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Fed Chair Powell said yesterday that the FOMC wants to tighten financial conditions. Investors must monitor to what degree this policy goal is achieved through wider credit spreads, lower equities, and/or higher interest rates.
This chart book looks at recent trends in credit markets, and the conclusion is that yield levels are rising, and IG spreads and HY spreads have widened. But with unemployment at 3.6% and inflation at 8.5%, there is still some way to go before the economy begins to cool down. The bottom line is that the Fed needs to continue to tighten financial conditions because of significantly elevated inflation levels, and some of this tightening will come in the form of wider credit spreads. As a result, the ongoing turbulence in markets is likely to continue until we begin to see inflation trend meaningfully lower.
Source: Bloomberg, Apollo Chief Economist. Note: Tickers used are HYG US Equity and LQD US Equity. See important disclaimers at the bottom of the page.
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This chart book looks at a broad range of supply chain indicators, and the conclusion is that things are getting better. So far, there are no signs that lockdowns in Beijing and Shanghai are having a major negative impact on global supply chains.
See important disclaimers at the bottom of the page.
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The Fed wants to tighten financial conditions to cool down inflation, and investors passively holding the S&P500 and the Investment Grade credit index are so far down 13% and 16% from their peaks, see charts below. The next step is to monitor for any sign of a slowdown in the economic data. The consensus expects the April employment report on Friday to come in at 391K and the unemployment rate to decline to 3.5%, suggesting that the consensus does not yet see any signs of a slowdown in the economy. For more, see our chart book I sent around on Saturday with daily and weekly indicators for the US economy.
Source: Bloomberg, Apollo Chief Economist. Note: Bloomberg ticker used for S&P500: SPY. 
Source: Bloomberg, Apollo Chief Economist. Note: Bloomberg ticker used for the IG credit index LQD. See important disclaimers at the bottom of the page.
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The average monthly payment on a new mortgage is now $1,361, driven by higher rates and higher home prices, see chart below.
Source: NAR, Haver Analytics, Apollo Chief Economist. Note: NAR begins with the median price of existing single-family homes sold, and they assume an 80% mortgage loan-to-value ratio, that is, a 20% down-payment from the buyer. Using the average effective mortgage rate on loans closed, NAR calculates the median mortgage payment. See important disclaimers at the bottom of the page.
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Two cheers for the Fed
https://www.brookings.edu/opinions/two-cheers-for-the-fed/Central banks can tighten by doing nothing
https://www.omfif.org/2022/04/central-banks-can-tighten-by-doing-nothing/“The New Fama Puzzle”
http://econbrowser.com/archives/2022/04/the-new-fama-puzzleSee important disclaimers at the bottom of the page.
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Wage growth continues to accelerate in particular for job switchers, see chart below. The labor market is overheating and the Fed is trying to cool down the economy by raising rates and doing QT.
Source: Federal Reserve Bank of Atlanta, Apollo Chief Economist See important disclaimers at the bottom of the page.
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My latest outlook presentation is available here.
See important disclaimers at the bottom of the page.
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QE had a positive impact on the stock market and QT will have the opposite effect see chart below.
Source: Bloomberg, Apollo Chief Economist. Note: US reserve balance forecast generated by regressing reserve balances on Fed Funds target rate and Fed balance sheet. See important disclaimers at the bottom of the page.
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The weekly data for bankruptcy filings have shown a modest uptick in recent weeks see chart below. This data is for companies with more than $50mn in liabilities. With the Fed keen on slowing down inflation investors must monitor high-frequency data for any sign of monetary policy beginning to cool down the economy.
Source: Bloomberg, Apollo Chief Economist. Note: Filings are for companies with more than $50mn in liabilities See important disclaimers at the bottom of the page.
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Yes, interest rates have increased, but 61% of all bonds in the world still trade at less than 3%. See chart below.
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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