Matthew Hornbach: Well. I'd like to now channel your views – and of course his views – to our listeners. Can you just go a little bit deeper into this dichotomy that you've been highlighting between the pace of job growth and the unemployment rate itself?

Michael Gapen: Yeah. Our thesis and what we've laid out coming into the year, and we think the data supports, is the idea that immigration controls have really slowed growth in the labor force. And what that means is the break-even rate of employment has come down.

So even as economic growth has slowed and demand for labor has slowed, and therefore employment growth has slowed – the unemployment rate has stayed low, and there's some paradox in that. Normally when employment growth weakens, we think the economy’s rolling over; the Fed should be easing.

But in an environment of a very slow growing labor force, the two can coincide. And there's tension in that, we recognize. But our view is – the more the administration pushes in the direction of restraining immigration, the more likely it is you'll see the combination of low employment growth, but a low unemployment rate. And our view is that still means the labor market is tight.

Matthew Hornbach: Indeed, indeed. Just one last question from me. How are you thinking about the Fed's policy path from here? In particular, how are you looking at the remaining data that could get the Fed to cut rates in September?

Michael Gapen: Yeah, I think that there's no magic sauce here, if you will; or secret sauce. Powell, you know, essentially is laying out a case where it's more likely than not inflation will be deviating from the 2 percent target as tariffs get passed through to consumer prices. And the flag that he planted on the labor market suggests maybe they're leaning in the direction of thinking the unemployment rates is likely to stay low.

So, we just need more revelations on this front. And the gap between the July and the September FOMC meetings is the longest on the Fed's calendar. So, they will see two inflation reports and two labor market reports.

And again, it just to provide context and color, right? What I think Powell was doing was positioning his view against the two dissents that he received. So where, for example, Governor Waller laid out a case where weaker employment growth could justify cuts, Powell was reflecting the view of the rest of the committee that said, ‘Well, it's not really employment growth, it's about that unemployment rate.’

So, when these data arrive, we'll be kind of weighing both of those components. What does employment growth look like going forward? How weak is it? And what's happening to that unemployment rate?

So, if the Fed's doing its job, this shouldn't be magic.

If the labor market's obviously rolling over, you'll get cuts later this year. If not, we think our view will play out and the Fed will be on the sideline through, you know, early 2026 before it moves to rate cuts then.

So Matt, what I'd like to do is kind of turn from the economics over to the rates views. How did the rates market respond to the meeting, to the statement, to the press conference? How are you thinking about the market pricing of the policy path into your end?

Matthew Hornbach: So initially when the statement was released, as you noted, it had a dovish flavor to it. And so, we had a small repricing in the interest rate market, putting a little bit of a higher probability, on the idea that the Fed would lower rates in September. But then as Chair Powell began the press conference and started to articulate his views around both inflation and the labor market we saw the market take out some probability that the Fed would lower rates in September.

And where it ended up at the end of that particular day was putting about a 50 percent probability on a rate cut and as a result of 50 percent probability of no rate cut; leaving the data to really dictate where the pricing of that meeting would go from there.

That to me speaks to this data dependence of the Fed, as you've discussed. And I think that in the coming weeks we get more of this data that you talked about, both on the inflation side of the mandate and on the labor market side of the mandate. And ultimately, if they end up, going in September, I would've expected the market to have priced most of that in, ahead of the meeting. And if they end up not cutting rates in September, then naturally the market will have moved in that direction ahead of time.

And again, I think what ends up happening in September will be critical for how the market ends up pricing the evolution of policy in November and December. But to me, what I think is more interesting is your view on 2026. And in that regard, the market is still some distance away from your view, that the Fed goes about 175 basis points in 2026.

Michael Gapen: Yeah, I mean, we're still thinking the lagged effects of tariffs and immigration will slow the economy enough to get more Fed cuts than the market's thinking. But, you know, we'll see if that happens. And maybe that's a topic we can turn back to in upcoming Thoughts on the Market.

But what I'd like to do is ask you this. I've been reading some of your recent work on term premiums. And in my view, had this really interesting analysis about how the market prices Fed policy and how U.S. Treasury yields then adjust and move.

You highlighted that Treasury yields built in a term premium after April 2nd. What's happening with that term premium today?

