A New Test for Private Credit

Our Chief Fixed Income Strategist Vishy Tirupattur and Morgan Stanley Investment Management’s Global Head of Private Credit & Equity David Miller discuss the recent pressure on the private credit market, potential risks and opportunities that remain in that space.Read more insights from Morgan Stanley.----- Transcript -----Vishy Tirupattur: Welcome to Thoughts on the Market. I'm Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist. David Miller: And I'm David Miller, Global Head of Private Credit and Equity within Morgan Stanley Investment Management. Vishy Tirupattur: Today – the evolving risks and opportunities in private credit. It's Tuesday, March 31st at 10 am In New York. Until recently, private credit was among the fast-growing parts of the financial system. In just over a decade, it went from a niche strategy to a market that's well worth over a trillion dollars. After years of outsized inflows and unusually smooth return, private credit is now in focus, and investors are asking tough questions about liquidity, transparency, and valuation. David, you manage private credit and equity portfolios within Morgan Stanley Investment Management. Do you think the industry is facing its first real stress test? And how do you think the industry is faring? David Miller: So, I think private credit has been tested before, you could go back to the GFC. And I know that was a long time ago and the industry was quite a bit smaller. But you could certainly look to the pandemic and the rate shocks of [20]22 - [20]23 as a stress test. And I think private credit performed, you know, quite well through that, despite the initial volatility. We saw some of that recently last year with Liberation Day; and the current environment from a fundamental perspective doesn't feel as bad as those times, and the industry does not feel under that stress. I think the current situation is more of a test of the non-traded BDC structure where roughly 20 percent of direct lending assets sit. And the liquidity provisions in those vehicles are designed to provide some liquidity, but not total liquidity. And so, while I think the vehicles are working as intended, obviously there's been a lot of noise. Vishy Tirupattur: So, I totally agree with you, David. The liquidity provisions that are in these structures are there for a reason; are designed to be that. It’s part of the feature and not a bug, precisely to prevent a fire sale of assets. And that really would hurt the overall system. So, we think that there’s a greater understanding of this is very much required. David Miller: I think that's right. The limitations on liquidity are there so that the vehicles can operate properly over the long run. When you have illiquid assets, you maintain some liquidity. But clearly those protections are in place so that the vehicle continue to run in ordinary fashion. I think there is a bit of a disconnect, you know, in the media between the sentiment and the fundamentals that are underlying private credit. And yeah, there are concerns about software, and macro, and unseen future risks. But right now, private credit portfolios are performing pretty well. And actually, if you look at 2025 versus [20]24, the metrics were actually improving… Vishy Tirupattur: Absolutely. I mean, we look at across various metrics, you know, in leverage and coverage metrics, we see overall trends are actually improving. Software [is] very much in focus. Fitch reported, yesterday that, uh, in the last, uh, you know, year to date there have been no software defaults. Another point I would make is there are about 5 percent defaults in – generally speaking – in the private credit space. And the default rates within the software sector is a little bit less than half of that. So, that's an important distinction to make. David Miller: Yeah, I think software is a very interesting and long topic. But generally, our view is: we think that AI is going to be a net tailwind overall for software over time. You know, even factoring in some of the erosion to the SaaS business models, I think well positioned incumbents will get their share of the upside. And so there will be some losers. We think that'll be pretty narrow. But overall, we feel very good about our software book. We've been looking at AI risk for at least three years, when we made loans. And we think that a lot of the embedded enterprise software platforms are going to be net beneficiaries of AI. Vishy Tirupattur: I have slightly different take on the software exposure and all the discussion points on this. The way I think about it is the market assumption is that AI disruption is necessarily going to disrupt all of software companies. And that disruption is imminent. I would push back on both of those points. You know, you could easily imagine that AI will lead to some disruption at some point in the future. But a necessary thing for that to happen is a significant amount of CapEx related to infrastructure to enable AI from innovation to adoption that needs to take place. That will take some time. So, this potential disruption is not imminent. It's potentially coming in the future. But all in, disruption is also not going to be negative. You know, we will have some companies whose business models, who don't have the moats and may not be able to benefit. But on the other hand, as you point out, there will be a number of business models which will actually flourish because of AI adoption and see their margins expand. So, I think I would push back on this notion that's prevalent in the media narrative here. That all AI disruption is imminent and it is all bad. David Miller: I think that's a very good point, and we do believe that there will be dispersion and outcome in private credit portfolios because of some of those facts. And it's really important for managers to have deep experience, not just in software, but any industries that they participate in. And really do very strong credit selection. Vishy Tirupattur: So, another thing that's happening in the private credit space is really the advent of the retail investor into the private credit. What do you think the advent of retail investors had done to the portfolio selection, portfolio construction and credit selection in your portfolios? David Miller: So, for us, we haven't changed our portfolio construction or credit selection process for retail portfolios. They're virtually the same as our institutional portfolios. And that's, you know, based on a lot of diversification, limiting borrower concentration, avoiding cyclicals, et cetera. The one difference that's important for our non-traded BDC is we do have about 10 percent of the portfolio in broadly syndicated loans, to add a little bit more liquidity to the portfolio. But otherwise, they're pretty much the same. I think the biggest impact that we've witnessed over the past few years, where there's been a large inflow of retail capital, has been to push spreads tighter. And weaken some of the terms than they would've otherwise been. There was a lot of capital that needed to be deployed quickly, so we saw that and we're quite cautious. You're seeing that trend reverse now as flows have moderated, and we expect that those trends will result in better pricing and better terms going forward. So, Vishy, how are you thinking about risk in the system now? Are you seeing signs of systemic risk? Or is the pressure more isolated? Vishy Tirupattur: I think the pressure is really more isolated, more focused on the software sector. As we just discussed, it will take time to figure out the winners and losers coming out of this. But that process is really; we think will result in some pickup in default rates. But we think it'll be very concentrated within the software sector. So, when I look back at the systemic risks, the echoes of the financial crisis of 2008 come back, you know. We both have gone through that in different roles, you know. I used to be tall and good looking is before the financial crisis. So, the scars of financial crisis are clearly on upon me now. But I compare these two time periods – and I say in any metric, the risks in the system today are nowhere comparable to the kind of systemic risk that existed back then. You look at the risks, the leverage at the company level. You look at the leverage; the vehicles where credit risk is sitting. Look at the risks and the leverage within the banking system. And the links of the non-banks to banks. All of them put together make us think that the systemic risks are very, very contained. And any allusion to that ‘We are back in 2008,’ I would very strongly push back against that illusion. So, David, let me ask you one final question here. If we had to highlight one risk or one opportunity in private credit for investors over the next year, what would it be? David Miller: I think the headlines have covered most of the risks, so I'll go with an opportunity. So, we believe spreads on private credit loans have widened quite a bit for direct lending. Both for non-software and software names. So, for investors looking to deploy new capital or investors who are underweight their target allocations, we think it's an interesting time. But we believe there's also a really nice opportunity in opportunistic or hybrid private credit.  And that's coming from borrowers who need more flexible solutions, and that can come from M&A activity, non-dilutive growth capital. Or balance sheet rationalizations where one can inject junior capital to good businesses that have over-levered balance sheets. And you can get paid well for the flexibility and the optionality that's providing equity holders. There's been far less capital raised for these types of opportunities over the last few years, and they're pretty favorable dynamics going forward as demand increases. Vishy Tirupattur: That's very insightful. David, thanks for taking the time to talk. David Miller: Great speaking with you, Vishy. Vishy Tirupattur: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.David Miller is not a member of Morgan Stanley’s Research department. Unless otherwise indicated, his views are his own and may differ from the views of the Morgan Stanley Research department and from the views of others within Morgan Stanley.

