US households are less and less mobile, and after the Fed started raising rates, the self-reported probability of moving residence started trending down again, see charts below.
A less mobile labor force will ultimately have negative consequences for GDP growth because workers with relevant skills do not move to regions with job growth. This is what we see in Europe, where language barriers limit mobility between regions in the euro area.
While there are many headwinds to the German economy at the moment, such as lower exports to China, energy transition, and geopolitical risks, it looks like the key driver of falling housing prices in Germany is rate hikes by the ECB, see chart below.
Government debt levels continue to increase in all G7 countries except Germany, and your finance textbook will tell you that when the stock of risk-free assets grows, it will attract dollars, euros, and yen from other asset classes, including credit and equities, see chart below.
The rapid growth in the stock of risk-free assets outstanding has consequences not only for risky assets. The probability is rising of a fiscal accident with significant implications for markets. Such a crisis could start with a sovereign downgrade, a bond auction with weak demand, or a significant increase in the term premium.
Recovery rates decline when the costs of capital stay higher for longer, see chart below. This dynamic argues for wider credit spreads when rates stay higher for longer.
There are more real estate agents per 1,000 jobs in Florida, Texas, Colorado, and Arizona, see the first chart. With many homeowners locked into sub-4% mortgage rates, existing home sales are at the lowest level since 2010, and the number of home sales per real estate agent is at the lowest level in decades, see the second chart.
The hype around AI is starting to fade, see chart below.
Current drivers of credit demand are retail and pensions seeking higher all-in yields, and annuity sales driven by more baby boomers retiring and by a higher level of interest rates giving policyholders higher monthly payments, see chart below. For more, see also our latest credit market outlook here.
Listen to Alexander Wright, Partner and Global Wealth Strategist at Apollo, and J.P. Vicente, Apollo’s Global Head of Content Strategy for Client and Product Solutions, discuss the current state of the capital markets, including reading the Fed’s tea leaves, asset allocation in 2024, and the growing deployment of alternatives in wealth portfolios.
Earnings expectations have diverged for the S&P 7 and the S&P 493, see chart below.
Markets fluctuate between the “lagged effects of Fed hikes are slowing down consumers, firms, and bank lending,” and “the easing of financial conditions since the December Fed pivot has boosted growth, including January hiring,” see chart below.
The bottom line is that what currently looks like a soft landing is a fragile equilibrium, and there is still more than 50% chance we will end up in either a hard landing scenario where the Fed cuts faster than the market expects or a no landing scenario where the Fed has to raise rates again. It makes sense that rates volatility and swaption volatility are high relative to VIX.
