All eyes have been on President Trump’s address at the World
Economic Forum. Michael Zezas, our Deputy Global Head of
Research, and Ariana Salvatore, our Head of Public Policy
Research, talk about potential implications for policy and the
U.S. outlook.
Read more insights from Morgan Stanley.
----- Transcript -----
Michael Zezas: Welcome to Thoughts on the
Market. I'm Michael Zezas, Deputy Global Head of Research for
Morgan Stanley.
Ariana Salvatore: And I'm Ariana Salvatore,
Head of Public Policy Research.
Michael Zezas: Today we're discussing our
takeaways from President Trump's speech in Davos and what we
think it means for investors.
It's Wednesday, January 21st at 1pm in New York.
Michael Zezas: So, Ariana, over the last
couple of weeks, there's been a lot of news about policy
proposals coming out of the U.S. and from President Trump around
affordability, as well as some geopolitical events around the
U.S. relationship with Europe. And investors really started
looking towards President Trump's speech at Davos, which he gave
earlier today, as a potential vehicle to learn more about what
these things would actually mean and what it might mean for the
economic outlook and markets.
Ariana Salvatore: Yeah, that's right. I
think specifically investors were looking for the President to
focus on affordability proposals pertaining to housing and some
commentary around Greenland. Remember last weekend, President
Trump proposed a 10 percent tariff on some EU countries related
to this topic specifically.
So obviously that did feature in his speech. What did we learn
and what do you think are the most important things for markets
to know?
Michael Zezas: So, maybe the most important
headline we got was President Trump appearing to take off the
table the use of force when it comes to an attempt to acquire
Greenland. And that would seem to, therefore, take off the table
the idea of a broader rupture in the U.S.-EU relationship. Both
the security relationship vis-a-vis NATO, as well as the economic
relationship which could have been ruptured with higher tariffs
on both sides, anti coercion measures around trade, and that
would be of obvious economic importance.
Europe is obviously a major importer of U.S. goods. Not as big as
Canada or Mexico, but still pretty significant. So, anything that
would've created higher barriers between the two would've had
meaningful economic consequences for the U.S. outlook.
Ariana Salvatore: Yeah, that's right. And
we've been saying that the bilateral trade framework agreement
between the U.S. and the EU is actually pretty tenuous in nature,
right? So, this doesn't yet have formal backing from the European
Parliament. They, in fact, delayed a vote on this exact deal,
kind of on the back of these Greenland headlines.
So how are we thinking about, you know, what's been priced into
markets and maybe what this could mean for something like the
dollar going forward?
Michael Zezas: Yeah, so it's important to
point out that we're not out of the woods yet in terms of
potential trade escalation on both sides around the Greenland
issue. However, it seems like that bigger tail problem of a
decoupling might have gone away. And so, what you saw in markets
so far today was that some of the actions over the past, kind of,
24-48 hours with equity market weakness. You know, the S&P
was down about 2 percent yesterday. The dollar was weaker. It
seemed like more term premium was being baked into the U.S.
Treasury market. A lot of that appears to be unwinding
today.
Said more simply, the idea of a kind of riskier investment
environment for the U.S. is getting priced out. At least today,
it's getting priced out. And it all makes sense when you think
about if there was less of a relationship between the U.S. and
Europe, there would be less demand for U.S. dollar holdings
overseas. And that's the type of thing that should manifest in a
weaker dollar and higher term premia, steeper yield curves for
U.S. Treasuries.
Ariana Salvatore: Yeah, and that dovetails
really nicely with the work that we just put out with the FX
team, kind of highlighting some of the policy factors as push
factors for countries to move away from the dollar. We think
that's happening marginally. We think it's not really a risk in
the immediate term, but some of these policy drivers can actually
create dollar weakness over the medium to longer term.
Michael Zezas: Of course, to the extent
that we get news that this is a head fake and that tensions are
re-escalating, you'd expect some of those trades to start pushing
markets back in the other direction again.
