Summary of Key Points from Morgan Stanley Research Cross-Asset Playbook - September 2025 Industry Overview - **Macro Environment**: The Federal Reserve is expected to cut rates due to a weakening labor market, despite tariff-induced inflation. In Europe, fiscal impulses are reducing downside risks, but growth and inflation remain weak. China's economic rebalancing is progressing slowly, insufficient to lift the economy from deflation soon [2][31]. Core Insights - **Market Sentiment**: Current market fundamentals are strong, supporting valuations, but September seasonality poses challenges. The debate continues regarding the risk premiums associated with US assets [3][11]. - **Investment Strategy**: The recommendation is to own US stocks and high-grade fixed income, focusing on quality. The preference for US assets does not extend to the USD, with a long position in EUR and JPY suggested [4][17]. - **Asset Allocation Changes**: - Equities allocation increased by 1% overall, with a notable 4% increase in US equities. - Core fixed income allocation increased by 7%, while other fixed income decreased by 3%. - Commodities allocation decreased by 3%, with a cautious outlook on Brent but a preference for copper and gold [5][19]. Economic Forecasts - **US Economic Outlook**: Slightly stronger growth is anticipated, with a lower peak unemployment rate and firmer inflation expected in 2026. The Fed is projected to cut rates by 25 basis points in September and 50 basis points by year-end [21][22]. - **Euro Area Growth**: Growth forecast for the euro area has been lifted to 1.2% for 2025, reflecting improved fiscal conditions and corporate sentiment [24]. - **Tariff Impact**: The effective tariff rate is currently around 16%, with expectations of further sector-specific tariffs. The impact of tariffs is expected to act as a tax on consumption, contributing to slower growth [39][49]. Additional Insights - **USD Outlook**: The USD is expected to remain under pressure due to diminishing growth and yield differentials compared to other G10 economies. Increased FX-hedging ratios by foreign investors are also anticipated [13][10]. - **Labor Market Trends**: Payroll growth is expected to slow, with average monthly gains projected at 113,000 for 2025, leading to a higher unemployment rate by 2026 [37][38]. - **Fiscal Policy Implications**: The One Big Beautiful Bill Act (OBBBA) is expected to provide a modest fiscal impulse, contributing 0.4 percentage points to GDP growth in 2026, but not sufficient to offset the negative impacts of tariffs and immigration policies [49][55]. Conclusion - The overall investment strategy emphasizes quality US assets amidst a backdrop of slowing growth and inflationary pressures. The macroeconomic environment is characterized by cautious optimism, with significant attention to labor market dynamics and fiscal policy developments.