Delinquency Rates Up

The New York Federal Reserve’s survey of household debt and credit, released last week, found that the impact of the Fed’s monetary policy continues to show up on consumer balance sheets. Data from that survey found that delinquency rates for credit cards and auto loans are rising—in some cases approaching 2008 levels. The bottom line for investors is that Fed policy is working, with impacts hitting consumers, corporates, and banks. What we’re watching for now are signs that high interest rates are having wider macroeconomic implications—slowing the broader economy down.

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.

US Consumers Want to Travel

The Conference Board’s consumer confidence survey asks households if they plan to travel to a foreign country, and the chart below shows that a record-high share of US consumers are planning to go on vacation to a foreign country within the next six months.

The continued strong demand for consumer services is the reason why it is difficult for the Fed to get supercore inflation under control. US households want to travel on airplanes, stay at hotels, eat at restaurants, go to sporting events, amusement parks, and concerts, and that is why inflation in the non-housing service sector continues to be so high.

The bottom line is that rates will stay higher for longer because the Fed is still trying to get non-housing service sector inflation under control.

A record-high share of US consumers are planning to go on vacation to a foreign country
Source: The Conference Board, Haver Analytics, Apollo Chief Economist

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The German Construction Industry Is in Serious Trouble

The German construction industry faces significant headwinds because of higher borrowing costs for homebuyers and homebuilders, higher costs of production, and substantial red tape in the construction sector—including bureaucratic building permit requirements, a rent break, and burdensome regulation.

German construction industry dragged down by higher interest rates, higher production costs, and red tape
Source: Ifo, Bloomberg, Apollo Chief Economist

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Soft Landing in Both Parts of the Fed’s Dual Mandate

Since the Fed started raising rates in March 2022, job growth has slowed steadily, see chart below.

This is what the textbook would have predicted. When the Fed raises rates, firms slow down their hiring.

Looking ahead, the consensus expects job growth to grind to a halt over the coming six months, see the consensus forecast in the chart below.

The key question for markets is if we can get a soft landing in both inflation and in the labor market, i.e., in both parts of the Fed’s dual mandate.

With inflation slowing and the labor market softening, the risks are rising that both inflation and employment are weakening faster than markets currently expect.

Weaker inflation is good. But a weaker labor market is not good.

Put differently, markets will soon turn their focus away from weaker inflation to a weaker labor market.

In short, everyone who is bullish on equities and lower-rated credit should ask themselves where they think the labor market will be in three months, with the Fed on hold and not showing any signs of cutting anytime soon.

Since the Fed started raising rates, employment growth has slowed
Source: BLS, Haver Analytics, Apollo Chief Economist

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Outlook for China

Our outlook for China is available here, and there are three conclusions:

1) Data for Chinese exports and US imports show that China and the US are now less dependent on each other, and the US is now importing more from Mexico than from China, see the first and second chart.

2) China continues to sell US Treasuries, and foreign purchases of US Treasuries are coming from the foreign private sector and not from the foreign official sector, suggesting that recent demand for US Treasuries has come from yield-sensitive buyers, see the third and fourth chart.

3) China has recently seen a trend increase in the share of private sector firms with negative earnings, see the fifth chart.

US and China less dependent on each other for trade
Source: IMF, Bloomberg, Apollo Chief Economist
US importing more from Mexico than China
Source: Census Bureau, Bloomberg, Apollo Chief Economist
China is selling Treasuries and buying fewer mortgages and fewer non-US bonds
Source: Treasury, Haver Analytics, Apollo Chief Economist
Foreign purchases of Treasuries come from the private sector
Source: Treasury, Haver Analytics, Apollo Chief Economist
A trend increase in the share of Chinese private firms that are loss-making
Source: Bloomberg, Apollo Chief Economist. Note: CNBUPRTD Index, CNLBPRTD Index used.

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Retailers Expect a Weaker Holiday Season

Hiring for the holiday season is generally done in October, and adding up new jobs created in the BLS-defined holiday season retail sectors in the latest employment report shows that retailers expect a weaker holiday season, see chart below. This soft outlook is consistent with growing inventories at many retailers. The BLS defines holiday sectors as furniture, electronics, personal care, clothing, sporting goods, general merchandise stores, miscellaneous store retailers (e.g., florists, office supply stores, gift shops, and pet shops), and non-store retailers (e.g., online shopping and mail-order houses, vending machine operators, and direct store establishments).

Recent hiring in retail holiday season sectors points to slower consumer spending ahead
Source: BLS, Apollo Chief Economist. Note: Non-seasonally adjusted data shown. Holiday season sectors defined by BLS is available here.

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Job Growth Cools

Last week, the Federal Reserve announced that they would keep interest rates unchanged, but future rate hikes may be on the horizon. In addition, October’s employment report came in a little weaker than expected at around 150,000 jobs created—continuing the steady decline in job growth we’ve seen since the Fed started raising rates in March 2022. Looking ahead, the consensus expects job growth to continue to slide even lower over the next six months, which could potentially jeopardize a “soft-landing” scenario.

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.

Bubble Chasing Is Not a Good Strategy

There is always a new fad somewhere, see chart below. But for investors, it is challenging to figure out when bubbles start, when they peak, and when they end.

Put differently, a bubble is a narrative. And the latest shiny narrative is AI. However, a lot of questions remain unanswered, such as how useful will AI be, how long will it last, will it significantly change our lives, are the AI companies worth buying when they have already increased 50% in 2023 and have P/E ratios around 50?

The bottom line is that bubble chasing is not a good investment strategy.

There is always a bubble somewhere
Source: Bloomberg, Apollo Chief Economist. Note: Nikkei for Japan’s real estate crisis of 1989; 1998 Moscow large-cap index; NVIDIA as a proxy for AI; 2005-07 China property bubble; and stock price of US homebuilders.

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