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Survey response rates for employment and inflation have declined significantly during the pandemic, and this is introducing substantial measurement errors and uncertainty, see chart below. One such example is the widening gap between the establishment survey and the household survey in the employment report, with the establishment survey showing 2.6 mn jobs created over the past eight months and the household survey showing no job growth over the same period. Whether the economy created no jobs or 2.6mn jobs over the past eight months is obviously extremely important for the Fed and financial markets.
Source: BLS, Apollo Chief Economist See important disclaimers at the bottom of the page.
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During the pandemic, the Fed expanded its balance sheet by $5trn, and the Fed is now shrinking it by $95bn every month with $60bn in Treasuries and $35bn in mortgages, see the chart below.
The implications for markets of QT are the opposite of what they were for QE. The idea with QE was to lower rates, boost equities, and narrow credit spreads. With the Fed now in tightening mode, the idea with QT is to raise long rates, lower equities, and widen credit spreads. Such a tightening in financial conditions helps increase the costs of capital and ultimately slow down inflation, see also this Fed paper, which finds that shrinking the Fed balance sheet by $2.5trn is equivalent to increasing the Fed funds rate by half a percentage point.
There are a lot of opinions in financial markets about the effects of QT, but the Fed’s view is clear: Even if the effects of QT are the opposite of QE, the negative effects on the economy and markets of QT are smaller than the positive effects of QE simply because QE normally comes quicker and bigger than QT. In other words, the fact that QT is drawn out over a much longer period than QE is spreading out the negative effects over a longer period.
The bottom line is that the Fed, with rate hikes and QT, is tightening financial conditions, and the Fed’s intentions are clear: higher long rates, lower equities, and wider credit spreads. But because these effects are spread out over a longer period than when the Fed is doing QE, the negative effects of QT on markets and the economy are smaller than the positive effects of QE.
For more, see these Fed papers here, here, here, and this paper by Caballero and Simsek.
Source: FRB, Haver, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Stiglitz: The Causes of and Responses to Today’s Inflation
https://rooseveltinstitute.org/wp-content/uploads/2022/12/RI_CausesofandResponsestoTodaysInflation_Report_202212.pdfBIS: The global foreign exchange market in a highervolatility environment
https://www.bis.org/publ/qtrpdf/r_qt2212f.pdfHow does the Consumer Price Index account for the cost of housing?
https://www.brookings.edu/blog/up-front/2022/05/18/how-does-the-consumer-price-index-account-for-the-cost-of-housing/See important disclaimers at the bottom of the page.
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The weekly data for office occupancy rates shows that New York City office use after Thanksgiving reached a post-pandemic high of 50% of capacity, see chart below. Our collection of daily and weekly indicators for the US economy is available here.
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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As the Fed starts to approach the peak in the Fed funds rate, the market narrative is changing from “there is a high level of uncertainty about inflation and how high rates will go” to “inflation has peaked and we have a better idea about where rates will peak during this cycle,” see chart below. This ongoing transition in the market narrative has important consequences for rates, credit, and equity markets, including levels of implied and realized vol.
Source: Apollo Chief Economist See important disclaimers at the bottom of the page.
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The Fed has clearly communicated that they want to downshift next week from 75bps to 50bps, and as we approach the peak in the Fed funds rate, we should begin to see capital markets reopen again, and in November there was a significant increase in investment grade refinancings and M&A/LBOs, see chart below.
Source: S&P LCD, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Our latest credit market outlook presentation is available here.
Source: LCD Comps, Apollo Chief Economist 
Source: ICE BofA, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Wage inflation has a weight of 25% in the CPI basket via Services ex-energy ex-shelter. The transmission channel is that higher wages in consumer services such as restaurants and hotels increase the price of eating out and staying at hotels.
The impact of higher wage inflation on the remaining 75% of the CPI index is more complex, see chart below.
With wages having a limited weight in the CPI basket, it is entirely possible to have higher wage inflation for a period while consumer price inflation is coming down as supply chains get better, rent inflation declines, car price inflation declines etc. In other words, the 25% of the CPI basket that is directly impacted by wages may be rising while at the same time, inflation in the remaining 75% of the basket is declining.
The bottom line is that with inflation currently at 7.7% and declining rent inflation, declining car price inflation, declining transportation inflation, declining import price inflation, and elevated inventory levels, we may not need a dramatic amount of demand destruction and a significant increase in the unemployment rate for inflation to come down to the Fed’s 2% inflation target.
In short, with inflation declining and the labor market remaining solid, the probability of a soft landing is rising.
Source: BLS, Haver Analytics, Apollo Chief Economist. Note: Weights as of October 2022. Goods also includes traditional commodities See important disclaimers at the bottom of the page.
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Inflation is coming down without a major increase in the unemployment rate, see charts below. That is the definition of a soft landing.
Source: BLS, Apollo Chief Economist 
Source: ISM, BLS, Haver Analytics, Apollo Chief Economist 
Source: ISM, BLS, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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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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