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With interest rates rising and debt levels going up, debt servicing costs are rising. Using CBO data shows that interest payments on US government debt have doubled from $1bn per day before the pandemic to now $2bn, see chart below.
Source: CBO, Haver Analytics, Apollo Chief Economist. Note: Interest rate assumption by CBO: 2.1% in 2022 and 2.7% in 2023. Annual CBO data divided by 365. See important disclaimers at the bottom of the page.
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The Fed’s dual mandate is full employment and inflation at 2%, but response rates to both labor market surveys and inflation surveys continue to decline, see chart below. Measurement problems are particularly problematic when both inflation and unemployment are not near the Fed’s desired goals of 2% inflation and 4% unemployment.
The homework for markets is to compare the outcome of different surveys such as the Employment report with Jobless claims and JOLTS data, where all data at the moment tell the same story of significant overheating in the labor market.
The bottom line is that the economic data is becoming more unreliable, causing more volatility in the incoming data and hence more volatility in markets.
Source: BLS, Apollo Chief Economist See important disclaimers at the bottom of the page.
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For the past 10 months, the consensus has expected a slowdown in the labor market, but every month the data has come in better than the consensus expected, see chart below.
This all-time high in being consistently too bearish since 1998 is noteworthy, and investors should reevaluate whether the ongoing bearishness on the economic outlook is justified, in particular in a situation with nonfarm payrolls at 517,000, the unemployment rate at the lowest level since the 1960s, and very strong retail sales.
The bottom line is that the no landing scenario continues, and the Fed has to increase interest rates more than the market expects to slow the economy down and get inflation back to the FOMC’s 2% inflation target.
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Looking at transcripts of earnings calls shows that industrials, consumer staples, and financials are more worried about inflation than other sectors in the S&P500, see chart below.
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Looking at transcripts of earnings calls show that banks remain more worried about a recession than other sectors in the S&P500, see chart below.
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Our latest US consumer outlook is available here. Consumer spending continues to be supported by strong job growth, high wage growth, and plenty of savings across the income distribution. A few key charts below.
Source: BLS, Haver, Apollo Chief Economist 
Source: National Restaurant Association, Haver, Apollo Chief Economist See important disclaimers at the bottom of the page.
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In 1993, Stanford Professor John Taylor published a paper where he showed that the Fed funds rate has historically been equal to the sum of deviations from the Fed’s target for inflation and unemployment. For example, if inflation is above the Fed’s 2% target, the Fed funds rate will be higher. And if unemployment is above the Fed’s target, the Fed funds rate will be lower.
This relationship where the Fed funds rate can be predicted by inflation and unemployment is called the Taylor rule, and John Taylor’s contribution was to come up with the weights to inflation and unemployment that the Fed has used historically to give the best explanation of the actual Fed funds rate. The logic with using inflation and unemployment is that those two variables capture the Fed’s dual mandate of price stability and full employment.
The Fed has used this framework for decades for understanding what the Fed funds rate should be, and inserting the current level of inflation and unemployment into the Taylor rule shows that the Fed funds rate today should be 9%. Significantly above the current level of the Fed funds rate at 4.5%, see chart below.
The bottom line is that the Taylor rule framework normally used by the Fed for evaluating the stance of monetary policy is saying that the Fed is still significantly behind the curve.
Source: Bloomberg, Apollo Chief Economist. Note: (Taylor Rule (9.23) = Neutral real rate (2.00) + Core PCE (4.42) + [alpha(0.5)*{(inf (4.42) – target (2.00)}]+[beta(0.5)*{factor (2.0)} *{(NAIRU (5.0) – Unemployment (3.40)}] See important disclaimers at the bottom of the page.
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We are carefully watching the labor market for signs that we are transitioning from a no landing scenario to a hard landing scenario, and some leading indicators for jobless claims suggest that the labor market could weaken going forward, see charts below. But so far, the incoming data shows that we remain firmly in the no landing scenario where the Fed needs to raise rates more to slow the economy down and get inflation under control. Our daily and weekly indicators for the US economy are available here.
Source: Challenger, Gray & Christmas Inc., Bloomberg, Apollo Chief Economist 
Source: Department of Labor, NFIB, Bloomberg, Apollo Chief Economist 
Source: National Restaurant Association, Haver, Apollo Chief Economist 
Source: STR, Haver Analytics, Apollo Chief Economist 
Source: NAR, Haver Analytics, Apollo Chief Economist 
Source: National Association of Homebuilders, Bloomberg, Apollo Chief Economist 
Source: Redfin, Haver, Apollo Chief Economist 
Source: Redfin, Haver, Apollo Chief Economist 
Source: University of Michigan, Haver Analytics, Apollo Chief Economist 
Source: The Conference Board, Haver, Apollo Chief Economist 
Source: Bloomberg, Apollo Chief Economist 
Source: BLS, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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A key feature of the no landing scenario is sticky inflation at high levels, and Fed-calculated measures of inflation persistence are not showing signs of inflation coming down quickly to the Fed’s 2% inflation target, see chart below.
Persistent high inflation at 7% is a problem because it means that the Fed needs to do more demand destruction to get inflation back to 2%. The bottom line is that higher interest rates for longer is negative for consumer spending, capex spending, and corporate earnings.
In short, under the no landing scenario, high inflation is a problem, and the Fed is not done raising rates, which means that the trading environment from 2022 will be coming back, and the 60/40 portfolio will perform poorly.
Source: Federal Reserve Bank of Cleveland, Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The retail sales data for January was strong and shows that the US consumer is not slowing down, see charts below. This is not surprising with a strong labor market, strong wage growth, and high savings across all income groups.
Incoming data for airlines, hotels, restaurants, movie theatre visits, and Broadway shows continue to be strong, and consumer services are not slowing down. And with retail sales mainly measuring goods consumption, the bottom line is that even consumer spending on goods continues to do well.
The no landing scenario continues, and the risks are significant that inflation will stay sticky around 5%, well above the Fed’s 2% inflation target.
Source: Census Bureau, Haver Analytics, Apollo Chief Economist 
Source: Census Bureau, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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