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The employment report confirms the Fed narrative that the economy is still strong and more rate hikes are needed. But the report also shows that wage inflation has peaked, allowing the Fed to turn less hawkish as we enter the third quarter. For more, download the PDF.
See important disclaimers at the bottom of the page.
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After a brief period of rising delinquency rates on credit cards and auto loans for subprime borrowers, the latest data shows a modest improvement in consumer credit quality with delinquency rates falling, see table below. This is consistent with a strong labor market, high wage growth, and a high level of household savings. US consumer spending will eventually grow at a slower pace because this is what the Fed wants to see, but the bottom line is that there are no signs yet in the macro data of the US consumer slowing down.
Source: Transunion Monthly Industry Snapshot See important disclaimers at the bottom of the page.
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The Fed and markets continue to expect a quick reversal in inflation back to the Fed’s 2% target, see chart below. This raises two questions for investors: As the Fed destroys demand to cool down inflation, what level of the unemployment rate is required to achieve this path, and can the Fed engineer a soft landing without increasing the unemployment rate too much and thereby triggering a recession?
Source: Bloomberg, Fed’s Statement of Economic Projections, Apollo Chief Economist. Note: Headline PCE inflation shown. See important disclaimers at the bottom of the page.
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The consensus continues to downgrade growth expectations for Europe, raising questions about ECB rate hikes and the rising risk of loan losses and defaults in Europe, see chart below.
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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There is more pedestrian traffic in Times Square, but current levels are still 25% below normal, see chart below.
Source: timessquarenyc.com, Apollo Chief Economist See important disclaimers at the bottom of the page.
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We updated our oil price forecasting model, and while sanctions continue to argue for higher oil prices, the downward pressure is significant from the Strategic Petroleum Reserve release, growing supply, and slowing global growth. As a result, our econometric model points to lower oil prices over the coming 18 months, see charts below.
Source: Apollo Chief Economist See important disclaimers at the bottom of the page.
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U.S. Retirement Assets: Amount in Pensions and IRAs
https://crsreports.congress.gov/product/pdf/IF/IF12117Reactions of household inflation expectations to a symmetric inflation target and high inflation
https://www.dnb.nl/media/2dzn0i2m/working_paper_no-_743.pdfRussia Sanctions and Cryptocurrencies: Policy Issues
https://crsreports.congress.gov/product/pdf/IN/IN11939See important disclaimers at the bottom of the page.
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There are some very early signs that the economy is starting to cool down, with layoffs rising in startups and some housing indicators starting to roll over from high levels. But the big picture remains that high-frequency indicators show that the economy is still strong. Most noteworthy this week was the decline in jobless claims. The solid data is consistent with the consensus expectation of nonfarm payrolls coming in at 330K next week and the unemployment rate falling from 3.6% to 3.5%.
Looking ahead, with the virus subsiding, we should begin to see a shift away from goods toward services. The chart below shows that this shift has not started yet. The surprise has been that consumer goods spending has continued to be so strong. But with more people flying, eating at restaurants, staying at hotels, and going to amusement parks, we should over the coming quarters see growth in consumer services accelerate, and spending on consumer goods begin to slow down.
The trading implication for equity and credit markets is to be long consumer services and short consumer goods. For the Fed the implication is that rate hikes continue. Read our slowdown chart book.
Source: BEA, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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With tech and venture capital taking a severe hit, layoffs at startup companies have started to increase, see chart below. The Fed is trying to destroy demand, including demand for labor, and this is early evidence that they are succeeding.
Source: Layoffs.fyi, Apollo Chief Economist. Note: Top 5 sectors that account for layoffs in May 2022: Transportation, Food, Travel, Finance, and Real Estate. See important disclaimers at the bottom of the page.
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The total value of the US-based venture capital private company universe is down almost 60% over the past six months, and with a rising risk of a US recession, there is more downside from here. The crash in venture capital will continue until the hard landing is behind us.
Source: Bloomberg, Apollo Chief economist. Note: The Thomson Reuters Venture Capital Index is designed to measure the value of the US-based venture capital private company universe in which venture capital funds invest. See important disclaimers at the bottom of the page.
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