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The latest data shows a modest improvement in credit card delinquency rates and auto loan delinquency rates for subprime, near prime, and prime borrowers, see chart below. This is the opposite of what would be expected with the Fed trying to tighten financial conditions.
Source: Transunion Monthly Industry Snapshot April 2023 See important disclaimers at the bottom of the page.
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We built a small vector autoregressive model with GDP growth, loan growth, and bank lending standards, and giving a one standard deviation shock to bank lending standards using a standard Cholesky decomposition shows that it takes six quarters before tighter credit conditions have a maximum negative impact on GDP, see chart below. In other words, the negative impact of the SVB collapse on tighter lending standards will continue to accumulate until the second half of 2024 because it takes time for banks to repair their balance sheets.
Source: FRB, Haver Analytics, Apollo Chief Economist. Note: Impulse response from the VAR model with variables Loan growth (YoY), GDP growth (YoY) and SLOOS tightening (Banks Tightening C&I Loans to Large Firms). One standard deviation shock to bank tightening leads to -0.7% pt. decline in real GDP growth bottoming in six quarters. One standard deviation for bank tightening is 10.2 pts. See important disclaimers at the bottom of the page.
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In Europe, there are three times as many publicly held companies as there are PE-backed companies, see chart below.
Source: Pitchbook, Statista, Apollo Chief Economist. Note: Data as of 31st March 2023. See important disclaimers at the bottom of the page.
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The number of publicly held companies is shrinking, and there are about three times as many PE-backed firms in the US as there are publicly held companies, see chart below.
With inflation remaining elevated, the costs of capital will also remain elevated, which will continue to put downward pressure on tech, growth, and venture capital.
Source: Pitchbook, Small Business Administration, Apollo Chief Economist. Note: Data as of 31st March 2023. See important disclaimers at the bottom of the page.
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M&A activity has declined over the past two years, and this trend will continue, driven lower by central banks increasing the costs of capital as they continue to fight inflation.
Source: S&P Capital IQ, Apollo Chief Economist. Note: M&A transactions include announced and completed transactions. See important disclaimers at the bottom of the page.
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Two years ago, the number of banks exceeding the FDIC’s CRE loan concentration guidelines was about 300. Today there are almost 700, see chart below.
In other words, US banks have become much more vulnerable to a decline in commercial real estate prices.
Our latest credit market outlook is available here.
Source: S&P Global Market Intelligence, Apollo Chief Economist. Note: C&D = Construction and Development, data as of May 2023 and based on regulatory filings. See important disclaimers at the bottom of the page.
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Households still have plenty of excess savings left, see chart below. That is the reason why consumer spending remains so strong, in particular consumer spending on services such as airlines, hotels, restaurants, etc.
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Consumer spending on goods is significantly higher than before the pandemic, and consumer spending on services is only modestly higher, see chart below.
The implication for markets is that there are still upside risks to consumer spending on services. And hence upside risks to service sector inflation.
Source: BEA, Haver, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Goods inflation is coming down and approaching pre-pandemic levels. Service sector inflation is still not showing signs of moving lower, see chart below.
The debate in markets is whether a significant increase in the unemployment rate is needed to get service sector inflation down, and this new Fed paper says that the labor market is not a key driver of service sector inflation.
In other words, there is a risk of inflation becoming more sticky even if the labor market starts weakening.
Source: BEA, Haver, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Inflation has been more sticky than the FOMC expected when they published their latest forecast in March, see chart below.
This argues for higher costs of capital for longer, which increases the probability of a harder landing.
Put differently, sticky inflation requires more demand destruction, which increases the downside risks to corporate earnings.
Source: BEA, FRB, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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