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Thoughts on the Market: Daily Summaries Delivered
by Morgan Stanley
Short, thoughtful and regular takes on recent events in the markets from a variety of perspectives and voices within Morgan Stanley.
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- 1 weeks ago11 min
To Hike or Not to Hike
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
- 2 weeks ago5 min
The Next Stage of the Market Correction
Is the end of the correction in sight? Our CIO and Chief U.S. Equity Strategist looks at what could bring this pullback to an end.Read more insights from Morgan Stanley.----- Transcript ----- Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist. Is the end of this equity market correction in sight? Today on the podcast, I’ll share what I think could turn the tide.It's Monday, October 26th at 11:30 am in New York. So, let’s get after itThe correction that began in June is now well advanced beneath the surface. But I believe the high-quality S&P 500 index may still have some unfinished business. Until that plays out, I don’t think we can say the adjustment is complete.The real question to ask: how bad does it have to get before it gets better?We have described this correction as a classic mid-cycle transition. The peak rate of change in earnings revisions arrived right on schedule, about a year after the recession troughed. And the market responded the way that it usually does: early-cycle leaders with more operating and financial leverage started to underperform, while higher-quality, asset-light, services-oriented businesses moved to the front.This quality rotation is now well understood though, and positioning has followed it. Ironically, the final step is usually a convergence between the resilient high quality S&P 500 index and the weaker breadth beneath. We may already be seeing the beginning of that meeting in the middle. If the index does move lower, I believe 7100-7200 on the S&P 500 is where the correction should find material support.The reason I believe we will ultimately have a positive resolution to this transition is that a lot of damage has already occurred. Roughly 60 percent of Russell 3000 stocks are down more than 20 percent since June. And the hit has been even more severe in early-cycle areas like Semiconductors, Autos, Consumer Cyclicals, and Capital Goods.At the same time, hedge-fund positioning has come down meaningfully leaving us near the lows for the past 12 months. That is encouraging, but sentiment overall is not yet at the kind of extreme that typically marks a durable low. I think we are close but we’re not quite there.So, what gets us there? I see three clearing events ahead.The first is AI. Investors are questioning the eventual return on capital, the cost of capital, and whether credit markets can fund all the spending that has been promised. Over the next few weeks, the market will need to absorb more supply, and lower-quality players may continue to see wider spreads and even lower stock prices.I view the supply as the event itself. Once it clears, the risk should begin to fade. Semiconductors remain at the center of this concern, and may offer a good benchmark to monitor for the broader market correction. Specifically, I see another 10 to 15 percent lower for the Semiconductor index into mid-November.The second clearing event is the midterm elections. Markets dislike uncertainty, and this election has plenty. A blue wave is not a surprise anymore though. The larger overhang is what may happen after the vote, including the possibility of a renewed military escalation in Iran.I have no special edge in forecasting geopolitics. But I do know that these kinds of shocks often create very good buying opportunities. Historically, post-midterm returns have been very strong, so I would be ready to embrace a sharp downdraft in stocks in the days and weeks around election day.The third, and most important, clearing event is liquidity. Financial conditions have tightened sharply through a combination of higher rates, slower balance-sheet growth, stronger demand for capital, and higher energy prices.The tightening is beginning to resemble 2018, and it is not far from what we experienced in 2022 despite very modest tightening from the Fed so far. In fact, the market may be doing the Fed’s tightening for it; and if that tightening begins to create funding stress or destabilizes credit markets, the Fed and Treasury have tools to respond. The question is whether conditions need to deteriorate further before they act.Bottom line, I think the correction in equity markets that began in June is in the final stages, but the final stage can be very uncomfortable. We may still need one more index-level drawdown and bout of volatility. Or one more moment when investors conclude that something has broken. That may be exactly what clears the path for the Fed to pivot and the next leg higher for stocks.For now, I want to stay with quality stocks that have already corrected more than the index in areas li
- 2 weeks ago11 min
One Global Shock, Different Rate Paths
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 incre
- 2 weeks ago14 min
Economic Roundtable: What’s Keeping Global Growth Going?
