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  • Solar and Wind Power Projects Under Construction

    Torsten Sløk

    Apollo Chief Economist

    There are more solar and wind power projects under construction in China than in all other countries combined, see chart below.

    More wind and solar projects under construction in China than the rest of the world combined
    Data for China and European countries to June 2024. All other countries to December 2023. Source: Global Energy Monitor, Apollo Chief Economist

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  • Canada: Immigration Doubled Starting in 2022

    Torsten Sløk

    Apollo Chief Economist

    In Canada, demand for foreign labor doubled starting in 2022, see chart below.

    Canada: Approved positions nearly doubled between 2021 and 2023s
    Note: A positive LMIA (Labor Market Impact Assessment) must be obtained by an employer before hiring a Temporary Foreign Worker (TFW) for a specific occupation. The data provided above tracks TFW positions on LMIAs only, not TFWs that are issued a work permit or who enter Canada. The decision to issue a work permit rests with Immigration, Refugees and Citizenship Canada (IRCC); therefore, not all positions approved result in a work permit or a TFW entering Canada. Source: Government of Canada, Apollo Chief Economist

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  • AI Is Likely Positive for Employment

    Torsten Sløk

    Apollo Chief Economist

    If AI is having such a profound impact on call centers, telemarketing, and other business process outsourcing jobs, then unemployment in the Philippines and India should be moving higher. But that is not what the data is showing, see chart below.

    Unemployment rate steady in Philippines and India
    Source: CMIE, PSA, Haver Analytics, Apollo Chief Economist

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  • $3 Billion Per Day in Interest Expenses

    Torsten Sløk

    Apollo Chief Economist

    The latest data from the Treasury shows that the US government now pays out on average $3 billion in interest expenses per day, including weekends, see chart below.

    If the Fed cuts interest rates by 1%-point and the entire yield curve declines by 1%-point, then daily interest expenses will decline from $3 billion per day to $2.5 billion per day.

    Average interest expense on US government debt now over $3 billion per day
    Source: US Treasury, Haver Analytics, Apollo Chief Economist

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  • China Entering an Extended Period of Overcapacity

    Torsten Sløk

    Apollo Chief Economist

    The Chinese population is shrinking, and the UN forecasts that the Chinese working age population will decline by roughly 100 million people every decade. These demographic headwinds are significant and a major drag on growth in China, see below and in our chart book available here.

    A shrinking population with fewer working age individuals means fewer taxpayers, more spending on government services for retired people, and overcapacity, as companies can no longer fill existing factories with workers. 

    For investors, the implication is slower growth, more disinflationary pressures, and weaker global demand for commodities.

    Five facts about the demographic challenges in China
    Source: Apollo Chief Economist

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  • It used to be the case that the percentage of foreign companies listed on European and US stock exchanges was very similar at around 15%, see chart below. But, over the past decade, the share of foreign companies listed on stock exchanges has declined significantly in Europe and increased significantly in the US.

    Share of foreign companies listed on European exchanges and US exchanges
    US = NYSE and Nasdaq US, Europe = LSE, Euronext, Deutsche Boerse AG and Nasdaq Nordic.
    Sources: World Federation of Exchanges, Apollo Chief Economist

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  • This week, jobless claims declined, GDP was revised higher, and personal income was higher than consensus expected. Our daily and weekly indicators continue to show no signs of a slowdown, see our chart book.

    Or, from a markets perspective, if the economy is about to enter a recession and the unemployment rate is about to go up, why is Walmart’s stock price trading at an all-time high?

    With this backdrop, let’s quantify what Fed cuts will do to the economy.

    The Fed is saying that monetary policy is restrictive and the Fed funds rate needs to normalize and come down to r-star, which they estimate to be around 3%.

    We ran a simulation on a simplified version of the Fed’s model for the US economy, FRBUS, to quantify what the normalization of interest rates means for GDP and inflation.

    Assuming a 100bps cut to the Fed funds rate this year and an additional 150bps in forward guidance about more cuts coming will boost GDP by 2% and inflation by 1%, see simulations below.

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    In short, the current excitement about a dramatic amount of rate cuts is ignoring the significant positive effects these cuts will have on the stock market, credit spreads, consumer spending, capex spending, corporate earnings, and inflation.

    Combined with a continued strong tailwind to the economy from fiscal policy and massive investments in AI, the risks are rising that Fed cuts are going to boost stock prices and tighten credit spreads and trigger a reacceleration in GDP and inflation, see again simulations below.

    The bottom line is that the r-star framework is missing what “normalizing interest rates” means for the economy, and this is particularly problematic when the Fed funds rate is significantly higher than the model-calculated terminal policy rate.

    Fed normalizing interest rates to 3% will boost GDP by 2.2%
    Note: Monetary policy shock: 100bps decline in the Fed funds rate and Fed forward guidance signaling that another 150bps of cuts are coming (to ultimately bring the Fed funds rate down to the Fed’s estimate of r-star at 3%). Source: Bloomberg SHOK Model, Apollo Chief Economist
    Fed normalizing interest rates to 3% will boost inflation by 1%
    Note: Monetary policy shock: 100bps decline in the Fed funds rate and Fed forward guidance signaling that another 150bps of cuts are coming (to ultimately bring the Fed funds rate down to the Fed’s estimate of r-star at 3%). Source: Bloomberg SHOK Model, Apollo Chief Economist

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  • Worldwide employment in all US multinational companies is 44 million.

    About 70% of employment in US multinational enterprises, or about 30 million jobs, are in the US, and 14 million jobs in US multinational firms are outside the US.

    With total nonfarm payrolls in the US at 159 million, 19% of US employment is in multinational enterprises.

    Put differently, more than 80% of jobs in the US economy are outside the S&P 500 companies, and privately owned companies continue to be the lifeblood of the US economy.

    For more, see this new data from the BLS.

    Employment by US multinational enterprises
    Source: US Bureau of Economic Analysis, Apollo Chief Economist

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  • Free Float Highest in the US

    Torsten Sløk

    Apollo Chief Economist

    MSCI defines the free float as the proportion of shares outstanding that is deemed to be available for purchase in the public equity markets by international investors.

    A higher free float normally means lower volatility and higher liquidity. The free float is higher in the US, UK, and Australia, and generally lower in emerging markets, see charts below.

    US, UK, and Australia have a higher free float than other countries
    Note: MSCI defines the free float of a security as the proportion of shares outstanding that is deemed to be available for purchase in the public equity markets by international investors. Data as of July 2024. Source: Bloomberg, Apollo Chief Economist
    EM: Significant differences in free float across countries
    Note: MSCI defines the free float of a security as the proportion of shares outstanding that is deemed to be available for purchase in the public equity markets by international investors. Data as of July 2024. Source: Bloomberg, Apollo Chief Economist

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  • The economics textbook says that higher interest rates should slow capex spending.

    But capex spending is currently much less sensitive to interest rates because of massive investments in AI.

    Despite the Fed funds rate being at the highest level in decades, capex spending by the Magnificent Seven is at record-high levels, see chart below.

    This is another reason why the monetary policy transmission mechanism is much weaker than usual. Fed hikes are having a much smaller negative impact than normal on business investment decisions because of the strong appetite among firms to invest in AI.

    Capex spending of the Magnificent Seven
    Source: Bloomberg, Apollo Chief Economist

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