Welcome to Thoughts on the Market.
I'm Michael Zizis, Deputy Global Head of Research for Morgan Stanley.
And I'm Mariana Salvatore, Head of Public Policy Research.
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 1 p.m. in New York.
So Ariana, over the last couple of weeks there's been a lot of news about policy proposals coming out of the US and from President Trump around affordability, as well as some geopolitical events around the US 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.
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?
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 US-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 US goods, not as big as Canada or Mexico, but still pretty significant.
So anything that would have created higher barriers between the two would have had meaningful economic consequences for the US outlook.
Yeah, that's right.
And we've been saying that the bilateral trade framework agreement between the US 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 what's been priced into markets and maybe what this could mean for something like the dollar going forward?
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 SP was down about 2 yesterday.
The dollar was weaker.
It seemed like more term premium was being baked into the US 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 US 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 US and Europe.
There would be less demand for US dollar holdings overseas.
And that's the type of thing that should manifest in a weaker dollar and higher term premiums, deeper yield curves for US treasuries.
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.
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?
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.
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?
So here's where I think it's really critical to understand the role that Congress has to play in all these policy initiatives.
So they're not only political constraints, but they're 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.
Necessarily, 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.
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?
I think 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.
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 or less.
And so restrictions there wouldn't necessarily change the game on home prices.
What about the 10% cap on credit card interest?
What are the broader ramifications that our colleagues see?
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 is trying to go for.
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 or two of the Trump term for investors.
Certainly not.
And not for us either.
Well, Ariana, thanks for finding the time to talk.
Great speaking with you, Mike.
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