Thoughts on the Market

Our Global Chief Economist explains why a predictable end to 2024 for central banks may give way to a tempestuous 2025.----- Transcript -----Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist, and today I'll be talking about how the year end is wrapping up with, surprisingly, a fair amount of certainty about central banks.It's Tuesday, December 17th at 10 a. m. in New York.Unlike the rest of this past year, year end seems to have a lot more certainty about the last few central bank meetings. Perhaps it is just the calm before the storm, but for now, let's enjoy a benign central bank week ahead of the holidays. Last Thursday, the ECB cut interest rates 25 basis points, right in line with what we were thinking and what the market was thinking. Similarly, but I have to say, with a pretty different narrative, we expect the Fed to cut 25 basis points this week and the market seems to be all in there as well.The Bank of England, the Bank of Japan, well, we think they're closed accounts; that is to say, they're going to be on pause until the new year. Last week's 25 basis point cut by the ECB came amidst a debate as to whether or not the ECB should accelerate their pace of rate cuts. With most doubts about disinflation resolved, it’s downside growth risks that have gained prominence in the decision making process there. Restrictive monetary policy is starting to look less and less necessary and President Lagarde’s statement seems to reflect that the council's negotiated stance, that easing will continue until the ECB reaches neutral. The question is what happens next? In our view, the ECB will come to see there's a need to cut through neutral and get all the way down to 1%.In stark contrast, there's the Fed, where there are very few residual growth concerns, but there have been more and more questions about the pace of disinflation. The recent employment data, for example, clearly suggests that the recession risk is low. Some members on the committee have started to express concerns, however, that inflation data really have proven stickier and that maybe the disinflation process is stalled.From our perspective, last week's CPI data and all the other inflation data we just got really point to the next PCE print showing continued clear disinflation, leaving very little room for debate for the Fed to cut 25 basis points in December. And indeed, if it's as weak as we think it is, that provides extra fuel for a cut in January.That said, our baseline view of cuts in March and May are going to get challenged if future data releases show a reversal in this disinflationary trend, if it's from residual seasonality or maybe pass through from newly imposed tariffs, and Chair Powell's remarks at next week's press conference are really going to be critical to see if they really are becoming more cautious about cuts.Now, we don't expect the Bank of England or the Bank of Japan to move until next year. The recent currency weakness in Japan has raised the prospect of a rate hike as soon as this month, but we've kept the view that a January rate hike is much more likely. The timing would allow the Bank of Japan to get greater insight into the Shunto wage negotiations, and that gives them greater insight into future inflation. And recent communications from the Bank of Japan also aligns with our view and in particular, there is a scheduled speech by Deputy Governor Himino on January 14th, one week before the January 23rd and 24th meeting. All of that says the stars are lined up for a January rate hike. Market pricing over the past couple weeks have moved against a hike in December and towards our call for a hike in January.Now, the market's also pricing the next Bank of England cut to be next year rather than this year. We expect those cuts to come at alternating meetings. December on pause, a cut in February, and gradual rate cuts thereafter. Now, services inflation, the key focus of the Bank of England so far, has remained elevated through the end of the year, but we expect to see mounting evidence of labor market weakness, and as a result, wage growth deceleration, and that, we think, is what pushes the MPC towards more cuts. All of that said, the recent announcement of fiscal stimulus in the UK starts to raise some inflationary risks at the margin.All right, well, as the year comes to an end, it has been quite a year to say the least. Elections around the world, not least of which here in the United States, wildly swinging expectations for central banks, and a structural shift in Japan ending decades of nominal stagnation. And I have to say an early glimpse into 2025 suggests that the roller coaster is not over yet. But for now, let's take some respite because there should be limited drama from central banks this week. Happy holidays.Well, thanks for listening, and if you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Our CIO and Chief U.S. Equity Strategist recaps how equity markets have fared in 2024, and why they might look more conservative early in the new year.