The latest data for delinquency rates for auto loans, credit cards, and mortgages show that consumer credit quality is still good, including for lower FICO scores, see table below.
With the Fed hiking rates and financial conditions tightening, and the economy slowing, we will, over the coming quarters, likely begin to see more broad-based signs of weakness.
Last week we received data releases regarding home prices and consumer confidence. Not surprisingly, the numbers indicated that home price inflation is still running relatively high (although showing signs of softening) and that high inflation remains a drag on consumer sentiment. While there’s currently debate over where inflation is headed next, we’re seeing mounting evidence that it may soon be on the decline, including: Commodity prices, transportation costs for goods, and airline ticket prices are all trending lower; Retailers’ inventories are growing and car production is rising; Rents and home prices are moderating; A higher dollar is helping to lower import prices. If inflation starts to come down faster than expected, that could result in fewer rate hikes from the Fed, which will have impacts across financial markets. Looking ahead to this week, the employment report for June will be released on Friday. The consensus expects to see strong but weakening numbers (250,000 jobs in June vs. 390,000 jobs in May).
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.
This is the most anticipated recession ever. Maybe it is so anticipated that firms and households are so prepared for a slowdown that we may end up not having a recession.
There are two important reasons why we could get a soft landing:
The bottom line is that we could get a soft landing because both firms and households have significant buffers to deal with a negative hit to demand and incomes.
The implication for markets is that once the Fed pivots from hawkish to dovish, either because of inflation rolling over or growth slowing, credit markets and stock markets could move higher. The next data release to watch is the employment report this coming Friday, where the consensus currently expects nonfarm payrolls at 275,000, unemployment at 3.6%, and average hourly earnings at 5.1%.
Any softening in the labor market and, in particular, in average hourly earnings would push the Fed in a more dovish direction because it would mean that the Fed has finally succeeded in slowing down the economy and ultimately inflation.
Fed: What Is Corporate Bond Market Distress?
https://libertystreeteconomics.newyorkfed.org/2022/06/what-is-corporate-bond-market-distress/
The Subjective Inflation Expectations of Households and Firms: Measurement, Determinants, and Implications
https://docs.iza.org/dp15391.pdf
ECB: Organisational structure as a driver of mergers and acquisitions in the European banking sector
https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2674~ebe571e288.en.pdf
Core CPI inflation for May was 6.0%, and the Cleveland Fed expects core inflation over the coming months to decline to 5.7% and 5.8%, see link here and the first table below.
The Fed’s forecasts for month-over-month inflation are also expected to decline over the coming months, in particular for headline inflation, see the second table below.
The June CPI release will come out on Wednesday, July 13.
Our slowdown watch is available here, and a major theme in markets this week continues to be the divergence between rates markets and equity markets. Rates investors have been downgrading growth expectations, whereas equity investors have been upgrading earnings expectations. Either rates investors are right, and we will have a recession, and then earnings will come down. Or equity investors are right, and we will have a soft landing, and GDP growth expectations will be revised higher.
Looking at ETF flows shows that retail investors are taking money out of IG, HY, and loan ETFs but adding money to long crypto ETFs, see charts below.