In the first of a two-part discussion, our roundtable explores how AI investment, trade and consumer spending are sustaining global growth, and what could put that resilience at risk.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: And today, our fourth quarterly economic roundtable discussion is going to try to take a wide-angle view on the global economy – and it has held up despite higher interest rates, higher energy prices, geopolitical uncertainty, you name it. It's Thursday, October 22nd at 10am in New York. Jens Eisenschmidt: And 4pm in Frankfurt. Chetan Ahya: And 10 pm in Hong Kong. Seth Carpenter: All right then. Let me start with that big question Why has global growth held up better than maybe would have been expected given everything that we've seen ? Mike, maybe I'll start from the U.S. perspective with you. What do you think has mattered most? What is driving – if I dare use an overused word – the resilience of the economy? Michael Gapen: Most of us believe AI-related spending is interest rate insensitive and geopolitically insensitive. And certainly, I think the data has borne that out. And in the direct translation of AI hypercaler Capex spending to growth, we find that AI is accounting for 4/10 to 6/10 contribution to growth in any given quarter. You could nudge that a little higher if you think it’s creating productivity, which we do. And that spending is underpinning asset market appreciation – or certainly has for the past several years. And that is underpinning resilient spending by upper income households. So, I think in the U.S. the clear answer is AI-related spending, but also its linkage to asset markets and upper-income households. Seth Carpenter: Jens, let me come to you for the European view. I mean the AI story has been a little bit different in Europe. I think consumer behavior sometimes can differ in Europe than in the United States. What would you say is the story behind the resilience of economic growth there in Europe? Jens Eisenschmidt: It’s similar in the sense that there is a clear element of also of AI-related external demand. That even in Europe now the phones are ringing, given that we are more typically seen as on the more higher cost end of the spectrum. So, I think there was clearly in the second quarter data, export-led growth elements related to AI or delivery into that. There was also an element of geopolitical tensions helping some of those producers – say, chemical industry in Germany comes to mind – that would deliver products that would previously be delivered out of the Strait [of Hormuz]. So, that is another element. And then, yeah, the consumer held up better than had expected. Or that you could have expected given the rise in energy prices. So all in all, that got us a relatively solid second quarter print. And we expect this to be more or less repeated also in the third. Seth Carpenter: Chetan, the export story is pretty important. You've been writing about a big CapEx cycle and big industrial cycle in Asia. So, when you think about the Asia story and why the economic growth held up in spite of the global shocks, how would you characterize that? Chetan Ahya: Yeah. So, Asia is benefiting from a strong pickup in CapEx, which initially was led by the tech sector, but is now broadening out to energy, defense, and broader industrial investments. Exports are strong, and showing some signs of broadening out from tech to non-tech goods too. This has meant that the region has faced positive terms of trade situation despite higher oil prices. Higher export prices have boosted corporate profits and in turn government tax revenues, offsetting the fiscal pressures from higher fuel subsidies. And when you're thinking about higher interest rates that you are seeing globally and also in Asia, what is different in this cycle is that the macro stability indicators are in a good place. Current account surpluses in the region have widened quite significantly.