The stock market has already discounted many disruptions, including geopolitics, oil and AI. Our CIO and Chief U.S. Equity Strategist Mike Wilson explains why investors are now focused on one thing: whether monetary policy stays too tight for too long.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.  Today on the podcast I’ll be discussing why the balance between the upside and the downside is actually better than at the start of the year. It's Monday, March 30th at 11:30 am in New York.   So, let’s get after it. Everyone I’ve been speaking with lately is focused on the same things: the conflict in Iran, oil prices, and of course, AI—whether it’s CapEx, disruption of labor markets, and efficiency. When I look at how markets are trading, I come away with a different conclusion than the consensus. First, the U.S. equity market is far less complacent about growth risks than people think. Consider this: more than half of the Russell 3000 stocks are down at least 20 percent from their highs, while the S&P 500’s Price/Earnings multiple is down 17 percent. That’s not complacency. That’s a well advanced correction consistent with prior growth scares, if not an outright recession. Second, let’s talk about oil, everyone’s top concern. Historically, oil spikes have often ended business cycles. However, recessions only occurred when earnings growth was decelerating or outright negative. Today, it’s accelerating and running close to 14 percent while forward earnings growth is north of 20 percent. Meanwhile, the magnitude of the oil move, on a year-over-year basis, is only about half of what we saw in the recession outcomes. In other words, the market isn’t pricing in a recession because the odds of that happening appear low. Instead, we believe it’s pricing in continued uncertainty about oil and other key resources until there is ultimately a resolution where tanker flows resume and prices stabilize or come back down. From my observations, I think interest rates are weighing more heavily on U.S. stocks rather than oil. Specifically, the correlation between equities and yields has flipped deeply negative. Stocks are extremely sensitive to moves in higher yields—more so than they’ve been in years. This is mainly due to the recent hawkish pivot by the Fed and other central banks. As a result, we’re also approaching the 4.5 percent level on 10-year Treasury yields, a point where we typically observe further equity valuation compression. Finally, bond volatility is also rising, and equity valuations are always sensitive to that. The good news is that the Fed is more sensitive to bond than stock volatility and any further rise could likely lead to a Fed pivot back to a more dovish stance.  In short, the tightening in financial conditions driven by rates and bond volatility is the bigger near-term risk, not the geopolitical backdrop. Ironically, it’s also what could provide relief. At the end of the day, I still think we’re getting closer to the end of this correction; and when I look at the next 6 to 12 months, the risk-reward looks better today than it did at the start of the year. On the positioning side, I’m also seeing some interesting shifts. Defensive stocks and Gold had a strong run from early January right up until tensions in the Middle East began at the end of February. But they have underperformed significantly since. Meanwhile, some of the better-performing sectors recently have been the more cyclical ones. That tells me the market got ahead of these concerns and may be ready to look past it, sooner than most investors. As for AI, there’s still a lot of focus on disruption, but I think the near-term story is more about efficiency and margin expansion. We’re not seeing a demand shock that would trigger a traditional labor cycle. Instead, we’re seeing companies use AI to right-size costs and improve productivity. Bottom line, the market has already done a lot of the heavy lifting of this correction by discounting the war, higher oil prices, AI, and credit risks. What it’s wrestling with now is the risk of a monetary policy mistake with central banks staying too tight for too long. If that hawkish bent starts to ease, which it probably will if bond volatility rises much further, the resumption of the bull market is likely to arrive faster than most expect. Thanks for tuning in; I hope you found it informative and useful. Let us know what you think by leaving us a review. And if you find Thoughts on the Market worthwhile, tell a friend or colleague to try it out!

