Markets Are Pricing the No Landing Scenario

Apollo Chief Economist

There are more and more signs of the market pricing the no landing scenario where the economy remains strong, and inflation remains sticky and persistent.

Not only are short rates increasing, but one-year breakeven inflation expectations are rising and approaching 3%, driven higher by the strong January employment report and yesterday’s CPI report.

In other words, the market is saying that inflation will be significantly higher in a year’s time than the Fed’s 2% inflation target. Put differently, instead of expecting a recession and lower inflation, short-term inflation expectations are rising and becoming unanchored.

In response to this, the Fed will have to be more hawkish to ensure that inflation expectations do not drift too far away from the FOMC’s 2% inflation target.

The bottom line is that high inflation and associated Fed hawkishness continue to be a downside risk to credit markets and equity markets.

Source: Bloomberg, Apollo Chief Economist

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