Episode summary
Investors’ Focus Shifts to Rates and AI
Thoughts on the Market (Morgan Stanley)
· · 5 min · Guests: Serena Tang
Summary
Serena Tang says the dominant questions from investor meetings in Europe and Asia were the Federal Reserve’s path and the durability of the AI capex cycle. On policy, many investors read the June FOMC meeting as hawkish, but Morgan Stanley’s economists think the rate-hike signals in the Fed’s summary of economic projections should be treated cautiously because they may reflect elevated near-term inflation rather than a lasting shift in the macro backdrop.
Morgan Stanley’s base case is that core inflation moderates as travel-related inflation rolls off and tariff effects reverse, leaving the Fed on hold through 2026. Tang frames that as a lower-inflation story than the market feared, even if the Fed’s projections initially looked more restrictive.
On AI, investors remain convinced the cycle is intact, but worry about “chipflation” and rising funding needs. Tang argues higher memory prices are more likely to reprice and ration AI infrastructure than derail it, while issuance tied to data-center construction is rising fast. Morgan Stanley therefore expects the AI buildout to continue, even as credit markets absorb more supply, and still recommends staying constructive on risk assets.
Key takeaways
- Serena Tang says investors are focused on whether the Fed’s June projections reflect policy caution or just elevated near-term inflation.
- Morgan Stanley expects lower core inflation from travel-related disinflation and tariff payback, and therefore sees the Fed staying on hold through 2026.
- Serena Tang says chipflation is more likely to reprice and ration AI infrastructure than derail the AI capex cycle.
- Morgan Stanley’s credit team expects nearly another $600 billion of AI-related global issuance in 2026, with US IG corporate bonds alone seeing $1 trillion of net issuance.
- The firm still recommends staying constructive on risk assets because it sees the AI capex cycle as intact and inflation as easing.
Notable quotes
“Two themes dominated nearly every room I walked into. The first is the Federal Reserve and monetary policy path in the US”
“Now, Morgan Stanley's economists think that hikes implied by SEP at the June FOMC meeting should be interpreted with caution”
“We actually anticipate a lower path for core inflation given a combination of a reversal in travel related inflation and tariff payback”
“while hyperscalers remain first in the allocation queue. Now the key risk is capex efficiency”
“we expect issuance to accelerate. Bringing it all together, investors globally are all grappling with the same uncertainties around the Fed and AI capex”
How the episode opens
Welcome to Thoughts on the Markets. I'm Serena Tang, global head of crossasset strategy research at Morgan Stanley and today I'm bringing you a debrief for my investor meetings across Europe and Asia and the key debates around AI and the Fed. It's Thursday, July 2nd at 10:00 a.m.
in New York. The last two weeks I have been traveling in Europe and Asia to meet with investors to discuss Morgan Stanley's latest views. Two themes dominated nearly every room I walked into.
The first is the Federal Reserve and monetary policy path in the US. Many investors had interpreted Chair Kevin Wars's June FOMC meeting, his first at the helm, as unambiguously hawkish. What market investors at my meetings pointed out is that Fed's summary of economic projections, commonly shortened to SE, which details policymakers forecasts for macro metrics like GDP growth, inflation, and the federal funds rate at a hike in 2026 and pushed out rate cuts, implying more restrictive policy.
Now, Morgan Stanley's economists think that hikes implied by SEP at the June FOMC meeting should be interpreted with caution. The projections appeared conditioned on elevated near-term inflation and may not capture the disinflation from a straight reopening. We actually anticipate a lower path for core inflation given a combination of a reversal in travel related inflation and tariff payback which lead to our call that the Fed remains on hold through 2026.
The second recurring theme in meetings with investors across regions is unsurprisingly AI. While in every single meetings investors believe firmly in the cycle of story of ongoing AI capex cycle, there was some unease especially since AI is now also becoming an inflation story on the macro side and a funding story on the micro side. Chipflation is a new word in town with markets still debating whether it can be one of the things that derail the AI capback cycle.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- u.s. monetary policy uncertainty
- rates
- ai sentiment
- investor caution
Watch the episode
Watch “Investors’ Focus Shifts to Rates and AI” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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