Our Global Head of Fixed Income Andrew Sheets and Head of U.S. Credit Strategy Vishwas Patkar discuss what’s driving record debt issuance and growing worries about private credit.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.Vishwas Patkar: And I'm Vishwas Patkar, Head of U.S. Credit Strategy at Morgan Stanley.Andrew Sheets: And today on the program, we're going to talk about two of the biggest questions facing global credit markets. A rush of issuance and questions around private credit.It's Friday, March 27th at 2pm in London.Vishwas, it's great to have you in town, talking over what I think are two of the biggest questions that are hanging over the global credit market. A large wave of issuance and a lot of questions around a segment of that market, often known as private credit.So, let's dig into those in turn. I want to start with issuance. You know, you and your team had a pretty aggressive forecast at the start of the year, for a significant level of supply. How's that going? How is it shaping out? We're now almost through the first quarter…Vishwas Patkar: Yeah. So, we came into the year expecting a record, [$]2.25 trillion of gross issuance in investment grade. That's 25 percent higher than last year. That would mark a record one year number for investment grade. And for the high yield market, we expected about [$]400 billion of issuance; up roughly 30 percent.If I were to mark to market those, the forecast is roughly playing out as expected through mid-March. IG issuance is up about 21 percent. High yield issuance is up about 25 percent. So far at least, it's along the lines of what we'd call for. More importantly though, when I think about the drivers of the issuance, that I think in some ways is a little more validating. Because there were two big components of what was going to drive the issuance.One was AI related issuance from the large hyperscalers, and the second was a decent uptick in M&A. And we've seen both of those. So, year-to-date, we've had north of [$]80 billion of issuance from hyperscalers alone in the dollar market. That's on top of significant non-USD issuance that we've had this year.So, I think this idea of AI CapEx investments and by extension issuance being somewhat agnostic to macro, that seems to be playing out so far.Andrew Sheets: So, let's talk a little bit more about that – because, you know, this is a new development. This kind of is a new regime to have this much supply, sort of, somewhat independent of a very volatile macro backdrop.And you know, maybe if you could talk just a little bit more about what we're learning about the issuers. What do they care about? What is bringing them to market? And then maybe what would cause them to slow down or speed up?Vishwas Patkar: Yeah, I think we've learned a couple of things, right? First is – this issuance is being driven by investments that are not opportunistic, right? They are competitive in nature. Clearly there is an arms race to figure out who will win the AI race.I think a second leg of it is the issuance is somewhat spread agnostic. So, you know, in credit we look at this metric called new issue concessions, which is effectively how much is a company paying in terms of excess funding costs relative to their bonds outstanding. And what we've seen with some of the larger deals is that new issue concessions are well above average.And that's pretty important in the grand scheme of things because, you know, we're talking about one sector that is driving AI infrastructure. But when you have issuance that comes in size, and it comes wide to where existing bonds are, we think that has knock-on effects repricing other companies that are downstream of those names.Andrew Sheets: So, we have a market for issuing corporate debt that's pretty wide open. You know, as you mentioned, very high levels of issuance and supply going through, despite what would've been a lot of concerns. And one of those concerns is the conflict in Iran.But another concern that's been cropping up is a concern around this market often known as private credit where you've seen a lot of focus, a lot of headlines, volatility in some of the managers of private credit. But also, I think this is an area where less is known. And where there's still a lot of confusion about what it is and how it's performing.So, for the second set of questions, Vishwas, maybe we could just start with, you know, when you think about private credit, what is it to you? And how do you break up the market?Vishwas Patkar: Yeah, so I think at a very high level, you can think about private credit as capital that is provided by non-bank lenders. And in some ways – that is not broadly syndicated. So it's different from investment grade bonds or high yield bonds or leverage loans in that respect. You know, the second factor I laid out.You know, private credit overarchingly is a big umbrella term. It includes direct lending to businesses. It includes infrastructure finance, project finance, the private placement market, asset-based finance. So, there are a lot of subcomponents.Now, you know, to your point where the market's a little worried and there is growing anxiety is around the direct lending portion of private credit. That segment of the market has grown substantially over the last decade. It was about [$]500 billion or so 10 years ago. It's about [$]1.3 trillion right now.Andrew Sheets: And this is lending directly to companies?Vishwas Patkar: Yeah. This is lending directly to companies. Leverage typically tends to be higher than what you see in the public market. So, one of the challenges around navigating the risks are, you know, when you get a bunch of negative headlines that isn't necessarily the readily available information to either disprove or validate it.So, I think that's some of the anxiety, which is building among the investor base. Our view is, you know, these risks are significant and investors should be cognizant of what's happening.Andrew Sheets: So maybe just to take a step back a little bit there. Why have investors been more worried about the private credit space?Have we seen particular events? Or is it more, kind of, other factors that you think have driven this increased focus?Vishwas Patkar: Yeah, I think it's been a rolling set of factors. This year the whole story has really been about software and concerns about AI disruption. But before I get into that, I think it was a process that really began, I would say, second half of last year.So, private credit really had its moment in the sun a few years ago where inflows were massive. The public market was choppy while the Fed was hiking rates, and a lot of stressed issuers were choosing to raise capital via direct lenders. And at that time, spreads in the private credit market were also very attractive.What you've seen last year is private credit AUM was effectively flat. The fee income being generated on the loans has come down as the Fed has eased policy and the spread on private credit versus the public market has also narrowed. So, what started off, I think, was more macro. It was driven more by what was happening on the policy front…Andrew Sheets: More yield compression. Less yield for investors, which caused them to be just a little bit less attracted to the space…Vishwas Patkar: Absolutely, yeah. And I think that was largely the driver of, you know, the correction in some of these asset manager stocks to begin with. Then you had some of the headlines around specific single name headlines. Double pledging of collateral, some accounting malpractices, which, you know, I think we can say with the benefit of hindsight, those were idiosyncratic. Those were one offs. But again, you know, doesn't make for a positive headline when you get news flow to that effect.And then this year, as I said, it's really been about concerns around the software sector…Andrew Sheets: Which is a very big part of the private credit market.Vishwas Patkar: It is a very big part of the private credit market. It made up for almost a third of all LBOs that were originated between 2018 through 2022. And in fact, really if you look at 2021, when interest rates were very low, a lot of the outstanding software loans were originated in those really weak vintages.And so, you know, I think AI disruption has maybe been the catalyst to drive some of this price action. But that's on top of software, where a lot of loans were originated with high leverage. But now that, you know, you have a very disruptive force around margins, potentially looming, the concern has now shifted towards what do balance sheets look like. And the software sector is very levered. In the bank loan market, for example, more than 50 percent of software loans outstanding are rated B- or lower.And one extension of that is that, you know, you have a non-trivial amount of debt that is maturing in the next few years. So, through 2028, we see about [$]65 billion of software loans maturing largely in that lower quality cohort.So, you know, even before we get clarity around how AI will diffuse and disrupt or will not disrupt these names, the issue is really refinancing. In this period of uncertainty, will all these software loans over the next 12 to 18 months – will they have the capital to term out their maturities?Andrew Sheets: So, Vishwas, maybe just in closing, as you're going around and talking to credit investors at the moment, what do you think are the two or three biggest, kind of, high level takeaways and views that you're trying to get across?Vishwas Patkar: A few things I would say. So, specifically on private credit, we are saying that, you know, I think we are in for a period where returns might be subpar. It is possible that private credit sees AUM growth that is sluggish, maybe even down year-over-year this year. But we would not conflate that with something that's systemic. And I think it's very important to lay that out. But importantly, some of the linkages to the banking system are through, you know, leverage that is significantly lower in this cycle than what we've seen in the past, say prior to the GFC. So that's one.Second, I continue to think that the aspect of issuance being very high and somewhat agnostic to macro conditions, that's been validated so far. And when I look at what credit markets are priced for, in aggregate, we think valuations are still too tight. And that's not withstanding everything that's going on in the Middle East.You know, we clearly have a commodity price shock to navigate. And that can have a feedback loop via what central banks will do. And the U.S. consumer. But I would say just the convexity of credit is very weak. If, let's say, we get a…Andrew Sheets: Limited upside versus relative to more downside…Vishwas Patkar: Very limited upside. And downside, if we get both a technical and a fundamental – and why it is, is significant.And the third thing I would say is it makes sense to own hedges here. You know, again, hedges can be expensive, can lead to loss of carry. But they can also be a very efficient way to protect yourself. And if you look at this time last year in the lead up to Liberation Day, credit had held up really well for the first, say, five or six weeks of that sell off.But then when it moved, it moved very quickly. And in some ways, you know, if you; if investors were able to protect themselves through that last leg of volatility, that effectively provided a very good entry point to capture the rally that played out thereafter.Andrew Sheets: Vishwas. I think that's a great thing to keep in mind. Thanks for taking the time to talk.Vishwas Patkar: Alright. Thank you for having me, Andrew.Andrew Sheets: And thank you as always for your time. If you find Thoughts on the Market useful, let us know by leaving review wherever you listen. And also tell a friend or colleague about us today.

