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Fed hikes are starting to cool down the economy via three transmission channels:
1) The interest rate-sensitive components of GDP are slowing down (housing, autos, and capex spending), see chart below.
2) The tech sector is in turmoil because of higher risk-free rates, and layoff announcements are rising.
3) HY primary markets are essentially closed, and this is having a negative impact on issuing firms in both the goods and service sectors.
The bottom line is that monetary policy is working as intended. The Fed started raising rates in March 2022, and these three transmission channels confirm the conventional wisdom that it takes 12 to 18 months before Fed hikes have their biggest effects on the economy.
From an inflation perspective, higher rates are cooling housing inflation and car price inflation, which will push down headline inflation over the coming quarters. As a result, the Fed will soon have achieved their goal and the FOMC will be done with raising rates.
Source: NAR, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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If there is a recession in 2023, it would be the most anticipated recession ever, see chart below. My latest outlook presentation is available here.
Source: Federal Reserve Bank of Philadelphia, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The chart below compares the price of different medical procedures across countries.
Note: Data for 2019. Source: The International Federation of Health Plans (iFHP), Apollo Chief Economist See important disclaimers at the bottom of the page.
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Weekly data shows that the number of people going to Broadway shows is rising and is now at 2019 levels, see chart below. Our collection of daily and weekly indicators for the US economy is available here.
Source: Internet Broadway Database, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The S&P500 rises on average 15% in the 12 months after the Fed pauses, see chart below.
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Not only is housing inflation rolling over in both the Zillow and Redfin data, but core CPI ex housing has been coming down and was actually negative in October, see chart below.
A sharp slowdown in core CPI ex shelter combined with the ongoing downturn in the housing market increases the probability that inflation is coming down faster than the market is currently expecting. Which raises the likelihood that the Fed may soon be done with rate hikes.
And note again that this decline in inflation is happening while at the same time the labor market is still strong and consumers have a lot of savings, see also my note yesterday. Maybe the Fed has raised rates enough and we don’t need a lot more demand destruction to get inflation down.
The bottom line is that the likelihood of a soft landing is rising.
Source: BLS, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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With a 9-month lag between rents starting to come down until OER moves lower, we are getting closer to the peak in housing inflation, see chart below. The fact that inflation is coming down before we see any deterioration in the labor market is very important for markets and for the outlook for a soft landing. The Fed hitting the dual mandate with first a decline in inflation and then an increase in unemployment increases the likelihood of a soft landing. If we had first an increase in unemployment with inflation still going up, it would increase the probability of a hard landing because then we would need more demand destruction from the Fed. The bottom line is that the sequencing of how the Fed reaches its dual mandate is key for markets.
Source: Zillow, BLS, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Early in the pandemic, a lot of people retired early. But the size of the retired population is now back at the pre-pandemic trend, see chart below.
Source: CPS IPUMS, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The labor force is currently 4 million below the pre-pandemic trend, see chart below. This is a high number when considering that the total number of unemployed is presently at 6 million. The bottom line is that it is difficult to find workers and the labor market remains tight, and the upward pressure on wages will likely continue.
Source: BLS, Haver, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Normally households move to another house within 15 miles from where they used to live. In 2022 the median distance between the home that recent buyers purchased and the home they moved from was 50 miles, see chart below. The increase is likely driven by covid and affordability considerations.
Source: NAR, Apollo Chief Economist See important disclaimers at the bottom of the page.
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