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The November employment report shows that wage inflation is increasing in the service sector and declining in the goods sector, and most of the jobs created in November were in Leisure and hospitality, see chart below and our chart book available here.
Source: BLS, Haver, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The US corporate high yield total return index is down 10% so far in 2022, and high inflation and rising rates have significantly impacted bond market returns. The average total annual return in high yield from 2010 to 2020 was 8%, see chart below.
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Foreign private investors are buying a lot of Treasuries at the moment, see chart below. Foreign central banks, on the other hand, are big sellers of Treasuries. And foreigners, more broadly, are big sellers of US equities.
Source: Treasury, Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Beijing subway passenger traffic is approaching the low levels seen earlier this year, see chart below.
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The New York Fed’s measure of supply chain pressures suggests that inflation could be close to the Fed’s 2% target within the next six months, see chart below.
Source: NY Fed, BLS, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Inflation is 7.7%, and there is an important debate in Fed working papers about how much demand destruction is needed to get inflation down to the FOMC’s 2% target.
Specifically, these Fed studies quantify the size of the sacrifice ratio, defined as the foregone output accruing from a one percentage point decline in inflation, and the two transmission channels investigated are intrinsic adjustment costs and expectational adjustment costs, with expectations playing by far the most important role.
Unfortunately, the sacrifice ratio is not a particularly useful concept when a significant source of the rise in inflation is not demand but supply chain problems driven by covid.
But a critical insight from these papers is that the sacrifice ratio has increased in recent decades, telling the Fed today that even if inflation quickly falls to, say, 4%, because of supply chain problems getting resolved, the demand destruction required to get inflation down to 2% is likely going to be significant, and therefore the ongoing slowdown could be deeper and longer than the market is currently pricing.
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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90-day delinquency rates for consumer loans are still very low, but +30-day delinquency rates are starting to rise for credit cards and auto loans, pointing to emerging signs of deterioration in consumer credit quality. This tells the Fed that a slowdown in consumer spending is underway. Combined with falling inflation, the case for a Fed pause is intensifying.
Source: FRBNY, Haver, Apollo Chief Economist 
Source: FRBNY, Haver, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Inventories are very high in general merchandise stores, and plenty of goods on the shelves is putting downward pressure on inflation, see chart below.
Source: Census, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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There are no reasons to expect a financial accident in the next month, but it is noteworthy how similar the pattern for the S&P500 and VIX is today to the pattern seen before the Lehman bankruptcy in September 2008, see chart below.
Source: Bloomberg, Apollo Chief Economist 
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Inflation peaked in June at 9.1%, and the stock market typically bottoms six months after the peak in inflation, see charts below.
Source: Bloomberg, Apollo Chief Economist 
Source: BEA, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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