Our Global Head of Macro Strategy Matthew Hornbach and our Chief U.S. Economist Michael Gapen discuss how oil prices, tariffs and inflation expectations are raising the bar for rate cuts by the Fed, and markets’ response to the new scenario.Read more insights from Morgan Stanley.----- Transcript -----Matthew Hornbach: Welcome to Thoughts on the Market. I'm Matthew Hornbach, Global Head of Macro Strategy. Michael Gapen: And I'm Michael Gapen, Morgan Stanley's Chief U.S. Economist. Matthew Hornbach: Today, the outcome of the March FOMC meeting and what it means for our economic and rates outlook for the rest of the year.It's Thursday, March 26th at 8:30am in New York. So, Mike, as we expected, the Fed stayed on hold last week at the FOMC meeting and retained its easing bias. But what do you think the heightened macro uncertainty means for rate cuts this year? Michael Gapen: Well, Matt, I think the answer is caution and probably rate cuts come later than earlier. So, we've changed our view on the back of the FOMC meeting. We previously thought rate cuts would come in June and September. We've slid those back to September and December. The short answer here is I think with the rise in oil prices and at least some renewed upward pressure on headline inflation – it will likely take the Fed longer to conclude that disinflation is occurring. So, I think they need more time, and that obviously means the Fed pushes rate cuts out. Matthew Hornbach: Is there anything about the press conference that struck you as being interesting? Michael Gapen: Yeah, I think the almost near singular focus on inflation. So, after the meeting was over and the press conference was done, we did a little deep dive into the transcript. Because that's what we do as economists who follow the Fed. And there were about 18 questions on inflation or prices. There were only five on labor markets. And if you do, kind of, a word count on inflation- and oil-related terms, that would've popped about 200 answers. If you looked at labor market terms, you would've gotten about 40. So, by a five-to- one ratio, the press conference was dominated by fears or concerns around inflation, inflation expectations, and oil prices. And, you know, whatever message the Fed was trying to send, I think it's hard to send either a neutral or a dovish message when nearly every question was about inflation. So, for me, I think the singular focus on inflation was what surprised me. Matthew Hornbach: And one of the questions that I think market participants, and I'm sure you yourself expected Powell to be asked, was about how the Fed would respond to this supply side energy shock that would raise inflation. And whether or not the Fed would look through that type of supply side effect. How did you interpret his answer?Michael Gapen: His answer was, for me, a little more complicated than I thought it would be. You're right that it is, kind of, traditional monetary policy knowledge or views that you're supposed to look through an increase in headline inflation from oil prices. History says in the U.S., they have little effect on core inflation.  Very little second round effects. So, you do, I think, want to come into this event thinking we're primed to look through. But what he said was, ‘Well wait. First of all, what we have to do is get through this tariff pass through to core goods first that I can't even tell you…’ I'm paraphrasing here. ‘That I can't even tell you whether or not we want to look through an increase in headline inflation until we get greater clarity that tariff pass through to core goods has ended.’ So, this, I think, contributes to our view that it's going to take a longer time until the Fed's comfortable easing, because I think that raises the bar for a conclusion that disinflation is happening. Matthew Hornbach: Right. So, they want to first check the box on being past the tariff-related inflation before they start to consider whether or not they look through the energy-related inflation. And as a part of that question, the reporter, sort of, framed it as: Well, in the context of missing your inflation target for five years – how are you going to think about it? And he layered that into his answer as well. Michael Gapen: They've missed their target for five years? I wasn't aware. Yes. No. That was the additional context, which is to conclude that you can look through increases in headline inflation from oil, one of the conditioning factors there is – that long run inflation expectations remain stable and well anchored around the Fed's 2 percent target. So, short run inflation expectations have moved higher. Just as they did when tariffs were implemented, just as they did during COVID. So yes, there's a multiple kind of step box checking – to use your term – that the Fed needs to go to before it can say, ‘Okay, fine. We think disinflation is in place.’ I still think they can get there this year. But obviously that's a later than sooner kind of decision. Matthew Hornbach: Absolutely, and I think in terms of the market response to the FOMC meeting and the press conference, it was that exchange with that reporter that was concerning to investors. And they said, ‘Well, if the Fed first needs to see tariff related inflation pass, and then they're going to consider whether or not to look through energy related inflation in the context of having missed their inflation target for five years.’ Market participants said, ‘Well, gosh, that really increases the chance the Fed doesn't ease at all this year.’ And so, at the end of that trading day, the market had been pricing about a 50 percent probability that the Fed would deliver its only rate cut in December. And of course, the market has moved since the FOMC meeting. But that was my takeaway, at least. In terms of inflation expectations… Because this is so critical in terms of how the Fed and other central banks around the world – who have slightly different mandates than the Fed does – how do you expect the Fed to think about inflation expectations later this year; when perhaps they're actually considering whether or not to look through the energy price inflation in the context of what happened to longer run inflation expectations in the wake of the pandemic? Michael Gapen: So, my view on this, and at least my takeaway from listening to Powell in prior press conferences – and hearing other FOMC members. I think they feel that coming out of COVID, yes, long run inflation expectations moved up. But they actually moved up for a good reason. I think they felt that long run inflation expectations were a little low going into COVID. So, still generally consistent with 2 percent outcomes. But kind of on the downside. So, a little increase in long run inflation expectations coming out of COVID, I think they were okay with. The risk now will be, COVID has been followed by a tariff price shock and an oil price shock. And in theory, these are supply side shocks that shouldn't result in long run inflation. But you never know, business and consumers may feel differently. So, I think as long as they – they meaning long run inflation expectations – are about where they are, I think the Fed's okay with that. Matthew Hornbach: Right. You did mention that the labor market didn't come up all that much. What’s your view on the labor market going into the end of the year? Michael Gapen: Well, I think that; I think it's pretty similar to the way Powell characterized it. Which is: it is abundantly clear that immigration controls have had a strong effect on the labor market and reduced growth in labor supply.It's obvious also, we've had a year now where hiring has come down. So, on one hand the labor market… I'm an economist, so I have to say on the one hand, and on the other hand. On the one hand, the labor market's generally in balance – low labor supply, low labor demand. The unemployment rate has been, you know, broadly unchanged, pretty stable since September. That's what Powell in the past has characterized as “the curious balance.” So yes, the labor market is in balance. But what concerns me and concerns us is – it's not a very dynamic labor market. An economy the size of the U.S., about 360-ish million people or so. We're basically not adding many jobs every month. 