Thoughts on the Market

Our Global Head of Macro Strategy Matthew Hornbach and Chief U.S. Economist Michael Gapen look at what could speed up tightening, what’s next for Treasury yields, and how the Fed can skip a hike now while signaling that more are coming.Read more insights from Morgan Stanley.----- Transcript ----- Matthew Hornbach: Welcome to Thoughts on the Market. I'm Matthew Hornbach, Global Head of Macro Strategy at Morgan Stanley.Michael Gapen: And I'm Michael Gapen, Chief U.S. Economist.Matthew Hornbach: Today, the challenge facing the Fed: to not hike rates while still convincing investors that you think rate hikes are coming.It's Tuesday, October 27th at 11am in New York.So Mike, how do you think the Fed and Chairman Warsh in particular is going to deal with this challenge?Michael Gapen: Well, I think the way that he can do it is to say, ‘Obviously we already did hike. So, we've started a process. You know we're serious about bringing inflation down in a timelier fashion. So essentially the question is: Do we want to raise rates at every meeting or do we want to take an action, assess incoming data and take a different action?’So I do think the message here can be balanced in a way that says, ‘We didn't hike rates today. We didn't feel a tremendous sense of urgency to raise rates today. But we think more work is needed.’ So I'm not sure that there's urgency to raise rates every meeting. But you can still suggest that rates are going to go higher.You can see I'm having trouble articulating the story as well. Warsh may have some of the same difficulty, but I think that's the basic message is – taking an action, assessing its effect, deciding to take another action.Matthew Hornbach: At the Jackson Hole Symposium in August, Chairman Warsh gave a speech, and in the speech, he invoked this imagery of going on a hike around the mountains of Jackson Hole.And he told us that there were, in essence, two types of hikes that one could go on around Jackson Hole. A more leisurely hike and a more aggressive hike around the mountains. Presumably because we don't think the Fed will hike rates at this meeting. Presumably the idea that he has in his head today is to go on a leisurely hike.But if that's the case, how long does a leisurely hike last? How…Michael Gapen: They can both be the same.Matthew Hornbach: … long will the hike be.Michael Gapen: Yes. So I think that I would interpret the leisurely hike also as the difference between, I think, what economists euphemistically call a recalibration of the policy stance – as opposed to a more aggressive tightening cycle.So one's kind of leaning against the wind while the other one is trying to change the course of the economy. So I think you're right. And he called the leisurely hike the Ben Bernanke hike and as opposed to the Don Kohn aggressive hike. That's inside Fed speak if you know your former Fed staff.And I think what the data is telling the Fed, on one hand growth is certainly resilient, and inflation is sticky. But the labor market doesn't look like it's overheating. We're only adding about 50,000 jobs a month. The unemployment rate is low, that's true. But wage growth is actually decelerating.So from my perspective, and I think their perspective, even with the AI investment boom, there's not a lot of evidence the broader economy is overheating. And that's where I think the urgency story fits in. Are they behind? Do they need to get on top of something?I think the answer to that is no. So you end up with this measured recalibration: Hey, we cut 75 basis points last year to support the labor market, should probably reverse those. That's what we should be thinking. We're not thinking we need to go all the way back to 2023 highs, which would be the more aggressive tightening cycle.That's the way I split it out.Matthew Hornbach: So what would have to happen with the weather in Jackson Hole to change the mind of the committee to go on a more aggressive hike? Maybe to get back into the lodge before the weather really turns inclement? What would have to happen in the economic data, do you think, to change their mind?Michael Gapen: Well, I think that the most likely story there. I mean, what macro data would make them do that sooner than later would just be inflation has a lot more momentum than they think. Rather than being flat or decelerating slowly, it actually starts to firm.So, the actual data that they have in hand, they wouldn't even have to decide where it's coming from. But if inflation's firming, they have to get on top of it. That could certainly shift them to hikes every meeting. So, I'll put that down as the most likely.The other would be just what I said about the labor market. You would need evidence that says, "Wow, look at that labor market. Employment growth is picking up, the unemployment rate's moving lower, and wage growth is turning and starting to firm."So that would tell you what was kind of a narrow business spending story is now a broad-based overheating story. That's likely to be a much-more-slower-moving train. But certainly that could get the Fed to more rate hikes in 2027 than we're thinking.Matthew Hornbach: On the inflation point that you're raising here. One of the statistical quirks in how the Bureau of Labor Statistics and the Bureau of Economic Analysis put together the inflation data is that in the first month or two of the year, you typically have seen the seasonally adjusted inflation data come in much stronger. And then in the final couple of months of the year, you've tended to see inflation data come in lower than what you might otherwise expect – because these statistical agencies have had difficulty properly seasonally adjusting the data.So presumably, because this has been going on for a couple of decades, we'll see this “residual seasonality" again in 2027. Of course, we may not. But if we do, how do you think the Fed will deal with that? Because that could very well show us that inflation is picking back up…Michael Gapen: That residual seasonality, you're correct, it's still present in the data. There are many firms in different industries that raise their prices once a year. It varies over time. That's why the seasonal adjustment process doesn't capture it.So we get big, kind of, one-off annual increases in January and February. The Fed knows this, you know this, I know this. But the point is to decide either to stop raising rates, or maybe even at some point to cut rates, you have to ascertain where the underlying trend is. So this makes it harder for them to know what the underlying trend is.So in our view, it actually means you still get one additional rate hike in March, then after that, it only starts to become clear that inflation is decelerating and the Fed stops hiking.So in my view, I think the way that they deal with it is they have to wait and get more data to decide that inflation's either going in the direction they want or it's not going in the direction they want.So Matt, I'd like to turn it back to you if I can. We've seen a lot of volatility in the Treasury market. As you know, for many months yields were backing up. The 10-year Treasury yield peaked above 5.25. It's now back down to about 5 percent. How do you read what's happening in the Treasury market today?Matthew Hornbach: So the biggest explanatory factor in the sell-off in the Treasury market since, really since the beginning of March, has been a combination of what has happened with energy prices. Both outside of the country and within the country. And then, how the central bank ended up shifting its perspective on rate policy as a result of the effects of these higher energy prices on underlying inflation.And so, as the Fed transitioned from easing monetary policy in 2025 to now tightening monetary policy in 2026, and on your forecasts into 2027, the bond market had to reprice. And this is a typical behavioral response to a big change in monetary policy expectations.The more recent price action in the Treasury market, where the 10-year yield went from 5 percent up to 5.25 percent, we think was driven much more by technical flows related to a very large fixed income marketplace that includes more than just U.S. Treasury securities.Of course, we have agency mortgage-backed securities. There's a huge corporate bond market as well. And so, we see the last 25 basis points as more of a technical dynamic that was driving yields to those peak levels. And once those technical flows stopped, then we saw yields settle back down to a level that was more aligned with fair value, given how the Fed is expected to behave with monetary policy.But what that means, though, is that as the data come in over the course of the next several quarters, how the market thinks about the path of Fed policy over the course of 2027 will become an increasingly important factor in the Treasury market once again.So if the investor base decides that maybe the Fed, after having delivered these rate hikes that you're expecting, is comfortable keeping rate policy where it is. And as the disinflationary process resumes, might even consider reversing some of these rate hikes that they have put into place, I would expect 10-year Treasury yields to fall alongside – of those expectations for monetary policy.So ultimately, we have had a big move in the U.S. Treasury market this year. It has been very much aligned with how investors have thought about the changing narrative around Fed policy. And so 2027 will likely hold more of the same.As we make our mind up about where the Fed is heading with monetary policy, we will very likely see the bond market move in sympathy with that. And I guess we'll keep an eye on inflation, the labor market, as well as the Treasury market as we look forward towards the next FOMC meeting in early December. And considering the question again: hike or no hike?Thanks for this, Mike.Michael Gapen: Thanks for having me on, 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.