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief US Equity Strategist. Today on the podcast I’ll be discussing how to position as we head into the new year.It's Monday, Dec 16th at 11:30am in New York. So let’s get after it.The big question for most investors trying to beat the S&P 500 is whether returns will continue to be dominated by the Magnificent 7 and a few other high quality large cap stocks or if we're going to will see a sustainable broadening out of performance to new areas. Truth be told, 2024 has been a year during which investors have oscillated between a view of broadening out or continued narrowing. This preference has coincided with the ever-changing macro view about growth and inflation and how the Fed would respond.To recount this past year, our original framework suggested investors would have to contend with markets reacting to these different macro-outcomes. More specifically, whether the economy would end up in a soft landing, a hard landing or a “no landing” outcome of accelerating growth and inflation. Getting this view right helped us navigate what kinds of stocks, sectors and factors would outperform during the year. The perfect portfolio this year would have been overweight broad cyclicals like energy, industrials and financials in the first quarter, followed by a Magnificent 7 tilt in early 2Q that got more defensive over the summer before shifting back toward high quality cyclicals in late third quarter. Lately, that cyclical tilt has included some lower quality stocks while the Magnificent 7 has had a big resurgence in the past few weeks. We attributed these shifts to the changing perceptions on the macro which have been more uncertain than normal.Going into next year, I think this pattern continues, and it currently makes sense to have a barbell of large cap high quality cyclicals and growth stocks even though small caps and the biggest losers of the prior year tend to outperform in January as portfolios rebalance. We remain up the quality curve because it appears the seasonal low quality cyclical small cap rally was pulled forward this year due to the decisive election outcome. In addition to the large hedges being removed, there was also a spike in many confidence surveys which further spilled into excitement about this small cap lower quality rotation.Therefore, it makes sense that the short-term euphoria that's now taking a break with the rotation back toward large cap quality mentioned earlier. The fundamental driver of this rotation is earnings. Both earnings revisions and the expected growth rate of earnings next year remain much better for higher quality stocks and sectors. Given the uncertainty around policy sequencing and implementation on tariffs, immigration and how much the Fed can cut rates next year, we suspect equity markets will tread a bit more conservatively in the first quarter than what we observed this fall.The biggest risks to the upside would be a more modest implementation of tariffs, a de-emphasis on deportations of working illegal immigrants and perhaps more aggressive de-regulation that is viewed as pro-growth. Other variables worth watching closely include how quickly and aggressively the new department of government efficiency acts with respect to shrinking the size of the Federal agencies. While I'm hopeful this new effort can prove the skeptics wrong, success may prove to be growth negative in the near term given how much the government has been driving overall GDP growth for the past few years. In my view, a true broadening out of the economy and the stock market is contingent on a smaller government both in terms of regulation and absolute size. In my view, this is the most exciting potential change for taxpayers, smaller businesses and markets overall. However, it is also likely to take several years to fully manifest.In the meantime, I wish you a happy holiday season and a healthy and prosperous New Year.Thanks for listening. If you enjoy the podcast, leave us a review wherever you listen, and share Thoughts on the Market with a friend or colleague today.

After an up-and-down 2024 for the U.S. airlines industry, our Freight Transportation & Airlines Analyst Ravi Shanker explains why he is bullish about the sector’s trajectory over the next year.----- Transcript -----Welcome to Thoughts on the Market. I’m Ravi Shanker, Morgan Stanley’s Freight Transportation and Airlines analyst. Today I’ll discuss why we remain bullish on the US Airlines industry for 2025.It’s Friday, December 13, at 10am in New York.The Airline industry entered 2024 with good momentum, lost it during the middle of the year with some concerns around the economy and capacity, but then turned it around in the fall to finish the year with the strongest run that the Airlines have had since the pandemic. The coast looks clear for 2025, and we remain bullish on the US Airlines for next year.While many airline stocks enter 2025 close to post-pandemic if not all-time highs, valuations are still attractive enough across the space to see upside across the industry. The big question right now is: will the focus on premium services continue to pay off, or will there be a resurgence in domestic travel that alters the market dynamics? We think the answer is both.Premium beneficiaries will continue to shine in 2025. We believe the premiumization trend in the industry is structural and will continue next year. Legacy carriers have successfully capitalized on this trend, enhancing their revenue streams significantly through upgraded service offerings such as premium seating and lounge access. This move isn't just about luxury—it's a calculated play to boost ancillary revenues, which are becoming a more critical component of financial stability in the airline industry. The premium leaders are building annuity-like business models – think razorblades, printers or smartphones – where the sale of a popular gateway product is followed by the bulk of the profitability coming from ancillary revenues generated in the following years, as loyalty and adjacent revenues contribute a steady stream of earnings and free cash