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There is a striking similarity between how the S&P500 has traded during this period of high inflation and the pattern we saw during the financial crisis in 2007-2008, see chart below. Maybe one conclusion is that when investors are faced with extreme levels of uncertainty, the behavioral response in financial markets over time is relatively similar. Markets think the problems are over and want to go higher but as more data comes in, then realize that the shock is still here and the downside risks are still substantial. Our latest Slowdown Watch is available here.
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The share of renters is higher in Germany and France than in the US, and the share of households with a mortgage is higher in the US than in most other OECD countries, see chart below.
Source: OECD, Apollo Chief Economist. Note: Data for 2019 or latest year available See important disclaimers at the bottom of the page.
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The annual net supply of Treasuries before the pandemic was $500bn. In 2023 it will be $1.5trn, with $1trn coming from the budget deficit and $500bn coming from Fed QT, see chart below.
This increasing supply of Treasuries is at risk of crowding out demand for other types of fixed income, including IG, HY, loans, and mortgages, in particular as the level of the risk-free rate continues to increase.
The upward pressure on rates because of the higher net supply of Treasuries is in addition to the upward pressure on rates coming from higher inflation.
The bottom line is that there is upside risk to rates not only from inflation but also from the growing supply of Treasuries, and the growing supply of Treasuries trading at higher rates could lower demand for other fixed income assets.
Source: CBO, FRB, Haver Analytics, Apollo Chief Economist. Note: QT is SOMA redemptions with cap assumed $60 bn per month in 2023 See important disclaimers at the bottom of the page.
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The US releases about 1mn barrels of oil daily from the Strategic Petroleum Reserve, and the SPR inventory is now at levels last seen in 1984, see charts below.
Source: DOE, Bloomberg, Apollo Chief Economist 
Source: DOE, Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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European energy prices are coming down from recent peaks. Our weekly energy PDF is available here.
Source: Bloomberg, Apollo Chief Economist (TZT1 Comdty as Dutch natural gas price, JXY1 Comdty as Germany electricity price, TM1 Comdty as European benchmark coal) 
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The consensus is close to forecasting a recession in Europe in 2023, see chart below.
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Fed: Credit Card Profitability
https://www.federalreserve.gov/econres/notes/feds-notes/credit-card-profitability-20220909.html
Air Pollution and Economic Opportunity in the United States
Fed: Anticipated FOMC Policy, Inflation and Credibility
https://www.richmondfed.org/publications/research/economic_brief/2022/eb_22-37
See important disclaimers at the bottom of the page.
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The Fed has been increasing the Fed funds rate, but banks have not increased interest rates on checking accounts and savings accounts, see chart below.
Households that want to benefit from rising short rates need to actively take money out of their bank accounts and into CDs, money market funds, or floating rate credit funds.
The implication for markets is that the transmission mechanism for monetary policy is weaker because the idea with a higher Fed funds rate is to attract money into savings and away from consumer spending.
With very high household savings and very high levels of deposits in banks, this lack of an increase in interest rates on checking accounts and savings accounts is likely a contributing reason why consumer spending is still so strong.
Our weekly Slowdown Watch PDF is linked here.
Source: FRB, RateWatch, Haver Analytics, Apollo Chief Economist. Note: Savings and Checking accounts minimum threshold balance $2,500. See important disclaimers at the bottom of the page.
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The Fed asks banks about credit conditions for firms and consumers, and the latest Senior Loan Officer Survey shows that banks are starting to tighten lending standards on commercial and industrial loans.
This is what the Fed wants to see because the goal for the FOMC is to slow down hiring and capex spending and, ultimately, inflation.
The challenge for the Fed is that the ongoing tightening in lending standards has not yet resulted in a corresponding widening in high yield spreads, see chart below.
The Fed’s goal is to tighten financial conditions and credit conditions, and if credit spreads don’t widen out further, then the Fed will have to do more with rates. Financial conditions are not tightening as much as the Fed would like to see, and as a result, the Fed will have to do more of the work by raising short-term interest rates further. Because the Fed is fully committed to getting inflation down from the current level at 8.5% to the Fed’s 2% inflation target.
For markets the conclusion is straightforward: The Fed wants to tighten financial conditions and investors should be positioned accordingly.
Source: FRB, Haver Analytics, Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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There are about 4500 publicly listed companies in the US, and about 16% are zombies, see chart below. A zombie company is a firm that has existed for ten years and had an interest coverage ratio of less than one for more than five consecutive years. After the financial crisis in 2008, interest rates were kept at zero for a decade, and low borrowing costs made it possible for many firms to continue to operate. With high inflation and rising interest rates, the number of zombie firms is likely to come down as the costs of capital continue to rise. For more discussion see this Fed publication and this BIS publication.
Source: FactSet, Apollo Chief Economist. Note: A firm is a zombie if its interest coverage ratio (ICR) has been less than one for at least 5 consecutive years and the firm is at least 10 years old. The last observation is 2022Q2. See important disclaimers at the bottom of the page.
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