The energy shock is global, but the policy response isn’t uniform. In the second of our two-part roundtable, our economists unpack the forces shaping interest rates across the U.S., Europe and Asia. Read more insights from Morgan Stanley.----- Transcript ----- Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist and Head of Macro Research.  Michael Gapen: I'm Michael Gapen, Chief U.S. Economist.  Jens Eisenschmidt: I'm Jens Eisenschmidt, Chief Europe Economist. Chetan Ahya: And I’m Chetan Ahya, Chief Asia Economist.  Seth Carpenter: Yesterday, we talked about why global growth is continuing to power on, why investment is playing a larger role, and how that investment cycle is spreading across regions. Today, we're going to take a deeper dive and think about monetary policy and what's going on. It's Friday, October 23rd, at 10am New York. Jens Eisenschmidt: 4pm in Frankfurt. Chetan Ahya: And 10pm in Hong Kong. Seth Carpenter: When I look around the world and think about especially developed market central banks, well, they're kind of all tightening at the same time – but maybe for somewhat different reasons.  Let's start with just a really broad policy question. Why are the Fed, the ECB, the Bank of England, and the Bank of Japan all tightening policy when their economies look so different?  Mike, I'm going to start with you back here in the U.S. with the Fed. How are you thinking about what the Fed is doing right now? Are they just recalibrating the stance of policy? Or is this a fundamental change where they're trying to rein in growth in the economy?  Michael Gapen: The way I look at it is this is a story about persistent inflation, and I would look at it as a recalibration of policy. I think the majority of participants on the FOMC know the Fed can't pump more oil or get, you know, oil through the Strait of Hormuz. So, it's about leaning against second-round effects. Inflation is gradually moving lower. They've characterized this as dissatisfaction with the speed of convergence to the target.  So, I think the Fed is tightening based on persistent inflation, and it appears to me to be more about a recalibration than it is about meaningfully tightening policy and leaning into demand.  Seth Carpenter: All right, Jens. Same question coming to you, and I have to say the energy shock is a global shock. So how do you think about what's going on with the tightening of the ECB and the Bank of England?  Jens Eisenschmidt: Yeah. No, I mean, first of all, if you sort of talk about both central banks – and here again, I guess the Fed comparison also matters. The starting point is important. The ECB was the only central bank that got inflation back to target, and so was already well advanced in its sort of rate normalization cycle, had cut back rates to 2 percent – which by most measures is sort of neutral, maybe leaning a little bit towards expansionary side of things.  And so, it was probably easiest for that central bank, when the supply shock came to tighten again, simply by getting a little bit towards the restrictive end of the neutral range, say. I think that is probably what has happened here, more than anything else. And for the Bank of England, of course, the discussion is a different one. They were running for a long time a relatively restrictive monetary policy. And so there was more scope to wait it out, essentially. A little bit like the Fed, essentially. This is where the similarities come in.  Now, if you look ahead, essentially, it becomes a question of how strong is your economy holding up? And, you know, the strength of that holding up in the face of a certain given energy shock will determine how much of the inflation that you experience today will be inflation of tomorrow, carried to the next period through stronger wage agreements.  I think that's basically the policy problem facing both central banks here. And I guess that in the end results in essentially a resolve to at least gradually further tighten the stance. I think that has to be the expectation. And so, from that perspective, this is where we arrive at essentially a current positioning that is not super hawkish, if you think about it. So, it's not like we have to gung ho every sequential meeting increase rates. But we see a gradual increase in rates. And so, for instance, for the ECB, we have a meeting around the corner next week. We don't think there will be an increase. But the risks have sort of stacked up and are really to the upside for inflation. So, it will be very hard to avoid a tightening for the ECB in the December meeting. So that's the gradual pace I was just referring to.  Seth Carpenter: Got it. Ok, Chetan, the developed market central bank in Asia that most people are staring at is the Bank of Japan. So big change there. 25 years of essentially stagnant nominal in GDP growth to now we're on a clear hiking path.  How far do you think the Bank of Japan is likely to go? What's driving it? And how important is this global energy shock to the Bank of Japan's plans? Chetan Ahya: We expect the BOJ to hike its policy rate twice, first in December and then again in March next year. This compares with market pricing of three more rate hikes. So, what explains our dovish forecast? Well, we think that Japan's inflation has been largely driven by FX weakness and higher commodity prices and not due to demand-side pressures. To elaborate, Japan's real consumption is still one percent below pre-COVID levels. Hence, we think BoJ will avoid taking up more aggressive policy tightening.  Seth Carpenter: So, Mike, let me come back to you for the U.S. We have seen globally a rise in interest rates. The long end of the curve has sold off everywhere. Some of that is being driven by energy prices. We've seen credit spreads in the U.S. start to widen.  Some of that's being driven by hyperscaler debt issuance, among other factors. But I guess what's important is when Chair Warsh first took over the helm of the Fed, his characterization of how restrictive monetary policy and financial conditions were – was not particularly forceful, right? He said it's hard-pressed to say that it's uniformly restrictive. But the world feels a little bit different now than it did when Chair Warsh took over. So how does the Fed need to react to the fact that longer-term interest rates have sold off and that credit spreads are starting to widen?  Michael Gapen: Financial conditions have tightened. We would characterize financial conditions as, let's call it moderately restrictive.  So, I think the Fed needs to look at that and then ask itself essentially, "Where is this inflation coming from? What inflation are we trying to stop?" I don't think there's a tremendous amount of evidence that points to an overheating labor market. Rates have risen, but long-run inflation expectations remain stable.So, I still think the right answer is to lean against potential second-round effects from the energy price shock. And here, I think that would show up in airfares, apparel, new and used cars, motor vehicles and parts.  We got some evidence in the September inflation report that these other goods prices were firm. We'll see if that continues, and this is an early sign of energy pass-through into other parts of core. But with financial conditions already moderately restrictive, it doesn't suggest they have a tremendous amount of work to do unless there's evidence that AI spending is broadening out to greater labor demand and higher wages. Then it would be a different story.  For now, I think a few more rate hikes – we have two more rate hikes penciled in, and 75 basis points of rate hikes in total – is probably where we think the Fed will be going by March of next year.  Seth Carpenter: Jens, let me turn that to you as well because rates in Europe have also gone up. And importantly, we've seen spreads for French sovereign debt over German debt widen a lot. So, OAT spreads are pretty high. How much has the tightening in financial conditions done the work of the ECB for it?And as a result, is that a reason to maybe expect less in the way of rate hiking than what the market has priced in? Jens Eisenschmidt: I think that's exactly the debate that I would expect to be raging in the governing council next week. We have already seen indications in the accounts in September that it was brought up.Since then, it hasn't gotten better. So, there is tightening. We had seen Philip Lane coming out essentially saying in very simplistic ways, ‘Well, this is AI. This is good for the U.S. It's not so clear it's as good for Europe. But, you know, rates have increased here too, and so we need to be super careful.’ That this is not representing us with much more tightening than we actually can stomach. So, to your point, indeed, I think the market is pricing too many rate hikes. We have one more at this stage in December, and that's it.  We have to acknowledge that since we made that change in call, we have seen more inflation and probably also more resiliency than we had thought. So that would push us at the margin to maybe one more in March.But then again, we have seen the tightening at the long end. If that continues, we may very well end up being right with that call without any need to change it. Again, that has to be closely watched. It will very likely depend on the growth outlook in the end.  But yeah, long story short, the market currently prices 3/25. I still think this is too much from the ECB here. Seth Carpenter: So, Chetan, maybe I’ll wrap up with you because we focused on some of the bigger central banks of the bigger economies. But there are different outcomes across different central banks. Here in the Americas, for example, down south, the Brazilian Central Bank, the BCB, is still easing, albeit gradually. Banxico in Mexico is holding rates, not hiking.  So, when you think about other central banks, across Asia, like say maybe Korea and India, where we're still seeing some strong domestic growth. Are they conforming to the same stories we've talked about for these major DM central banks?  Chetan Ahya: Yeah, the situation in Asia is somewhat different. They don't have a big inflation problem, but we are seeing strength in growth coming in because of exports. And so, for most central banks, we are expecting them to take up rate hikes. But those will be more countercyclical in nature. As such, core inflation, except for Australia and Korea is pretty much in the central bank's comfort zone. And so, we don't expect them to react to higher inflation. But to the extent to which, you know, U.S. rates are going up, growth is strong, most central banks will take up countercyclical rate hikes in the coming quarters. Seth Carpenter: That's super helpful, and that helps make, I guess, a key observation or theme about what's going on. Inflation is a global phenomenon. We are seeing somewhat resilient growth, and major central banks generally are tightening. But it is not a uniform story in every single place. And so, there are some interesting nuances in all of the details here.  That point also means that the endpoint for hiking cycles at different central banks might not be fully synchronized either. And it will depend, I suspect, in different jurisdictions on the specific evidence that each central bank is looking at – be it inflation itself, wage dynamics, what's going on in labor markets, domestic demand, foreign demand, external demand for exports, depending on the economy. And of course, as we touched on a bit, what's going on in financial conditions. Well, Mike, Jens, Chetan, thank you so much for helping us connect all of those dots. And to the listener, thank you for listening. And if you enjoy this show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or a colleague today. 

