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European energy prices continue to decline, see chart below.
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The idea with QE was to lower rates and create a rally in stock markets and credit markets. The idea with QT is the opposite: To push long rates higher, widen credit spreads, and lower stock prices. As QT gears up over the coming months, see chart below, investors should be positioned accordingly.
Source: Bloomberg, Apollo Chief Economist. Pace of purchases for 2021: BOE: £3.4bn per week till mid December 2021, FED: USD120bn per month with wind down from December with purchases ending in March 2022, ECB: Euro 90bn per month (20 bn APP + 60 bn PEPP), PEPP till March 2022, Euro 40bn in April, Euro 30bn in May and Euro 20bn in June, and only redemptions reinvested from August. BOJ: USD 70bn per month. For 2022: All programs are expected to wind down linearly from January 2022 to December 2022. Fed QT $ 95bn per month from May 2022. BoE starts to sell GBP80 bn in the next 12 months and ECB starts QT in 2Q23. See important disclaimers at the bottom of the page.
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The Fed is not going to pivot anytime soon because if the Fed pivots to dovish with inflation at 8%, it will push up inflation even more. The FOMC wants to lower inflation from 8% to 2%, and it has to happen through a tightening of financial conditions via higher rates, wider credit spreads, and lower equities. Our latest credit market outlook is attached.
Unless otherwise noted, information as of October 2022. Confidential and Proprietary – Not for distribution, in whole or in part, without the express written consent of Apollo Global Management, Inc.
It should not be assumed that investments made in the future will be profitable or will equal the performance of the investments shown in this document.See important disclaimers at the bottom of the page.
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During the pandemic, more people earned income doing TikToks, selling things online, and, more recently, driving Uber, and the growth of the gig economy over the past decade has been very significant.
Data from the Fed shows that 27% of US adults earned some money from gigs, and 8% were regular gig workers, in that they spent 20 or more hours in the prior month on gigs. The Fed survey also shows that gig work frequently supplements earnings from a traditional job, nearly half of gig workers also have full-time jobs, while 22% have part-time jobs.
This gradual shift towards more and more gig workers is complicating the Fed’s efforts at cooling down the economy. The more flexibility workers have with alternative work arrangements, the harder it is for the Fed to slow down aggregate demand because having a job is no longer a binary decision, which is a problem when the FOMC is trying to quickly slow down growth and income in the economy.
Source: Fed: Economic Well-Being of U.S. Households. Apollo Chief Economist, https://www.federalreserve.gov/publications/2021-economic-well-being-of-us-households-in-2020-executive-summary.htm. Note: Among all adults. Respondents could select multiple answers. See important disclaimers at the bottom of the page.
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Tourism in Singapore is starting to come back to normal, see chart below.
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The Fed is increasing interest rates, and this is starting to have an impact on the housing market. Rising mortgage rates, high home prices, a strong supply pipeline, and high building costs are risks to this housing cycle. Our updated US Housing Outlook is attached.
See important disclaimers at the bottom of the page.
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Our weekly slowdown watch PDF is available here, and the incoming data continues to point to an overheating economy, with core PCE inflation in August rising to 4.9% and weekly jobless claims falling to levels not seen since April, see chart below. The interest rate sensitive goods sector of the economy is slowing down, including housing and autos, but the service sector, including restaurants, airline traffic, hotels, concerts, and sporting events, is not showing signs of slowing down. The bottom line is that more Fed hikes are needed to cool down the economy to get inflation back to 2%.
Source: Department of Labor, Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The 1994 Fed hiking cycle is often mentioned as a very unusual period, but in 2022 the FOMC has increased interest rates faster and more than during the 1994 episode, and the FOMC expects this to be the biggest percentage point increase in the Fed funds rate in recent history, see chart below. Inflation is 8.3% and the FOMC’s inflation target is 2%. The Fed is trying to cool down the economy by tightening financial conditions, i.e. by pushing rates higher, credit spreads wider, and stocks lower. Investors should be positioned accordingly.
Source: FRB, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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If you had entered 2022 with a portfolio of 60% stocks and 40% fixed income, you would be down 20% so far, see chart below. With inflation still at more than 8% in the US, EU, and the UK, central banks will continue to push rates higher and stocks lower to cool down the economy and slow down earnings growth until inflation moves closer to the central banks’ 2% inflation target.
Source: Bloomberg, Apollo Chief Economist. The Bloomberg US BMA6040 Index rebalances monthly to 60% equities and 40% fixed income. See important disclaimers at the bottom of the page.
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Monetary theory points to a sharp decline in inflation over the coming months, see chart below.
Source: BLS, FRB, Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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