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One strong argument for the Fed hiking 75bps today is that the average US household is starting to expect higher inflation to become a permanent feature of the US economy, see chart below. In other words, inflation expectations are becoming entrenched among workers, households, and businesses.
This has significant negative implications for the planning of CapEx spending and consumer spending. As a result, the Fed wants to reduce long-term inflation expectations as quickly as possible. The only way to do that is to show a strong commitment to getting inflation down by tightening financial conditions further through higher short and long rates, wider credit spreads, and lower equities.
From a strategy perspective, if we get 75bps today, it could trigger a rally in credit and equities after the meeting because it would signal that the Fed is committed to getting the inflation problem under control.
Source: U. of Michigan Sentiment, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Since the ECB last week announced that from July 1, they will no longer be doing QE, i.e. the ECB will no longer be buying European government bonds, spreads between periphery government bonds and German bunds have widened, see chart below. This is increasing the risk of more distress in European assets.
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The biggest foreign holder of US Treasuries is Japan, but Japanese investors have in recent months been selling Treasuries. With the Fed raising rates, hedging costs have increased, making US Treasuries less attractive for foreign investors. This is likely to continue as long as the Bank of Japan does yield curve control. The bottom line is that with rising hedging costs, foreign investors have less appetite to buy US Treasuries, which adds to the upward pressure on US rates.
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Larry Summers: Comparing Past and Present Inflation
https://www.nber.org/papers/w30116Buy Now, Pay Later (BNPL)…On Your Credit Card
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4001909China’s Economic and Trade Ties with Russia
https://crsreports.congress.gov/product/pdf/IF/IF12120See important disclaimers at the bottom of the page.
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The most important economic data this week was inflation, and both the 3-month change and the 6-month change in core CPI moved higher, raising the risk that inflation will not come down as quickly as the Fed and the consensus expect. View the report here.
Source: BLS, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The minimum wage in Germany will increase in October to 12 euros per hour, see chart below, which will lift the income for about 6 million workers. Total employment in Germany is about 45 million.
Source: Federal Statistics Office, Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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A crucial part of the Fed’s goal to tighten credit conditions is to push credit spreads wider. So far, HY spreads have not widened as much as the tightening in lending conditions in banks, see chart below.
Source: FRB, Haver Analytics, Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The Fed is cooling down the economy, and CEO confidence is plunging. That is why the E in the P/E ratio is going lower, see chart below.
Source: BEA, Conference Board, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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US is 25% of global GDP but 61% of global stock markets and 54% of global credit markets, see chart below.
Source: Bloomberg, Haver, Apollo Chief Economist. Note: Bloomberg tickers: MXUS Index, MXWD Index , LUATTRUU Index, BTSYTRUU Index, LF98TRUU Index, LG30TRUU index, LUACTRUU Index, I09805US index. See important disclaimers at the bottom of the page.
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We have updated our US consumer outlook chart book, see the attached PDF.
See important disclaimers at the bottom of the page.
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