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With no signs of a recession, commercial real estate prices are starting to recover, see chart below. This is helpful for the regional banks and for the broader economic recovery.
Source: RCA, Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The ongoing rally in credit is likely to continue driven by attractive all-in yields with strong demand from retail, insurance, and pensions. Our latest outlook for credit markets is available here.
Source: Apollo Chief Economist See important disclaimers at the bottom of the page.
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The distribution of P/E ratios for the S&P 500 shows that stocks today are more overvalued than they were in March 2000, see chart below.
Source: Bloomberg, Apollo Chief Economist. Note: 1990s tech bubble is March 2000. See important disclaimers at the bottom of the page.
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Household expectations to future home price appreciation are currently at the highest level since 2007, see chart below.
Source: University of Michigan, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Since the Fed turned dovish in December, financial conditions have eased dramatically, with the S&P 500 reaching all-time highs, credit spreads tightening, IPO activity picking up, and M&A activity picking up. As a result, consumer spending is currently getting a strong boost from record-high stock prices, high home prices, and record-high Bitcoin prices combined with high cash flows for owners of fixed income. The bottom line is that a dovish Fed giving the green light to investors too soon could result in a second mountain in inflation. That is the reason why the last mile is harder.
Source: Bloomberg, BLS, Apollo Chief Economist See important disclaimers at the bottom of the page.
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With the Fed on hold until 2025, my colleague Shobhit Gupta and I took a look at recent episodes since 2022 when rates markets have been pricing higher for longer. The evidence shows that rates higher for longer have generally been associated with tighter credit spreads both for IG and HY, likely because of stronger-than-expected growth and earnings, see table below.
Source: Apollo Chief Economist See important disclaimers at the bottom of the page.
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The employment report showed a continued increase in immigration, which supports employment growth, consumer spending, and demand for housing, see chart below.
Source: BLS, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Normally, the business cycles in the US and Europe are highly correlated, but over the past six months, a remarkable gap has appeared, with growth expectations rising in the US and falling in Germany, see chart below.
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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What are the arguments for a strong February employment report?
1) Financial conditions have eased dramatically since the December FOMC meeting, with the S&P 500 at all-time highs and very tight IG and HY spreads. Significant wealth effects and lower borrowing costs are a major tailwind to consumer spending and capex spending, see the first and second charts.
2) Jobless claims remain very low, around 200,000, and the economy remains surprisingly resilient, with households and firms having locked in lower interest rates during Covid, see the third and fourth charts.
3) The fiscal deficit is running at a high 6% of GDP for an expansion, driven by the CHIPS Act, IRA, and Infrastructure Act, and associated positive effects on manufacturing construction, energy investments, and infrastructure investments.
4) The employment-to-population ratio is almost a full percentage point lower than pre-Covid, and immigration continues to be strong, suggesting there is still more upside potential to employment.
Source: Bloomberg, Apollo Chief Economist 
Source: Bloomberg SHOK, Apollo Chief Economist. Note: $20 oil price decline, 60 bps tighter IG spreads, one standard deviation decline in VIX, and 100 bps lower rates via changed Fed forward guidance. 
Source: University of Michigan, Haver Analytics, Apollo Chief Economist 
Source: The Conference Board, Haver, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The vacancy rate for US office is approaching 20%, see chart below. And this is in a strong economy with a strong labor market. If the unemployment rate starts rising because of the lagged effects of Fed hikes, the office vacancy rate will increase even more.
Source: REIS data, Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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