During the post-Covid period, US population growth has been the fastest in Idaho, Utah, Montana, Texas, Florida, and New Jersey, see map below.
Japanese Stock Rally Is Mainly Large Cap
The global rise in stock prices is driven mainly by large-cap firms, not only in the US and Europe but also in Japan, see charts below.
More Firms Planning to Raise Prices
The NFIB survey of small businesses asks 10,000 firms if they plan to increase selling prices over the next three months. The recent acceleration in the share of firms saying yes suggests that CPI inflation could increase over the coming months, see chart below.
Comparing the Fiscal Position in the US and Italy
The government budget deficit is bigger in the US than in Italy, see the first chart.
Government debt levels are currently higher in Italy than in the US, but according to IMF forecasts, they are converging over the coming years, see the second chart.
Government net interest payments are similar in the US and Italy, see the third chart.
Despite these similarities, Italy has a BBB rating, and the US has a AAA rating.
If the US continues on the fiscal trajectory forecasted by the CBO, the risks are rising that the US will be downgraded later this year.
The Current AI Bubble Is Bigger than the 1990s Tech Bubble
The top 10 companies in the S&P 500 today are more overvalued than the top 10 companies were during the tech bubble in the mid-1990s, see chart below.
What Happens When RRP Reaches Zero?
The Fed’s Reverse Repo Program (RRP) is a measure of excess reserves in the banking sector. If banks have excess cash, RRP balances go up and vice versa.
With Fed cuts on the horizon, there is an emerging debate about what will happen once RRP balances reach zero, in particular if QT continues, see chart below.
The worry is that once there are no longer abundant reserves in the banking sector, then reserves will be scarce, and the consequences could be less support for T-bills, duration, and credit markets, or stresses in money markets similar to what we saw in September 2019.
The bottom line is that credit investors should keep an eye on RRP balances because as they are depleted, we will find out if reserves in the banking sector are scarce, abundant, or ample.
In short, once RRP reaches zero in May or June, there may no longer be abundant reserves in the banking sector, which increases the probability of an accident somewhere in the plumbing of the financial system.
SMEs Playing Bigger Role in Europe than in the US
The share of total employment in large firms with more than 250 employees is bigger in the US than in Europe, see chart below.
The Fed Is the Reason the Last Mile Is Harder
Since the Fed pivot on December 13, consumers have become much more optimistic about the economic outlook, see chart below. Combined with record-high IG issuance, high HY issuance, and more IPO and M&A activity since December, it is not surprising that employment and inflation rebounded in January and jobless claims remain low.
The last mile is harder not because of some structural feature in the economy, but because of the Fed turning dovish too soon, triggering a reacceleration in growth and inflation. That is why the Fed will keep rates higher for longer than markets expect.
Services as a Share of Consumer Spending
The share of private consumption spent on services is still 2 percentage points below its pre-pandemic level, see chart below.
The implication for markets is that there is still more upside for growth in consumer services, i.e., spending on airlines, hotels, restaurants, concerts, sporting events, etc.
Adjusting Portfolio Allocations in Times of Market Uncertainty
With inflation still not fully tamed, stock valuations high, and bond spreads tight, what’s an investor seeking diversification to do? In his latest paper, Apollo Partner & Global Wealth Strategist Alexander Wright argues that private markets—both equity and debt—might offer solutions amid expected continued volatility.
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