The Daily Spark

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  • Long Covid Keeping 4mn People Out of Work 

    Torsten Sløk

    Apollo Chief Economist

    A new Brookings piece looks at Census data and finds that about 4 million workers are out of work because of long covid.  

    For comparison, the total number of unemployed is about 6 million, and total employment is 153 million. 

    The bottom line is that long covid is a key reason why there are labor shortages and hence why wage inflation remains so high.  

    It is difficult for the Fed to increase the labor supply, but by raising interest rates, the FOMC can lower labor demand and increase the unemployment rate to get wage and price inflation down to the Fed’s target.  

    The challenge for the Fed is that the unemployment rate has not increased yet, so the Fed will likely have to raise rates more than the market currently expects to get the softening in the labor market that is needed to get inflation down to sustainable levels. 

    Access the piece here. 

    See important disclaimers at the bottom of the page.


  • Supply Chains Normalizing 

    Torsten Sløk

    Apollo Chief Economist

    The costs of transporting goods are normalizing across all types of transportation, see charts below. For example, the dry van spot rate per mile has declined over the past six months from $3 to $2. This is all putting downward pressure on inflation and costs of production. 

    Container freight rates falling: Inflation pressures are easing
    Source: WCI, Bloomberg, Apollo Chief Economist
    Truck transportation costs declining: Inflation pressures are easing
    Source: Bloomberg, Apollo Chief Economist
    Transportation costs declining
    Source: Bloomberg, Apollo Chief Economist

    See important disclaimers at the bottom of the page.


  • European Energy Crisis 

    Torsten Sløk

    Apollo Chief Economist

    The energy crisis is intensifying in Europe, and the significant increase in natural gas prices and electricity prices is starting to spill over to the US economy. Once a week we will update this outlook

    Europe: Electricity prices are 10 to 15 times higher than normal and rising
    Source: Bloomberg, Apollo Chief Economist
    71 percent of US LNG exports now going to Europe
    Source: EIA, Apollo Chief Economist

    See important disclaimers at the bottom of the page.


  • Did Inflation Go Up Because of Demand or Supply?

    Torsten Sløk

    Apollo Chief Economist

    Why did used car prices go up 50% during the pandemic, was it because of more demand for vehicles, or was it because of supply chain problems with semiconductors? The answer to this question will determine where the Fed funds rate will peak during this cycle.

    Specifically, identifying the sources of the increase in inflation is essential for understanding how quickly inflation will return to the Fed’s 2% target. A recent Fed working paper suggested that only 1/3 of the inflation increase during the pandemic was due to demand. If that is the case, the Fed today will not need to destroy much demand, and inflation will automatically come down to 2% again.

    With supply chains improving every day and growth slowing, the trend in inflation should be lower. If supply problems mainly drove the run-up in inflation, then inflation could come back to 2% faster than the market currently thinks. In that case, a soft landing is likely, and equities and credit should be trading higher.

    Picture of used car prices rising sharply since the COVID-19 pandemic
    Source: Cargurus.com, Apollo Chief Economist

    See important disclaimers at the bottom of the page.


  • Excess Savings in EU and UK 

    Torsten Sløk

    Apollo Chief Economist

    A high level of savings in the household sector during covid can also be seen in the Eurozone and in the UK, see charts below. This is a tailwind for the outlook for consumer spending across Europe. The headwinds to European private consumption include slowing growth, sanctions, and higher inflation, including higher energy prices. 

    Eurozone households have almost €1trn in excess savings
    Source: Bloomberg, Apollo Chief Economist
    UK households have £200bn in excess savings
    Source: Bloomberg, Apollo Chief Economist

    See important disclaimers at the bottom of the page.


  • Slowdown Watch 

    Torsten Sløk

    Apollo Chief Economist

    Weekly data for credit card spending shows no signs of a slowdown across all spending categories, see charts below. The implication is that the Fed needs to raise rates more to cool down the economy. Our weekly chart book with high-frequency indicators for the US economy is available here.  