20,000 to 30,000, if you, kind of, take a six month or so average is about all we're adding every month. That doesn't feel very robust. Rates of turnover, movement in and out of the labor market have slowed down. And so, I think you can say ‘Yes, the labor market is in a general equilibrium.’ But payroll growth close to zero doesn't feel good. This is also why I think it's reasonable to expect rate cuts out of the Fed in the second half of the year. It can come either because disinflation happens. Or higher oil prices can weigh on demand, slow consumer spending, delay business spending plans. If that happens, I think it'd be reasonable to think the unemployment rate may drift up a little. Not a lot, but enough to get the Fed thinking maybe we should give it some more support. Matthew Hornbach: And I think if that's what we end up seeing out of the economy and out of the Fed, then the U.S. Treasury market is set up for a decent run into the end of the year. The market today isn't pricing many rate cuts at all to speak of. And in fact, at one point after the FOMC meeting for a moment in time, we were pricing rate hikes. But I think if we get that outcome for the U.S. economy and for Fed policy, I think investors in U.S. treasuries will be rewarded. And even if they're not rewarded in the way that they might expect or hope – the U.S. Treasury market itself and the correlations that it has delivered vis-a-vis riskier assets like the equity market, suggest that U.S. Treasuries, despite the recent sell off, have been behaving as good hedge securities for broader risky asset portfolios. So, we certainly would expect the U.S. Treasury market to perform quite well in this scenario.And so, with that, Mike, I am afraid I will have to bid you adieu until the next FOMC meeting. Michael Gapen: Thanks for having me on, Matt. It's great speaking with you. Matthew Hornbach: Likewise, And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.

Our Head of Public Policy Research Ariana Salvatore breaks down what’s being discussed by policymakers around the world to try to cap the oil price spike.  Read more insights from Morgan Stanley.----- Transcript -----Welcome to Thoughts on the Market. I’m Ariana Salvatore, Head of Public Policy Research. Today, I’ll be talking about the ongoing conflict in Iran and the policy options to offset a rise in oil prices. It’s Wednesday, March 25th at 8pm in Tokyo. The U.S.-Iran conflict is stretching into its fourth week, and markets are still trying to distill headlines for news of an off-ramp or further escalation. Even here in Tokyo, the global supply crunch is top of mind. But we’re also watching for second order effects among a number of key supply chains, ranging from food to semiconductors. As you’ve been hearing on the show, the Middle East is a critical supplier of aluminum, petrochemicals, and fertilizers—all industries that are energy intensive and deeply embedded in global supply chains. There’s also sulphur, which is needed to produce copper and cobalt, largely used for chip materials and components. And helium, which is a critical material for semiconductor manufacturing. So with all this supply chain disruption on the line, what are policymakers’ options to mitigate that loss? Let’s start by putting some numbers around the disruption. The Strait of Hormuz accounts for about 20 percent of global oil supply, and about a third of seaborne oil. Our strategists highlight three potential offsets. First, alternative pipelines. Saudi Arabia maintains an East-West pipeline and the UAE similarly has a smaller scale Abu Dhabi Crude Oil Pipeline. Those together can allow for some crude to bypass Hormuz. Second, the U.S. has publicly discussed potential naval escorts. We’ve written about the logistical difficulties with this plan, in addition to significant execution risks. Third, the IEA has coordinated a strategic stock release, which could translate to a sustained release of around 2 million barrels a day, depending on the duration of the conflict. There are also geographic considerations though that can add a lag to those strategic releases. On net, our oil strategists think these policy levers can mitigate about 9 million barrels per day from the lost 20, meaning that the global economy will still be short about 11 million barrels per day; more than three times the supply shock the market feared from the Russia-Ukraine conflict back in 2022. So, given those limitations, we’re starting to see countries around the world – particularly in Asia – begin to implement rationing measures to conserve energy. The Philippines, for example, has implemented a four-day workweek for government workers and mandated agencies to cut fuel and electricity use. Myanmar has imposed driving limits, and Sri Lanka has introduced gasoline rationing. But what about in the U.S.? We’ve seen domestic gasoline prices climb due to this conflict, and the national average is now close to $4, almost a dollar up from where we were about a month ago. The President has announced a number of policy efforts – including a Jones Act waiver, which temporarily allows foreign vessels to transport fuel between U.S. ports, and a temporary pause on some Russian and Iranian oil sanctions. President Trump has also directed a release from the Strategic Petroleum Reserve, but similarly to the IEA stockpile, the flow rate is going to be the key limit. The authorization was for 172 million barrels over a 120 period, which translates to just about 1.4 million barrels per day on average. So what should we be watching? Tanker transits, signs of upstream shut-ins as storage fills, refinery run-cuts, and—most crucially—whether policy announcements on insurance and escorted convoys can actually translate into reality. These are all going to be critical elements going forward. For now, our oil strategists have raised their near-term Brent forecast to $110 per barrel, which underscores our U.S. economists’ outlook for weaker growth and stickier inflation than previously expected. And for now, policy tools seem to be unable to meaningfully offset that disruption. Thanks for listening. As a reminder, if you enjoy Thoughts on the Market, please take a moment to rate and review us wherever you listen and share the podcast with a friend or colleague today.

