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Balance sheets with higher debt, lower earnings, and lower savings will get hit first by Fed hikes, both for consumers and firms, see the first chart below. As this process continues, Fed hikes will gradually impact higher-quality balance sheets over time.
Once the Fed funds rate reaches sufficiently restrictive levels, the macro data will weaken. This is happening now: Delinquency and default rates are increasing for more vulnerable households and firms, and capex spending and nonfarm payrolls are weakening, see the second and third charts below.
This is how monetary policy works, and markets should expect the economic data to weaken further over the coming months as Fed hikes gradually bite harder and harder on consumers and firms.
Source: Apollo Chief Economist 
Source: BLS, Haver Analytics, Apollo Chief Economist 
Source: Census Bureau, Bloomberg, Apollo Chief Economist. Note: Capex spending is real capital goods orders nondefense ex-aircraft deflated by private capital equipment PPI. See important disclaimers at the bottom of the page.
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The Conference Board’s consumer confidence survey asks households if they plan to travel to a foreign country, and the first chart below shows that a record-high share of US consumers are planning to go on vacation to a foreign country within the next six months.
The continued strong demand for consumer services is the reason why it is so difficult for the Fed to get supercore inflation under control. US households want to travel on airplanes, stay at hotels, eat at restaurants, go to sporting events, amusement parks, and concerts, and that is why inflation in the non-housing service sector continues to be so high, see the second chart.
The bottom line is that rates will stay higher for longer because the Fed is not succeeding with getting non-housing service sector inflation under control.
Source: The Conference Board, Haver Analytics, Apollo Chief Economist 
Source: BEA, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Our monthly outlook for public and private markets is available here.
Fed hikes continue to push delinquency rates higher on credit cards and auto loans.
Also, Fed hikes continue to push higher default rates for HY and loans. And interest coverage ratios are moving down for both IG and HY.
The bottom line is that higher interest rates are biting harder and harder on consumers and firms, and the Fed’s ongoing efforts to cool down the economy will continue. There are more downside risks than upside risks to markets, see overview below.
Source: Apollo Chief Economist See important disclaimers at the bottom of the page.
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Interest coverage ratios are declining for investment grade and high yield companies, see charts below.
This is how monetary policy works. Higher interest rates lower earnings and increase debt servicing costs.
With the Fed on hold until the middle of next year, the weakening of corporate balance sheets will continue.
The downside risks to the economic outlook are intensifying with falling interest coverage ratios combined with rising consumer delinquency rates, households running out of excess savings, and student loan payments coming back.
Source: Bloomberg, Apollo Chief Economist 
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The ongoing slowdown in China is not just a cyclical downswing driven by slowing growth in the US and Europe.
Slower growth in China is also the result of the deflating housing bubble and deteriorating demographics.
Our outlook for China is available here, key charts inserted below.
Source: Bloomberg, Apollo Chief Economist 
Source: Haver, Apollo Chief Economist 
Source: Bloomberg, Apollo Chief Economist 
Source: UN, Haver, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Almost half of US households have used Buy Now Pay Later (BNPL), see chart below.
Source: LendingTree, Apollo Chief Economist. Survey of 1,000+ consumers conducted in March 2021, March 2022, and March 2023. See important disclaimers at the bottom of the page.
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One source of upward pressure on US rates is the $7.6 trillion in US government bonds that will mature over the coming 12 months, see chart below.
Source: Treasury, BEA, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The share of Chinese exports to the US, Europe, and Japan has declined steadily over the past 20 years, see the first chart below.
Similarly, China is today the top export destination for eight of the G20 countries, up from zero in 2000, see maps below.
Source: General Administration of Customs (China), Haver Analytics, Apollo Chief Economist 
Source: IMF DOT, Haver Analytics, Apollo Chief Economist 
Source: IMF DOT, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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We have updated our estimates of how much excess savings households have left using the Fed’s methodology, and the conclusion is that consumers are almost out of pandemic savings, see chart below.
Source: BEA, Haver Analytics, Apollo Chief Economist.
Note: Excess savings are calculated as the accumulated difference between actual personal savings and the trend implied by data for the 48 months leading up to the first month of each recession, as defined by the NBER.See important disclaimers at the bottom of the page.
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IG and HY issuance are higher in September, and this is a technical headwind to credit markets over the coming weeks, see charts below.
Source: Pitchbook LCD, Apollo Chief Economist 
Source: Pitchbook LCD, Apollo Chief Economist See important disclaimers at the bottom of the page.
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