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Consensus continues to downgrade growth expectations, and Treasury markets are starting to price a recession coming.
This narrative in rates is in sharp contrast to the story being told in equity and credit markets, where the consensus has only revised down earnings expectations very modestly, see chart below.
The bottom line is that rates investors and Fed watchers are getting increasingly worried about a coming recession, but equity investors are much more bullish and see little reason to downgrade earnings expectations meaningfully.
Our chart book with daily and weekly indicators for the US economy is available here.
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Weekly data shows that a rising share of households say that they have difficulties paying their expenses, see chart below.
Source: Census Bureau, Apollo Chief Economist (Note: Household Pulse Survey) See important disclaimers at the bottom of the page.
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The costs of electricity for European households and firms are currently five to ten times higher than normal, and this is a serious risk to the outlook for Europe, see chart below.
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With Walmart’s earnings out, the debate about the health of the US consumer is heating up again.
Wage growth is high, and job creation is strong, but inflation is starting to have a negative impact and trigger substitutions and changing consumption patterns.
From a rates and Fed perspective, what matters is growth in overall consumer spending. The top 60% of incomes account for almost 80% of total consumer spending, and with significant savings left among middle- and high-income households, it will take some time before overall consumer spending starts to slow down, see charts below.
The bottom line is that the Fed will have to raise rates more than the market expects to successfully cool the economy down. And faster Fed hikes increase the risk of a harder landing and deeper yield curve inversion.
Source: Consumer Expenditure Survey, Haver Analytics, Apollo Chief Economist 
Source: FRB, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Using the global BIS database, there are currently zero countries in the world with inflation below 2%, see chart below.
This fact raises the question whether US inflation is really something special driven by stimulus checks, higher unemployment benefits, and PPP loans.
Maybe the simple explanation is that inflation in the US is not driven by fiscal policy or even monetary policy, as our economics textbooks would say.
Instead, inflation went up literally everywhere in the world because of supply problems in the goods sector and in the energy sector. If this is the case, then inflation will soon come down once the supply chain problems in the goods and energy sectors have been resolved.
The bottom line is that with falling commodity prices and falling costs of transporting goods by container, truck, train, and air, we could see a sharp decline in inflation over the coming months. At least, the global nature of inflation seen in the chart below suggests that there is really nothing special about US inflation.
Source: BIS, Haver Analytics, Apollo Chief Economist. Note: Data till May 2022 (46 countries reported). The dataset includes the following 60 countries Euro Area, United States, United Kingdom, Austria, Belgium, Denmark, France, Germany, Italy, Luxembourg, Netherlands, Norway, Sweden, Switzerland, Canada, Japan, Finland, Greece, Iceland, Ireland, Malta, Portugal, Spain, Turkey, Australia, New Zealand, South Africa, Argentina, Brazil, Chile, Mexico, Peru, Cyprus, Israel, Saudi Arabia, United Arab Emirates, Hong Kong, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Thailand, Algeria, Bulgaria, Russia, China, Czech Republic, Slovakia, Estonia, Latvia, Serbia, Hungary, Lithuania, Croatia, Slovenia, Macedonia, Poland, and Romania. See important disclaimers at the bottom of the page.
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Dollar Funding Stresses in China
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4099944
IMF: Sharing the Pain of a Potential Russian Gas Shut-off to the European Union
https://www.imf.org/en/Publications/WP/Issues/2022/07/18/Market-Size-and-Supply-Disruptions-Sharing-the-Pain-of-a-Potential-Russian-Gas-Shut-off-to-520928
BIS: Big tech interdependencies – a key policy blind spot
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Our set of daily and weekly economic indicators for the US economy is available here, and we are watching the ongoing increase in jobless claims very carefully, see chart below.
So far, the uptrend in these weekly unemployment numbers is not alarming, but any signs of faster softening in the labor market would begin to impact Fed thinking. Ultimately Fed communication later this year will change from “we have an inflation problem” to “we have a growth problem.”
Source: Department of Labor, Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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CFOs are less worried about their own business than they are about the broader economy, see chart below.
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The United Nations is forecasting significant declines in the size of the working-age populations for Japan, Europe, and China, see chart below. This has important implications for consumer spending patterns, overall GDP growth, and the level of long-term interest rates in the US relative to the rest of the world.
Source: UN, Haver, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The risks are rising that sometime over the next three months, the Fed will go from “inflation is a problem” to “growth is a problem.” Once that happens, the FOMC will slow down Fed hikes, and this pivot from very hawkish to less hawkish will push down long rates. And once financial conditions move from tightening to easing, the dollar will begin to go down, see chart below.
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