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Firms in Germany are reducing their consumption of natural gas. The reduction is driven by slowing economic growth in Europe and substitution toward other sources of energy.
Source: https://www.bundesnetzagentur.de/, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The CPI index used by the Fed and financial markets captures the spending habits of about 80 percent of the population of the United States. But spending patterns vary across different age groups. For example, older generations spend more on services such as housing and medical care, and less on goods including food, beverages, and apparel.
To better understand these differences in spending patterns, the BLS calculates a CPI index looking at inflation for people age 62 and above. It shows that for older generations, inflation has for decades been higher because of higher inflation in services. But during the pandemic, when inflation on goods was very high, inflation for people age 62 and above has been relatively lower. With goods inflation coming down and service sector inflation still rising, we should expect more convergence between the two inflation measures going forward, a process which has already started in the chart below.
Source: BLS, Haver Analytics, Apollo Chief Economist. Note: It is calculated as the difference between CPI-E which is the CPI for 62 years and older and CPI-U which is for the total basket. Elderly spend more on housing, medical care and less on food & beverages, apparel, transportation, education and communication. See important disclaimers at the bottom of the page.
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Inflation will be coming down over the coming quarters. This is what the Fed is predicting, that is what the consensus is expecting, and that is what we are predicting. The problem is that this has been the forecast ever since inflation started going up in April 2021, see chart below. Given how systematically wrong inflation forecasts have been over the past 18 months, there are good reasons to be cautious about the current forecast.
Source: Cleveland Fed, Bloomberg, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The Fed will remain hawkish for longer than the ECB because European inflation is mainly driven by food and energy, see chart below. This is in contrast to US inflation, which is driven primarily by higher core inflation, see again the chart below.
Source: BEA, Eurostat, Haver Analytics, Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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National energy policy responses to the energy crisis
https://www.bruegel.org/dataset/national-energy-policy-responses-energy-crisis
Fed: The Financial Stability Implications of Digital Assets
https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr1034.pdf
Fed: A New Measure of Consumers’ (In)Attention to Inflation
See important disclaimers at the bottom of the page.
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The number of people going to Broadway shows is rising, and the gap to 2019 continues to close, see chart below. Household balance sheets remain strong, job growth is still strong, and wage growth is strong, and indicators for air travel, hotel occupancy rates, restaurant bookings, and concerts continue to show that the consumer services sector is red hot, see also our attached PDF with daily and weekly indicators for the US economy.
The Fed is raising interest rates to slow down growth, and so far, it is only the interest-rate sensitive components of GDP (housing, autos, capex) that are responding. The services sector makes up 80% of GDP, and it is not yet showing signs of slowing down.
Source: Internet Broadway Database, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The forward P/E ratio for the S&P500 is currently 15, a level last seen in 2019 when inflation was 1.8%.
Inflation today is 8.2%, and the Fed is raising rates aggressively to slow down GDP growth and slow down growth in the “E” in the P/E ratio.
The Fed does not worry about how much or how little the S&P500 has declined since the peak in 2021. In other words, it is not important to the Fed if the P/E ratio today is 10, 15, or 20.
What the Fed worries about is that inflation at 8.2% is much higher than the FOMC’s 2% inflation target. And with the Fed stepping hard on the brakes, the downside risks to equity and credit markets remain significant.
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The goods sector of the US economy (housing, autos, capex spending, etc.) is more sensitive to interest rates, and Fed hikes are having a more negative effect on the S&P500 than on GDP because the goods sector makes up a much smaller share of GDP, see chart below. In addition, the service sector which is most vulnerable to higher interest rates is tech, and the tech sector has also responded very negatively to Fed hikes. The bottom line is that it is not surprising that Fed hikes have had a more negative effect on the stock market than on GDP.
Source: BLS, S&P, Bloomberg, Haver Analytics, Apollo Chief Economist. Note: S&P 500 services industries include Software, Interactive Media & Services, IT Services, Health Care Providers & Services Indus, Internet & Catalog Retail, Specialty Retail, Hotels Restaurants & Leisure, Life Sciences Tools& Services, Diversified Financial Services, Diversified Telecom Services, Multiline Retail, Commercial Services & Supplies, Professional Services, Wireless Telecommunication Services, Diversified Consumer Services. See important disclaimers at the bottom of the page.
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People age 55 and older are getting more worried about having a comfortable retirement, likely driven by covid, high inflation, and a falling stock market, see chart below.
Source: U. of Michigan Sentiment, Haver, Apollo Chief Economist (Q: Compared with 5 years ago, do you think the chances that you (and your husband/wife) will have a comfortable retirement have gone up, gone down, or remained about the same?) See important disclaimers at the bottom of the page.
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The share of loans rated B- in the leveraged loan index has increased from 13% in 2017 to 29% today, see chart below. The implication is that if there is a recession with a spike in the unemployment rate, then CLOs will be more vulnerable.
Source: S&P, Apollo Chief Economist See important disclaimers at the bottom of the page.
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