Matthew Hornbach: Yeah. The April 2nd Liberation Day event catalyzed an expansion of term premia in the Treasury market. And ultimately what that means is that Treasury yields went up relative to what people were thinking about the path of Fed policy, and of course, the risks that they were thinking about in the month of April were risks related to trade policy. Those risks have diminished somewhat, I would argue in the subsequent months as the administration has been announcing deals with some of our trading partners. And then the market's focus turned to supply and what was going to happen with U.S. Treasury supply. And then, of course, the reaction of investors to that coming supply.

And I would say, given what the Treasury announced last week, which was – it had no intention of raising supply, in the next several quarters. In our view is that the U.S. Treasury will not have to raise supply until the early part of 2027. So way off in the distance.

So, investors are becoming more comfortable taking on duration risk in their portfolios because some of that uncertainty that opened up after April 2^nd has been put away.

Michael Gapen: Yeah, I can see how the substantial tariff revenue we're bringing in could affect that story. So, for example, I think if you annualize the run rates on tariffs, you'll get something over $300 billion in a 12-month period. And that certainly will have an impact on Treasury supply.

Matthew Hornbach: Indeed. And so, as we make our way through the month of August, we'll get an update to those tariff revenues. And also, towards the end of August, we will have the economic symposium in Jackson Hole, where Chair Powell will give us his updated thoughts on what is the outlook for the economy and for monetary policy. And Mike, I look forward to catching up with you after that.

Thanks for taking the time to talk today.

Michael Gapen: Great speaking with you Matt.

Matthew Hornbach: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.

Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley.

Today – the big difference between our view and the market on what the Fed will do next month; and how that impacts our credit view.

It's Thursday, August 14th at 2pm in London.

As of this recording, the market is pricing in a roughly 97 percent chance that the Federal Reserve lowers interest rates at its meeting next month. But our economists think it remains more likely that they will leave this rate unchanged. It's a big divergence on a very important market debate.

But what may seem like a radical difference in view is actually, in my opinion, a pretty straightforward premise. The Federal Reserve has a so-called dual mandate tasked with keeping both inflation and unemployment low.

The unemployment rate is low, but the inflation rate – importantly – is not. In order to ensure that that inflation rate goes lower, absent a major weakening of the economy, we think it would be reasonable for the Fed to keep interest rates somewhat higher for somewhat longer. Hence, we forecast that the Fed will end up staying put at its September meeting.

Indeed, while the market rallied on this week's latest inflation numbers, they still leave the Fed with some pretty big questions. Core inflation in the US is above the Fed's target. It's been stuck near these levels now for more than a year. And based on this week's latest data, it started to actually tick up again, a trend that we think could continue over the next several readings as tariff impacts gradually come through.

And so, for credit, this presents three scenarios. One good, and two that are more troubling.

The good scenario is that our forecasts for inflation are simply too high. Inflation ends up falling faster than we expect even as the economy holds up. That would allow the Fed to lower interest rates sooner and faster than we're forecasting. And this would be a good scenario for credit, even at currently low rich spreads, and would likely drive good total returns.

Scenario two sees inflation elevated in line with our near-term forecast, but the Fed lowers rates anyway. But wouldn't this be good? Wouldn't the credit market like lower rates? Well, lowering rates stimulates the economy and tends to push inflation higher, all else equal. And so, with inflation still above where the Fed wants it to be, it raises the odds of a hot economy with faster growth, but higher prices.

That sort of mix might be welcomed by the equity market, which can do better in those booming times. But that same environment tends to be much tougher for credit. And if inflation doesn't end up falling as the Fed cuts rates, well, the Fed may be forced to do fewer rate cuts overall over the next one or two years. Or, even worse, may even have to reverse course and resume hikes – more volatile paths that we don't think the credit market would like.

A third scenario is that a forecast at Morgan Stanley for growth, inflation, and the Fed are all correct. The central bank doesn't lower interest rates next month despite currently widespread expectation that they do so. That scenario could still be reasonable for the credit market over the medium term, but it would represent a very big surprise – not too far away, relative to market expectations.

For now, markets may very well return to a late August slumber. But we're mindful that we're expecting something quite different than others when that summer ends.

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.