A Rebound for Hong Kong’s Property Market

Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist and Head of Macro Research. And today we're kicking off our quarterly economic roundtable for the year. We're going to try to think about everything that matters in economics around the world. And today we're going to focus a little bit more on central banking. And when we get to tomorrow,   we'll focus on the nuts and bolts of the real side of the economy.

I'm joined by our chief regional economists.

Michael Gapen: Hi, Seth. I'm Mike Gapen, Chief U.S. Economist at Morgan Stanley.

Chetan Ahya: I'm Chetan Ahya, Chief Asia economist.

Jens Eisenschmidt: And I'm Jens Eisenschmidt, Chief Europe economist.

Seth Carpenter: It's Thursday, January 22nd at 10 am in New York.

Jens Eisenschmidt: And 4 pm in Frankfurt.

Chetan Ahya: And 9 pm in Hong Kong.

Seth Carpenter:  So, Mike Gapen, let me start with you as we head into 2026, what are we thinking about? Are we going into a more stable expansion? Is this just a different phase with the same amount of volatility? What do you think is going to be happening in the U.S. as a baseline outlook? And then if we're going to be wrong, which direction would we be wrong?

Michael Gapen: Yeah, Seth, we took the view that we would have more policy certainty. Recent weeks have maybe suggested we're incorrect on that front. But I still believe that when it comes to deregulation, immigration policy and fiscal policy, we have much more clarity there than we did a year ago.

So, I think it's another year of modest growth, above trend growth. We're forecasting something around 2.4 percent for 2026. That's about where we finished 2025.

I think what's key for markets and the outlook overall will be whether inflation comes down. Firms are still passing through tariffs to the consumer. We think that'll happen at least through the end of the first quarter. It's our view that after that, inflation pressures will start to diminish. If that's the case, then we think the Fed can execute one or two more rate cuts.   But we have those coming [in] the second half of the year. So, it looks like growth is strong enough. The labor market has stabilized enough for the Fed to wait and see, to look around, see the effects of their prior rate cuts, and then push policy closer to neutral if inflation comes down.

Seth Carpenter: And if we go back to last year to 2025, I will give you the credit first. Morgan Stanley did not shift its forecast for recession in the U.S. the way some of our main competitors did.

On the other hand, and this is where I maybe tweak you just a little bit. We underestimated how much growth there would be in the United States. CapEx spending from AI firms was strong. Consumer spending, especially from the top half of the income distribution in the U.S. was strong. Growth overall for the year was over 2 percent, close to 2.5 percent.  So, if that's what we just came off of, why isn't it the case that we'd see even stronger growth? Maybe even a re-acceleration of growth in 2026?

Michael Gapen: Well, some of that, say, improvement vis-à-vis our forecast, the outperformance. Some of that I think comes mechanically from trade and inventory variability. So, . I'm not sure that that says a lot about an improving trend rate of growth.

Where there was other outperformance was, as you noted, from the consumer. Now our models, and I don't mean to get too technical here, but our model suggests that consumption is overshooting its fundamentals.   Which I think makes it harder for the economy to accelerate further. And then AI; it's harder for AI spending to say get incrementally stronger than where it is. So, we’re getting a little extra boost from fiscal. We've got that coming through. And I just think what it is, is more of the same rather than further acceleration from here.

Seth Carpenter:    Do you think there's a chance that the Fed in fact does not cut rates like you have in your forecast?

Michael Gapen: Yes, I do think... Where we could be wrong   is we've made assumptions around the One Big Beautiful Bill and what it will contribute to the economy. But as you know, there's a lot of variability around those estimates.

If the bill is more catalytic to animal spirits and business spending than we've assumed, you could get, say, a demand driven animal spirits upside to the economy, which may mean inflation doesn't decelerate all that much.  But I do think that that's, say, the main upside risk that we're considering. Markets have been gradually taking out probabilities of Fed cuts as growth has come in stronger. So far, the inflation data has been positive in terms of signaling about disinflation, but I would say the jury's still out on how much that continues.

Seth Carpenter:   Chetan,    When I think about Japan, we know that it's been the developed market central bank that's been going in the opposite direction. They've been hiking when other central banks have been cutting. We got some news recently that probably put some risk into our baseline outlook that we published in our year ahead view about both growth and inflation in Japan. And with it what the Bank of Japan is going to do in terms of its normalization.

Can you just walk us through a little bit about our outlook for Japan? Because right now I think that the yen, Japanese rates, they're all part of the ongoing market narrative around the world.

Chetan Ahya: Yeah, Seth. So, look, I mean, on a big picture basis, we are constructive on the Japan macro-outlook. We think normal GDP growth remains strong. We are expecting to see the transition for the consumers from them seeing, you know, supply side inflation. Keeping their real wage growth low to a dynamic where we transition to real wage growth accelerating. That supports real consumption growth, and we move away from that supply side driven inflation to demand side driven inflation.