Now, President Trump also talked quite a bit about domestic
policy, largely about affordability, and some of the policy
proposals he's put forward over the last couple of weeks. Was
there any new details that you heard that you think are
meaningful for investors?
Ariana Salvatore: So, the short version is
nothing really new, and the reality is that a lot of housing
policy in particular is actually out of the hands of the
executive. And even if you do see congressional action here, it's
likely to be marginal. A lot of housing policy is done at the
state level, and even bipartisan efforts to address both the
demand and the supply sides of the equation have faced some
resistance in Congress.
That doesn't mean they can't reemerge. But we would need to see a
very large decline in the mortgage rate to get noticeable effects
on economic indicators like GDP, inflation and employment. And in
terms of what this means for the housing outlook, the programs
talked about so far should push sales marginally higher but have
little impact on our expectations for our home prices.
Now it's important to note that the president didn't spend that
much time of the speech talking about housing affordability
proposals, as was telegraphed ahead of time. And since that, the
head of the NEC Kevin Hassett has said they plan to announce more
details on housing in the coming days.
Michael Zezas: Got it. So, on the two
pieces here that investors have really focused on, which are
capping institutional ownership of single-family homes and
potentially capping interest rates on credit cards, it sounded
like the president talked about he would go to Congress for
authorization on those things.
Is that right? And if so, how plausible is it that Congress could
actually deliver those authorities?
Ariana Salvatore: So, here's where I think
it's really critical to understand the role that Congress has to
play in all of these policy initiatives. So, there are not only
political constraints, but there are also procedural ones. If we
were to see Republicans kind of push for this 10 percent cap, for
example, that likely would have to go through the reconciliation
process. And that process, as we know, comes with a number of
limitations because something like a 10 percent cap wouldn't have
much of an impact on the federal budget in terms of revenues or
outlays.
We think it's most likely not going to be permissible under that
framework. So, understanding that the first filter here is
Congress, and the second filter is these procedural limitations
that exist in and of themselves is really important context for
understanding the president's proposals on housing.
Michael Zezas: So, is it fair to say the
starting point is that we think Congress is unlikely to act on
these things? And what would you have to see that might make you
think differently?
Ariana Salvatore: I think where we're
looking for signals from Republican leadership in Congress –
because as of right now, it's been our thinking that a second
reconciliation bill ahead of the midterm elections is not
feasible. It's too difficult politically, it takes a lot of time,
but if you see enough of a push from the president, we do think
that can start to become feasible. Again, we have to keep in mind
these procedural limitations and where the rest of the party
falls on these issues. But I think they're possible if the
administration pushes hard enough for them.
Michael Zezas: Got it. So, even though we
don't think it's likely, we obviously want to prepare in case
that happens. When it comes to housing, it seems like our team
has said institutional ownership of single-family housing is
quite low, 1 percent or less. And so, restrictions there wouldn't
necessarily change the game on home prices.
What about the 10 percent cap on credit card interests? What are
the broader ramifications that our colleagues see?
Ariana Salvatore: Yeah, so I'd say
generally speaking, when it comes to consumer credit
affordability policies, our strategists think that these could
actually translate to a benefit for consumer ABS performance
because they tend to be a tailwind for a consumer that's
struggled with rising delinquencies and defaults post-COVID,
right?
However, there are some specific proposals like this cap on
credit cards, and that's likely going to have a negative
consequence because it's going to limit credit access for
consumers, especially for those carrying a balance. So, probably
a little bit counterintuitive to the overall affordability agenda
that the administration's trying to go for.
Michael Zezas: So, lots of interesting
stuff coming out of the speech. Lots of things we have to track
over the next few weeks and months. It certainly doesn't seem
like it's going to be a boring year two of the Trump
term for investors.
Ariana Salvatore: Certainly not, and not
for us either.
Michael Zezas: Well, Ariana, thanks for
finding the time to talk.
Ariana Salvatore: Great speaking with you,
Mike.
Michael Zezas: And as a reminder, if you
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