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The rise in the share of fixed-rate mortgages over the past four decades is the reason why the transmission mechanism of monetary policy is weaker today, see chart below.
When interest rates go up, it has a milder impact on the economy as mortgages are locked-in at lower interest rates. But this effect is symmetric. When the Fed starts cutting interest rates in September, lowering interest rates will not trigger a strong boost to housing demand because 95% of mortgage holders are already in mortgages with low interest rates. In addition, a record-high 40% of homeowners don’t have a mortgage, which also contributes to making monetary policy less potent.
The bottom line is that the high share of fixed-rate mortgages makes monetary policy less effective both when the Fed raises interest rates and when the Fed lowers interest rates.
Source: FHLMC, FHFA, Haver Analytics, IMF WEO, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The uptrend in immigration continues with a near record-high level of immigrant visas issued every month, see chart below. Examples of immigrant visas include employer-based visas and family-sponsored visas (such as spouses of US citizens). Maybe the reason why the unemployment rate is rising is because the government is gradually working through a Covid-related backlog of visa applications, which increases the labor supply.
Note: The data is monthly visas issued. Source: US Department of State, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The source of the rise in the unemployment rate is not job cuts but a rise in labor supply because of rising immigration. That is the reason why the Sahm rule doesn’t work. The Sahm rule was designed for a decline in labor demand, not a rise in immigration.
For more insights, a replay of my Tuesday webcast on the current market volatility and its implications for the Fed, the economy, and the markets is available here.
Source: Challenger, Gray & Christmas, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The soft employment report for July is in sharp contrast to the steady decline in default rates seen in recent months, see chart below.
If the economy were crashing, default rates would be spiking higher, and that is not what the data shows.
Also, join us today for a live discussion hosted by yours truly on what the current market volatility might mean for the Fed, the economy, and the markets. We start at 8:00 am EDT. Register now.
Source: PitchBook LCD, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The CHIPS Act, the Inflation Reduction Act, and the Infrastructure Act have triggered a new industrial renaissance in AI and energy. Also, US manufacturing capacity is now growing after having declined for many decades, see chart below.
Note: SIC = Standard Industrial Classification. Source: Federal Reserve Board, National Bureau of Economic Research, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Research by David Autor from MIT shows that 60% of today’s workers are employed in occupations that didn’t exist in 1940, see chart below.
This is important when discussing what impact AI may have on the labor market.
Source: David Autor, Caroline Chin, Anna Salomons, Bryan Seegmiller, “New Frontiers: The Origins and Content of New Work, 1940–2018.” The Quarterly Journal of Economics, Volume 139, Issue 3, August 2024; Apollo Chief Economist See important disclaimers at the bottom of the page.
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The soft July employment report is inconsistent with the hard data for economic activity, see charts below and our chart book. There are no signs of a slowdown in restaurant bookings, TSA air travel data, tax withholdings, retail sales, hotel demand, bank lending, Broadway show attendance, and weekly box office grosses. Combined with GDP in the second quarter coming in at 2.8%, the bottom line is that the current state of the economy can be described as slowing, but still a soft landing.
Note: Data as of Saturday, August 3, 2024. Source: Apollo Chief Economist See important disclaimers at the bottom of the page.
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Since December 2019, US government debt outstanding has grown by $11.6 trillion, and over the same period, nominal GDP has grown by $6.7 trillion, see chart below.
Source: BEA, US Treasury, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Since the Fed started raising rates, business confidence has diverged for small and large companies, see chart below.
The source of the divergence is likely higher costs of capital for small companies that have higher leverage and lower coverage ratios, and lack access to broadly syndicated loan markets and private credit.
In other words, the transmission mechanism of tighter monetary policy mainly works through smaller companies that are harder hit by Fed hikes and don’t benefit from tighter credit spreads and higher stock prices.
Source: Conference Board, NFIB, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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China is slowing, Europe is slowing, and the US economy is also in the process of slowing down over the coming quarters.
As a result, commodity prices are falling.
Prices for energy, which make up almost 60% of the S&P GSCI, are declining because of weaker demand from China and more energy supply in the US.
Agriculture prices are falling, in particular soybean, driven lower by weaker global growth. But there are exceptions such as coffee, cocoa, livestock, and orange juice, where low supply is important.
Industrial metals prices are falling because of weaker global growth. For precious metals, gold prices are rising as households in China diversify away from falling Chinese property prices and falling Chinese stock prices. Central banks are also buying gold.
Our latest commodity outlook chart book is available here.
See important disclaimers at the bottom of the page.
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