Can markets absorb this much new debt? Our panel examines strong demand for investment-grade bonds, stress in high-yield debt and the macro risks that could shape the next six to twelve months in credit markets.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. Anish Shah: I'm Anish Shah, Global Head of Debt Capital Markets. Rehan Latif: I am Rehan Latif, Global Head of Credit Trading. Samer Oweida: And I'm Samer Oweida, Global Head of Foreign Exchange and Emerging Markets. Andrew Sheets: Today, a discussion of historical levels of bond issuance and how it could affect the broader markets. It's Wednesday, October 21st at 9am in New York. Gentlemen, it's great to talk with you. I think what we're talking about is an issue that really cuts across all parts of Morgan Stanley's businesses, from issuance to credit trading to macro markets and beyond. And I'd like to get into it, but just quickly to kind of frame where we are. Anish, we are in the midst of a historic investment cycle in AI CapEx. We're in the midst of a very large pickup in M&A activity that I also want to make sure we get into. But you sit at the intersection of our capital markets businesses. Talk a little bit about what we're seeing in the bond issuance space. Anish Shah: Sure, Andrew. I look after all of our new issue capital markets business in credit, and that's across the credit spectrum and across geographies. And I'm constantly looking to Rehan for the latest in investor sentiment and how we can deliver the right product for our issuing clients. And to Samer on macro views that impact our clients every day. We are in the midst of a significant decommoditization of new issue credit markets and a decompression in credit. It's really driven by four important factors. One is, as you note, unprecedented levels of issuance. Investment grade debt volumes are up almost 25 percent on the year. That's driven by the AI CapEx theme and a resurgence in M&A. Number two is the rate backdrop has been, to date, pretty constructive for credit. We've seen $100 billion of new cash come into investment grade credit. We've seen new pools of investors drive tremendous new capacity into credit markets, whether it be insurance, capital fueled by annuity investments or other private credit. We're also seeing an increase in complexity, and that's driven by the AI CapEx cycle and the interconnectedness between hyperscalers, the chip makers, the neo clouds, the data centers, and that's requiring an unprecedented level of innovation in structuring new solutions for issuers. And the last is the market is grappling with supply-demand dynamics and winners and losers in the AI thematic. Andrew Sheets: Rehan, that's actually a great place to turn to you because you're on the other side of this. You're focused on can markets absorb all of this supply? And I often kind of hear two narratives. You know, one is everything is great. You've got record issuance and record supply into the credit markets. And the other is cracks are forming. You're seeing widening of CCC spreads. You're seeing some headlines around some issuers running into more trouble. From your perch, how do you see things? Rehan Latif: So, Andrew, instead of two, I'll give you three narratives within public credit trading. One, I agree with Anish. I think first of all, I've got to thank Anish because it's never been busier on the public credit side because of the amount of issuance coming through. But there are, really, three different themes coming through. One, investment grade has been incredibly strong. The higher quality part of the credit market is benefiting from all this new investor money coming through at these higher rate levels. For the longest period of my 20-year career, 20-plus year career, we were in a zero-rate environment. At current yield levels, investment grade has never looked like a more attractive proposition. You add in growth in the U.S. and across the rest of the world, the reality is that investment grade looks like a very interesting investment thesis. And I think spreads continue to be appropriately priced for the risk. On the CCC side of the market, that's where we're seeing real dispersion. Where we're seeing investors from the distressed community, from the high yield community, really have to figure out how to refinance some of these names. And that's been where the real challenge has been from a credit perspective. And then obviously, you've got the hyperscalers that have come through in significant wave across many different parts of the capital market. So, one thing Anish mentioned was the number of different financings that are available to the hyperscalers. So, I do think that given the cash flows that these hyperscalers actually have, you've managed to be able to attract a new investor base to our market as well. Andrew Sheets: Samar, we just heard that, you know, Anish has never been busier. Rehan has never been busier. There's clearly a very credit-specific story here. But, you know, this is something that I imagine is also top of mind in the macro markets. You've got all of this supply. You've got AI that's kind of driving the market, but you've also got all these other broader issues around energy and deficits. How do you see the historic wave of credit supply fitting into the macro piece? Samer Oweida: Well, maybe I'll start by also thanking Anish because our corporate derivative business, where we hedge exposure, whether it's on a deal basis or on a normal course basis for these issuers, has never been busier. And part of that is because of the historic issuance that's been discussed. But part of that, Andrew, is also about the uncertainty that you mentioned in these markets. And so, this epic wave that we're seeing around hyperscalers and AI is happening at a time where energy prices are high, inflation is sticky, fiscal concerns abound, and there's a lot of uncertainty in the forward. And so, what we've seen from a behavioral standpoint is clients having much more appetite to engage on these discussions because of the uncertainty and hedge that exposure. What we've also seen is a lot of re-racking of traditional macro models and how do we think about what is the rate level that the economy can handle? What does that rate level mean for winners and losers by jurisdiction or by sector, as Rehan mentioned earlier? And we've seen that manifest itself in a lot of the invested decisions that our clients have made over the course of the year, where we've seen capital and engagement go up with names both corporate and sovereign. Where there's a positive commodity story and there's a positive AI hyperscaler story. And we've seen less investment around the jurisdictions and the names where that story is not the case. And so we're seeing some amount of divergence, but I think also given that the economic background globally, and particularly in the U.S., continues to be strong. We've just seen very high levels of activity coming out of our corporate and sponsors-based businesses. Andrew Sheets: So, Anish, that brings me to a question I wanted to ask you about – which is, you know, Samer, you mentioned this, really important macro question is: at what point do higher rates slow down activity? And yet, so far, activity's still been very solid, and it's not just AI. We've also seen a lot of strategic activity, a lot of M&A activity. I would love for you to take us inside the conversations that you're having with these companies – and how they're thinking about the environment. How much these current levels of interest rates are impacting their decision-making? Anish Shah: Andrew, you could probably break that question down into two pieces.One is in the AI ecosystem, where, you know, certainly there's a lot of optimism on the return on these investments. And so, sitting in the shoes of a hyperscaler or a data center developer or a chip maker, there's a lot of optimism that – notwithstanding the current higher rate environment, that the long-term return on these investments is going to be very, very attractive. And so, we're seeing a relative level of insensitivity on rates from the issuer's perspective in accessing capital. The first wave of all of the AI CapEx has predominantly been in the investment-grade bond market. That's the deepest, most liquid, fastest way to raise capital and speed. Now you're seeing some of these companies diversify into different currencies and different products, and that's been a really healthy technical for the markets. From an M&A context, I think a lot of the resurgence in activity is driven by the fact that there's a meeting of the minds in terms of valuation. So, for the first time in many years, we're seeing large-scaled sponsor private equity-owned assets come to market and be acquired by an investment-grade corporate strategic. Yes, they are borrowing at higher rates than they would have a few years ago. But the view is that they're able to acquire these assets at an appropriate valuation, and it makes long-term strategic sense, and we're seeing just a big pickup in that activity. I think that also has another implication for credit markets, which is some of these assets that have been long held by private equity sponsors had multi-billion dollar debt complexes that are going to be repaid as part of these transactions. That's a recycling of credit. That's going to free up some capacity in the leverage finance markets as well.Andrew Sheets: And yeah, Rehan, how do you think about that? Because, you know, again, we have these big macro forces of AI CapEx, and then these very micro company-specific stories around M&A. How do you see that impacting your backdrop? Rehan Latif: Within credit, the biggest driver is always growth. You pay the rate that you pay simply because there's an expectation towards growth. When Anish talks about some of these developments that are happening within the market, these are all, you know, big paradigm shift in growth. And, AI investment the reality is that we are at the forefront of creating the capital for that. And the reality is that the yield that is being paid; or the coupon that is being paid is essentially the price for that investment. Investors are seeing that across all these different markets. I think we have to be very deliberate about the difference between investment-grade, investments in newer sectors, and what is actually happening within the more distressed part of the credit market. Simply because that market has been challenged for a long time. That market was held together to a certain degree by a zero-rate environment. And that has changed quite dramatically as rates went higher and as the global economy has evolved as well.So, from my perspective, this is all very healthy. Rehan Latif: Samar, I'll let you have the last word here. You know, Anish and Rehan have talked about these historic waves of credit issuance. Part of that's coming from AI, but part of it's coming from M&A and strategic transactions. You know, we're sitting here on the eve of our Morgan Stanley Credit Symposium in New York. It's tomorrow. We have over 1,000 investors attending. I think that indicates just the amount of interest and focus on this space. And yet, as you hear Anish talk about kind of the almost insensitivity of rates for some of these key borrowers, how does this impact how you're thinking about macro markets and how they could trade over the next six to twelve months? Samer Oweida: I think it speaks to what both Anish and Rehan said in that between the growth and the higher level of rates, there are going to be winners and losers. And what we can't predict is what energy markets or political developments or fiscal developments might have in store. But generally speaking, macro markets are responsive to underlying growth, inflation, and policy discipline. And I think as we go into the depths of what is one of the most consequential CapEx cycles in post-Industrial Revolution history, the governments, the jurisdictions, and the corporates that have discipline and capacity around this growth will be the winners. We think so. We see that as on the go forward. And those that don't have a clear policy will suffer the consequences. I think that is still a very early innings discussion to be had. Lots of data still has to come through. I think what we know is what is on the docket for the next year or two in terms of how much capital needs to be raised and debt issued. But what we don't know is how does that affect underlying economic activity. And I think as that data manifests in conjunction with policy initiatives globally, there's a lot to be excited about. And there's a lot to be quite concerned about. And looking at how policy mistakes one way or the other might affect a lot of the behavioral patterns in credit markets and from an issuer standpoint. Andrew Sheets: Gentlemen, thank you for taking the time to talk, and see you tomorrow at the conference. And thank you for listening. If you enjoy Thoughts the Market, please take a moment to rate and review us wherever you listen and tell a friend or colleague about us today.Anish Shah is a member of Morgan Stanley’s Global Capital Markets Division. Rehan Latif and Samer Oweida are members of Morgan Stanley’s Fixed Income Division. They are not members of Morgan Stanley’s Research Department. Unless otherwise indicated, their views are their own and may differ from the views of the Morgan Stanley Research Department and from the views of others within Morgan Stanley.

