The Daily Spark

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  • Outlook for Europe Deteriorating

    Torsten Sløk

    Apollo Chief Economist

    The consensus continues to downgrade growth expectations for Europe, raising questions about ECB rate hikes and the rising risk of loan losses and defaults in Europe, see chart below.

     

    Chart showing further deterioration of Europe's growth forecast.
    Source: Bloomberg, Apollo Chief Economist

    See important disclaimers at the bottom of the page.


  • Number of Pedestrians in Times Square

    Torsten Sløk

    Apollo Chief Economist

    There is more pedestrian traffic in Times Square, but current levels are still 25% below normal, see chart below.

     

     

    Chart showing pedestrian traffic is rebounding in Times Square, but it's still 25% below normal levels
    Source: timessquarenyc.com, Apollo Chief Economist

    See important disclaimers at the bottom of the page.


  • Oil Price Outlook

    Torsten Sløk

    Apollo Chief Economist

    We updated our oil price forecasting model, and while sanctions continue to argue for higher oil prices, the downward pressure is significant from the Strategic Petroleum Reserve release, growing supply, and slowing global growth. As a result, our econometric model points to lower oil prices over the coming 18 months, see charts below.

    Source: Apollo Chief Economist

    See important disclaimers at the bottom of the page.


  • Weekend Reading

    Torsten Sløk

    Apollo Chief Economist

    U.S. Retirement Assets: Amount in Pensions and IRAs
    https://crsreports.congress.gov/product/pdf/IF/IF12117

    Reactions of household inflation expectations to a symmetric inflation target and high inflation
    https://www.dnb.nl/media/2dzn0i2m/working_paper_no-_743.pdf

    Russia Sanctions and Cryptocurrencies: Policy Issues
    https://crsreports.congress.gov/product/pdf/IN/IN11939

    See important disclaimers at the bottom of the page.


  • Slowdown Watch

    Torsten Sløk

    Apollo Chief Economist

    There are some very early signs that the economy is starting to cool down, with layoffs rising in startups and some housing indicators starting to roll over from high levels. But the big picture remains that high-frequency indicators show that the economy is still strong. Most noteworthy this week was the decline in jobless claims. The solid data is consistent with the consensus expectation of nonfarm payrolls coming in at 330K next week and the unemployment rate falling from 3.6% to 3.5%.

    Looking ahead, with the virus subsiding, we should begin to see a shift away from goods toward services. The chart below shows that this shift has not started yet. The surprise has been that consumer goods spending has continued to be so strong. But with more people flying, eating at restaurants, staying at hotels, and going to amusement parks, we should over the coming quarters see growth in consumer services accelerate, and spending on consumer goods begin to slow down.

    The trading implication for equity and credit markets is to be long consumer services and short consumer goods. For the Fed the implication is that rate hikes continue. Read our slowdown chart book.

    Chart showing that despite a slowdown in the pandemic, consumer spending has not yet shifted towards services from goods
    Source: BEA, Haver Analytics, Apollo Chief Economist

    See important disclaimers at the bottom of the page.


  • Labor Market Cooling Down

    Torsten Sløk

    Apollo Chief Economist

    With tech and venture capital taking a severe hit, layoffs at startup companies have started to increase, see chart below. The Fed is trying to destroy demand, including demand for labor, and this is early evidence that they are succeeding.

    Chart showing layoffs at startups are picking up as technology and venture capital firms are under pressure
    Source: Layoffs.fyi, Apollo Chief Economist. Note: Top 5 sectors that account for layoffs in May 2022: Transportation, Food, Travel, Finance, and Real Estate.

    See important disclaimers at the bottom of the page.


  • Crash in Venture Capital Continues

    Torsten Sløk

    Apollo Chief Economist

    The total value of the US-based venture capital private company universe is down almost 60% over the past six months, and with a rising risk of a US recession, there is more downside from here. The crash in venture capital will continue until the hard landing is behind us.

    Chart showing venture capital valuations down nearly 60% from their record high
    Source: Bloomberg, Apollo Chief economist. Note: The Thomson Reuters Venture Capital Index is designed to measure the value of the US-based venture capital private company universe in which venture capital funds invest.

    See important disclaimers at the bottom of the page.


  • Upward Pressure on Agriculture Prices

    Torsten Sløk

    Apollo Chief Economist

    Wheat prices and barley prices are up 50% not only because Ukraine and Russia combined account for 30% of global wheat trade but also because of bad weather slowing the US spring wheat planting progress, see chart below.

    Chart showing slow wheat planting in the US this year due to poor weather compared with other years
    Source: USDA, Haver Analytics, Apollo Chief Economist

    See important disclaimers at the bottom of the page.


  • Outlook for Credit Markets

    Torsten Sløk

    Apollo Chief Economist

    We have updated our credit market chartbook, and the conclusion is that the Fed wants to see wider spreads in both IG and HY to get inflation down. There is also a rising risk that Fed rate hikes will result in a recession, triggering additional spread widening for both IG and HY spreads.

    The bottom line is that with inflation currently at 8% and the Fed’s inflation target at 2%, it is too early for markets to declare victory. Credit spreads need to go wider until we have certainty about inflation coming down to 2% and certainty that we will not have a hard landing.

    Chart showing investors are now buying investment grade bonds and selling high yield bonds
    Source: Bloomberg, Apollo Chief Economist. Note: Ticker used HYG US Equity and LQD US Equity.
    Chart showing investment grade bond investors have a 15% drawdown
    Source: Bloomberg, Apollo Chief Economist. Note: Index used LUACTRUU Index.

    See important disclaimers at the bottom of the page.


  • US Housing Outlook: Slowdown has Started

    Torsten Sløk

    Apollo Chief Economist

    The charts below show that traffic of prospective buyers of new homes is declining, homebuilder confidence is declining, weekly data for mortgage purchase applications has started to move down, consumer plans to buy a new home have softened, home sales are coming down from their recent peak, leading indicators for home prices are rolling over, and mortgage originations have started to come down, in particular for 30- to 49-year olds. These are all signs that the housing market has started to cool down. This is what the Fed would like to see. The question is if we will get a soft or a hard landing. View the full report.

    Chart shows declining home buyer traffic
    Source: Bloomberg, Apollo Chief Economist

    Chart showing homebuilder confidence is waning again
    Source: NAHB, Apollo Chief Economist
    Chart showing slumping mortgage applications as interest rates have rebounded
    Source: Mortgage Bankers Association, Bloomberg, Apollo Chief Economist

    See important disclaimers at the bottom of the page.


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