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Europe’s growing league of small corporate bond issuers: new players, different game dynamics
https://www.ecb.europa.eu/pub/economic-research/resbull/2022/html/ecb.rb220615~b69a5f0ce5.en.pdf
ECB: The impact of credit supply shocks in the euro area: market-based financing versus loans
https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2673~7d8599b01a.en.pdf
Fed: Volatility in Home Sales and Prices: Supply or Demand?
https://www.federalreserve.gov/econres/feds/files/2022041pap.pdf
See important disclaimers at the bottom of the page.
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More people are going to movie theatres to watch Top Gun, Jurassic World, and Minions, and household savings are still very high, see charts below and in our Slowdown Watch.
The bottom line is that daily and weekly data combined with the June employment report show that the economy continues to do well, and the Fed is still not succeeding in slowing the economy down.
Source: Boxofficemojo.com, Apollo Chief Economist 
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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S&P500 earnings normally decline 14% on average during recessions, see chart below.
See important disclaimers at the bottom of the page.
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There is substantial disagreement in markets about the outlook for global rates in 2023, see chart below.
Looking at forward OIS curves shows that markets are pricing rate increases in 2023 by the ECB, the Riksbank, and the SNB.
In sharp contrast, markets are pricing that the Fed, BoC, and BoE will cut rates significantly in 2023.
Implicit in these forecasts are very different assumptions about inflation. In some countries, the expectation seems to be that inflation will soon reverse back toward the central bank’s target. In other countries, the assumption is that inflation will be a much more permanent problem that requires higher rates for much longer.
Normally central banks move in sync, and the bottom line is that several of these central banks seem mispriced. In particular, it seems highly unlikely that in 2023 the ECB will be hiking rates several times, and the Fed will be cutting rates several times.
Source: Bloomberg, Apollo Chief Economist. Note: Hikes and cuts are derived from the pricing of the forward OIS curve for individual countries using FWCV on Bloomberg. See important disclaimers at the bottom of the page.
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The latest data for delinquency rates for auto loans, credit cards, and mortgages show that consumer credit quality is still good, including for lower FICO scores, see table below.
With the Fed hiking rates and financial conditions tightening, and the economy slowing, we will, over the coming quarters, likely begin to see more broad-based signs of weakness.
Source: Transunion Monthly Industry Snapshot See important disclaimers at the bottom of the page.
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This is the most anticipated recession ever. Maybe it is so anticipated that firms and households are so prepared for a slowdown that we may end up not having a recession.
There are two important reasons why we could get a soft landing:
- Corporate profit margins are near all-time highs, and corporate cash balances are near record-highs, which gives companies room to absorb declines in demand without having to lay off workers, see the first chart below.
- Consumers have record-high savings, which means that households will still have money to support consumer spending even if the unemployment rate starts rising, see the second chart.
The bottom line is that we could get a soft landing because both firms and households have significant buffers to deal with a negative hit to demand and incomes.
The implication for markets is that once the Fed pivots from hawkish to dovish, either because of inflation rolling over or growth slowing, credit markets and stock markets could move higher. The next data release to watch is the employment report this coming Friday, where the consensus currently expects nonfarm payrolls at 275,000, unemployment at 3.6%, and average hourly earnings at 5.1%.
Any softening in the labor market and, in particular, in average hourly earnings would push the Fed in a more dovish direction because it would mean that the Fed has finally succeeded in slowing down the economy and ultimately inflation.
See important disclaimers at the bottom of the page.
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Core CPI inflation for May was 6.0%, and the Cleveland Fed expects core inflation over the coming months to decline to 5.7% and 5.8%, see link here and the first table below.
The Fed’s forecasts for month-over-month inflation are also expected to decline over the coming months, in particular for headline inflation, see the second table below.
The June CPI release will come out on Wednesday, July 13.
See important disclaimers at the bottom of the page.
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Fed: What Is Corporate Bond Market Distress?
https://libertystreeteconomics.newyorkfed.org/2022/06/what-is-corporate-bond-market-distress/The Subjective Inflation Expectations of Households and Firms: Measurement, Determinants, and Implications
https://docs.iza.org/dp15391.pdfECB: Organisational structure as a driver of mergers and acquisitions in the European banking sector
https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2674~ebe571e288.en.pdfSee important disclaimers at the bottom of the page.
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Our slowdown watch is available here, and a major theme in markets this week continues to be the divergence between rates markets and equity markets. Rates investors have been downgrading growth expectations, whereas equity investors have been upgrading earnings expectations. Either rates investors are right, and we will have a recession, and then earnings will come down. Or equity investors are right, and we will have a soft landing, and GDP growth expectations will be revised higher.
See important disclaimers at the bottom of the page.
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Looking at ETF flows shows that retail investors are taking money out of IG, HY, and loan ETFs but adding money to long crypto ETFs, see charts below.
Source: Bloomberg, Apollo Chief Economist (Note: bito US equity: Crypto ETF flows, BFFUEBK Index: US Bank loans ETF flows, BFFUEHY Index: HY ETF flows; BFFUEIG Index: US IG ETF flows) See important disclaimers at the bottom of the page.
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