Higher rates can take time to filter through the economy, making their full impact difficult to judge. Arunima Sinha from our U.S. and Global Economics teams considers where the pressure may emerge next and how policymakers could navigate the competing risks.Read more insights from Morgan Stanley.----- Transcript ----- Welcome to Thoughts on the Market. I'm Arunima Sinha, from the Morgan Stanley’s U.S. and Global Economics teams. Today, I'll talk about what rising rates mean for economic activity, inflation, and the policy path.  It’s Monday, October 19th, at 10am in New York. The FOMC raised rates in September. But expectations for future hikes remain volatile. Within hours of the latest CPI print, markets round-tripped, pushing the probability to even for an October hike before retreating. Now, consistent with our baseline forecast, the market assigns December the highest likelihood for the next hike. But moves further along the U.S. curve matter even more; notably the 10-year yield shifted. One question that arises, taking a step back is – how much we should worry that broad-based inflation upside means tighter policy is required to push down inflation and, therefore, growth? Or have financial conditions tightened enough on their own that the central bank has less, not more work to do? The calibration of monetary policy has always been difficult, and now it is becoming urgent.Economists try to put the level of interest rates into the context of where they stand relative to the economy's natural rate. Stronger productivity growth and investment demand should mean a higher natural rate, so a given level of rates is less restrictive.The rise in long-term treasury yields alongside still firm growth and earnings expectations is an indication that the neutral rate may indeed be higher. When yields rise because growth prospects are improving, expected returns rise and the demand for capital strengthens. In that setting, higher rates are not necessarily contractionary.But there is a less benign alternative. Yields have also risen because inflation has been hot, fiscal concerns are intensifying, and investors are demanding more compensation for holding duration. The question that Chair Warsh has posed – are financial conditions restrictive – is starting to get a different answer. Calibration will be key to how the economy evolves. For the U.S. so far, even the most recent upside inflation surprise pointed to resilient demand rather than energy-driven stagflation. The simple explanation is that many firms still see returns well above their cost of capital. Recent work from our U.S. economics team supports such a view. Where there may be a contrast is at the sector level, and that seems to be becoming more apparent. If activity is concentrated in sectors driven by innovation, productivity, and strategic investment, the economy may be less rate sensitive than in past cycles. Calibrating policy amid these opposing forces is no easy task. The fact that we're seeing the biggest spread widening in the lowest quality part of the credit spectrum and the fact that housing activity is at recessionary levels are some tells in the U.S. that policy and financial conditions are restrictive. The signs of tighter financial conditions are somewhat more visible in Europe, in part because the AI CapEx spend is less of a factor. Growth has been resilient, but not sufficiently so to offset rising fiscal concerns from higher rates. The French OAT sell-off shows how quickly the balance of risks shifts. Globally, financial conditions are introducing tougher questions to the macro landscape. Until recently, the economy's message had been clear.Higher rates were restraining some sectors, but without meaningfully altering the expansion's trajectory. As long as expected returns rise alongside borrowing costs, then yields can remain high – without becoming decisively restrictive. But as our rate strategy colleagues have noted, inflationary pressures have pushed up real rates, not break evens. So, the market is telling us that policy is getting tighter to restrain growth and eventually pull-down inflation. The latest inflation print in the U.S. reinforces this debate. Are financial conditions restrictive?With several catalysts ahead, Q3 earnings, hyperscaler CapEx credit spread widening, and U.S. elections, the Fed meeting coming up, markets will need to shift to assessing growth risks as central banks try to recalibrate. Thanks for listening. If you enjoy the show, please leave us a review and share Thoughts on the Market with a friend or colleague today.

Our Chief Latin America Equity Strategist Nikolaj Lippmann explains why Brazil’s election, the cost of capital, AI investment and geopolitics could help unlock a new era of growth across Latin America.Read more insights from Morgan Stanley.----- Transcript -----   Welcome to Thoughts on the Market. I'm Nikolaj Lippmann, Morgan Stanley's Chief Latin America Equity Strategist. Today – why Brazil could be the missing piece of what we call LatAm Spring, and what AI has to do with it. It’s Thursday, October 15th, at 10am in New York.Brazilian equities rallied sharply last week after a surprising first-round presidential election result. Flávio Bolsonaro finished ahead of President Lula, setting up a runoff later this month. The outcome remains uncertain. But for investors, I think there’s a bigger question. Can Brazil approach a policy shift that unlocks something the country has lacked for years: investment. We've long argued that Latin America is moving from a consumption-led economy towards an investment-led cycle, thanks to: 1. Changing geopolitics; 2. investment-friendly policies; and 3. The potential for lower interest rates. What's more, this fits into the framework of the AI CapEx cycle, driving the global and especially the U.S. economy that has moved from consumption to CapEx, as argued by Mike Gapen, our U.S. economist. We're already seeing signs of this LatAm Spring in Argentina, Chile, Peru and Colombia. Brazil could be the largest missing piece. And there are three reasons why. First, the cost of capital. Brazil remains one of the world's most expensive places to invest. High government debt and elevated interest rates have made fixed income investment more attractive than equities or entrepreneurial risk-taking. But credible fiscal reform could change that equation. Lower government spending could reduce borrowing costs, strengthen the currency, and encourage private investment. Which means capital could shift from sitting in fixed-income assets toward funding growth. Second, AI. AI might seem unrelated to Brazilian politics, but we see an important connection. Our global framework suggests that annual capital spending could rise from roughly $2.5 trillion to about $5 trillion - $6 trillion as companies build out global AI infrastructure. And Latin America has a critical role to play. Data centers need electricity. Electricity requires energy infrastructure. And the infrastructure requires copper, lithium, and other critical minerals. Latin America as a whole supplies roughly 10 percent of the world's energy, holds about 20 percent of global energy reserves, about 30 percent of global copper, and approximately 60 percent of the world's lithium resources. So, we've argued that Brazil and Argentina look increasingly like Texas, with exports of energy and of agriculture. And one other area around politics where Brazilians could perhaps learn or be inspired from peer Latin American countries and gather some inspiration from Texas could be around deregulation.For Brazil, lower interest rates and greater policy credibility could make participating in this investment boom considerably easier. And that brings me to the third factor: geopolitics. Brazil has strengthened its economic ties with the East, while remaining deeply connected to Western capital markets and U.S. technology. A more balanced relationship could improve access to capital markets and support long-term investments. Of course, an election result alone doesn't guarantee change. Fiscal discipline, policy execution, and global financing conditions remain critical. Higher U.S. Treasury yields are an especially important risk for a region carrying substantial debt. But consider what's already happening elsewhere. Mexico contributes hardware to the AI supply chain. Chile is rebuilding its investment pipeline. And Peru is benefiting from mining activity. Argentina is attracting capital after significant policy changes. As Latin America's largest economy, Brazil could have substantial regional implications if it moves in the same direction. That's ultimately our LatAm Spring thesis: a shift away from consumption toward investment, entrepreneurship, and capital formation. There's still a long road ahead, but Brazil could be the most important test of whether that spring truly takes hold.Thanks for listening. If you enjoy the show, please leave us a review wherever you listen to podcasts and share Thoughts on the Market with a friend or colleague today.

Our Head of Asia Credit Strategy Kelvin Pang explains why investors would benefit from a broader fixed income market in Asia, with opportunities across more countries, local-currency credit and dollar-denominated bonds.Read more insights from Morgan Stanley.----- Transcript ----- Welcome to Thoughts on the Market. I’m Kelvin Pang, Head of Asia Credit Strategy [at] Morgan Stanley. Today – why the challenge in Asia fixed income may not be the region at all, but the way investors have traditionally looked at it. It’s Tuesday, October 13th at 8am in Hong Kong.Picture this. You’re shopping in a supermarket. As you walk down the aisles, you notice half of them are off limits. It’s unexpected. Something similar has happened in Asia fixed income. The region’s fundamentals remain supportive, but the traditional investment universe has become increasingly constrained. The pressure began in early 2023, when U.S. policy rates rose above those in much of Asia for the first time since before the Global Financial Crisis. The environment that had supported Asian bond markets for years turned upside down. Consider Asia-dollar credit. Issuers have increasingly turned to cheaper local-currency financing, which is shrinking dollar-bond supply. Asia-dollar credit is now on track for a fifth straight year of negative net supply. At the same time, investment-grade spreads have tightened to 55 basis points. That makes Asia investment-grade credit the most tightly valued major credit market globally. And investors have taken notice of this. Assets in dedicated Asia credit and high-yield funds have fallen 62 percent from their 2021 peak – from roughly $75 billion USD to around $29 billion USD. But we feel Asia itself is not the problem. In fact, Asia Pacific nominal GDP could rise from $41 trillion USD in 2025 to [$]54 trillion by 2031. That would account [for] roughly one-third of global nominal GDP growth over that period. And most importantly investment is also accelerating. Asia’s capital spending could rise from $11 trillion to [$]16 trillion by 2030. That would mark the strongest industrial cycle since the mid-2000s. And we think this extends well beyond AI, with energy, defense, and broader industrial investment all playing major roles. The key issue here is how investors have traditionally looked at Asia. They basically need a bigger map. That broader map is what we call APAC fixed income. Traditional Asia fixed income has largely focused on U.S.-dollar credit and local-currency government bonds across emerging Asia. APAC fixed income adds convertible bonds and local-currency corporate credit. It also brings Japan and Australia into the mix. So, what’s the advantage of this broader map? You see, each of these pieces behaves differently. Convertible bonds let investors participate in regional growth through their equity link. APAC dollar credit plays a more defensive role, with a mostly investment-grade, U.S.-dollar-denominated profile. Local-currency rates provide exposure to interest rates, currencies and the economic cycle. At the same time, local-currency corporate credit broadens credit and sector exposure. Together, they create a more flexible mix of risks across changing economic conditions. For example, when growth and inflation rise together, convertible bonds can benefit from their equity link. In a recession, currency-hedged local bonds can benefit from falling rates while limiting foreign-exchange risk. During stagflation, dollar credit can offer more defensive characteristics. Our portfolio analysis since 2023 suggests a diversified APAC fixed-income portfolio could target a 7.5 percent return with a vol[atility] of roughly 4 percent, depending on allocation constraints. Investors also increasingly need to manage currency exposure as the dollar cycle shifts. For years, investors could navigate Asian bonds with a relatively narrow toolkit. Today’s market demands more flexibility. The opportunity in Asia has not disappeared. The better question may be whether investors are looking at enough of 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.

