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  • Inflation Scenarios

    Torsten Sløk

    Apollo Chief Economist

    Month-over-month inflation has been rising on average 0.4% for the past three months and 0.3% for the past six months. 

    If inflation continues to rise at this pace for the rest of the year, then year-over-year core CPI inflation will increase from currently 3.8% to 4% to 4.5%, see chart below. 

    Even if month-over-month increases in core CPI comes in at the historical average of 0.2% for the rest of the year, then year-over-year inflation will still end the year at 3%. 

    To get inflation back to the Fed’s 2% inflation target, core CPI for the rest of the year will have to come in at an unprecedented 0.1% month over month.

    The bottom line is that base effects and strong recent readings complicate the Fed’s efforts to get inflation back to its 2% inflation target. Put differently, it will require a sharp, immediate slowdown in consumer spending and capex spending for the Fed to be able to cut rates by the end of this year. 

    Inflation will likely be above the Fed’s 2% inflation target for the rest of 2024
    Source: BLS, Haver Analytics, Apollo Chief Economist

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  • Many More Private Firms in the US

    Torsten Sløk

    Apollo Chief Economist

    In financial markets, a lot of conversations are about public companies, but the reality is that in the US, 87% of firms with revenue greater than $100 million are private, see chart below.

    In the US, 87% of firms with revenue greater than $100 million are private
    Source: S&P Capital IQ, Apollo Chief Economist. Note: For companies with last 12-month revenue greater then $100 million by count.

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  • Rates Higher for Longer than Normal

    Torsten Sløk

    Apollo Chief Economist

    It normally takes eight months from the last Fed hike until the central bank starts cutting. But during this cycle, the Fed has kept interest rates constant for ten months since the last hike in July 2023, see chart below. With easy financial conditions still giving a significant boost to inflation and growth over the coming quarters, the risks are rising that we could see a Fed cycle that is very different, with the Fed keeping rates higher for much longer than we usually see. 

    The Fed is keeping interest rates higher for longer than normal
    Source: FRB, Haver Analytics, Apollo Chief Economist

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  • Younger Households Have Lower FICO Scores

    Torsten Sløk

    Apollo Chief Economist

    Younger households tend to have lower credit scores, and the consequence is that Fed hikes and associated tighter credit conditions tend to have a more negative impact on younger generations, see chart below.

    Younger households have lower credit scores
    Source: Experian, Apollo Chief Economist. Note: Data for 2023.

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  • Gold Price Rising

    Torsten Sløk

    Apollo Chief Economist

    The price of gold has been rising in recent months on the back of geopolitical tensions, central banks including China stepping up purchases of gold, and expectations of lower rates triggering a rise in inflation after the December Fed pivot.

    Geopolitical risks, central bank purchases, and Fed pivot pushing gold price higher
    Source: Bloomberg, Apollo Chief Economist

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  • Capital Markets Reopening After the Fed Pivot

    Torsten Sløk

    Apollo Chief Economist

    For two years, the Fed was saying, “Interest rates are going higher.”

    That message resulted in very little activity in capital markets, with low levels of IPO, M&A, sponsor-to-sponsor deals, or sponsor-to-strategic deals.

    This changed at the December 2023 meeting when the Fed said, “Interest rates are now going lower.”

    The impact of this signal change from the FOMC was profound. It triggered a significant rally in the S&P 500 and in IG, HY, and loans. As a result, capital markets reopened and LBO financings have rebounded significantly since December, see chart below.

    With the Fed still saying that the next move in rates is lower, we should expect the rebound to continue.

    LBO financings coming back after the December Fed pivot
    Source: PitchBook LCD, Apollo Chief Economist. Note: Private credit count is based on transactions covered by LCD News.

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  • The US Is the Biggest Oil Producer in the World

    Torsten Sløk

    Apollo Chief Economist

    The US now produces more oil than Saudi Arabia and Russia, see chart below.

    The US produces more oil than Russia and Saudi Arabia
    Source: EIA, International Energy Statistics, Apollo Chief Economist. Note: Rest of the world produces 22.8 million barrels per day.

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  • Ownership of Government Bonds Across Countries

    Torsten Sløk

    Apollo Chief Economist

    The US has a relatively high share of domestic ownership of government bonds relative to European countries, see chart below.

    Switzerland, Japan, Korea, and US have high domestic ownership of government bonds
    Source: IMF, Apollo Chief Economist. Note: Data as of Q2 2023.

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  • More Demand for Travel Driven by Wealth Gains

    Torsten Sløk

    Apollo Chief Economist

    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

    Torsten Sløk

    Apollo Chief Economist

    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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