Want it delivered daily to your inbox?
-
Japan owns $1.2 trillion of US Treasuries, and with 10-year interest rates on JGBs rising above 1% for the first time in more than a decade, Japanese investors will begin to find their own yen-denominated bonds relatively more attractive compared with US rates.
Put differently, as Japanese yields move higher, the global savings glut will shrink, putting upward pressure on the US term premium, see also Bernanke’s speech from March 2013 discussing this dynamic.
Any decline in USDJPY driven by such Japanese repatriation could be magnified once the Fed begins to cut interest rates. Then USDJPY would move lower not only because of higher long rates in Japan but also because of lower short rates in the US.
The bottom line is that rising long-term interest rates in Japan put upward pressure on long-term US Treasury yields, steepen the US yield curve, and put downward pressure on USDJPY.
For more, see also our chart book looking at Japanese demand for US Treasuries available here.
Source: Bloomberg, Apollo Chief Economist 
Source: Bloomberg, Apollo Chief Economist 
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
-
There is a puzzle in financial markets at the moment. How can the amount of money in money market accounts go up while the stock market goes up at the same time?
The finance textbook would have predicted that the Fed raising interest rates should increase the amount of money in money market funds and put downward pressure on equities and credit.
Maybe the answer is foreigners, who are aggressively buying risky assets such as credit because of higher yields and a better US economic outlook relative to the outlook for Europe, Japan, China, and EM. These portfolio flows would also put upward pressure on the US dollar.
Another explanation is that the AI story is boosting equities and credit no matter what interest rates are on money market accounts.
The bottom line is that there is still a lot of money on the sidelines, with $6 trillion in money market funds that can be used to purchase public and private credit and public and private equity.
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
-
The Bloomberg natural language processing model analyzes Fed speeches and currently shows FOMC members moving toward a tightening bias, see chart below.
Note how the model never predicted rate cuts in 2024. Instead, Fed sentiment has simply been less hawkish in 2024 than in 2022 and 2023.
The bottom line is that this Fed sentiment model using data back to 2009 shows that Fed communication continues to favor Fed hikes rather than Fed cuts.
Source: Bloomberg, Apollo Chief Economist. Note: Fedspeak: NLP model of Fed sentiment. The index is underpinned by an NLP algorithm trained on Bloomberg News headlines, covering about 6,200 speaking engagements by Fed officials since 2009. A reading below zero implies rate cuts, while above zero indicates a tightening basis. See important disclaimers at the bottom of the page.
-
Financial conditions are significantly easier than when the Fed started raising interest rates in March 2022, see chart below.
The strength in the stock market is partly driven by strong earnings, including from NVIDIA. But the stock market is being boosted by more than strong earnings and the prospects of AI lifting future GDP growth.
Since the Fed pivot in November 2023, when the FOMC started talking about cuts instead of hikes, the S&P 500 market cap is up $9 trillion. For comparison, consumer spending in 2023 was $19 trillion. In other words, in a few months, the household sector has experienced a windfall gain corresponding to about 50% of last year’s consumer spending!
Combined with continued easy fiscal policy via the Chips Act, the Inflation Reduction Act, and the Infrastructure Act, it is not surprising that employment growth and inflation have been reaccelerating in 2024.
In short, why is the economy still so strong? Because fiscal policy is still a significant tailwind to the economy, and easy financial conditions have been offsetting Fed hikes.
Looking ahead, with the stock market hitting fresh all-time highs and fiscal policy still supportive, the expectation in markets should be that the economy will continue to accelerate over the coming quarters.
You can call this the Fed Cut Reflexivity Paradox: The more the Fed insists that the next move in interest rates is a cut, the more financial conditions will ease, making it more difficult for the Fed to cut.
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
-
Earnings growth is a three-quarter leading indicator for capex spending, and the continued strength in earnings suggests that we will see a strong rebound in business fixed investment over the coming quarters, see chart below.
Source: BEA, S&P, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
-
At the beginning of the year, the market was pricing six Fed cuts this year, six ECB cuts, and five BoE cuts, see chart below.
Today, the market is pricing two-and-a-half cuts by the ECB and the BoC, one-and-a-half cuts by the Fed and the BoE, and only half a cut by the RBA.
With inflation still a problem and continued strong tailwinds to the US economy from easy financial conditions and expansive fiscal policy, we continue to expect zero Fed cuts this year.
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
-
Net foreign purchases of US credit have increased dramatically since the Fed started raising yield levels, see chart below.