Markets have remained resilient despite the prospect of higher-for-longer rates. Our Global Head of Fixed Income Research Andrew Sheets considers the risks building beneath the surface.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, exploring further the question that seems to be on everyone's mind: At what point do higher rates become a problem for markets?It's Friday, October 9th, at 2pm in London.We recently hosted Morgan Stanley's ninth annual European Credit Conference here in London. Fifty companies, over a thousand investors, and to some extent, one dominating question.The market has been impressively resilient this year – but as yields rise, at what point does this change?I think a good place to start with this question is whether the current level of interest rates are obviously wrong. And I don't think it's clear that they are. Growth in the U.S., Europe, and Asia remains surprisingly robust and has for a lot of this year. Meanwhile, inflation across regions is still generally above central bank targets.Too high, and a sign that conditions are more likely too hot than too cold. That's the opposite of what the wrong level of rates would imply – as rates that were too high would be curtailing activity and pushing inflation down below target.Thanks in part to the scale of AI spending and how insensitive the spending has been to the level of interest rates; we're just not seeing this.I think the yield curve is also confirming this message that the level of rates for now is okay. In an environment where the market thinks that central banks have raised rates too much, it will often so-call invert the yield curve. Pushing short-term interest rates above longer-term ones on the belief that rates that are too high today will need to be lowered when conditions weaken in the future.We're not seeing that, and that is, I think, a pretty important indicator.At the risk of being pedantic, I think there's also the premise of the question around resilience. At one level, without a doubt, markets have been impressively solid given the large rise in yields this year. U.S. and European stocks have been posting double-digit gains. Credit spreads, a measure of risk premium, sit near multi-decade lows.But under the surface, that resilience isn't so apparent. Spreads on the lowest-rated credits, so-called triple CCCs, have increased significantly this year across both the U.S. and Europe. Publicly traded BDCs, which contain portfolios of lower-rated private credit, have traded at widening discounts to their book value.And even in the mighty U.S. stock market, my colleague Mike Wilson and our U.S. equity strategy team note that over half of the 3000 largest stocks have seen a drawdown of at least 20 percent since June, which happens to be the month that yields started to rise.2026 may be showing that global growth overall is just less sensitive to higher rates than was initially expected. Large government deficits in the U.S., Europe, and Asia, and large spending on AI may be two reasons why. With growth strong and inflation still too high, rates may be simply seeking out a level that they think will keep things in balance.But the interest rate that helps balance – this technology and spending boom – are not the same rates that keep a smaller, weaker, or a more indebted company happy. If higher rates are needed to balance things overall, the weaker tails of the market can still suffer.We've seen this in the past, particularly 2005. Back then, a large U.S. government deficit, booming China CapEx, and significant U.S. housing wealth all helped push up rates. The overall econom y held up for several more years. But weaker parts of the credit market were challenged by those rates more quickly.We think the same may be true today and therefore favor an upper quality bias. We favor high-yield bonds over loans and decompression across credit indices.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.

The AI investment boom has been a defining force in markets. Our Head of Public Policy Research Ariana Salvatore looks at whether the U.S. midterm elections could change the spending and policies behind it.Read more insights from Morgan Stanley.----- Transcript -----Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Head of Public Policy Research at Morgan Stanley. Today, what the midterms could mean for the AI investment cycle. It's Wednesday, October 7th at 10am in New York. I've spoken on this podcast before about the broader implications of the midterm elections. This time, I want to go a little deeper on what they could mean specifically for AI sentiment. We think about that through two separate channels. The first is data center opposition, where we do think the elections can be an important catalyst. The second is broader AI safety and regulation, where we think the election outcome matters much less. And that distinction is important. It suggests that the midterms are more likely to influence investor confidence in the pace and the durability of AI infrastructure spending, rather than fundamentally rewriting the rules governing AI. Let's start with data centers. Our base case is still a conditional build-out. We still expect substantial AI infrastructure investment, but increasingly subject to conditions around things like power costs, grid investment, siting, permitting, water use, and community impact. We don't expect a broad federal pause on data center development. AI compute is increasingly being viewed in Washington as strategic infrastructure, particularly when you consider competition with China. So, we think that national security framing should remain supportive of the build-out. But here's the important point for these elections. Many of the policy levers that can actually delay a project sit well below the federal level. Think about things like interconnection approvals, large load electricity tariffs, zoning, water permits, and tax abatements. Those are all generally controlled by states, utility commissions, and local governments. So, when it comes to AI infrastructure, we actually think governors, state legislatures, and public utility commissions may ultimately matter more than control of any one Senate seat in particular.And that brings us to sentiment. At the federal level, we think a Republican sweep would likely be the most constructive outcome for AI infrastructure sentiment. Now, that's because investors would likely expect fewer regulatory constraints ahead. As well as a greater likelihood of active support for permitting reform, additional power generation, and development on federal land. A divided government outcome, we think, looks closer to the status quo. It would preserve questions about the durability of the build-out, but the gridlock in D.C. would also leave many of the substantive decisions at the state and local level. And lastly, we think a Democratic sweep would be the least constructive outcome for sentiment. Now, importantly, that doesn't mean that we expect a nationwide data center moratorium, as I said. Rather, investors could interpret Democratic outperformance as increasing the probability of tighter local restrictions in the near term, and potentially much more federal scrutiny after the next 2028 elections. So that's the infrastructure side. What about AI regulation more broadly? Here, we think the midterms are actually much less consequential. Our expectation remains for incremental and fragmented regulation rather than a sweeping new federal regime. AI safety, data governance, and frontier model oversight, we think can certainly see targeted action. But we just don't think congressional composition by itself is likely to trigger comprehensive legislation – unless there's a sufficiently high-profile safety or security incident. Executive agencies are also likely to remain the more important actors on tech restrictions and model access. And that gets us to the main takeaway for investors. The midterms probably won't determine whether the AI investment cycle continues. We think the strategic case for expanding U.S. compute capacity remains intact. What they can influence, however, is the friction around that build-out. Where the projects get built, how quickly they receive approval? Who bears the cost? And ultimately, how confident investors are in the durability of AI CapEx? So, when we think about what happens in November through an AI lens, we'll be watching D.C. But in many cases, the more important signals can come from governors' races, utility commissions, and local elections – because that's where the politics of AI are increasingly meeting the physical constraints of actually building 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.

Recent headlines about Canada have focused on trade uncertainty and weak productivity. But our Global Economist Arunima Sinha explains why the country may be on the cusp of a stronger, investment-led growth cycle.Read more insights from Morgan Stanley.----- Transcript ----- Arunima Sinha: Welcome to Thoughts on the Market. I'm Arunima Sinha from Morgan Stanley's Global and U.S. Economics teams. Today, why Canada's economy may be closer to a new growth phase. It's Monday, October 5th at 10am in New York. Canada has been in the news recently. There have been lots of headlines related to trade, around population growth, around weak productivity, years of underinvestment. And those are real constraints, and they have weighed on the near-term outlook. At Morgan Stanley, we are more constructive on the medium-term outlook for Canada. And we recently wrote a report around this along with our strategists titled, “Canada: The Next Acceleration.” And, from our perspective, we think that the near-term uncertainty around trade is actually clouding the opportunity for global investors. There are three points that we make in the report. We estimate that the growth model in Canada over the next three to four years can actually pivot from the export-led growth story that we've seen over the past few years into one that emphasizes capital deepening and greater technological diffusion across the economy. So, it really is about the domestic build-out and the opportunity in shifting away from trade and export-led growth into a more productive economy – that's not just larger over time but can actually grow at a much faster pace as well. And so, by our estimates, we think that potential growth in Canada could feasibly rise from about 1.5 percent to closer to 1.75 percent. The way that we see it, this really doesn't require things to start from scratch. There are already large capital pipelines that are in place. But one of the things that we do note is that a lot of these pipelines are actually concentrated in a few sectors. So, about half of these are in utilities and oil and gas, transportation. These sectors together combine about 13 to 14 percent of the gross value add for the economy. But they actually account for more than half of the announced capital pipelines. And so, for the money that's going into the economy – and a lot of this is going into structures – it's not going as much into machinery and equipment. And so, while the capital build-out is going to support the widening, we also need to think about crowding in private investment into other sectors. And some of these other sectors that we've identified in the note, such as finance, information services, that have historically had much greater gains in productivity – they would need to see bigger capital intentions as well. The other opportunity that we identify for the Canadian growth model is – although the near-term population growth has been slowing, it doesn't actually change the longer run demographic picture. We looked at what the numbers would be for the working age population growth for Canada, taking 2025 as a starting point. And what we see is that Canadian working age population is going to rise by about 3 percent by 2035, by 5 percent by 2040, and 6 percent by 2045. Meanwhile, most of the developed economy peers are going to see shrinkage in their working age populations. And so that is really going to give Canada a window into the rest of the 2030s to continue to accelerate its growth model. From our perspective, the test for the next few years is going to be whether the investment that's being undertaken in a few sectors spreads beyond the big projects. And it really lifts productivity across the economy. Construction, manufacturing, agriculture, and wholesale will be especially important because they are machinery intensive, technology adoption remains low, and recent productivity gaps are large. If those sectors begin to improve, Canada could enter the 2030s with a much stronger growth engine than it has today. And in our perspective, Canada's potential growth could actually pivot from being about 1.5 percent today to entering the 2030s with close to 2 percent in potential output growth. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share our Thoughts on the Market with a friend or colleague today.

