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The Fed pivot in December parallels what happened a decade ago.
In 2013, the taper tantrum triggered a quick tightening in financial conditions due to a modest change in Fed communication.
Today, we are seeing a similar significant change in financial conditions on the back of a modest shift in Fed communication, but with the opposite sign.
The Fed pivot in December was a modest change in Fed communication, but the subsequent easing in financial conditions has been dramatic.
As a result, 2024 will be the year of the lagged effects of Fed hikes versus the Fed pivot. If the Fed pivot continues to push mortgage rates lower, stock prices higher, and credit spreads tighter, we could get a solid rebound in the economy over the coming months, particularly in housing, which will trigger a rebound in employment growth, see chart below.
Source: BLS, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The US Treasury market is the same size as the combined government bond markets of China, Japan, UK, France, Italy, and Germany, see chart below.
The bottom line is that there is no substitute for the US Treasury market.
Looking into 2024, the list of upside risks to yields in the long end is long, with a big budget deficit, increasing Treasury issuance, the risk of a sovereign downgrade, the Fed doing QT, falling foreign demand for Treasuries, and a shift in issuance away from bills to coupons.
These forces are pushing long rates higher. But a dovish Fed pulls in the other direction.
Even if the Fed starts cutting rates, a steepener in the first half of 2024 seems most likely, with upside risks to long-term interest rates coming from factors unrelated to what the Fed will do.
In particular, if we get a soft landing in 2024, then both economic and non-economic forces could, by the end of 2024, push long-term interest rates higher than where they are today.
Source: BIS, Apollo Chief Economist. Note: Data for general government debt outstanding. Data for 2022. See important disclaimers at the bottom of the page.
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The Japanese economy has become more dynamic in 2023 with more shareholder proposals and higher M&A activity, see charts below.
Source: Bloomberg, Apollo Chief Economist. Note: Shareholder proposals include Approve Name Change, Approve Statutory Auditor, Business Operations, Charter/Bylaw Amendment, Climate Change Risk, Decrease Authorized Stock, Director Compensation, Discharge Directors, Dividend/Profit Distribution, Elect Director, Extend Poison Pill (Shareholder Rights Plan), Methane/Greenhouse Gas Emissions, Other Auditor Related, Other Board Related, Other Capital Structure, Other Compensation, Other Governance, Remove Director, Remove Poison Pill (Shareholder Rights Plan), Share Repurchase Related Proposals. 
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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A recovery in the housing market has started, driven by the Fed’s pivot, rising consumer confidence, falling mortgage rates, solid job growth, solid wage growth, and pent-up demand. The Fed will soon be forced to reverse course and be more hawkish. Our latest US housing outlook is available here, key charts inserted below.
Source: Census, Haver Analytics, Apollo Chief Economist 
Source: BLS, Haver Analytics, Apollo Chief Economist 
Source: Haver Analytics, BLS, S&P, Apollo Chief Economist 
Source: Mortgage Bankers Association, Bloomberg, Apollo Chief Economist 
Source: Redfin, Haver Analytics, Apollo Chief Economist 
Source: Census Bureau, Haver Analytics, Apollo Chief Economist 
Source: American Enterprise Institute, Haver, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The NFIB survey of small businesses asks 10,000 firms if they plan to increase wages over the next three months. The recent acceleration in the share of firms saying yes suggests that wage growth could increase in the first half of 2024, see chart below.
Source: FRB of Atlanta, NFIB, Haver Analytics, Apollo Chief Economist. Note: NFIB: Net Percent Planning to Raise Worker Compensation in Next Three Months (SA, %). See important disclaimers at the bottom of the page.
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The Fed will not be able to get inflation under control with a booming housing market because housing makes up 40% of the inflation basket, and with housing currently rebounding, the risks are rising that the shelter components of inflation will stay elevated and complicate the Fed’s path back to the 2% inflation target, see charts below. The bottom line is that the Fed will keep rates higher for longer than the market is currently pricing.
Source: Haver Analytics, BLS, S&P, Apollo Chief Economist 
Source: BLS, S&P Case-Shiller, Zillow, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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A record-high share of stocks in the S&P 500 have underperformed the index this year, see chart below.
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The Bank of Japan now owns almost 60% of Japanese government bonds outstanding, see chart below. This statistic is truly remarkable. As this number approaches 100%, there is no economic theory for what will happen.
As the only G7 central bank, the BoJ has not raised short-term interest rates in response to rising inflation. With the Fed now talking about rate cuts in 2024, the BoJ may end up never raising short-term interest rates during this cycle.
With Japanese interest rates staying low and US rates coming down, the implication for markets is that Japan may return as a US fixed income buyer in 2024.
This presentation discusses this topic and the outlook for Japanese demand for US fixed income.
Source: BoJ, Bloomberg, Apollo Chief Economist 
See important disclaimers at the bottom of the page.
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Our inflation outlook for the G7 is available here, there are three conclusions:
1. Headline inflation is coming down in most G7 countries because of falling energy prices and global supply chains normalizing after Covid.
2. Core inflation is more sticky in the US and Canada, where easier financial conditions and a rebounding housing market could lift inflation over the coming quarters. Core inflation is also more sticky in Japan.
3. In Europe and the UK, both headline and core inflation are moving faster down to 2%, driven by normalizing supply chains, falling energy prices, and a faster slowdown in their economies because of the energy transition, a more interest rate-sensitive housing market, and slower growth in China.
Source: Apollo Chief Economist 
Source: BLS, 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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A majority of participants in the Apollo Academy class on my 2024 Economic and Capital Markets Outlook said that they are planning to allocate more to alternatives in 2024. In a poll taken during the live class on December 20, 59.7% of respondents said they planned to increase alts allocations in the year-ahead, while 20.3% said they didn’t plan to augment allocations (see chart).
Interestingly, a small majority of participants, 51.4%, said they were “more concerned” about the future course of inflation when planning client allocations than they were before the “Fed pivot” on December 13. Another 35.3% said they were “less concerned,” while 13.3% said they weren’t concerned (see chart). These results point to an interesting paradox: By signaling that they weren’t as concerned with the course of inflation as they had previously been, the FOMC’s board members may have inadvertently prompted an economic boomlet, leading to the increase of the very thing of which they themselves had expressed a decrease—concerns over inflation.
We asked a similar question about participants’ expectations of a US recession after the “Fed pivot.” A majority, 54.8%, said they were “less concerned” about a recession in 2024 than before the pivot; 32.4% were “more concerned” than previously; 12.8% said they weren’t concerned.
Survey taken from live participants in the Apollo Academy class on the 2024 Economic and Capital Markets Outlook on December 20, 2023. Results based on 672 total votes. 
Survey taken from live participants in the Apollo Academy class on the 2024 Economic and Capital Markets Outlook on December 20, 2023. Results based on 711 total votes. 
Survey taken from live participants in the Apollo Academy class on the 2024 Economic and Capital Markets Outlook on December 20, 2023. Results based on 690 total votes. See important disclaimers at the bottom of the page.
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