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.
Last week we learned that the consumer-price index increased 8.6% in May from the same month a year ago – the highest reading since December 1981. With this development, the Fed is expected to continue to raise interest rates in an attempt to tighten financial conditions. This week we will receive retail sales and consumer sentiment information. We will be interested to see if there continues to be a discrepancy between negative consumer sentiment and relatively strong consumer spending. On the corporate side, CEO business confidence is starting to wane as worries mount over the rising costs of production, labor, energy, and supply chain-related logistics. CEO confidence levels are correlated with corporate profits – serving as an important data point that helps us monitor the speed of the slowdown. The debate over a soft landing vs. hard landing continues across markets. At this point, we’re still leaning towards a near-term baseline scenario of a softer landing. But if the pace of the slowdown accelerates, as this CEO confidence data seems to suggest, the risk of a hard landing is likely to rise.
This presentation may not be distributed, transmitted or otherwise communicated to others in whole or in part without the express consent of Apollo Global Management, Inc. (together with its subsidiaries, “Apollo”).
Apollo makes no representation or warranty, expressed or implied, with respect to the accuracy, reasonableness, or completeness of any of the statements made during this presentation, including, but not limited to, statements obtained from third parties. Opinions, estimates and projections constitute the current judgment of the speaker as of the date indicated. They do not necessarily reflect the views and opinions of Apollo and are subject to change at any time without notice. Apollo does not have any responsibility to update this presentation to account for such changes. There can be no assurance that any trends discussed during this presentation will continue.
Statements made throughout this presentation are not intended to provide, and should not be relied upon for, accounting, legal or tax advice and do not constitute an investment recommendation or investment advice. Investors should make an independent investigation of the information discussed during this presentation, including consulting their tax, legal, accounting or other advisors about such information. Apollo does not act for you and is not responsible for providing you with the protections afforded to its clients. This presentation does not constitute an offer to sell, or the solicitation of an offer to buy, any security, product or service, including interest in any investment product or fund or account managed or advised by Apollo.
Certain statements made throughout this presentation may be “forward-looking” in nature. Due to various risks and uncertainties, actual events or results may differ materially from those reflected or contemplated in such forward-looking information. As such, undue reliance should not be placed on such statements. Forward-looking statements may be identified by the use of terminology including, but not limited to, “may”, “will”, “should”, “expect”, “anticipate”, “target”, “project”, “estimate”, “intend”, “continue” or “believe” or the negatives thereof or other variations thereon or comparable terminology.
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.
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.
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.
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.
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.
US is 25% of global GDP but 61% of global stock markets and 54% of global credit markets, see chart below.
Last Friday, we received the monthly employment report which revealed that the US economy produced 390,000 jobs in May. This was much stronger than the 320,000 jobs the consensus was expecting – helping to reinforce the Fed’s narrative that the economy remains strong and that more interest rate hikes are needed to address elevated inflation. One critical factor that’s putting pressure on inflation is the current imbalance in the labor market. At the moment, there are around six million unemployed people in the US and more than 11 million job openings. In other words: for every unemployed person, there are approximately two job openings. Historically speaking, this situation is unusual and, by some estimates, could potentially take up to two years to stabilize. In this scenario, the central bank would need to continue to raise rates longer, increasing the probability of a hard landing. In the week ahead, we will receive May CPI inflation data, which is expected to stay at the same level it was in April (8.3%), still far above the Fed’s target of 2%.
This presentation may not be distributed, transmitted or otherwise communicated to others in whole or in part without the express consent of Apollo Global Management, Inc. (together with its subsidiaries, “Apollo”).
Apollo makes no representation or warranty, expressed or implied, with respect to the accuracy, reasonableness, or completeness of any of the statements made during this presentation, including, but not limited to, statements obtained from third parties. Opinions, estimates and projections constitute the current judgment of the speaker as of the date indicated. They do not necessarily reflect the views and opinions of Apollo and are subject to change at any time without notice. Apollo does not have any responsibility to update this presentation to account for such changes. There can be no assurance that any trends discussed during this presentation will continue.
Statements made throughout this presentation are not intended to provide, and should not be relied upon for, accounting, legal or tax advice and do not constitute an investment recommendation or investment advice. Investors should make an independent investigation of the information discussed during this presentation, including consulting their tax, legal, accounting or other advisors about such information. Apollo does not act for you and is not responsible for providing you with the protections afforded to its clients. This presentation does not constitute an offer to sell, or the solicitation of an offer to buy, any security, product or service, including interest in any investment product or fund or account managed or advised by Apollo.
Certain statements made throughout this presentation may be “forward-looking” in nature. Due to various risks and uncertainties, actual events or results may differ materially from those reflected or contemplated in such forward-looking information. As such, undue reliance should not be placed on such statements. Forward-looking statements may be identified by the use of terminology including, but not limited to, “may”, “will”, “should”, “expect”, “anticipate”, “target”, “project”, “estimate”, “intend”, “continue” or “believe” or the negatives thereof or other variations thereon or comparable terminology.