Betsy Graseck and Michael Cyprys explore how AI could expand advisor capacity and tokenized assets could grow into a $2.3 trillion market by 2030.Read more insights from Morgan Stanley.----- Transcript ----- Betsy Graseck: Welcome to Thoughts on the Market. I'm Betsy Graseck, Morgan Stanley's Global Head of Banks and Diversified Finance Research. Michael Cyprys: And I'm Mike Cyprys, Head of U.S. Brokers, Asset Managers, and Exchanges Research at Morgan Stanley. Betsy Graseck: Today, we're looking at the next phase of growth across asset and wealth management – and how tokenization, AI, and changing investor flows could reshape the industry. It's Thursday, October 1st at 9am in New York City. Assets under management, or AUM, are near record highs across the globe, with a lot changing beneath the surface. Now, much of the recent AUM growth has come from markets rather than from net new client flows. And meanwhile, fees do remain under pressure. At the same time, technologies like AI and tokenization are creating new opportunities for both asset and wealth managers. Our base case has tokenized real world assets growing from roughly [$]40 billion today to about [$]2.3 trillion by 2030. Mike, let's start with tokenization. What are the use cases that matter most near term? Michael Cyprys: So, as we think about it, there's a number of use cases that we see. The most compelling ones really are around cash treasuries and collateral. Take for example, earning yield. Some tokenized funds allow you to earn interest by the minute or the second that is invested rather than having to remain invested by that 4pm cutoff that is the case today. Another benefit is allowing collateral to move around a lot more easily, and this can help support a shift toward 24/7 markets. So, if securities can trade 24/7 – or derivatives – you may also need the cash leg of that transaction to keep pace. Right now, there are certain futures contracts that do trade over a weekend, but those positions do need to be pre-funded on Friday. So that's going to limit perhaps the full uptake for that of 24/7 until you can get the movement of the collateral to keep pace. And that's where tokenization can come in to help solve a real market need. There's also trapped collateral that's just sitting around the world, where institutions and corporates just keep pockets of liquidity in different places just in case they need it at a moment's notice. There’s a cost to that while it sits idle. But tokenization can allow for just more just-in-time movement of money, say with tokenized deposits, tokenized money funds, or stable coins. And another use case is around investors outside the U.S. that may not have as easy access to U.S. markets. But tokenization can help lower barriers, reduce frictions, and allow for greater access to U.S. market exposure. Private markets get a lot of attention, but we think that's maybe a little bit further out. So, to put some numbers around this, today there's around [$]40 billion of tokenized real-world assets. So, think tokenized stocks, bonds, funds. In our base case, we could see that growing to about [$]2.3 trillion by 2030, with a vast majority tied to these collateral mobility and reserve and treasury management use cases. Betsy Graseck: Pulling up a notch, we are expecting assets under management to reach about [$]247 trillion by 2030. But revenue growth is expected to lag asset growth. Mike, what really separates the firms that can grow above market trends you expect? Michael Cyprys: Yeah. So, as you said, most of the growth is going to be driven by market beta, right? So, we have expectation for about 9 percent growth annually in assets under management for about $160 trillion globally today to about $250 trillion by 2030. We expect about three-quarters of that growth rate comes from market beta, which leaves you around 2.5 percent for organic asset growth. So, growing just AUM with the market is not going to really be enough to differentiate. And so, as we think about, you know, how one can differentiate? First, I think it comes down to where one is positioned across the industry. We do see flows concentrating in passive solutions and selected private markets, and the economics can be pretty different there as well. Another way to differentiate is through distribution. Wealth, retirement, model portfolios, customized solutions, all of those channels are becoming much more important. And so, you want to be closer to where that asset allocation decision is actually getting made. And another point of differentiation is around operating leverage, and that's where AI comes in, which I'm sure is a topic we're going to get to in a little bit. That we think can help allow money managers to expand research coverage, can allow salespeople to cover more clients, allow for adding more products and customization without adding necessarily a lot more people and cost at the same rate. So, look, bottom line, I'd say, we think above market growth from having the right products, the right distribution, getting them in front of the right clients, and the technology to scale that just a lot more efficiently. Betsy Graseck: And how important is that AI tool going to be, in your opinion, for separating yourself from the pack? And is it more top-line generative or cost efficiency generative? Michael Cyprys: I think it's critical. It's both. I think it changes the competitive game because a lot of the economics are very different across the businesses, right? Take passive and index investing, for example, that continues to take share. It's a low-fee business, so there scale really matters. In solutions and private markets, the revenue opportunity is better, but you need more capabilities and distribution reach. And in private markets, origination is also key, as well as distribution, right? You can have private credit or an infrastructure product out there in the marketplace. But if you can't get it into a wealth or retirement or insurance channels, then you're leaving a lot of growth on the table. And then with traditional active, performance still matters, but the wrapper is key. Distribution matters more so than ever, and active ETFs are a great example of that. Betsy Graseck: And one question on AI is: How far along do you think it is in your coverage embedded already in the workflow and the processes across your group, your asset managers? Michael Cyprys: So, we're pretty early days here. A lot of firms, already have AI tools today: RFP tools, sales tools, tools within the operational and distribution side. But saving someone, you know, 10 minutes on a task doesn't necessarily show up in the P&L, right? You need to start removing entire steps from workflows. And then using that time savings to cover more clients, to launch more products, do more research, and ultimately slow the pace of hiring. And that's where we think the industry needs to move towards, away from these, sort of, point solutions into an enterprise workflow. And that is tools that connect across the entire organization, underpinned by the same data and the same controls. And our work suggests that this could be pretty meaningful over time, perhaps up to as much as 15 points worth of operating margin improvement – for the leaders over time. But we don't assume that all falls to the bottom line. We expect it to – you know, a lot of that's going to get reinvested, and a portion probably also gets competed away. And when we look at our forecasts for the money managers we cover, I'd say we have modest improvement in operating margins over the next couple of years. And, to your point, on cost versus revenue, we may actually see it on the revenue side first, as it can help allow for more client touches, broader coverage, and faster product development. Betsy Graseck: Okay. So, or as you mentioned, early days. How do you see AI and tokenization impacting either the leverage opportunities, the operating leverage opportunities, or the revenue growth opportunities? Let's start with AI. Michael Cyprys: We think that the potential here is to really improve the capacity to serve clients. As you think about today, the time that advisors spend actually not talking to clients, right? When you think about time that they're spending on meeting prep or research, notes, follow-ups, onboarding.  And that's a lot of administrative work that is wrapped up, in terms of the advisor’s relationship there. And our work suggests that call it about half of that advisor time could be freed up. Then advisor capacity could increase upwards of 30 to 40 percent on our numbers, and that can also increase the quality and the experience that the clients receive. We also see a broader opportunity beyond just the advisor. As you look across the advisor team and the organization, we see an overall cost to serve to come down quite materially. And I know this is a question you didn't ask it, but that's out there. We don't see AI replacing financial advisors, particularly at the higher end, just given the importance of that trusted relationship. And if anything, the value of that advisor probably goes up, particularly just given there's so much change happening around the world every which way you look. And then you overlay that with the aging demographic trends. We actually think there could be a bull market for advice as we look ahead. And AI could be that tool to enable the industry to execute on that market opportunity set and also help expand the TAM in terms of the ability of the industry to capture that opportunity set and bring advice to more people than was ever possible before. Betsy Graseck: And this would be incremental to your growth outlook that you indicated earlier of 7 percent? Michael Cyprys: This could be incremental… Betsy Graseck: Okay! Michael Cyprys: ... to that opportunity potentially over time. Betsy Graseck: Anything on tokenization that is an opportunity for wealth managers? Michael Cyprys: Oh, absolutely. And I think that we're really, really early days; just scratching the surface on this in tokenization and wealth. You know, I think one way to frame tokenization and wealth is it could just make the client balance sheet that much more productive. And this creates some risk as we talk about in the report for the traditional wealth model with respect to sweep cash and the monetization of that, right? If clients hold less idle cash, that could put some pressure on deposit and sweep economics. But that could also be offset by new lending opportunities at the same time. So, wealth firms need to be able to support tokenized assets and lending capabilities without losing that client relationship to someone else's platform. And that's why longer term, the wallet or the client interface becomes pretty important – because that's where the investments, cash borrowing, payments, all of that comes together. Betsy Graseck: And all of this happening right ahead of Nasdaq and NYSE's December 6th, a big event. Michael Cyprys: That's right. U.S. equity markets are going 23/5 on December 6th. Betsy Graseck: Meaning that the only hours they will be closed every day are between... Michael Cyprys: 8 and 9pm. Betsy Graseck: And that's on a pathway to 24/7 ultimately, you believe? Michael Cyprys: That's our expectation, as you have other disruptors around the world that are looking to provide retail with access to 24/7 markets. Betsy Graseck: Exciting times, Mike. As you indicated in the beginning, we have 79 percent growth with AI and tokenization potentially amping that up ahead of a pathway to a 24/7 market. Michael Cyprys: Indeed. Betsy Graseck: Thank you so much for joining us here on Thoughts on the Market, Mike. Michael Cyprys: It's been great speaking with you, Betsy. Betsy Graseck: And thank you 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.

