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Consensus expectations show that the market is expecting Europe to be in stagflation in 2023 and in 2024, see charts below.
The classic textbook response to stagflation by the central bank is to keep interest rates high until inflation is under control and then wait for growth to eventually restart.
This is also what we should be expecting from the ECB. The implication for markets is high short rates and low growth in earnings.
Source: Bloomberg, Apollo Chief Economist 
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The CCC spread in Europe is normally very highly correlated with the CCC spread in the US. But this relationship has changed after the Fed started raising rates, see the first chart below.
Spreads are currently pricing that Europe will have a recession with many defaults, but in the US, everything is fine.
The rally in the US relative to the EU has happened despite the consensus seeing a 60% probability of a recession in the US over the next 12 months and only a 50% probability in Europe, see the second chart.
The bottom line is that there is an inconsistency in pricing of lower-rated corporate credit in the US and Europe. We cannot both have that everything is fine and at the same time we are going into a recession.
The key question is why US credit has rallied so much despite the high recession probability. Given the relationship changed after the Fed started raising rates maybe the reason is what could be called a yield level illusion in US lower-rated credit, where investors focus more on the levels of yields than on the underlying fundamental credit risks of Fed hikes and permanently higher costs of capital.
In short, credit investors today should be asking themselves if spreads are focusing on yield levels or on credit fundamentals.
Source: Bloomberg, Apollo Chief Economist 
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The seven biggest stocks in the S&P500 are up more than 50% in 2023, see chart below.
The remaining 493 stocks are basically flat.
The bottom line is that if you buy the S&P500 today, you are basically buying a handful of companies that make up 34% of the index and have an average P/E ratio around 50.
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Since the Fed started hiking rates last year, US households have bought $1.5 trillion in Treasuries, and over the past six months, US pension and insurance have also emerged as a buyer, see chart below. Over the same period, the Fed has been doing QT and been a net seller of Treasuries. The bottom line is that US households and real money are finding current levels of US yields attractive.
Source: FFUNDS, Haver, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The Business Roundtable CEO survey is designed to provide a picture of the future direction of the US economy by asking CEOs to report their company’s expectations for sales and plans for capital spending and hiring over the next six months.
Since the Fed started raising rates in March 2022, CEOs have gradually worried more and more about the economy slowing, see chart below.
This is how monetary policy works. Higher cost of capital slows down business spending. The decline in the employment sub-index to 2020 levels is particularly noteworthy.
Source: Business Roundtable, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Our monthly credit market outlook is available here, and the three key themes for investors are 1) Up in quality, 2) Large cap, and 3) Low leverage and high interest coverage ratios.
With the Fed on hold well into 2024 and the maturity wall coming, debt refinancings will continue to come in at higher levels of yields, see the first chart below.
The bottom line is that the cost of capital has increased significantly, and Fed hikes are biting harder and harder, particularly for companies with weak credit fundamentals.
Source: Bloomberg, Apollo Chief Economist 
Source: Moody’s Analytics, Apollo Chief Economist 
Source: Apollo Chief Economist 
See important disclaimers at the bottom of the page.
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Slowing global growth would argue for falling commodity prices. That is also what we are seeing for industrial metals such as copper.
Slowing global growth combined with extreme weather and inventory situations have created a more mixed situation for agricultural commodities. The agriculture price index has been moving sideways, with some components (such as orange juice, cocoa, and sugar) going up and others (such as soybean, corn, and coffee) going down.
For energy, slowing global growth and rising US production would argue for lower oil prices. But OPEC+ production cuts have pushed oil prices higher in recent months.
The sideways movement in the broad commodity price index is likely a welcome development for the Fed. However, a continued rise in oil prices could magnify the ongoing slowdown in growth and reverse the ongoing decline in inflation.
Our latest outlook for commodity prices is available here.
Source: S&P Global, Apollo Chief Economist 
Source: Statistical Review of World Energy, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The divergence between different Fed forecasts for third-quarter GDP is significant.
The Atlanta Fed estimates that GDP this quarter is 4.9%, and the St. Louis Fed estimates that the US economy is currently in a recession.
Given this uncertainty, it makes sense for the FOMC to keep interest rates on hold at their meeting this week.
Source: Atlanta Fed, FRBNY, St. Louis Fed, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The number of people going to Broadway shows has in recent weeks been falling faster than normal, see chart below. We will over the coming weeks be closely monitoring whether Broadway attendance picks up like it normally does in the fall. For markets, this is important because consumer services continue to be the key reason why the economy, despite significant Fed hikes, is still holding up.
Source: Internet Broadway Database, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The 10 largest companies in the S&P500 make up 34% of the index, and these 10 mega-cap companies have an average P/E ratio of 50, see chart below.
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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