flow to the airlines.On the flip side, the conversation around better margins on domestic travel is gaining momentum as well. 2024 saw a big shift where several domestic carriers made significant changes and even in some cases fundamentally overhauled their business models to fly less, fly differently, bundle fares, and move upmarket. This change brought significant disruption in 2024 but could be set to pay dividends in 2025 and reignite investor interest in these domestic names. This shift toward domestic travel could potentially redistribute market share and redefine competitive dynamics within the entire Airlines industry.To sum up, the setup for 2025 looks very good. But volatility could remain high due to external factors. The biggest risk into 2025 -- especially the second half of [20]25 -- continues to be the macro backdrop. More specifically, our economists' view of a sharply slowing GDP growth and services spending environment in the second half of [20]25 and into [20]26. While we take comfort from the resilience of travel spending so far, we know that things could change quickly. We will continue to keep you updated throughout the next year.Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

Our U.S. Retail Analyst Simeon Gutman discusses shoppers’ embrace of a private labels super cycle and how changing consumer behavior could fundamentally change grocery and discount retailers.----- Transcript -----Welcome to Thoughts on the Market. I’m Simeon Gutman, Morgan Stanley’s US Hardlines, Broadlines and Food Retail Analyst. Today, we’ll talk about a fascinating shift in the retail landscape: the rise of private label products and what this could mean for the future of grocery and discount retailers.It’s Thursday, December 12, at 10am in New York.Think about your recent trip to your favorite grocery store. As you reached towards the shelves for your preferred brand of mayonnaise, frozen pizza, or bread, you may have noticed that more and more shelves are stocked with store-brand products. Products that not only match the quality of national brands but often exceed it. This isn't just a minor trend. We estimate private label sales growth will accelerate by 40 per cent to reach $462 billion by 2030. An expansion that will redefine market dynamics significantly.In essence, we think the private label grocery market is on the cusp of a super cycle. This super cycle is a by-product of COVID-era shifts in the way that customers shop and how retailers invest into this trend. At the same time, private label groceries reflect the rise of mega platforms, which are taking ever greater consumer wallet share and are innovating more than ever before.When you look at macro drivers, US consumers have been navigating a difficult post-COVID environment. While inflation is currently moderating, overall food prices remain 30-34 per cent above their 2018 levels. Most consumers are spending more on food at home vs. food away from home, which is a positive catalyst for private label acceleration. Further, consumers are willing to substitute lower priced goods, especially groceries, and these categories present a growth opportunity for private labels. This is the tipping point that we’re talking about. High costs, recent innovation, and innovation like we’ve never seen before – with the rise of these mega platforms, this industry looks like it’s ripe for disruption.The market views private label penetration as a slow, gradual, and ongoing event. But our work challenges this premise. We believe the rate of change in private label growth will accelerate substantially over the next few years. We think private label products will grow at double the rate of the overall grocery market bringing private label market penetration from about 19 per cent in 2023 to about 23 per cent by 2030.This growth is not just about stocking up the shelves. It's about changing consumer perceptions and behavior. Consumers increasingly see private labels as viable alternatives to national brands because they often offer better value and innovation. From healthier ingredients, like no more seed oils, to organic products that you had no idea they can produce, to premium products like frozen lobster ravioli to mushroom and truffle pizza. There are a couple of retailers in the US that are all private label and they are among the fastest growing ones, taking away the stigma of what private label products could mean.So what does this mean for the broader retail and consumer packaged good industries? For grocers and discounters with already strong private label offerings, this shift presents a significant opportunity for growth. It’s also accretive to margins. On the flip side, traditional food companies might face increased competition. These companies have historically relied on brand superiority. But as private label gains market share – particularly in food categories – these national brands could see a hit to their gross profit growth, which could fall from 3 per cent historically to about 2 per cent. And while household and personal care categories have seen some resilience against private label encroachment, the ongoing economic pressures and shifts in consumer spending habits could challenge the status quo.Looking ahead, the rise of private labels could lead to a reevaluation of what brands mean to consumers. As private label becomes synonymous with quality and value, we may see a new era in which traditional brand loyalty becomes less significant compared to product quality and cost-effectiveness.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.