Our China Industrials Analyst Sheng Zhong explains how AI, robotics and a major investment cycle could transform China’s manufacturing base and its role in global supply chains.Read more insights from Morgan Stanley.----- Transcript -----Sheng Zhong: Welcome to Thoughts on the Market. I’m Sheng Zhong, Morgan Stanley’s China Industrials analyst. Today – how AI and automation are transforming China’s factories, and what that could mean for global manufacturing. It’s Tuesday, September 29th, at 3 PM in Hong Kong.For decades, Made in China has been shorthand for scale, speed, and low-cost manufacturing. Now the story is shifting toward something more ambitious: using technology, productivity, and industrial know-how to shape not just what gets made, but how it gets made. We call this transition Industry 5.0. Industry 4.0 was about connecting machines and digitizing production. Industry 5.0 goes a step further, using AI to improve how factories schedule production, manage quality, and maintain equipment. China is starting from a position of enormous scale. It represents roughly 28 percent of global manufacturing value-added and covers all 666 industrial subcategories defined by the United Nations. There are already more than 30,000 basic-level smart factories and more than 100 million connected industrial devices. That industrial base also gives China a strong platform for robotics. Traditional industrial robots generally perform fixed tasks. Embodied AI could make machines more flexible, allowing them to gain new capabilities through software and updated models. That could effectively turn some physical labor into software-upgradable capital. And the numbers give you a sense of how quickly this could scale. China could go from selling about 8 million robots a year in 2025 to 29 million in 2030, and 76 million by 2035. That’s roughly a ninefold increase in annual sales in just a decade. Scaling robotics and AI across such a large manufacturing base will require a lot of capital. We estimate Industry 5.0 could generate about $12 trillion USD of incremental industrial investment in China from 2026 through 2035. Around $5.5 trillion USD would go toward factory upgrades, including robotics, smart equipment, and software, while roughly $6 trillion USD would support new industrial capacity. But that investment cycle is likely to build gradually. We expect industrial capex growth of about 4 to 5 percent annually in 2026 and 2027, before accelerating toward 6 to 7 percent from 2028 as excess capacity is absorbed, technology bottlenecks ease, and AI adoption broadens across factories. If that investment translates into higher productivity, the economic impact could be meaningful. By 2035, China’s industrial profit margin could rise to 8 percent from roughly 5 today. Industry 5.0 could lift China’s potential GDP level by around 3.5 percent, helping cushion some of the drag from an aging population. And China’s share of global manufacturing value-added could increase from about 28 percent to 30 percent. And those changes would not stop at China’s borders. Final assembly can shift to new locations, but the supplier networks, machinery and production know-how behind it are much harder to replicate. We estimate only around 40 percent of China-to-U.S. exports can be readily substituted. That means China’s role may increasingly extend beyond exporting finished goods to supplying the equipment, components and industrial systems used to make them elsewhere. That is the move from Made in China toward Made by China. 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.

Morgan Stanley Research analysts Michelle Weaver, Ravi Shanker and Dave Arcaro discuss two industrial inflection points: how long it will be before autonomous trucking becomes a reality and why power infrastructure is racing to keep up with AI-driven demand.Read more insights from Morgan Stanley.----- Transcript -----Michelle Weaver: Welcome to Thoughts on the Market. I'm Michelle Weaver, Morgan Stanley's U.S. Thematic and Equity Strategist.Ravi Shanker: I'm Ravi Shanker, Morgan Stanley's U.S. trade transportation analystDave Arcaro: And I'm Dave Arcaro, Morgan Stanley's Utilities, Power & Clean Energy analyst.Michelle Weaver: Today, what we learned at Morgan Stanley's Industrials Conference about the changing economics of autonomous trucking and the increasingly tight power market supporting the AI build-out.It's Friday, September 25th at 10am in New York.Now, I know we're all on the road taking meetings post-conference, so the audio might sound a little bit different, but we wanted to bring you the latest from our annual Industrials Conference that recently concluded in Laguna Beach, where two themes really stuck out. The growing physical infrastructure demands behind AI, particularly power, and the shift in autonomous trucking from proving the viability of the technology to commercializing it at scale.Ravi, after roughly a decade of development, you've said autonomous trucking is entering a critical 12 to 18-month period ahead of serial commercial production.What's changed, and why is the debate shifting from whether the technology works to whether it can be commercialized at scale?Ravi Shanker: I think for 10 years the industry has been focused on making the technology work. but with players like Aurora now putting up almost half a million miles of fully driverless revenue-generating operations, on public highways in the U.S., day and night, rain and shine, for different customers. With people like Kodiak, also running, several trucks, in revenue-generating service, for customers like Atlas, I don't think there is much debate on the technology itself.And so, I think the debate is now moving from does this work to can this work for me? Where the next steps are going to be dotting i's and crossing t's on the path to actually pressing these trucks into commercial service rather than having to prove that it works in the first place.Michelle Weaver: Your research suggests that autonomous trucking can deliver roughly a 20 percent lower cost per mile, while higher utilization could be an even bigger source of value. What are the key assumptions behind that math? And what still needs to happen operationally for fleets to capture those benefits?Ravi Shanker: Yeah, so we recently updated our TCO math, on autonomous trucks and published a North American insight, where we revised and revisited our views on autonomous trucking with a lot of proprietary data, in there as well. And part of that new TCO math, again, I think revisited some of the changes in the split of operating costs of trucking over the last several years.First of all, I'll kind of throw a huge disclaimer out there that your mileage may vary, right? Because, depending on who you are as a trucker, if you're public or private, small or large, dry van or reefer, heavy or asset light, long haul or short haul, your split of costs are going to be slightly different.But we started out, by looking at the ATRI's national average. And labor accounts for 35 to 40 percent of the P&L of the average trucker. So, when you take the driver out and substitute that with an autonomous driver, if you will. Even after paying the autonomous technology company roughly 85 cents a mile, for the autonomous operation, you will still save a significant amount of money. Versus the 40 percent of the roughly $3 per mile that it costs for labor today.In addition to that, fuel is another third of your cost structure. And there, an autonomous truck should be anywhere from 13 to 22 percent more fuel efficient. We have taken the low end of the scale to be conservative. And then you layer on insurance savings, maintenance savings on top of that. Even if you add some incremental costs, either for human drayage at both ends or for the truck itself being more expensive – we believe you will save about 20 percent per mile versus a human driver today.And I'll point out that the unit economic savings are only about a-third of the total savings with the utilization benefit driving another two-third savings on top of that.Michelle Weaver: But there, there still seems to be a notable disconnect between how much freight carriers and shippers think can be automated and how much of the network may actually be suitable to be automated. What's the industry potentially underestimating?Ravi Shanker: Yeah. We have seen this in our conversations. Again, part of our report was conducting detailed surveys and in-depth interviews with a lot of our coverage companies. And I will say that there still needs to be a lot of education, of how these trucks work, where they work, what the unit economics are going to be out there.There's still a lot of misinformation. For instance, there's this big perception that you still need human drivers at both ends of an autonomous truck move because these trucks can only operate on a highway. And here's where our AlphaWise analysis, comes in. I think it's the first of its kind analysis where we use geolocation data to pinpoint 10,000 plus of the largest commercial facilities belonging to the hundred largest commercial shippers in the U.S.And we found out that the average [00:05:00] commercial facility is less than two miles away from the nearest ramp point. And these trucks can comfortably do seven to 10 miles, if not longer, off a highway on main roads to get to their end destinations. So, I think you just need a lot of education in the industry.And that is part of the dotting of i's and crossing of t's that we think the industry needs to do in the next 12 months before we see the start of serial commercial production next year.Weaver: Thanks, Ravi. I want to bring Dave into the conversation here, and that question of turning demand into real world capacity brings us naturally to power, where the challenge is also increasingly about physical infrastructure and execution.Dave, coming out of Laguna, you describe management commentary across power equipment as notably positive. What surprised you most about what you heard on demand bookings and project activity?Arcaro: Yeah, absolutely. What surprised me most was probably how consistent the commentary was across companies, across large frame turbine providers and the smaller, on-site power equipment players, the new entrants and the more mature companies in the market. Very consistent feedback. All very positive.And I would say also what surprised me too was the lack of disruption across the board. You know, we all see the headlines about data center moratoriums, political pushback, community challenges that really, it seemed, to increase the risk of data center execution and delays out in the market.But at least with the power equipment companies, they're just not seeing it. You know, in terms of the feedback that we heard from management teams across the board at Laguna, they review project timelines actively with their customers, and that's all still intact. We haven't seen any changes in bookings or slot reservations for equipment deliveries.Still seems to be a very stable and very strong backdrop across the board.Weaver: One of the broader conference themes was the availability of power is becoming a bottleneck for AI infrastructure. How are equipment shortages, longer wait times, and customers planning further ahead affecting pricing? And how far ahead can the industry see?Arcaro: Yeah, we are seeing equipment companies booking out orders farther and farther. The large frame gas turbines, to give you a couple examples, from companies like GE Vernova, they're now in conversations to contract turbines for 2031 and 2032. Smaller equipment companies like INNIO, who make, smaller scale engines for data centers, they're in conversations with customers and taking reservations into 2029 and 2030.So, what we heard from the conference as well was that utilities, which is a big customer for this equipment, they're looking out farther and farther now into the 2030s. That's new and that's a surprisingly long time in terms of how far they're looking out. And we're also hearing data centers looking out toward the end of the decade, you know, late 2020s in terms of trying to secure their power equipment in advance.We would still consider it very much a seller's market. Pricing has been rising, and companies at the conference gave further indications that it's likely to keep rising, what looks like into the 2030s from here. We just haven't seen any signs of softening yet, really regardless of the company or the equipment type that they're selling into the market.So still farther and farther out that we're seeing visibility into the order flow, and with that is also coming firm and even rising prices into the 2030s.Weaver: Investors often frame the power debate as electricity from the grid versus smaller power sources built on-site at data centers. Based on what you heard at Laguna, how should investors think about the balance between those two approaches?Arcaro: Yeah, it's an interesting dynamic. When you talk to utilities and some of the large frame turbine companies, they all say that all this data center demand is going to the grid. Eventually, it's all going to go to the grid. When you talk to the smaller equipment manufacturers and the power as a service providers, they say nobody wants the grid.They see long-term opportunities to sell, on-site power equipment and contract it with their end customers for 15 to 20 years, and we're seeing evidence of that. So, I think, it'll stay It's an ongoing debate among, investors as well. On our end, we think the on-site power market is going to be an extremely large market as we get toward 2030, given limitations in how much power is likely to be accessible from the grid over time for the data center industry.But I would say, my takeaway and my observation from the conference that I would highlight is that it's a really favorable market and favorable backdrop for both sides.Michelle Weaver: From autonomous freight to the power needed to support AI, one message from Laguna was clear. The next phase of technology adoption increasingly depends on what the physical economy can actually build and scale.Ravi and Dave, thanks for taking the time to talk.Shanker: Thanks, Michelle.Arcaro: Thanks for having me.Weaver: And to our listeners, thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen to the show and share the podcast with a friend or colleague today.