So broadly we are constructive, but I think in the backdrop, what we are seeing on currency depreciation is making things a bit more challenging for the BOJ.

While we are expecting that demand side pressure to build up and drive inflation, in the trailing data, it is still pretty much currency depreciation and supply side factors like food inflation driving inflation. And so, BOJ has been hesitant.   So, while we had the expectation that BOJ will hike in January of 2027, we do see the risk that they may have to take up rate hike earlier to manage the currency not getting out of hand and adding on to the inflation pressures.

Seth Carpenter Would I be right in saying that up until now, the yen has swung pretty widely in both directions. But the weakening of the yen until now hasn't been really the key driver of the Bank of Japan's policy reaction. It's been growth picking up, inflation picking up, wanting to get out of negative interest rates first, wanting to get away from the zero lower bounds.

Second, the weaker yen in some sense could have actually been seen as a positive up until now because Japan did go through 25 years of essentially stagnant nominal growth. Is this actually that much of a fundamental change in the Bank of Japan's thinking – needing to react to the weakness of the yen?

Chetan Ahya: Broadly what you're saying is right, Seth, but there is also a threshold of where the currency can be. And beyond a point, it begins to hurt the households in form of imported inflation pressures. And remember that inflation has been somewhat high, even if it is driven by currency depreciation and supply side factors for some time. And so, BOJ has to be watchful of potential lift in inflation expectations for the households. And at the same time, they are also watching the underlying inflation impact of this currency depreciation – because what we have seen is that over period workers have been demanding for higher wages. And that is also influenced by what happens to headline inflation, which is driven by currency depreciation. So, I would say that, yes, it's been true up until now. But, when currency reaches these very high levels of range, you are going to see BOJ having to act.

Seth Carpenter:  Jens let's shift then to Europe.  The ECB had been on a cutting cycle. They came to the end of that. President Lagarde said that she thought the disinflationary process had ended.

In your year ahead forecast and a bunch of your writing recently, you've said maybe not so fast. There could still be some more disinflationary, at least risk, in the pipeline for Europe. Can you talk a little bit about what's going on in terms of European inflation and what it could mean for the European Central Bank?

Because clearly that's going to be first order important for markets.

Jens Eisenschmidt: I think that is right. I think we have a crucial inflation print ahead of us that comes out on the 4th of February. So, early February we get some signal, whether our anticipated fall of headline inflation here below the ECB’s target is actually materializing. We think the chances for this are pretty good.

There's a mix why this is happening. One is energy. Energy disinflation and base effects. But the other thing is services inflation resets always at the beginning of the year. January and February are the crucial month here. We had significant services upward pressure on prices the last years. And so just from base effects, we think we will see less of that. Another picture or another element of that picture is that wage disinflation is proceeding nicely. We have notably a significant weakness in the export-oriented manufacturing sector in Germany, which is a key sector of setting wages for the country. The country is around 30 percent of the euro area GDP. And here we had seen significant wage gains over the last year. So, the disinflationary trend coming from lower wage gains from this country, that will be very important. And an important signal to watch.

Again, that's something we don't know. I think soon we have to watch simply monthly prints here. But a significant print for the first quarter comes out in May, and all of that together makes us believe that the ECB will be in a position to see enough data or have seen enough data that confirms the thesis of inflation staying below target for some time to come. So that they can cut in June and September to a terminal rate of 1.5 percent.

Seth Carpenter:   That is, I would say, out of consensus relative where the market is. When you talk to investors, whether they're in Europe or around the world, what's the big pushback that you get from them when you are explaining your view on how the ECB is going to act?

Jens Eisenschmidt:   There are two essential pushbacks. So, one is on substance. So, no, actually wages will not come down, and the economy will actually start overheating soon because of the big fiscal stimulus. That, in a nutshell is the pushback on substance. I would say here, as you would say before, not so fast. Because the fiscal stimulus is only in one country. It's 30 percent. But only 30 percent of the euro area. Plus, there is another pushback, which is on the reaction function of the ECB. Here we tend to agree. So far, we have heard from policy makers that they feel rather comfortable with the 2 percent rate level that they're at. But we think that discussion will change. The moment you are below target in an actual inflation print; the burden of proof is the opposite. Now you have to prove: Is the economy really on a track that inflation will get back up to target without further monetary stimulus?

We believe that will be the key debate. And again, happy to, sort of, concede that there is for now not a lot of signaling out of the ECB that further rate cuts are coming. But we believe the first inflation print of the year will change that debate significantly.

Seth Carpenter: Alright, so that makes a lot of sense.  However, looking at the clock, we are probably out of time for today. So, for now, Michael, Chetan, Jens, thank you so much for joining today. And to the listener, thanks for listening. And be sure to tune in tomorrow for part two of our conversation.

And I have to say, 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.

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 enjoy Thoughts on the Market, please take a moment to rate and review us wherever you listen. And share Thoughts on the Market with a friend or colleague today.