Affordability Takes Center Stage in U.S. Policy

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

Today I'm going to talk about key signposts for stability – in a world that from day to day feels anything but.

It's Friday, January 30th at 2pm in London.

A core theme for us at Morgan Stanley Research is that easier fiscal, monetary, and regulatory policy in 2026 will support more risk taking, corporate activity and animal spirits. Yes, valuations are high. But with so many forces blowing in the same stimulative direction across so many geographies, those valuations may stay higher for longer.

We think that the Federal Reserve, the Bank of England, the European Central Bank, and the Bank of Japan, all lower interest rates more, or raise them less than markets expect. We think that fiscal policy will remain stimulative as governments in the United States, Germany, China, and Japan all spend more. And as I discussed on this program recently, regulation – a sleepy but essential part of this equation – is also aligning to support more risk taking.

Of course, one concern with having so much stimulative sail out, so to speak, is that you lose control of the boat. As geopolitical headwinds swirl and the price of gold has risen a 100 percent in the last year, many investors are asking whether we're seeing too much of a shift in both government and fiscal, monetary, and regulatory policy.

Specifically, when I speak to investors, I think I can paraphrase these concerns as follows: Are we seeing expectations for future inflation rise sharply? Will we see more volatility in government debt? Has the valuation of the U.S. dollar deviated dramatically from fair value? And are credit markets showing early signs of stress?

Notably, so far, the answer to all of these questions based on market pricing is no. The market's expectation for CPI inflation over the next decade is about 2.4 percent. Similar actually to what we saw in 2024, 2023. Expected volatility for U.S. interest rates over the next year is, well, lower than where it was on January 1st. The U.S. dollar, despite a lot of recent headlines, is trading roughly in line with its fair value, based on purchasing power based on data from Bloomberg. And the credit markets long seen as important leading indicators of risk, well, across a lot of different regions, they've been very well behaved, with spreads still historically tight.

Uncertainty in U.S. foreign policy, big moves in Japanese interest rates and even larger moves in gold have all contributed to investor concerns around the potential instability of the macro backdrop. It's understandable, but for now we think that a number of key market-based measures of the stability are still holding.

While that's the case, we think that a positive fundamental story, specifically our positive view on earnings growth can continue to support markets. Major shifts in these signposts, however, could change that.

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

Welcome to Thoughts on the Market. I’m Michael Zezas, Deputy Head of Global Research for Morgan Stanley.

Today, we’ll discuss the possibility of a U.S. government shutdown later this week, and what investors should – and should not – be worried about.

It’s Wednesday, January 28th at 10:30 am in New York.

In recent weeks investors have had to consider all manner of policy catalysts for the markets – including the impact to oil supply and emerging markets from military action in Venezuela, potential military action in Iran, and  risks of fracturing of the U.S.-Europe relationship over Greenland. By comparison, a potential U.S. government shutdown may seem rather quaint.

But, a good investor aggressively manages all risks, so let's break this down.

Amidst funding negotiations in the Senate, Democrats are pressing for tighter rules and more oversight on how immigration enforcement is carried out given recent events. Republicans have signaled some openness to negotiations, but the calendar is really a constraint. With the House out of session until early next week any Senate changes this week could lead to a lapse in funding. So, a brief shutdown this weekend, followed by a short continuing resolution once the House returns, is a very plausible path – not because either side wants a shutdown, but because they haven’t fully coalesced around the strategy and time is short.

Of course, once a shutdown happens, there’s a risk it could drag on. But in general our base case is that the economic impact would be manageable. Historically, shutdowns create meaningful hardship for affected workers and contractors. But the aggregate macro effects tend to be modest and reversible. Most spending is eventually made up, and disruptions to growth typically unwind quickly once funding is restored. A useful rule of thumb is that a full shutdown trims roughly one‑tenth of a percentage point from the annualized quarterly GDP for each week it lasts. With several appropriations bills already passed, what we’d face now is a partial shutdown, meaning that figure would be even smaller.

For markets, that means the reaction should also be modest. Shutdowns tend not to reprice the fundamental path of earnings, inflation, or the Fed – which are still the dominant drivers of asset performance. So, the market’s inclination will likely be to look past the noise and focus on more substantive catalysts ahead.

Finally, it’s worth unpacking the politics here, because they’re relevant. But not in the way investors might think. The shutdown risk is emerging from actions that have contributed to sagging approval ratings for the President and Republicans – leading many investors to ask us what this means for midterm elections and resulting public policy choices. And taken together, one could read these dynamics as an early sign that the Republicans may face a difficult midterm environment. We think it's too early to draw any confident conclusions about this, but even if we could, we’re not sure it matters.

First, many of the most market‑relevant policies—on trade, regulation, industrial strategy, re‑shoring, and increasingly AI—are being executed through executive authority, not congressional action. That means their trajectory is unlikely to be altered by near‑term political turbulence. Second, the President would almost certainly veto any effort to roll back last year’s tax bill, which created a suite of incentives aimed at corporate capex. A key driver of the 2026 outlook.

Putting it all together, the bottom line is this: A short, calendar‑driven shutdown is a risk worth monitoring, but not one to overreact to.

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