The initial shock of the U.S. administration’s tariff
announcements is over, but Andrew Sheets, our Head of Corporate
Credit Research, suggests the current calm could still give way
to headwinds for the markets.
Read more insights from Morgan Stanley.
----- Transcript -----
Andrew Sheets: Welcome to Thoughts on the
Market. I'm Andrew Sheets, Head of Corporate Credit Research at
Morgan Stanley. Today we're going to discuss whether the worst is
over for markets – or whether it's just the eye of the storm.
It's Friday, May 9th at 2pm in London.
After extreme recent volatility, markets have bounced back,
generally unwinding their losses since April 2nd. So was that it?
The shock of tariff announcements and positioning adjustments may
have now passed through, but the impact on the real economy is
still to come. In meteorological terms, we think this may be just
the eye of the storm.
There are several specific bouts of potentially bad weather that
we're looking at, driven by tariffs that may be about to pass
through.
First is the Federal Reserve. Our economists still see no cuts
from the Fed this year as tariffs keep inflation elevated on our
forecast. The markets in contrast are expecting more action. A
scenario where credit markets face both weaker growth and a lack
of central bank support remains one of our top concerns.
Second is the data. So far in 2025, measures of consumer and
company expectations have generally been weak, while readings of
activity have tended to be stronger. Now, we think there's a good
historical case that it's the expectations that tend to leave and
are thus concerned that actual activity could start to soften –
as it starts to be measured in a post tariff period.
To this end, we're keenly watching measures like shipping and
trucking activity, which could give us a better picture of the
real impact. Again, a core driver of our concern, despite the
economic data holding up so far, is that the impact of tariffs
usually takes more time. As our economists note, tariffs
historically have pushed up prices after a couple of months and
pushed down growth after a couple of quarters. In short, the full
storm of that impact may be yet to pass through.
That thinking also lies behind our inflation views. Those more
optimistic on inflation, and thus expecting more interest rate
cuts from the Fed, note that the latest core inflation readings
were generally fine. But in contrast, our economists remain more
concerned that tariff price impacts simply haven't yet arrived in
the official data, noting little change in the core inflation
readings for things like goods that in theory should see the
largest tariff impact. This, in our view, suggests that the
impact on the underlying numbers that the Fed is looking at is
still to come.
The initial surprise of the U.S. tariff announcements is behind
us. Things feel calmer. And the recent economic data has been
relatively resilient. One scenario is this simply speaks to how
resilient the U.S. economy is. But another explanation is that
there's a gap between the surprise of those tariffs and their
ultimate economic impact. And our concern remains that those
impacts are real, driving forecast at Morgan Stanley for weaker
growth, higher inflation, and later interest rate cuts by the
Federal Reserve than the market consensus.
With credit spreads below average, we'd recommend patience. Those
forecasts at these spreads could still drive turbulence.
Thank you, as always, for your time. If you find Thoughts in the
Market useful, let us know by leaving a review wherever you
listen; and also tell a friend or colleague about us today.
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