Tighter AI safety requirements could reshape the pace of AI investment. Ariana Salvatore and Michael Zezas dig into why the spending may shift toward more compute, not less.Read more insights from Morgan Stanley.----- Transcript -----Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Head of U.S. Public Policy Research at Morgan Stanley. Michael Zezas: And I'm Michael Zezas, Deputy Global Head of Research at Morgan Stanley. Ariana Salvatore: Today, we'll be talking about AI safety and regulation. It's Wednesday, September 23rd, at 10am in New York. We put out a note last week on AI frontier capability gain and the associated safety risks. Those have been in focus in recent weeks, and as a result, we've gotten a number of questions about the path forward for government regulation. So today, Mike and I are going to get into some of the newest developments, where we think things are headed, and how the midterms could shape that path. Michael Zezas: Yeah, and this is pretty important because the concern is that if AI safety scrutiny increases, it's going to slow everything down. You might have less CapEx, fewer model releases, and there's all sorts of downstream effects for the pace of U.S. growth and investment strategy in equities and throughout the AI investment theme. But Ariana, you and the team landed in a bit of a different place and are arguing that a bigger focus on AI safety could end up being a tailwind to compute spend rather than a brake on it. Can you break that down for us? Ariana Salvatore: Sure. So, the way we see this playing out, is there are five potential states of the world. Some include industry self-policing; some include the prospects for heavier government intervention. Across all of them, as you mentioned, we actually think this is a pretty big tailwind to compute spend and CapEx more broadly. That's because as the labs integrate greater safety monitoring infrastructure, we think that spend is only going to accelerate, especially as LLM capabilities increases at a nonlinear rate. Similarly, on the regulation front, we think there are a few things that prevent something like a large comprehensive AI regulation bill from coming to fruition. We think there's really three, kind of, key obstacles to something like that happening. The first is the politics. So, the president himself has said he's against some sort of large-scale regulation. The second is the procedure. So mechanically speaking, there would need to be a legislative vehicle for this sort of thing to ride on. That's hard to see emerging in the very near term. And the third is precedent. So, historical precedent here tells you that usually regulation is catalyzed by some sort of high salience event. That's why our framework for government reaction here hinges on two components: incident salience, as I just mentioned, and instrument availability. Instrument availability basically reflects the extent to which the government already has a tool that it can pull in this direction. So, that's how we think about it going forward. That doesn't mean all policy action is off the table, but that supports our expectation for higher CapEx, higher compute spend over the coming years. Michael Zezas: Right. So, the idea is that the spending continues and the things that would otherwise limit that spending, you don't see as real plausible policy options at the moment. And can you break this down a little bit more? Because I know there's a lot of different proposals floating around Washington, D.C. from policymakers right now. What are you paying attention to? Ariana Salvatore: We don't expect an overarching AI regulatory authority in the near term. Now, importantly, we also don't expect sweeping open weight model regulation. The reason for that is threefold. First of all, we think the U.S. is keen on maintaining this managed stability relationship with China. We've written about the expectations around the U.S.-China summit. That's kind of a delicate balance that we think is likely to persist. So, overly restricting open weights models might throw a little bit of a wrench into that equilibrium that we see. So that's the first reason. The second reason is diffusion. We think the U.S. administration wants to see the proliferation of open weights models. We know that companies are using some sort of hybrid of open and closed weight. So, to the extent that, you know, banning these models would slow adoption, we don't think that's in the interest of the administration. And the third reason is purely mechanical. It's really hard to enforce these sorts of restrictions. Once a model weight is published online, it can be really hard to clamp down exactly who and where it's going to. Obviously, companies can download them, customize them, et cetera. So, the enforcement picture here is also really challenging. That being said, we do think that the executive can continue to lean in and, sort of, make some incremental adjustments or changes on the regulatory front. But we think it's likely less severe than some of the proposals you're seeing in Congress right now. Things like the Kill Switch Act, for example, which basically mandate that companies can maintain an ability to shut down models at a moment's notice, right? If a certain threshold is crossed. So, that's something that we see as less likely to come to fruition. But again, setting safety standards, guardrails, all of that from the administration we think is possible in the near term.Michael Zezas: What about some of the pushback that would at least appear to be rising at the state and local level around construction of data centers? Is that something that you think might materially slow the industrial build-out and the CapEx levels around AI? Ariana Salvatore: So far, what we've seen is that AI safety risks are not the top of the priority list when it comes to data center pushback, right? So, things like environmental concerns, affordability – those tend to be the main vectors of the opposition. That being said, we've gotten the question, right, to your point, of does this, sort of, risk focus mean that the data center backlash is likely to grow? We think that it could, but at the same time, we think this is a highly idiosyncratic issue, meaning that this is something to pay attention to on a very granular level. Certain states and localities will be the ones to really administer these restrictions, and we think in the aggregate, hyperscalers are going to be able to continue to mitigate. We've already seen these mitigation measures employed. We're still constructive on AI CapEx this year and next, because overall, we see the build-out really becoming more of a conditional build-out. So, that means contingent upon some of these concessions, maybe it's more expensive in certain areas. But overall, we don't think that the concerns around safety are going to derail that story. Michael Zezas: So, then when it comes to data centers, the conditions that might be being put on their construction at the state and local level, for the most part – those building out the data centers have been willing to make those concessions, so it hasn't slowed that much. Is that fair? Ariana Salvatore: That's right, and it really depends on where the pushback is coming from, right? So, in some cases, you're seeing communities push back on things like water usage, right? And we're seeing the hyperscalers come out and respond and say explicitly, you know, how much water they're using in some of these operations. Google is proposing a regulatory framework, so that's something that they're mitigating through that lens. In another example, you've got local communities pushing back on just, sort of, disruptions to quality of life, and you're seeing companies like Meta announce a fund to engage more locally there.So, it really is different. There's no one-size-fits-all solution here. But yes, I agree with you that overall, we don't think this is going to meaningfully constrain the build-out. Michael Zezas: Got it. So, it seems like the idea here is that the secular trend around AI development is going to continue in your view. Is there any way that you think the midterm elections or the outcome around that might change your thinking? Ariana Salvatore: So, I think the midterms will be important for sentiment, but when it comes to the actual policy path, we don't think they're the main driver, and there's two key reasons for that. The first is obviously the president is not changing until 2029. So, the fact that President Trump still has to be involved in any capacity – if we were to see a bill emerge from Congress to us gives a little bit of clarity on what that bill could actually look like. And so ultimately, whatever comes to fruition will have to be a product of collaboration between Democrats, Republicans in Congress, and the president. So, that's a pretty much a constant. The second reason I would say is because, as I kind of alluded to earlier, you tend to see government response when there's a high salience event. And in that case, it doesn't really matter what the government configuration is if it's reactionary. When you think back to things like the pandemic, we saw the CARES Act. In 2008-2009, you saw the ARRA. Those are all efforts that were produced in a divided government. And so, in that vein, we basically think that you need to see some sort of event catalyze a response. The key driver is not going to be government configuration. It's going to be the salience of that event specifically. Michael Zezas: Okay, got it. So, the guidance to investors on the back of all of this is what? Ariana Salvatore: So, the thematic recommendations from our team are intact, right? So, what we were talking about is basically we see these all converging towards a tailwind to CapEx and a tailwind to compute supply. So, in that vein, we still think that you should own inference compute bottlenecks because of that excess demand relative to supply. We think that's going to persist regardless of most of the policy scenarios. We also think own leaders in cybersecurity, as we mentioned. This should drive increased spend, especially as open weight models become much more capable. And then in the third piece, we think you should own AI adopters. AI models are already pretty capable to drive significant productivity. We think that that's just going to continue to unlock. The last thing I would mention, we didn't really get into it in this podcast, but in this conversation we typically also talk about AI sovereignty and the U.S.-China restrictions here. So, in that context, we would avoid negative exposure to rising U.S.-China technology transfer restrictions. We think that's an increasing probability because we do see the governments taking more of an active role, which we think drives bifurcation of the global market. Michael Zezas: Well, Ariana, thanks for breaking it down. Appreciate talking to you today. Ariana Salvatore: Always great speaking with you, Mike. And thank you 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.