- 2 weeks ago12 min
Inside the Biggest Bond Boom in Years
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 com
- 2 weeks ago10 min
AI’s Next Winners: Signals From Private Markets
With AI startups scaling at record speed, our analysts Sabrina Hao, Adam Wood and Brian Nowak share takeaways from Morgan Stanley's Spark Conference on AI returns, competitive moats and implications for public markets. Read more insights from Morgan Stanley.----- Transcript ----- Sabrina Hao: Welcome to Thoughts on the Market. I'm Sabrina Hao, Morgan Stanley's AI and Tech Thematic Equity Strategist. Adam Wood: And I'm Adam Wood, Head of U.S. Software Research at Morgan Stanley. Brian Nowak: And I'm Brian Nowak, Head of U.S. Internet Research. Sabrina Hao: Today, what private companies are telling us about the AI opportunity and what it means for public markets. It's Tuesday, October 20th, at 10am in New York. Last week, we were at our Spark Private Company conference in California, bringing together more than a hundred startups across software, robotics, AI infrastructure, and beyond. There was even a company helping to manufacture pharmaceuticals in space. It was a really interesting week to be at the conference given everything that was happening in the market. But really, we came away feeling even more positive about the AI cycle. While public market investors are waiting for returns to justify trillions of dollars in AI spending, we're already seeing that pay off in private markets. AI demand is real, companies are delivering tangible returns for customers, and startups are scaling faster than ever. Adam, let's start with growth. We heard from startups scaling at extraordinary speeds. One was approaching [$] 4 billion in annual recurring revenue in two years, another reaching a billion in under a year. What really stood out to you about the pace of AI adoption, and why aren't we necessarily seeing that same growth at established software companies? Adam Wood: So yeah, absolutely, the pace was remarkable. And clearly one of the standouts from the conference when we used to discuss how quickly a company could get to a $1 billion so-called unicorn valuation. And now we're discussing how quickly they can get to a unicorn revenue run rate of a billion dollars, which for me is quite incredible. But I think I wouldn't make the debate simply about private versus public companies. I'd make the distinction between two different types of software. I think we have to make a distinction between largely coding and inference tools. There were a number of coding and inference software companies at the conference, and application software. And I think there's a big difference in terms of time and complexity to bring these products to market. I think the coding and inference, which tends to be the building blocks, as I would call them, underneath the application layer, they can be constructed much more quickly. And I think because we can adopt when we're still building bespoke, which I think is a lot of the phase we're in today, we're still building bespoke software rather than buying off the shelf. They can be adopted earlier as well. So, we've got faster time to build and faster time to adopt by companies. So, I think it's natural you can see very fast growth in those types of businesses very quickly. I think in the application landscape, it's a little bit different because those applications have to deliver complete business solutions for customers. In finance and customer service, that means integrating data, understanding workflows, and putting controls in place. There's much more to build and much more to implement, and generally, the adoption of those tools takes place a little bit later. After we've gone from the bespoke phase where companies are building themselves, we go to a phase where companies see that there are off-the-shelf packages that are available, that companies have built out. So, I think it's both a complexity of build debate and also, a time in terms of where we are in the software adoption cycle. The second thing I'd say is, you know, in public software companies that have a big incumbent existing business, sometimes there can be that big incumbent business that's not growing very quickly. And a very fast-growing AI business in there as well. And that very fast AI growth business can be hidden a little bit by that large public software company that exists. So, I don't think it's as straightforward as just saying, you know, private's growing very quickly, public not. I think there's a couple of layers of complexity in there in terms of what type of software you're dealing with. And then how big the existin
- 3 weeks ago5 min
A Narrower Path for Growth and Stability
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 colle
- 3 weeks ago4 min
AI Boom Faces a Higher-Yield Roadblock
