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The concentration in the S&P500 continues to increase, and the ten largest stocks now make up 35% of the index, the highest level since the last tech bubble in 2000, see chart below.
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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With long rates falling in recent weeks, Treasury supply has seemingly become less important as a driver of long rates.
But the fiscal challenges have not disappeared.
Next week, we have a 10-year auction on Monday and a 30-year auction on Tuesday. And looking into 2024, Treasury auction sizes will be, on average, 23% higher than in 2023.
Because of the constant rise in government debt levels, investors need to monitor not only Treasury auctions but also rating agencies and the term premium.
In this short presentation is a collection of relevant data for thinking about the US fiscal situation and the likely transmission channels to financial markets.
Source: OMB, Haver Analytics, Apollo Chief Economist 
Source: CBO, Haver Analytics, Apollo Chief Economist 
Source: The IMF, Apollo Chief Economist. Note: Data as of year-end 2022. See important disclaimers at the bottom of the page.
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Measures of underlying inflation have started to reaccelerate in recent months, and this is a problem for the Fed, see chart below.
The Fed cannot and will not turn dovish as long as inflation remains significantly above the FOMC’s 2% inflation target, particularly when underlying inflation is trending higher.
The consequences are that delinquency rates on credit cards and auto loans will continue to increase, corporate default rates will continue to move higher, and bank lending will continue to trend lower.
In other words, we are entering a period with weaker economic data where the Fed will stay on hold.
Source: FRB of Atlanta, FRB of Cleveland, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Since the Fed started raising rates, the biggest foreign buyer of US Treasury bonds has been the yield-sensitive private sector, see the first chart below.
But with rates peaking, the foreign private sector has been slowing purchases, see chart below.
The foreign official sector has been a net seller during this rate cycle. This is also the case for China, where holdings of US Treasuries have declined by $300 billion since 2021, see the second chart below.
With growth slowing in China due to demographic headwinds, slowing exports, and a deflating housing market, demand for US Treasuries from the foreign official sector will likely remain weak.
Our 2024 outlook for China is available here.
Source: Treasury, Haver Analytics, Apollo Chief Economist 
Source: Bloomberg, Apollo Chief Economist 
See important disclaimers at the bottom of the page.
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Looking across the wage distribution shows that wage inflation remains sticky between 4% and 5%, see chart below.
The FOMC would likely look at this chart and conclude that a higher unemployment rate is needed to get wage inflation down to levels consistent with the Fed’s 2% inflation target.
Source: BLS, Apollo Chief Economist. Note: Low-wage workers are defined as the bottom third percentile in the wage distribution, mid-wage workers as the mid third percentile, and high-wage workers as top third percentile. See important disclaimers at the bottom of the page.
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The consensus expects nonfarm payrolls on Friday to come in at 180,000 jobs added in November. This bullish consensus estimate is likely based on one single indicator, namely jobless claims.
But other indicators are showing ongoing signs of weakness in labor demand, which would point to a weaker employment report for November:
1) The quits rate, i.e., the share of workers voluntarily quitting their jobs every month, continues to trend lower, see the first chart below.
2) More consumers are starting to say that it is harder to find a job, see the second chart below.
3) The work week for private sector workers has been declining, suggesting labor demand is weaker, see the third chart.
4) There is now very little difference between wage growth of job switchers and job stayers, suggesting that job switchers are no longer able to get big pay increases, see the fourth chart.
5) The number of job openings has decreased since the Fed started raising interest rates, see the fifth chart.
6) The pace of job growth has declined as the Fed has raised interest rates, and with the Fed on hold well into 2024, this trend will likely continue, see the sixth chart.
Source: BLS, Haver, Apollo Chief Economist 
Source: The Conference Board, BLS, Haver, Apollo Chief Economist 
Source: BLS, Haver, Apollo Chief Economist 
Source: FRB of Atlanta, Haver, Apollo Chief Economist 
Source: BLS, Haver, Apollo Chief Economist 
Source: BLS, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Since the Fed started raising rates, lending growth has slowed, see chart below. This is not surprising. The idea with raising interest rates is to make it more expensive for firms and households to borrow. Our latest outlook for the banking sector is available here.
Source: FRB, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The FAA’s monthly Business Jet Report provides a snapshot of trends in business jet activity, and the report from November 2023 shows continued strong demand for private jets, see chart below.
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Our outlook for the US consumer is available here, there are two key conclusions:
1) The data for both retail sales and personal consumption expenditures for October have been weaker than expected, and the market is likely underestimating the negative impact of student loan payments resuming in October, see the first two charts below.
2) Since the Fed started raising interest rates, nominal consumer spending growth has continued to slow, see the third, fourth, and fifth charts. With the Fed in the process of getting inflation under control and job growth slowing, we should continue to see a steady slowdown in nominal growth rates in consumer spending and, therefore, in nominal GDP. The question for markets is whether we can get a soft landing in both nominal and real GDP. Nominal GDP will come down as inflation comes down, but the risk remains that real GDP (i.e., volumes) will come down faster than the consensus currently expects.
Source: Census Bureau, Haver Analytics, Apollo Chief Economist 
Source: BEA, Haver Analytics, Apollo Chief Economist 
Source: Census Bureau, Haver Analytics, Apollo Chief Economist 
Source: BEA, Haver Analytics, Apollo Chief Economist 
Source: BLS, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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For decades, the biggest foreign holders of US Treasuries were central banks and sovereign wealth funds around the world, see chart below.
Foreign official institutions were buying Treasuries because many countries, in particular emerging markets, were intervening to limit the appreciation of their domestic currencies because a domestic currency that is too strong hurts exports.
In other words, the foreign official sector was not buying Treasuries for yield reasons but for FX reasons to support the US dollar and thereby domestic exports.
With the Fed raising rates and the dollar going up, that has now changed.
Foreign central banks no longer need to buy US Treasuries and US dollars to depreciate their currencies. And foreign private buyers find US yield levels attractive despite high hedging costs.
The bottom line is that with the Fed raising rates and the dollar going up, yield-insensitive central banks have been selling Treasuries to limit the weakening of their domestic currencies, and yield-sensitive foreign private investors have been buying Treasuries to benefit from both higher yields and a rising dollar.
With the Fed cutting rates in 2024, these trends may reverse again.
Source: FRB, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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