Our Global Commodities Strategist Martijn Rats discusses how the Strait of Hormuz shutdown has created a deep air pocket that will likely keep markets tighter and prices higher for longer than many expect.Read more insights from Morgan Stanley.----- Transcript -----Welcome to Thoughts on the Market. I’m Martijn Rats, Morgan Stanley’s Global Commodities Strategist. Today – an update on the global impact on the Strait of Hormuz shutdown.It’s Tuesday, March 24th, at 3pm in London.More than three weeks into the Iran conflict and the Strait of Hormuz disruptions, the numbers are striking. Normally, around 35 oil tankers leave the Gulf each day. Today, that number is closer to zero to two. That amounts to a shock. In fact, we estimate this event has disrupted roughly 20 percent of global oil supply – double the scale of the Suez crisis in the 1950s. Now, you might think: can’t the system adapt? Can’t oil just flow another way? At first, oil kept moving by being stored on ships already inside the Gulf. But that buffer is now full. Floating storage has surged in the area to over 120 million barrels, and new loadings have effectively stopped. Once storage is filled, producers have no choice but to cut output – and that’s exactly what we’re seeing. About 10 million barrels per day of upstream oil and gas production is now offline. Now once we reach this point, the Hormuz closure becomes a real supply loss. There are some partial workarounds. Pipelines that bypass the Strait. Strategic reserve releases. Possibly, naval escorts at some point to help ships move along. But unfortunately, none of these fully solve the problem. Even after accounting for all these offsets, the market still faces a shortfall of around 10 to 12 million barrels per day. Now, that is more than three times the supply shock markets feared in 2022, when Brent oil prices surged to around $130 a barrel. And beyond crude oil, the supply strain is showing up even more in refined products. Now, how so? By comparison, crude oil is still flexible. One barrel can sometimes be substituted with another. But refined products – like jet fuel or petrochemical feedstocks – are much more specific. They’re harder to replace quickly. And we’re already seeing acute shortages. Europe relies on imports for about 37 percent of its jet fuel needs, and those flows have now declined sharply. Middle East exports of naphtha, a key input for plastics and chemicals to destinations in Asia, have fallen from about 1.2 million barrels per day to almost zero. And in shipping hubs like Singapore, marine fuel prices have surged dramatically, with some fuels exceeding $250 per barrel. Once fuel shortages hit logistics, the disruption spreads beyond energy to affect the movement of goods across the economy. So where does this leave us? We envision two broad scenarios. First, a reopening. Even if the Strait reopens relatively quickly, say within one to two weeks, the system doesn’t just snap back. There’s what we call an air pocket in the system – a gap created by delayed shipments, empty inventories, and disrupted supply chains. In that case, oil prices are still likely to stay elevated throughout the second and third quarters, rather than quickly returning to pre-crisis levels which were about $70 per barrel at the time. A second scenario would be a prolonged closure. If the disruption continues, the market shifts from substitution to rationing. And rationing means demand has to fall. Historically, that only happens at much higher prices – typically in the range of $130 to $150 per barrel. Now given all this, we’ve revised our base case forecasts higher. We now expect Brent oil prices to average around $110 per barrel in the second quarter, easing only slightly to $90 in the third and $80 by the fourth quarter. But it’s key to realize that reopening the Strait is not the same as repairing the system. This supply chain shock to the oil market will take time to unwind.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.

Our Asia Energy Analyst Mayank Maheshwari discusses how the conflict in the Middle East is sending ripple effects through Asia’s energy, power and food systems.Read more insights from Morgan Stanley.----- Transcript -----Welcome to Thoughts on the Market. I’m Mayank Maheshwari, Morgan Stanley’s research analyst covering energy markets in India and Southeast Asia.Today—how disruptions linked to Iran and the Strait of Hormuz are creating energy-related disruptions across Asia.It’s Monday, March 23rd, at 8am in Singapore.To understand the scale of the impact, let’s start with a simple fact: about a quarter of Asia’s energy—that is oil, liquefied natural gas, and propane—comes from the Middle East, much of it flowing through a single chokepoint, the Strait of Hormuz. Any disruption here affects more than just oil prices. It also hits power generation, industrial output and even food supply chains across the region.Asia hasn’t seen a true energy access shock in over 50 years. So that makes this moment very critical. And with oil around $100 per barrel, stress is building in the system. Diesel margins are double pre-conflict levels. Jet fuel premiums have nearly doubled. And Dubai crude—normally cheaper than Brent historically—is now trading at a premium of more than $20 per barrel. This kind of price move signals tightening supply chains.Asia’s dependence on [the] Middle East runs deep. Refiners source up to 80 percent of crude from the region, and 30–40 percent of LNG imports originate there. For major economies like India and China, roughly 40–50 percent of oil demand passes through Hormuz. It’s a critical energy highway. And when flows slow, the entire system backs up.Inventories may look like a buffer. Asia holds around 65–70 days of crude. But the system reacts sooner than waiting to run out. Governments are already rationing energy, industries are cutting LNG and LPG usage, and export restrictions are limiting downstream production of fuels. The tightening has already begun.The real pressure point may not be oil, but natural gas—particularly LNG, as Qatar, which is a big supplier of Asia's LNG, has seen infrastructure damage. Asia accounts for about half of global LNG consumption, with up to 40 percent secured from the Middle East. Unlike oil, LNG has very limited buffers; in number of days, and not in months.This is where the story extends well beyond energy. Around 25 million tons per year of petrochemical capacity has been impacted, along with roughly 10 million tons of fertilizer production. Prices for key materials like polymers have risen 15–25 percent in just a few weeks, and the premiums are still rising. These inputs feed into everyday products—from cars and electronics to packaging and agriculture. Even basic services are affected, with cooking gas shortages hitting restaurants in parts of Asia.Policymakers are responding, but options are limited. Around 100 million barrels of crude has been released from reserves. Countries are securing higher-cost LNG cargoes. And many are turning back to coal for reliability despite environmental trade-offs.Ultimately, the longer this disruption persists, the more pressure builds across energy, power, chemicals, and food systems. And in a region as interconnected and import-dependent as Asia, those ripple effects spread quickly—and widely.Thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.

