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  • Car Insurance Costs Have Increased Significantly

    Torsten Sløk

    Apollo Chief Economist

    The price of car insurance has increased 50% since the pandemic began, see chart below.

    The price of car insurance is up 50% since 2019
    Source: BLS, Haver, Apollo Chief Economist

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  • Income and Expenditure by Quintile

    Torsten Sløk

    Apollo Chief Economist

    The bottom 40% of incomes account for 22% of total consumer spending and 13% of total income, and the top 20% of incomes account for 39% of total consumer spending and 47% of total income, see chart below.

    US income and expenditure, by quintile
    Data for 2022. Source: BLS, Haver Analytics, Apollo Chief Economist

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  • GDP Per Capita in Poland, Spain, and Italy

    Torsten Sløk

    Apollo Chief Economist

    The IMF is forecasting that in a few years GDP per capita in Poland will be higher than in Spain and at the same level as Italy, see chart below.

    GDP per capita in Poland will soon be higher than in Spain and at the same level as Italy
    Source: IMF WEO, Haver Analytics, Apollo Chief Economist

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  • Sources of Growth in Denmark

    Torsten Sløk

    Apollo Chief Economist

    The pharma industry currently accounts for about 70% of GDP growth in Denmark, see chart below.

    70% of GDP growth in Denmark is coming from the pharma industry
    Source: Statistics Denmark, Apollo Chief Economist

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  • Debanking Continues

    Torsten Sløk

    Apollo Chief Economist

    Long-term loans to corporates are moving away from being financed by overnight deposits to instead being financed by the long-term liabilities of organizations such as insurers and pensions, thereby making the financial system more stable, see chart below.

    Banks playing a smaller role as providers of credit
    Source: FRB, Haver Analytics, Apollo Chief Economist

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  • Strong Economy but Weak Labor Market?

    Torsten Sløk

    Apollo Chief Economist

    It is inconsistent to say that the incoming economic data is strong but the labor market is weakening.

    For example, if the Atlanta Fed GDP Now estimate is 2.9%, significantly above the CBO’s 2% estimate of long-run growth, then job growth is accelerating and the unemployment rate is declining.

    With the data for consumer spending, capex spending, and government spending still strong, we should soon begin to see a rebound in nonfarm payrolls and a decline in the unemployment rate.

    That is also what the incoming data is showing:

    1) This week, jobless claims declined to 219,000, and given this was the survey week for the September employment report, this suggests that nonfarm payrolls for September could come in at 300,000, see the first chart below.

    2) The Atlanta Fed GDP Now estimate currently stands at 2.9%, and looking at the historical relationship, this implies that nonfarm payrolls in the third quarter will come in at 240,000 jobs created each month in July, August, and September, see the second chart. In other words, we could see a sharp rebound in job growth in September from the low levels we saw in July and August.

    3) A new Fed paper looks at the procyclicality of quits and countercyclicality of layoffs and finds that layoffs are a leading indicator of a recession. During recessions, quits decline as layoffs increase. But this is not what the latest data for layoffs and quits to non-participation show, see the next four charts below.

    4) Finally, with mortgage rates coming down and Case-Shiller at 5% we could see a rebound in the housing market, which could trigger a rebound in overall inflation, see the last chart.

    With financial conditions easing further because of the 50bps Fed cut and still strong tailwinds to economic growth from the CHIPS Act, the IRA, the Infrastructure Act, strong AI spending, and strong defense spending, the bottom line is that there are no signs of the economy entering a recession. And because of these tailwinds, there are no reasons to expect a recession. On the contrary, the incoming data seen in our chart book (available here), in particular jobless claims and the Atlanta Fed GDP Now, are pointing to a reacceleration in employment growth over the coming months.

    Jobless claims were 219K in the survey week for the September employment report.Looking at the historical relationship suggests September NFP could come in at 300K
    Note: Sample from Jan 2000 to Aug 2024 and excludes data from March 2020 to March 2021 due to Covid behavior. Source: BLS, DOL, Haver Analytics, Apollo Chief Economist
    Atlanta Fed GDP Now for Q3 2024 is at 2.9%.Looking at the historical relationship suggests Q3 average NFP could come in at 240K
    Note: Sample from Q12010 to Q22024 and excludes data from Q22020 and Q32020 due to Covid behavior. Source: BLS, DOL, Haver Analytics, Apollo Chief Economist
    Quits rate to non-participation is rising
    Source: Ellieroth and Mchaud (2024), “Quits, Layoffs, and Labor Supply”,  Fed Working Paper, Haver Analytics, Apollo Chief Economist
    Very low levels of layoffs
    Source: BLS, Haver Analytics, Apollo Chief Economist
    WARN data points to lower claims in coming months
    Note: The Worker Adjustment and Retraining Notification (WARN) Act helps ensure 60 to 90 days advance notice in cases of qualified plant closings and mass layoffs. WARN factor is the Cleveland Fed estimate for WARN notices (https://www.clevelandfed.org/publications/working-paper/wp-2003r-advance-layoff-notices-and-aggregate-job-loss). Source: Department of Labor, Haver Analytics, Federal Reserve Bank of Cleveland, Apollo Chief Economist
    Announced job cuts remain low
    Source: Challenger, Gray & Christmas, Haver Analytics, Apollo Chief Economist
    Rebound coming in housing inflation
    Source: Haver Analytics, BLS, S&P, Apollo Chief Economist

