Morgan Stanley: The Fed is unlikely to raise interest rates in the second half of the year, and may even continue to cut rates next year.

Golden Finance reported that on July 6, Xing Ziqiang, Chief Economist of Morgan Stanley China, shared his latest insights at a closed-door meeting on Monday, focusing on topics such as the global AI financing boom, the direction of Federal Reserve policy, and the rebalancing of China's domestic demand. He pointed out that the main themes currently dominating global markets remain AI and energy. To support massive capital expenditures, major U.S. tech companies may raise nearly a trillion dollars through bond, equity, and loan markets over the next year, which will significantly drain global micro-liquidity and make markets more sensitive to changes in the Federal Reserve's interest rates.

Regarding the Federal Reserve, Xing Ziqiang believes that market concerns about rate hikes are overblown. He expects that a rate hike is unlikely in the second half of the year, and there may even be further rate cuts next year. However, the new Fed Chair Kevin Warsh's approach of reducing forward guidance and returning to policy opacity will exacerbate financial market volatility. Turning to China's economy, the year-on-year GDP growth rate for the second quarter is expected to be only around 4.4%, a significant decline from the first quarter. Xing Ziqiang suggests a two-pronged rebalancing: in the short term, most export tax rebates for high-tech industries could be eliminated and redirected to tax and fee reductions for domestic consumption and the service sector; in the medium to long term, social security should be strengthened to boost the consumption power of low- and middle-income groups after redistribution. However, he believes the most likely theme for the second half of the year is not large-scale direct stimulus of consumption, but rather accelerating the use of the approximately two trillion yuan in unspent fiscal and local government bond quotas to build the "six networks" for technological self-sufficiency and energy security.

In addition, Morgan Stanley's Chief Strategist Laura Wang said that the U.S. job market is not overheating, making the possibility of a rate hike in July extremely low, and a rate-cutting cycle may even begin in the first half of 2027. She believes that oil prices are stabilizing and inflationary pressures are easing, which is relatively favorable for risk assets. Although short-term market volatility has increased, she sees no fundamental shift. The AI supercycle and the energy capital expenditure supercycle are multi-year, cross-year opportunities. Regarding the Chinese market, she disagrees with concerns that the listing of mega-cap companies will drain liquidity; instead, she believes such listings could attract more investors. Moreover, from the beginning of the year to now, the national team has sold over $150 billion worth of A-share positions, giving it the capability to help smooth market volatility.