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Before the pandemic, the sub-components of CMBS traded as one asset class where delinquency rates would move up and down in sync with the business cycle.
Since the pandemic and after the Fed started raising rates, there has been significant differentiation between different types of commercial real estate, with delinquency rates for office and regional malls rising, delinquency rates for hotels first going up and then down, and the delinquency rate for retail settling at a permanently higher level, see chart below.
The bottom line is that after the pandemic, active credit selection has become key for investors in CMBS and CRE more broadly.
Source: Moody’s Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Since the Fed started raising rates in March 2022, S&P500 companies have on earnings calls talked more and more about weak demand, see chart below.
This is what the textbook would have predicted. Higher interest rates increase borrowing costs for consumers and corporates—which slows down demand.
Source: Bloomberg, Apollo Chief Economist. Note: “weak demand” includes consumer demand, consumption demand, deteriorate, decelerate, demand side, end market, erode, market demand, sluggish, soften, softer, softening, weaken, weakening, and worsen. See important disclaimers at the bottom of the page.
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The Conference Board’s consumer confidence survey asks households if they plan to travel to a foreign country, and the chart below shows that a record-high share of US consumers are planning to go on vacation to a foreign country within the next six months.
The continued strong demand for consumer services is the reason why it is difficult for the Fed to get supercore inflation under control. US households want to travel on airplanes, stay at hotels, eat at restaurants, go to sporting events, amusement parks, and concerts, and that is why inflation in the non-housing service sector continues to be so high.
The bottom line is that rates will stay higher for longer because the Fed is still trying to get non-housing service sector inflation under control.
Source: The Conference Board, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The average price of a concert ticket has increased from $90 in 2018 to $120 in 2023, see chart below.
Source: Pollstar, Apollo Chief Economist. Note: The top 100 North American concert tours rank artists by average box office gross per city and include the average ticket price for shows across North America. See important disclaimers at the bottom of the page.
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The German construction industry faces significant headwinds because of higher borrowing costs for homebuyers and homebuilders, higher costs of production, and substantial red tape in the construction sector—including bureaucratic building permit requirements, a rent break, and burdensome regulation.
Source: Ifo, Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Since the Fed started raising rates in March 2022, job growth has slowed steadily, see chart below.
This is what the textbook would have predicted. When the Fed raises rates, firms slow down their hiring.
Looking ahead, the consensus expects job growth to grind to a halt over the coming six months, see the consensus forecast in the chart below.
The key question for markets is if we can get a soft landing in both inflation and in the labor market, i.e., in both parts of the Fed’s dual mandate.
With inflation slowing and the labor market softening, the risks are rising that both inflation and employment are weakening faster than markets currently expect.
Weaker inflation is good. But a weaker labor market is not good.
Put differently, markets will soon turn their focus away from weaker inflation to a weaker labor market.
In short, everyone who is bullish on equities and lower-rated credit should ask themselves where they think the labor market will be in three months, with the Fed on hold and not showing any signs of cutting anytime soon.
Source: BLS, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Our outlook for China is available here, and there are three conclusions:
1) Data for Chinese exports and US imports show that China and the US are now less dependent on each other, and the US is now importing more from Mexico than from China, see the first and second chart.
2) China continues to sell US Treasuries, and foreign purchases of US Treasuries are coming from the foreign private sector and not from the foreign official sector, suggesting that recent demand for US Treasuries has come from yield-sensitive buyers, see the third and fourth chart.
3) China has recently seen a trend increase in the share of private sector firms with negative earnings, see the fifth chart.
Source: IMF, Bloomberg, Apollo Chief Economist 
Source: Census Bureau, Bloomberg, Apollo Chief Economist 
Source: Treasury, Haver Analytics, Apollo Chief Economist 
Source: Treasury, Haver Analytics, Apollo Chief Economist 
Source: Bloomberg, Apollo Chief Economist. Note: CNBUPRTD Index, CNLBPRTD Index used. See important disclaimers at the bottom of the page.
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Hiring for the holiday season is generally done in October, and adding up new jobs created in the BLS-defined holiday season retail sectors in the latest employment report shows that retailers expect a weaker holiday season, see chart below. This soft outlook is consistent with growing inventories at many retailers. The BLS defines holiday sectors as furniture, electronics, personal care, clothing, sporting goods, general merchandise stores, miscellaneous store retailers (e.g., florists, office supply stores, gift shops, and pet shops), and non-store retailers (e.g., online shopping and mail-order houses, vending machine operators, and direct store establishments).
Source: BLS, Apollo Chief Economist. Note: Non-seasonally adjusted data shown. Holiday season sectors defined by BLS is available here. See important disclaimers at the bottom of the page.
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A decade ago, foreigners owned 33% of US government debt. That number has now declined to 23%, see chart below.
Source: Treasury, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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There is always a new fad somewhere, see chart below. But for investors, it is challenging to figure out when bubbles start, when they peak, and when they end.
Put differently, a bubble is a narrative. And the latest shiny narrative is AI. However, a lot of questions remain unanswered, such as how useful will AI be, how long will it last, will it significantly change our lives, are the AI companies worth buying when they have already increased 50% in 2023 and have P/E ratios around 50?
The bottom line is that bubble chasing is not a good investment strategy.
Source: Bloomberg, Apollo Chief Economist. Note: Nikkei for Japan’s real estate crisis of 1989; 1998 Moscow large-cap index; NVIDIA as a proxy for AI; 2005-07 China property bubble; and stock price of US homebuilders. See important disclaimers at the bottom of the page.
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