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  • 23 States Use E-Verify

    Torsten Sløk

    Apollo Chief Economist

    E-Verify is a Department of Homeland Security website that allows businesses to determine the eligibility of their employees, both US and foreign citizens, to work in the United States. Currently, only 23 states require the use of E-Verify for at least some public and/or private employers.

    23 states use E-Verify
    Note: E-Verify is a voluntary internet-based program to help employers verify the work authorization of all new hires. The program is administered by the US Department of Homeland Security in partnership with the Social Security Administration. Currently, 23 states require the use of E-Verify for at least some public and/or private employers. Source: NCSL, Apollo Chief Economist

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  • The Market Narrative Is Almost Always Wrong

    Torsten Sløk

    Apollo Chief Economist

    Since the Fed started raising rates, the terminal rate has fluctuated between 2% and 4.5%, see chart below.

    That’s a pretty wide range of outcomes.

    The bottom line is that the market narrative at any point in time is almost always wrong.

    Since the Fed started raising interest rates, the terminal rate has fluctuated between 2% and 4.5%
    Source: CME, Haver Analytics, Apollo Chief Economist

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  • Higher for Longer, Still for Longer

    Torsten Sløk

    Apollo Chief Economist

    Fed Chair Powell told the audience at Jackson Hole that “the time has come for policy to adjust,” acknowledging recent progress on inflation, and setting the scene for a rate cut today—the first reduction in more than four years.

    While the announcement provided investors with much-needed clarity about the timing of the first rate cut, there remains a large deal of disagreement around the magnitude of rate cuts throughout the rest of the year and into 2025. It seems as though overnight investors have replaced concerns about a stubbornly high inflation with a possible recession that will force the Fed to cut rates more aggressively.

    In our view, recent economic data—including the July and August payrolls reports—point to an economy that is slowing down but not heading into a recession. This was very much the outcome that the Fed was working towards given the resilience and stamina of the US economy over the past three years. While employment gains have been more moderate over the last three months, average hourly earnings have increased, and the unemployment rate declined in August. On top of that, recent economic indicators continue to point to a strong economy. Initial jobless claim applications fell to the lowest since July, US retail sales accelerated in July by the most since early 2023, and gross domestic product rose at a 3% annualized rate during the second quarter, up from the previous estimate of 2.8%. Other indicators continue to signal robust growth: Restaurant bookings, TSA travel data, hotel bookings and box office revenue remain strong.

    Even if the Fed embarks on an easing cycle, we believe that interest rates will remain relatively higher for longer. If we assume the interest rate futures market is correct in pricing in at least four rate cuts in 2024—which we believe is overblown—short-term interest rates would by the end of 2024 be around 4.5%, a level that would still be the highest for overnight rates since 2007 (excluding the Fed’s current hiking cycle). Furthermore, if we take in the expectations for additional ~five rate cuts in 2025, rates will reach 3% by the end of next year, which is nearly double the average 1.8% rate over the past decade.

    A soft landing remains our base case, driving our broadly constructive view on direct lending. Our expectation remains that it will take longer for inflation to come down to the central bank’s 2% target range, and as a result the curve will continue to steepen, meaning long rates are going to decline less than short rates. The combination of a strong economic backdrop along with elevated yields further out the curve is favorable for high-quality private credit. With private credit spreads of 5%-6% and Original Issue Discounts of 2% factored in, investors should still be able to command solid returns over the coming years. We continue to believe that the opportunity set to lend to bigger businesses on a first lien, senior secured basis at elevated yields remains attractive.

    Source: Bloomberg, Apollo Chief Economist

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  • Rates Markets Are Pricing in a Recession

    Torsten Sløk

    Apollo Chief Economist

    Despite surveys showing that the consensus is expecting a soft landing, rates markets are pricing in a full-blown recession, see chart below.

    Rates markets are pricing in a recession
    Source: FRB, Haver Analytics, Bloomberg, Apollo Chief Economist

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