Our Insights

Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Head of U.S. Public Policy Research at Morgan Stanley.

Today, I'll be talking about next week's U.S.-China summit, specifically the bilateral trade relationship, what we can expect on critical minerals and rare earths, AI dialogues, and what it all means for markets.

It's Friday, September 18th at 10am in New York.

President Xi is scheduled to visit the White House on September 24th for his second meeting with President Trump this year, and his first White House visit in roughly a decade.

The meeting follows President Trump's visit to Beijing in May, where the two sides established a framework for what they call a more constructive relationship of strategic stability. That meeting also produced new trade and investment dialogues, commitments around agricultural purchases and aircraft, and an agreement to begin a dialogue on artificial intelligence.

But next week's summit comes at an important moment because several of the temporary arrangements that helped stabilize the economic relationship are due to expire later this fall.

We think there are three areas to focus on.

The first is trade. The current U.S.-China tariff truce is scheduled to expire in November. Now, public reporting suggests that the two governments are discussing an extension alongside potential announcements on agriculture, non-tariff barriers, and a relatively narrow set of goods that could see lower tariffs.

The question for markets, therefore, is less whether next week produces a comprehensive new trade agreement and more so on whether the two sides can extend the current period of stability and prevent another significant increase in tariffs.

The second area is critical minerals. This is probably one of the clearest examples of the leverage that each side has over the other.

Washington, we think, wants more predictable Chinese exports of rare earths and other critical materials used across semiconductors, autos, aerospace, and defense. Beijing, meanwhile, has been pushing back against U.S. restrictions on Chinese companies' access to advanced technology.

Public reporting suggests that both of these issues are part of the negotiations heading into the summit, and the timing here is really important. November 10th is an upcoming cliff affecting China's rare earth restrictions and U.S. technology controls, followed later that month by another deadline covering certain minerals. So what happens next week could determine whether those restrictions remain suspended or begin to snap back.

The third area is technology, and increasingly artificial intelligence. The two leaders agreed in May to establish an AI dialogue, and President Trump has specifically said AI will be discussed next week.

Reporting also shows that shared AI risks could be one area for discussion, although the broader competitive relationship makes a comprehensive agreement difficult, we think. From a policy perspective, the most important point is that technology restrictions are moving beyond advanced chips. The debate includes cloud and compute access, model distribution, procurement, and potentially the use of certain foreign AI models themselves.

In other words, we think that while the summit could produce something like an agreement to keep talking on AI, the underlying shift matters more. AI sovereignty pushes both the U.S. and China toward more restrictions or heavier government involvement even over a longer period of time.

We expect that a middle path is the more plausible U.S. approach. So think targeted restrictions on specific Chinese developers rather than a blanket prohibition on Chinese open weight models. But even that would reinforce what we've called the two worlds thesis, increasingly distinct U.S. and Chinese tech ecosystems with separate infrastructure, supply chains, standards, and distribution channels.

There could also be a host of other issues on the agenda, specifically the U.S.-Iran conflict, which we see as a tail risk into the talks.

So what does all this mean for investors?

Even a constructive summit is unlikely to reverse the structural push toward technology and supply chain diversification. In fact, we argue that greater U.S.-China bifurcation will actually reinforce investment in parallel ecosystems, semiconductor capacity, data centers, cloud infrastructure, power, and critical mineral supply chains.

In that sense, actually less geopolitical friction next week could reduce near-term market volatility, but without necessarily changing the underlying investment cycle.

So, the key question coming out of the summit is not simply whether the relations are improving or deteriorating. It's whether the two sides can preserve enough stability to manage their competition while the longer-term process of de-risking continues underneath.

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.

Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley.

Today, why the Federal Reserve may have raised interest rates and yet still thinks that monetary policy is providing support.

It's Thursday, September 17th at 2pm in London.

Yesterday, the Federal Reserve raised interest rates by a quarter of a percent. That part was widely expected. What was more notable was how Chair Warsh described it.

At the press conference following the action, he said that the Fed had removed "a dose of accommodation," and he said that both he and many of his colleagues were hard-pressed to describe broader financial conditions as restrictive.

That's an important distinction that now moves to the heart of the market debate.

If monetary policy is already restrictive, another rate hike means that the Fed is pressing harder on the proverbial brakes on the economy. But if policy is still accommodative, a hike is more like easing off the gas. It means the Fed is simply providing a little less support. And if that is how the committee sees the world, it suggests that there could be further to go.

Following yesterday's meeting, Morgan Stanley's economists now expect two additional quarter point rate hikes in December and March, taking the Fed's target rate range from 4.25 to 4.5 percent; and we then expect those rates to remain there through the rest of 2027.

Three things are driving this updated view.

First is exactly that language around accommodation. The interest rates that keep the economy in balance are always a mystery when viewed in real time. But given booming earnings growth, loan growth, and corporate activity, it's not obvious that the current level of interest rates are holding back activity for the economy as a whole. The Fed may believe that as well, making higher rates a little more palpable.

Second is inflation. Chair Warsh repeatedly emphasized that trends matter here more than individual data points, and on that basis, inflation still looks too high. Too many categories are still running above 3 percent. The Fed simply does not sound convinced that inflation is moving sustainably back towards its 2 percent target as fast as it would like.

Third is geopolitics. Chair Warsh explicitly cited geopolitical developments as one of the things that had changed since their meeting in July. He also made it clear that the Fed is watching not just high oil prices, but so-called second-round effects. And whether higher prices for fuel translate into higher prices for things that require a lot of fuel.

Airline tickets, for example, are one of the areas of the economy where prices are going up the fastest. Higher oil prices are a key reason why. And so with energy markets still severely disrupted, this remains a wild card.

There is, maybe, one other wrinkle. The committee also raised its estimate of the so-called long-run neutral interest rate – the rate that it thinks we'll ultimately end up at over the long term that will keep the economy in balance. And it raised this to about 3.25 percent.

This is an uncertain estimate, and Chair Warsh himself downplayed its importance. But directionally, a view that the interest rate that keeps things in balance is higher means that any given interest rate that we see today is less restrictive on economic growth.

It's less elevated relative to that neutral rate than we previously thought. That, too, leans towards the case for more tightening and more rate increases rather than less.

None of this is set in stone. If energy prices fall, geopolitical tensions ease, or inflation improves more quickly, the Fed could stop earlier. But for now, we think the important message from this week's meeting was not simply that the Fed raised rates.

It was that even after doing so, it still doesn't think that policy is especially tight. And if that's right, there may be still more to do.

Thank you, as always, for your time. If you find Thoughts the Market useful, let us know by leaving a review wherever you listen. And also tell a friend or colleague about us today.