Our ABS Strategist Carolyn Campbell explains how rising borrowing costs are slowing the AI data center boom and what could drive a rebound in financing.Read more insights from Morgan Stanley.----- Transcript ----- Carolyn Campbell: Welcome to Thoughts on the Market. I'm Carolyn Campbell, Morgan Stanley's Asset-Backed Securities Strategist.Today, why the AI boom is running into an unexpected obstacle: the cost of borrowing money.It's Friday, October 16th, at 10am in New York.Demand for data center facilities is booming. Yet even as companies race to build more capacity, the financing for them is becoming increasingly expensive. And that tension is creating an interesting story in credit markets.Since January, five-year Treasury rates have climbed more than one percentage point, and spreads for data center assets have also gone wider. At the beginning of 2026, the highest-rated data center bonds offered yields below 5 percent. Today, similar bonds are yielding closer to 7 percent, and that increase matters enormously for companies trying to finance multi-billion-dollar facilities.Many operators turn to the securitized credit markets to raise money. Essentially, they issue bonds backed by the income generated by their data centers. By the time these bonds are issued, construction on the data center is complete, the power is secured, and the rent is already being paid.So, on the one hand, cash flows are stabilized – but there is a catch. These facilities often sign long-term leases well before they seek financing in the securitized credit market.By the time they're ready to issue these bonds, rental income is already locked in. And so, when interest rates rise quickly, as we've seen this year, and these borrowing costs increase, revenues aren't necessarily keeping pace.Our analysis suggests that when borrowing costs approach 8 percent, issuing these bonds becomes significantly more challenging under these current financing terms. And we're already seeing the effects in the market.So far in 2026, data center operators have issued around [$] 15 billion in ABS and another [$] 7 billion in the CMBS markets. That's roughly in line with last year's pace, but it's below what we'd expect given the extraordinary growth in data center demand this year. Still, we believe the slowdown in supply is temporary.Our forecast suggests that U.S. data center power capacity could grow from roughly 60 gigawatts today to 150 gigawatts by 2028; although there are some constraints on power availability that could leave capacity 30 percent to 40 percent below these projections.Regardless, much of the lease capacity that comes online will require debt financing, and these operators have ambitious growth plans. So, they have some options to navigate these higher rate environments.They might borrow less against their properties. They might accept lower investment returns in the near term. Or they can turn to different credit channels that offer more flexible financing structures.So, where does this leave the market? To take into account the higher rate environment, we've lowered our forecast slightly for 2026 and 2027 for securitized credit data center issuance. But the amount of lease capacity that's set to come online in 2028 is so high that we've actually held those numbers steady.All told, we now expect around a [$] 120 to a [$] 150 billion of supply over the next couple of years. That's substantial financing activity, even with the higher interest rates creating near-term challenges.The higher cost of borrowing may slow the pace of data center financing for now, but the scale of the build-out ahead suggests that this market still has plenty of room to grow. And there are pockets within the market that we do like.We've talked a lot about the hyperscaler data centers, which are big campuses leased to one or two hyperscaler tenants, often with 10- or 15-year leases.But the other part of the market, the colocation data center market, is where we see a lot of value today. These campuses have many different types of tenants, many different industries represented, and they often have shorter leases.Given the sharp increase in data center rental rates and vacancy rates around 1 percent, these data center operators are more quickly able to monetize the changes that we're seeing in the industry.That flexibility could prove particularly valuable when borrowing costs remain elevated.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.
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Frequently Asked Questions
What is Podzilla's Thoughts on the Market daily summary?
It's a free AI-powered email that summarizes new episodes of Thoughts on the Market as soon as they're published. You get the key takeaways, notable quotes, and links & mentions — all in a quick read.
How does the Thoughts on the Market podcast summary work?
When a new episode drops, our AI transcribes and analyzes it, then generates a personalized summary tailored to your interests and profession. It's delivered to your inbox every morning.
Is this an official Thoughts on the Market product?
No. Podzilla is an independent service that summarizes publicly available podcast content. We're not affiliated with or endorsed by Morgan Stanley.
Can I get summaries of other podcasts too?
Absolutely! The free plan covers up to 3 podcasts, any in the catalog. Basic raises that to 15, Pro to 40 and Max to 100. Browse our full catalog at /podcasts.
How often does Thoughts on the Market release new episodes?
Thoughts on the Market publishes daily. Our AI generates a summary within hours of each new episode.
What topics does Thoughts on the Market cover?
Thoughts on the Market covers topics including Business, Investing. Our AI identifies the specific themes in each episode and highlights what matters most to you.
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