Source: US Treasury, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
-
Ten reasons to be bullish on US housing:
1) Household formation is 2.3 million below its long-run trend, i.e., there is pent-up demand for 2.3 million homes in the US, see the first chart.
2) The share of homes without a mortgage is rising, and now at about 40%, see the second chart.
3) 30% of homes are selling above their list price, see the third chart.
4) The inventory of homes for sale remains very low, see the fourth chart.
5) The share of people planning to move to a new address has started to increase, see the fifth chart.
6) The share of homes built for rent is going up, see the sixth chart.
7) Employment in construction is rebounding, see the seventh chart.
8) The number of new foreclosures remains very low, see the eighth chart.
9) About half of mortgages have an interest rate below 4%, see the ninth chart.
10) After the Fed pivot in November 2023, asking rents have started to increase, see the tenth chart.
Our updated US housing chart book is available here.
Source: Census, Haver Analytics, Apollo Chief Economist 
Source: US Census Bureau, Bloomberg, Apollo Chief Economist 
Source: Redfin, Apollo Chief Economist 
Source: Census Bureau, FRED, Apollo Chief Economist 
Source: FRB of NY, Haver Analytics, Apollo Chief Economist 
Source: Census Bureau, Haver Analytics, Apollo Chief Economist 
Source: BLS, Haver Analytics, Apollo Chief Economist 
Source: FRBNY Consumer Credit Panel, Equifax, Haver Analytics, Apollo Chief Economist 
Source: FHFA, Apollo Chief Economist 
Source: Rent.com, Apollo Chief Economist See important disclaimers at the bottom of the page.
-
Demographic trends will weigh on inflation over the coming decades, but the secular stagnation forces pulling inflation down are currently being offset by upward pressures on inflation coming from deglobalization, energy transition, defense spending, restrictions on immigration, easy financial conditions, and easy fiscal policy.
Put differently, the structural forces pushing inflation down are currently being offset by cyclical forces putting upward pressure on inflation.
That’s the reason why interest rates will not only be higher for longer in the short term but also in the longer term, see also the second chart, which shows that the market is currently pricing that the Fed funds rate will be between 4% and 5% over the coming years.
Source: UN Population statistics, Haver Analytics, Apollo Chief Economist 
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
-
The key reasons why supercore inflation remains high are auto insurance and hospital services, and it is a legitimate question to ask whether the Fed keeping interest rates higher for longer will slow down inflation in those two categories, see chart below.
The problem with that logic is that housing inflation is also high, and if the Fed were to lower interest rates, it would put new upward pressure on the demand-driven components of CPI, including housing inflation, airfares, hotel prices, restaurant prices, etc.
The bottom line is that if the Fed, instead of focusing on the overall CPI index, decides to put less weight on housing inflation, auto insurance, and hospital services, it runs the risk that Fed communication about what is important and what is not important becomes very difficult. This challenge is particularly difficult when the Fed is already being asked why it puts no weight on inflation in food and energy.
Source: BLS, Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
This presentation may not be distributed, transmitted or otherwise communicated to others in whole or in part without the express consent of Apollo Global Management, Inc. (together with its subsidiaries, “Apollo”).
Apollo makes no representation or warranty, expressed or implied, with respect to the accuracy, reasonableness, or completeness of any of the statements made during this presentation, including, but not limited to, statements obtained from third parties. Opinions, estimates and projections constitute the current judgment of the speaker as of the date indicated. They do not necessarily reflect the views and opinions of Apollo and are subject to change at any time without notice. Apollo does not have any responsibility to update this presentation to account for such changes. There can be no assurance that any trends discussed during this presentation will continue.
Statements made throughout this presentation are not intended to provide, and should not be relied upon for, accounting, legal or tax advice and do not constitute an investment recommendation or investment advice. Investors should make an independent investigation of the information discussed during this presentation, including consulting their tax, legal, accounting or other advisors about such information. Apollo does not act for you and is not responsible for providing you with the protections afforded to its clients. This presentation does not constitute an offer to sell, or the solicitation of an offer to buy, any security, product or service, including interest in any investment product or fund or account managed or advised by Apollo.
Certain statements made throughout this presentation may be “forward-looking” in nature. Due to various risks and uncertainties, actual events or results may differ materially from those reflected or contemplated in such forward-looking information. As such, undue reliance should not be placed on such statements. Forward-looking statements may be identified by the use of terminology including, but not limited to, “may”, “will”, “should”, “expect”, “anticipate”, “target”, “project”, “estimate”, “intend”, “continue” or “believe” or the negatives thereof or other variations thereon or comparable terminology.