We are watching the weekly data for the number of people who file for unemployment benefits in Washington DC, Maryland, and Virginia, and any impact federal government layoffs may have on nationwide jobless claims, see chart below. This data comes out every Thursday at 8:30 a.m. ET.
The outlook for Spain continues to improve, and the outlook for Germany continues to deteriorate, see charts below.
The average age of passenger cars on the roads in the US continues to rise, see chart below.
The data this week shows that the economy remains strong.
Consumers are in good shape, and year-over-year retail sales show steady growth, see the first chart below. Capex spending plans are improving, see the second chart, and the Atlanta Fed GDP estimate for first quarter GDP and the Dallas Fed weekly estimate for GDP are at 2.3% and 2.5%, respectively, see the third and fourth chart.
We are carefully monitoring trade war uncertainty, but so far, there are no signs that it is having a negative impact on the incoming data, see the fifth chart.
Listen to Torsten Slok, Apollo’s Chief Economist and John Cortese, Partner and Global Head of trading at the Firm, explore a lesser-known area of private credit—Investment Grade Private Credit, or Private IG. In a wide-ranging conversation, they discuss what Private IG is, the key differences with public investment grade credit, secular drivers, its potential role in portfolios, and much more.
Almost all returns in the 60/40 portfolio come from the stock market, see chart below. When the stock market goes down, there are years when Treasuries are not the correct hedge against downside risks in the S&P 500, including in 2022.
Asset allocation has evolved significantly since the 60/40 portfolio was invented in the 1950s, and investors are now asking more nuanced questions about fixed income replacement and equity replacement, with a focus on less concentration in the S&P 500, lower volatility in returns, and less need for daily liquidity, see also here.
Inflation is moving higher, inflation expectations are moving higher, and breakevens are moving higher, see charts below. If the Fed cuts interest rates too early, it increases the likelihood that we will see a repeat of the 1970s. The Fed has no other options than to keep interest rates higher for longer.
The share of equity trading volume on the exchanges is now smaller than the share of equity trading volume in dark pools, negotiated trades, and internalized trades, see chart below.
The transmission mechanism of monetary policy works through higher costs of capital that lowers demand for capex and hiring but also raises return requirements for equity to pay the debtholders in the company.
Higher interest rates are a redistribution of value from the junior parts of the capital structure to the senior parts, see chart below. Someone has to pay the higher level of interest rates in corporate capital structures, and it is not the Fed, it is the equity holder.
In short, companies with no earnings, no cash flow, and no revenue will continue to struggle simply because they cannot pay the higher debt servicing costs. In other words, when interest rates are higher for longer, companies with earnings tend to outperform because companies with earnings are able to pay higher debt servicing costs. The purpose with higher interest rates is to slow growth, which makes value more attractive than growth.
In fact, this is the entire idea from the Fed with raising interest rates—to discourage too much risk taking, such as investments in companies and capital structures with no earnings, no revenue, and no cash flow. Examples of unattractive sectors are growth, software, and venture capital.
The share of US imports from China has been declining since 2016 and currently stands at 13%, see chart below.