    US consumer still strong
    Source: BEA, Haver analytics, Apollo Chief Economist. Note: The weekly values represent the predicted percentage difference from the typical level of spending (prior to the pandemic declared by the World Health Organization on March 11, 2020) after adjusting for day-of-week, month, and year effects, based on daily data. The typical level corresponds to a value of zero.
    US consumer still strong
    Source: BEA, Haver analytics, Apollo Chief Economist. Note: The weekly values represent the predicted percentage difference from the typical level of spending (prior to the pandemic declared by the World Health Organization on March 11, 2020) after adjusting for day-of-week, month, and year effects, based on daily data. The typical level corresponds to a value of zero.
    US consumer still strong
    Source: BEA, Haver analytics, Apollo Chief Economist. Note: The weekly values represent the predicted percentage difference from the typical level of spending (prior to the pandemic declared by the World Health Organization on March 11, 2020) after adjusting for day-of-week, month, and year effects, based on daily data. The typical level corresponds to a value of zero.
    Source: BEA, Haver analytics, Apollo Chief Economist. Note: The weekly values represent the predicted percentage difference from the typical level of spending (prior to the pandemic declared by the World Health Organization on March 11, 2020) after adjusting for day-of-week, month, and year effects, based on daily data. The typical level corresponds to a value of zero.

    See important disclaimers at the bottom of the page.


  • The Rally in HY 

    Torsten Sløk

    Apollo Chief Economist

    During the recent rally in credit, the HY index has outperformed the IG index even on a duration-adjusted basis, and there are some good reasons why HY is less sensitive than previously to the coming economic slowdown, including higher average rating quality of the index and a record-high share of secured bonds in the HY index. 

    A rally in High Yield
    Source: Bloomberg, ICE BofA, Apollo Chief Economist. Note: Red dot indicates data as of 18 August 2022

    See important disclaimers at the bottom of the page.


  • CPI Housing Inflation About to Come Down 

    Torsten Sløk

    Apollo Chief Economist

    Housing has a weight of 40% in the core CPI index, and leading indicators of rent inflation are showing signs of rolling over, but the leading indicators in the charts below suggest that it may take some time before housing inflation returns to or below pre-pandemic levels. The implication for markets is that it is not enough that inflation has peaked. We also need to see key components of the CPI, such as housing, return to pre-pandemic levels of inflation, which is required to get headline inflation back to 2%. 

    Rent inflation is slowing down
    Source: Bloomberg, Haver, Apollo Chief Economist
    Rent inflation is slowing down
    Source: BLS, Penn State, Apollo Chief Economist

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  • Too Early to Declare Victory Over Inflation 

    Torsten Sløk

    Apollo Chief Economist

    Inflation today is 8.5%, and the consensus expects inflation at the end of this year at 7.3%. Inflation may have peaked, but these numbers are all unacceptably high for the Fed.  

    The implication for markets is that the Fed will not turn dovish anytime soon. The Fed’s inflation target is 2%, and the FOMC will continue to raise interest rates and keep them elevated until there are clear signs inflation is coming down to 2% even if this requires a slowing in corporate earnings growth.  

    The bottom line is that it is too early to declare victory over inflation, and we don’t know yet how much Fed tightening and lower earnings growth are going to be needed to get inflation all the way down to 2% again. 

    Inflation coming down but still meaningfully above the Fed's 2% target
    Source: BLS, Haver Analytics, Apollo Chief Economist

    See important disclaimers at the bottom of the page.


  • China Youth Unemployment 20%

    Torsten Sløk

    Apollo Chief Economist

    The youth unemployment rate in China has increased from 15% to 20% over the past year, and once the economy reopens after covid, many of these jobs will be coming back, see chart below.

    China youth unemployment rate is rising
    Source: NBS, Bloomberg, Apollo Chief Economist

    See important disclaimers at the bottom of the page.


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