As the Iran conflict upends market narratives, our Global Head of Fixed Income Research Andrew Sheets offers his take on how to view the historic disruption happening in March and what the next few weeks could bring.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. Today on the program, a survey of just how quickly key narratives have changed and how lasting that might be. It's Friday, March 20th at 2pm in London. The NCAA basketball tournament, also known as March Madness, is one of my favorite times of the year. The single elimination tournament of 64 teams is wonderfully chaotic with plenty of surprises, especially in the early games. And basketball is one of those sports where momentum often seems real. A team that has somehow forgotten how to shoot in the first half of the game can suddenly look unstoppable in the second. As I said, March is one of my favorite times to watch sports. It is often not one of my favorite times to forecast markets. In 2005, 2008, 2020, 2022, 2023, and 2025, March saw outsized market volatility. And it’s the case again this year. I'm sure, it's just a coincidence. This time, it's not just about a historic disruption to the energy markets, which my colleague Martijn Rats and I discussed on this program last week. It's also a major reversal of the market storyline. If this were a basketball game, the momentum just flipped. In January and February of 2026, there were strong overlapping signals that the U.S. and global economy were in a good – even accelerating – place, boosted by cheap energy, stimulative policy, and robust AI investment. Oil prices were down as metals, transports, cyclicals and financial stocks, all rose. Europe, Asia, and emerging market equities – all more sensitive to global growth – were outperforming. Inflation was moderating. Central banks were planning to lower interest rates. The yield curve was steepening and the U.S. dollar was weakening. The January U.S. Jobs report was pretty good. And then … it all changed. In a moment, the Iran conflict and the subsequent risk of an oil price shock flipped almost every single one of those storylines on its head. Now, oil prices rose and the prices for metals, transports, cyclicals and financial stocks all fell. Equities in Europe and Asia – regions that rely heavily on importing oil – underperformed. The U.S. dollar rose as investors sought out safe haven. Inflation jumped following oil prices. The yield curve flattened on that higher inflation, as we and many other forecasters adjusted our expectations for what central banks would do. And, as it happens, the last U.S. Jobs report was pretty bad. If the Iran conflict ends and oil resumes flowing through the Strait of Hormuz, it's very possible that this story could once again swing back. But until it does, the speed of which this momentum has flipped means that almost by definition, many investors have been caught off guard and left poorly positioned. If you couple that with the challenge of diversifying in this new environment – where the prices for stocks, bonds, and even gold have all been moving in the same direction – the path of least resistance for investors may be to continue to reduce their exposure to ride out the storm, driving further near term weakness.Unfortunately, that could make for an uncomfortable few weeks. At least, there's some good basketball on. 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.

Live from Morgan Stanley’s European Financials Conference, our Head of European Banks Alvaro Serrano and European Equity Research Banks Analyst Giulia Aurora Miotto discuss how geopolitics, private credit risk and AI are testing how resilient banks really are.Read more insights from Morgan Stanley.----- Transcript -----Alvaro Serrano: Welcome to Thoughts on the Market. I'm Alvaro Serrano, Head of European Banks.Giulia Aurora Miotto: And I'm Giulia Aurora Miotto, European Equity Research Banks Analyst.Alvaro Serrano: Today we're at our annual European Financials Conference.It's Thursday, March 19th at 1:30pm, London.We're at our European Financials conference. Attendance is up almost at record levels, a great deal of engagement with both investors and companies – with three main topics dominating the debate: geopolitics, private credit, and AI. I think, on the Middle East, clearly a lot of focus during the whole three days. I think the message from banks has been about the resilience of the business model, acknowledging the loan growth could be weaker. Some of the investment decisions could be delayed, given the uncertainty. And of course, fees could also be affected as a result. On the flip side, there's an acknowledgement that during stress, savings rates go up. Deposit growth could be better, and with a steeper curve that could be better monetized. So, the message from the banks is about the resilience of the pre-provision profit outlook. Some banks have been talking about top-up of provisions if the situation persists in a IFRS9 world. But we do believe the overall outlook for earnings is of a resilient picture. However, we acknowledge the positioning of the sector is much richer than it was this time last year. The positioning; that means if stress continues, we could see the multiple suffering. And that, to be honest, is what we see the biggest channel of contagion to the sector is – is multiple de-rating if the stress continues, in what otherwise looks like a pretty resilient earnings picture. Giulia, what did you learn on private credit? Giulia Aurora Miotto: Yes, private credit was definitely another area of big focus and worrying from investors. From a bank's perspective, all the banks that are involved in private credit highlighted a couple of things. First of all, they tend to be senior when they lend to B2Cs. Secondly, they are over collateralized by hundreds, if not thousands of loans. And then thirdly, most investment banks have been doing this for a decade or more, and they tend to partner only with prime sponsors. So overall, the message was actually rather reassuring. Alvaro, AI was the other big topic at the conference. What did you learn there? Alvaro Serrano: It's even a bigger topic than last year. And obviously some of the volatility we've seen year-to-date contributed to that. I think overall the banks are seen as net beneficiaries of AI from an operational perspective. There's an acknowledgement that in an AI world, competition might increase, deposit competition has come up. Some fee products has also come up. But you have banks guiding to 9 percentage points improvement in cost income ratio in the next three years. So, the operational savings from productivity are seeing them more than offsetting any potential increase in competition. I think the known-unknown is employment; consequences of the improved productivity further down the line. But the message in Europe is relatively reassuring considering that over 20 percent of the workforce in Europe is expected to retire [in] the next 10 years. So, overall, seen as net beneficiaries.There's also discussions around regulation Giulia… Giulia Aurora Miotto: Yes, we had Maria Luís Albuquerque, European Commissioner in charge of the Savings and Investment Union project. This was one of the most attended sessions. And we heard on one side definitely determination to deliver on the project of the savings and investment union and deepen European capital markets. And mobilize savings towards more productive investments. On the other side, investors were rather skeptical and are really in wait and see mode. Some banks highlighted that they expect the progress on some of the key packages like securitization or market integration package as soon as May. So, we think this is a key area to monitor over the coming months – from a European competitiveness standpoint, Alvaro Serrano:  I think that's a great place to wrap it up. And to our audience, thanks for listening. If you enjoy listening to Thoughts on the Market, do let us know wherever you listen and share the podcast with friends and a colleague today.

