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The Fed is going to shrink its holdings of Treasuries by $60bn a month and using the estimates in this Fed working paper, quantifying the stock effect shows that this decline in the Fed’s balance sheet is expected to increase the level of 10-year rates by 50bps by the end of this year. The rule of thumb from the Fed’s work is that for every $100bn in QT 10-year rates will rise by 10bps. The bottom line is that QE pushed rates down and markets should expect QT to push rates higher.
Source: Bloomberg, Apollo Chief Economist. Pace of purchases for 2021: BOE: £3.4bn per week till mid December 2021, FED: USD120bn per month with wind down from December with purchases ending in March 2022, ECB: Euro 90bn per month (20 bn APP + 60 bn PEPP), PEPP till March 2022, Euro 40bn in April, Euro 30bn in May and Euro 20bn in June, and euro 20bn per month onwards. BOJ:: USD 70bn per month. For 2022: All programs are expected to wind down linearly from January 2022 to December 2022. Fed QT $ 95 per month from May 2022. See important disclaimers at the bottom of the page.
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In New York City, subway use is at 60% of pre-pandemic levels office use is only 37% of pre-pandemic levels and restaurant bookings are more than 30% below pre-pandemic levels; see charts below.
Source: Bloomberg, Apollo Chief Economist 
Source: Bloomberg, Apollo Chief Economist 
Source: OpenTable, Apollo Chief Economist See important disclaimers at the bottom of the page.
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This focus provides an estimation of the effect of a Russian stop of energy imports. The main results are as follows:
- The impact for France would be modest with a decline of around 0,15 to 0,3% in gross national income.
- For Germany, the negative impact on gross national income is real (around 0.3% and up to 3% in the most pessimistic scenarios) but overall moderate and can be absorbed.
- The same is true for the EU as a whole although there is significant heterogeneity in the magnitude of the shock across countries.
- For some EU countries, the consequences are much greater: Lithuania, Bulgaria, Slovakia, Finland, or the Czech Republic may experience national income drops of between 1 and 5%.
- These estimates take into account cascading effects along production value chains in a model with 30 sectors and 40 countries. Despite the imprecision of this type of simulation exercise, the orders of magnitude appear very robust: we can rule out with a high degree of confidence a scenario of a GDP collapse of more than 1% for France for example.
- The relatively low impact of an embargo (except for the aforementioned countries) can be explained by the fact that even in the short term companies and the economy as a whole can substitute (even very partially) sources of energy to others and intermediate or final goods to others. The analysis of historical experiences of very strong shocks (Fukushima in Japan or COVID in China) with potential effects along production value chains also shows that individual companies and the economy are able to minimize the impact of the shock. This substitution even though it is very partial helps to very significantly mitigate the impact of the shock compared to a scenario where the entire production and consumption structure is fixed.
The Economic Consequences of a Stop of Energy Imports from Russia
https://www.cae-eco.fr/staticfiles/pdf/cae-focus084.pdfSee important disclaimers at the bottom of the page.
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A record-high 20% of single-family homes sold are sold to investors, see chart below.
This part of the housing market is less sensitive to the Fed hiking rates and to higher mortgage rates. In that sense, a higher investor share weakens the transmission mechanism of monetary policy to the housing market.
With a high investor share combined with a high level of excess savings in the household sector, the Fed has to raise rates even more and even faster to cool the economy and inflation down. Which increases the likelihood of a harder landing.
See important disclaimers at the bottom of the page.
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Equity investors tend to focus on the upcoming earnings season, i.e., the next three months. This is in contrast to rates investors who normally have a longer horizon, focusing on the next few years.
This fundamental difference in perspective is likely why the uncertainty about the inflation outlook is having a much more significant impact on volatility in rates relative to equities, see chart below.
Rates markets tell us there is a lot of disagreement about where inflation will be over the coming years. And equity markets are saying that inflation will not be a problem for corporate earnings in the future.
We are tracking this divergence in views very closely. Because if inflation is going to be a problem, it will also impact corporate earnings and hence equities.
In short, either inflation is a problem or it is not a problem. Inflation cannot be a problem in rates markets but not a problem in equity markets.
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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