More Demand for Travel Driven by Wealth Gains

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.

Because of the significant rise in the stock market and significant cash flows from fixed income, US households have more money 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 continued strong demand for consumer services is the reason why it is difficult for the Fed to get supercore inflation under control. The bottom line is that rates will stay higher for longer as strong gains in employment and wealth continue to provide a tailwind to consumer services.

A record-high share of the population is planning to go on vacation to a foreign country within the next six months
Source: The Conference Board, Haver Analytics, Apollo Chief Economist

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The Deteriorating US Fiscal Situation

Where would the first signs of US fiscal stress appear in markets?

1) Tailing Treasury auctions, lower bid-to-cover ratios, or softer demand from interest rate-sensitive buyers.

2) Rating agencies issuing opinions about the deteriorating US fiscal situation.

3) The term premium trending higher.

Our latest chart book looking at demand and supply of Treasuries is available here.

As the Fed was raising rates, US households were big buyers of US Treasuries. But this trend is now reversing
Source: FFUNDS, Haver, Apollo Chief Economist
Auction sizes growing in 2024
Source: Bureau of Public Debt, Haver Analytics, Apollo Chief Economist
Downside risks to bid-to-cover ratios in 2024
Source: Bureau of Public Debt, Haver Analytics, Apollo Chief Economist
T-bill issuance dominates
Source: SIFMA, Haver Analytics, Apollo Chief Economist
Under current policies, government debt outstanding will grow from 100% to 200% of GDP
Source: CBO, Haver Analytics, Apollo Chief Economist
A record-high $8.9 trillion of government debt will mature over the next year
Source: Treasury, BEA, Haver Analytics, Apollo Chief Economist
Who owns the $25 trillion in Treasuries outstanding? Foreigners, mutual funds, and the Fed
Source: FFUNDS, Haver, Apollo Chief Economist
Switzerland, Japan, Korea, and US have high domestic ownership of government bonds
Source: IMF, Apollo Chief Economist. Note: Data as of Q2 2023.
As the Fed was raising rates, US households were big buyers of US Treasuries. But this trend is now reversing
Source: FFUNDS, Haver, Apollo Chief Economist
Foreign purchases of Treasuries come mainly from the private sector
Source: Treasury, Haver Analytics, Apollo Chief Economist
The share of T-bills on the Fed balance sheet is much smaller than T-bills as a share of outstanding marketable debt
Source: Treasury, FRB, Haver Analytics, Apollo Chief Economist
Government debt servicing costs currently make up 12% of government spending
Source: Treasury, OMB, Haver Analytics, Apollo Chief Economist. Note: OMB estimates 10-year yield at around 3.5% in the next 10 years.
Interest rates will remain permanently higher
Source: Bloomberg, Apollo Chief Economist
Source: Apollo Chief Economist

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M&A Activity Picking Up

Capital market activity has increased significantly since the Fed meeting in December, with more issuance in IG and HY in January, February, and March, see charts below.

More M&A activity, more IPO activity, tighter credit spreads, and higher stock prices all contribute to stronger GDP growth and higher inflation over the coming quarters.

IG issuance rising after the Fed pivot in December
Source: Pitchbook LCD, Apollo Chief Economist. Note: GCP means general corporate purpose, which means making or financing any payment for working capital, capital expenditures, or any other general corporate purpose.
High yield issuance rising after the Fed pivot in December
Source: Pitchbook LCD, Apollo Chief Economist

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Continued Strength in Consumer Spending

The number of people going to Broadway shows has been rising faster than normal in recent weeks, likely driven by the strong labor market and strong household gains in financial wealth and housing wealth.

Broadway show attendance has been accelerating in recent weeks
Source: Internet Broadway Database, Apollo Chief Economist

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AI Story Falling Apart

In 2023 it was all about the Magnificent Seven. Then it was the Fabulous Four. But now it is turning out that the story is actually a lot more complicated, see charts below.

From Magnificent 7 to Fabulous 4 to it’s complicated
Source: Bloomberg, Apollo Chief Economist
Tesla used car prices have fallen significantly
Source: Cargurus.com, Apollo Chief Economist

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Coverage Ratios Rebounding for Loans

After the Fed started raising rates in March 2022, coverage ratios began to move lower, see chart below, and after the Fed turned dovish at the November 2023 FOMC meeting, coverage ratios have started to rebound.

The bottom line is that the strong economy and strong earnings combined with very easy financial conditions are helping companies manage their balance sheets, including high debt levels.

Coverage ratios for loans starting to move higher
Source: Pitchbook LCD, Apollo Chief Economist

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The View from Apollo - A New Podcast Series

Private Credit Investing in a “Higher for Longer” Environment

Listen to Apollo Chief Economist Torsten Slok speak with Jim Vanek, Co-Head of Global Performing Credit at Apollo, about what a “higher for longer” interest-rate environment can mean for investors in private credit. Their wide-ranging conversation assesses current market conditions, discusses how the private credit market is growing and evolving, and identifies areas where they see opportunities arising for investors in the months ahead.