A prolonged oil disruption is pushing gas prices higher. Arunima Sinha from our U.S. and Global Economics team joins Head of U.S. Policy Strategy Ariana Salvatore to discuss what that means for consumer spending, inflation expectations and the U.S. midterm elections.Read more insights from Morgan Stanley.----- Transcript -----Arunima Sinha: Welcome to Thoughts on the Market. I'm Arunima Sinha from Morgan Stanley's U.S. and Global Economics Teams.Ariana Salvatore: And I'm Ariana Salvatore, Head of U.S. Policy Strategy.Arunima Sinha: Today – what are the implications of the ongoing oil disruption for the U.S. consumer?It's Wednesday, March 18th at 10am in New York.Ariana, let's start with where we are in week three of this particular oil disruption and what you are thinking about in terms of what the paths to resolution could look like.Ariana Salvatore: Yeah. Great place to start. So, I would say before we get into what the resolution could look like, we need to think about how long could this conflict possibly last? And that's the most relevant question for investors as well. And there I would say there's very little conviction just because of the uncertainty associated with this conflict. But I'm keeping my eye on three different things.The first is a clearer prioritization of the objectives tied to the conflict. The Trump administration has laid out a number of different goals for this conflict, some of which are shorter in nature than others. The second thing I think we're looking at – that's really important – is traffic at the Strait of Hormuz. And there, the Trump administration has spoken about insurance, you know, naval escorts – all of these things that we think will take some time to really come to fruition. And at the time that we're recording this, it seems that we're still getting about low single digit number of tankers through the strait on a daily basis. So that's the second thing.The third point I would make is any type of escalation is really critical here. So, whether it's vertical – meaning different types of weapons used, different types of targets being hit. Or horizontal escalation, broadening out into different proxies and, and more so throughout the region. Those are really important indicators, and right now all of these things are pointing to a slightly longer-term conflict than I think most people expected at the start.Now, in terms of what that means for markets, for domestic gasoline prices, all these are really important questions that I'm sure we're going to get into. But what we should note is that the president has spoken about a number of policy offsets to mitigate those price increases, ranging from the Treasury actually loosening up some of the sanctions on Russia to sell some oil. You know, we've heard some talk of invoking the Jones Act waiver. That's a temporary fix.On net, we think that these policy offsets are not going to really be enough to mitigate that supply loss that we're getting. That's a 20 million barrel per day loss. Some of these efforts mainly will, kind of, target about 7 or 8 million barrels per day. You're still in a deficit of about 10 to 13 [million]. And that's really meaningful for markets, for consumption as you well know, and everything else in between.Arunima Sinha: That's really helpful perspective, Ariana. And it's also a useful segue to think about the note that we jointly put out a few days ago. And just thinking about what this means for the U.S. consumer. And there, I think there's the first point to start with is that the consumer is now going to be living through the third supply shock in about five years. So, after COVID, after tariffs, here comes the next. And I think this particular oil shock is going to be somewhat different from tariffs in the sense that this is going to hit consumers at the front end and directly. This is not something that is going to have to pass through business costs. And some of them could be absorbed by businesses and not fully passed on to the consumer. So, I think that's an important point.The second point here is that in terms of the share of spending of gasoline out of total spend, we are at pretty low numbers. We're somewhere in the 2 to 3 percent range. So, it could give a little bit of a cushion. So, the longer-term average can be somewhere about 4 percent. So, there could be some cushion. But we know that consumers have already been stretched by, sort of, several years of high prices.And so, the way that we thought about what some of the channels could be for how higher oil prices, which translate into higher gas prices, could matter for the consumer. I think there are, sort of, three to identify.The first one is that it is really just a hit to your real purchasing power because this is a type of good that is actually really hard to substitute away from. And you could look through some of it, at the start. So maybe in the first month you don't react very much. You pull down on some savings; you take out a little bit of short-term credit.But the longer it lasts, the bigger the consumption response is going to be. And the second channel then to identify is – you start to build up some precautionary savings motives because there's this uncertainty that's also lasting for some time. And what do you pull back on? You'll typically pull back on discretionary types of spending.And so, we sized out this impact to say that if oil prices were to be about 50 percent higher and they last for two to three quarters, it could hit real personal spending growth by about 40 [basis points] after 12 months. And most of that is really just coming from the impact on good spending, specifically through durable goods.So, there could be some meaningful impact to real consumer spending in the U.S., if this shock were to go on longer. And the last point I would just say is, you know, how do inflation expectations move? Because that's an important point for the Fed and it's an important point for just people who are thinking about their spending decisions over the next year or so.And one interesting thing I think came out in the University of Michigan survey that came out this Friday; and this was a preliminary survey. About half of it was conducted before the conflict started, and half of it was after the conflict started. And what we saw was that inflation expectations in the year ahead, so the 12-month-ahead expectations that had been trending down, paused.So, they are no longer trending down. And, in its release, the University of Michigan noted that for the responses that were collected after the conflict started, inflation expectations did tick up. And interestingly, the strains were the most for the bottom income cohort. So, they saw a bigger uptick in inflation expectations. They actually also saw a bigger uptick in their unemployment expectations over the next year.Ariana Salvatore: So, Arunima, if I can ask, we've been talking a lot about the K-shape economy this year, right? So, consumption really being led by the upper; let's call it the upper income cohort. When we think about this translation to consumption, like you said, more of the stresses on the lower income side, how do you square that with the economic impact that you guys are expecting?Arunima Sinha: The way that I would square it is the longer it lasts and the greater the, sort of, uncertainty in asset markets – that might actually begin to weigh on the upper income consumer as well. So that might make some of those wealth effects less supportive, than what we have seen, over most of 2025. Just given where consumption has been running in terms of its pace.So not only might we see a bigger strain on the lower-income cohorts as we see this shock lasting longer, we might actually see some pressures not through the direct spending channel on gas, but really just, you know, how it's impacting their balance sheets.Ariana Salvatore: And that's a really important point because it also, to me, resonates with the concept of affordability, which has been a really key political topic for the past few months, I would say.And the way we're thinking about this is, like I mentioned, there are limited policy offsets that can be used to mitigate the potential increase in domestic gasoline prices. And that matters a lot for the midterm elections. Typically voters don't really rank foreign policy as a top issue when it comes to their choice for candidates – in midterm elections and elections in general.But once you see that feed through to, you know, inflation, cost of living, job expectations, that's when it starts to really matter for people. And what we've been saying, it's not a perfect rule of thumb, but looking back at the past few elections. If gasoline prices here in the U.S. are something like $3 a gallon, that tends to be pretty good for the incumbent party. [$]4 [a gallon], let's say it's a little bit more politically challenging. And [$]5 [a gallon], you know, is when you kind of get into that even more challenging territory for the administration and for Republicans in Congress.So again, not a perfect benchmark, but something that we'll be keeping an eye on too as this conflict evolves.Arunima Sinha: Ok! So, we'll be keeping an eye on how that oil disruption plays out and matters for the U.S. consumer.Ariana Salvatore: 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. Important note regarding economic sanctions. This report references jurisdictions which may be the subject of economic sanctions. Readers are solely responsible for ensuring that their investment activities are carried out in compliance with applicable laws.