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Our latest credit market outlook presentation is available here.
Source: LCD Comps, Apollo Chief Economist 
Source: ICE BofA, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Wage inflation has a weight of 25% in the CPI basket via Services ex-energy ex-shelter. The transmission channel is that higher wages in consumer services such as restaurants and hotels increase the price of eating out and staying at hotels.
The impact of higher wage inflation on the remaining 75% of the CPI index is more complex, see chart below.
With wages having a limited weight in the CPI basket, it is entirely possible to have higher wage inflation for a period while consumer price inflation is coming down as supply chains get better, rent inflation declines, car price inflation declines etc. In other words, the 25% of the CPI basket that is directly impacted by wages may be rising while at the same time, inflation in the remaining 75% of the basket is declining.
The bottom line is that with inflation currently at 7.7% and declining rent inflation, declining car price inflation, declining transportation inflation, declining import price inflation, and elevated inventory levels, we may not need a dramatic amount of demand destruction and a significant increase in the unemployment rate for inflation to come down to the Fed’s 2% inflation target.
In short, with inflation declining and the labor market remaining solid, the probability of a soft landing is rising.
Source: BLS, Haver Analytics, Apollo Chief Economist. Note: Weights as of October 2022. Goods also includes traditional commodities See important disclaimers at the bottom of the page.
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Inflation is coming down without a major increase in the unemployment rate, see charts below. That is the definition of a soft landing.
Source: BLS, Apollo Chief Economist 
Source: ISM, BLS, Haver Analytics, Apollo Chief Economist 
Source: ISM, BLS, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The November employment report shows that wage inflation is increasing in the service sector and declining in the goods sector, and most of the jobs created in November were in Leisure and hospitality, see chart below and our chart book available here.
Source: BLS, Haver, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The US corporate high yield total return index is down 10% so far in 2022, and high inflation and rising rates have significantly impacted bond market returns. The average total annual return in high yield from 2010 to 2020 was 8%, see chart below.
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Foreign private investors are buying a lot of Treasuries at the moment, see chart below. Foreign central banks, on the other hand, are big sellers of Treasuries. And foreigners, more broadly, are big sellers of US equities.
Source: Treasury, Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Beijing subway passenger traffic is approaching the low levels seen earlier this year, see chart below.
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The New York Fed’s measure of supply chain pressures suggests that inflation could be close to the Fed’s 2% target within the next six months, see chart below.
Source: NY Fed, BLS, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Inflation is 7.7%, and there is an important debate in Fed working papers about how much demand destruction is needed to get inflation down to the FOMC’s 2% target.
Specifically, these Fed studies quantify the size of the sacrifice ratio, defined as the foregone output accruing from a one percentage point decline in inflation, and the two transmission channels investigated are intrinsic adjustment costs and expectational adjustment costs, with expectations playing by far the most important role.
Unfortunately, the sacrifice ratio is not a particularly useful concept when a significant source of the rise in inflation is not demand but supply chain problems driven by covid.
But a critical insight from these papers is that the sacrifice ratio has increased in recent decades, telling the Fed today that even if inflation quickly falls to, say, 4%, because of supply chain problems getting resolved, the demand destruction required to get inflation down to 2% is likely going to be significant, and therefore the ongoing slowdown could be deeper and longer than the market is currently pricing.
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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90-day delinquency rates for consumer loans are still very low, but +30-day delinquency rates are starting to rise for credit cards and auto loans, pointing to emerging signs of deterioration in consumer credit quality. This tells the Fed that a slowdown in consumer spending is underway. Combined with falling inflation, the case for a Fed pause is intensifying.
Source: FRBNY, Haver, Apollo Chief Economist 
Source: FRBNY, Haver, Apollo Chief Economist See important disclaimers at the bottom of the page.
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