In short
Why U.S. financial markets haven’t “slowed down” despite policy catalysts: speculation about Fed leadership, estimates of deficit impact from a new fiscal bill, and major tariff announcements that could escalate effective U.S. tariff rates from ~13% to above 20%.
Key claims
(1) Tariff effects may be delayed; economists expect growth near 1% and higher recession risk, but companies may use existing lower-cost inventory for months, so hard data may not yet reflect tariff costs. (2) Markets may be discounting tariff details; corporate cost exposure is most sensitive to China, Mexico, Canada, and Europe, and exceptions/quotas could blunt impact.
Notable examples
tariff rate escalation path (3%→4%→13%→>20%); lag between implementation and economic impact; focus on trading-partner-specific tariff details.
Guests
none mentioned; only host Michael Zezas and referenced internal equity/fixed-income research teams.
Written by AI. May contain mistakes. Listen to the episode to check what was said.
Chapters
Tap a time to open that second in VOAnalyzing Market Reactions to Policy Changes
0:45 to 3:14
Discussion on the impact of recent U.S. policy events on financial markets.
“Yet major financial markets seem to have shrugged it all off.”
Transcript
Automatic transcript. May contain errors.0:00Michael Zezas:Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income Research and Public Policy Strategy. Today, why there's no summer slowdown yet for U.S. policy catalysts for the financial markets. It's Friday, July 18th at 8 a.m. in New York. The past week and a half has seen many major policy events and headlines relevant to the outlook for financial markets. This includes more speculation by the U.S. administration over leadership of the Fed, more information about the deficit impact of the new fiscal bill, and, perhaps most tangibly, announcements of new tariffs that, if they take effect, would be a meaningful step up from already elevated levels.
0:44Michael Zezas:It would all suggest a weaker growth outlook and less overseas demand for U.S. assets. Yet major financial markets seem to have shrugged it all off. The S &P and the U.S. dollar are up about 1 % over that time, and Treasury yields are modestly higher. So what's going on? Two possibilities to consider, and it implies investors should pay more attention than they may be inclined to this summer. First, when it comes to the impact of tariffs on the economy, it's possible we're dealing with a delayed impact. The effective average U.S. tariff rate shut up from 3 % to 4 % earlier this year to 13%, and if recent announcements go through, that could exceed 20%.
1:29Michael Zezas:That's a major escalation in costs for U.S. companies and consumers, and something our economists argue takes growth down to 1 % and elevates the possibility of recession. But our economists also point out that we may not be experiencing these cost increases quite yet. But history suggests several months of lag between implementation and economic impact as companies leverage existing lower-cost inventory before making tough decisions on pricing and managing their own costs. That means hard economic data likely does not yet tell us about the impact, or lack thereof, of tariffs. But that may change in the coming months.
2:09Michael Zezas:Second, it's also possible that the recent announcements of tariff increases don't tell us the whole story. As my colleagues in our equity strategy team point out, corporate America's cost base is most sensitive to the U.S.'s largest trading partners, China, Mexico, Canada, and Europe. As we've discussed in prior episodes, we see tariff rate increases as likely on all these trading partners as tough negotiations continue. However, the details will matter greatly. If rates are increased, but with a healthy dose of exceptions or quotas, even if they diminish over time, then the real impact could be significantly blunted.
2:47Michael Zezas:In that case, markets would resume taking cues from other factors, such as earnings revisions and forward-looking expectations around AI-driven productivity. So bottom line, market movements suggest investors are assuming benign U.S. policy outcomes. But there's plenty of developments to track in the coming weeks and months to test if those assumptions will hold. Trade policy details and hard economic data are key among them. Thanks for listening. If you enjoy Thoughts on the Market, please leave us a review. And tell your friends about the podcast. We want everyone to listen. The preceding content is informational only and based on information available when created.
3:27It is not an offer or solicitation, nor is it tax or legal advice. It does not consider your financial circumstances and objectives and may not be suitable for you.
From the publisher
Markets may seem calm following recent policy headlines, but for Michael Zezas, our Global Head of Fixed Income Research and Public Policy Strategy, investors may need to wait on more data to assess whether the macroenvironment will remain stable.
Read more insights from Morgan Stanley.
----- Transcript -----
Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income Research and Public Policy Strategy.
Today: Why there's no summer slowdown yet for U.S. policy catalysts for the financial markets.
It's Friday, July 18th at 8am in New York.
The past week and a half has seen many major policy, events and headlines relevant to the outlook for financial markets. This includes more speculation by the U.S. administration over leadership at the Fed, more information about the deficit impact of the new fiscal bill, and – perhaps most tangibly – announcements of new tariffs that, if they take effect, will be a meaningful step up from already elevated levels.
It would all suggest a weaker growth outlook and less overseas demand for U.S. assets. Yet major financial markets seem to have shrugged it all off. The S & P and the U.S. dollar are up about 1 percent over that time, and Treasury yields are modestly higher.
So, what's going on? Two possibilities to consider, and it implies investors should pay more attention than they may be inclined to this summer.
First, when it comes to the impact of tariffs on the economy, it's possible we're dealing with a delayed impact. The effective average U.S. tariff rate shot up from 3 to 4 percent earlier this year to 13 percent, and if recent announcements go through, that could exceed 20 percent. That's a major escalation in costs for U.S. companies and consumers and something our economists argue takes growth down to 1 percent and elevates the possibility of a recession.
But our economists also point out that we may not be experiencing these cost increases quite yet. History suggests several months of lag between implementation and economic impact as companies leverage existing lower cost inventory before making tough decisions on pricing and managing their own costs.
That means hard economic data likely does not yet tell us about the impact or lack thereof of tariffs, but that may change in the coming months.
Second. It's also possible that the recent announcements of tariff increases don't tell us the whole story. As my colleagues in our equity strategy team point out, corporate America's cost base is most sensitive to the U.S.' largest trading partners – China, Mexico, Canada, and Europe. As we've discussed in prior episodes, we see tariff rate increases as likely on all these trading partners as tough negotiations continue.
However, the details will matter greatly if rates are increased, but with a healthy dose of exceptions or quotas. Even if they diminish over time, then the real impact could be significantly blunted. In that case, markets would resume taking cues from other factors such as earnings revisions and forward-looking expectations around AI driven productivity.
So bottom line, market movements suggest investors are assuming benign U.S. policy outcomes. But there's plenty of developments to track in the coming weeks and months to test if those assumptions will hold. Trade policy details and hard economic data are key among them.
Thanks for listening. If you enjoy Thoughts on the Market, please leave us a review, and tell your friends about the podcast. We want everyone to listen.