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  • S&P500 Similarity with 2008

    Torsten Sløk

    Apollo Chief Economist

    Last week, the S&P500 continued to follow the pattern seen in 2008, see chart below.

    S&P500 is following a pattern similar to 2007-08
    Source: Bloomberg, Apollo Chief Economist

    See important disclaimers at the bottom of the page.


  • Weekend Reading

    Torsten Sløk

    Apollo Chief Economist

    Quantifying the Role of Interest Rates, the Dollar and Covid in Oil Prices

    https://www.bis.org/publ/work1040.pdf

    Labor Force Exiters around Recessions: Who Are They?

    https://s3.amazonaws.com/real.stlouisfed.org/wp/2022/2022-027.pdf

    Dollar Reserves and U.S. Yields: Identifying the Price Impact of Official Flows

    https://www.nber.org/papers/w30476

    See important disclaimers at the bottom of the page.


  • Fed Expectations Changing

    Torsten Sløk

    Apollo Chief Economist

    In March 2021, the FOMC thought the Fed funds rate would be zero at the end of 2023. Now they think the Fed funds rate at the end of next year will be 4.5%, see chart below.

    Our attached Slowdown Watch PDF shows that the US economy is still overheating, with unemployment at 3.7% and inflation at 8.3%.

    Chart showing rising projections for the Fed funds rate
    Source: FRB, Apollo Chief Economist

    See important disclaimers at the bottom of the page.


  • Recession in Germany

    Torsten Sløk

    Apollo Chief Economist

    The consensus is now expecting a recession in Germany in 2023, see chart below.

    Chart projecting a recession for Germany in 2023
    Source: Bloomberg, Apollo Chief Economist

    See important disclaimers at the bottom of the page.


  • Inventories Normalizing

    Torsten Sløk

    Apollo Chief Economist

    Although services make up 80% of GDP, fluctuations in the goods sector are still important. Inventory levels are normalizing as a result of the supply chain improving and the goods sector of the economy slowing down, see chart below. Inventories for wholesalers are back to pre-pandemic levels, but inventories for retailers are still substantially below 2019 levels.

    Chart showing wholesale inventories are back to pre-pandemic levels. But retail inventories are still below levels in 2019.
    Source: Census Bureau, Haver, Apollo Chief Economist

    See important disclaimers at the bottom of the page.


  • Inflation Expectations Coming Down

    Torsten Sløk

    Apollo Chief Economist

    Survey-based and market-based measures of inflation expectations are starting to decline, and the market believes that the Fed will get inflation down to the FOMC’s 2% target, see charts below.

    Chart showing inflation expectations from surveys coming down over one- and three-year time frames
    Source: FRBNY, Haver, Apollo Chief Economist
    Chart showing hedging costs falling
    Source: Bloomberg, Apollo Chief Economist

    See important disclaimers at the bottom of the page.


  • Who is Buying Treasuries?

    Torsten Sløk

    Apollo Chief Economist

    With rates rising and the dollar going up, foreign private investors are buying US Treasuries at a record pace, see chart below.

    Chart showing foreign investors are buying US Treasuries at a record rate as interest rates and the dollar rise
    Source: Bloomberg, Apollo Chief Economist

    See important disclaimers at the bottom of the page.


  • Recession Probability Rising

    Torsten Sløk

    Apollo Chief Economist

    The consensus now sees a 50% probability of a recession in the US and 60% chance of a recession in Europe and the UK, see chart below. Investors should be positioned accordingly.

    Chart showing the probability of a recession rising in the US, EU, and UK
    Source: Bloomberg, Apollo Chief Economist

    See important disclaimers at the bottom of the page.


  • Inflation Mainly Driven by Supply

    Torsten Sløk

    Apollo Chief Economist

    US and European inflation for the past two years has been almost identical despite the fiscal response to covid being double the size in the US relative to Europe, see charts below.

    With a much more aggressive fiscal response in the US, both headline and core inflation should have been much higher in the US today than in Europe.

    The identical path of inflation in the US and Europe strongly suggests that inflation is not driven by demand but instead by supply problems associated with covid. Some of these supply problems for goods will get resolved quickly as supply chain problems ease. But other supply problems in the labor market will take some longer time.

    The implication for markets is that the Fed and the ECB may not need to do much demand destruction to get inflation down.

    This topic is also debated in several Fed working papers at the moment, see here and here.

    Chart showing inflation in the US and EU has mostly followed the same path
    Source: Bloomberg, Apollo Chief Economist
    Chart showing that the fiscal response to COVID in the US has been much greater than the EU in 2020 and 2021
    Source: OMB, ECB, Haver Analytics, Apollo Chief Economist

    See important disclaimers at the bottom of the page.


  • S&P500 today vs 2008

    Torsten Sløk

    Apollo Chief Economist

    There is a striking similarity between how the S&P500 has traded during this period of high inflation and the pattern we saw during the financial crisis in 2007-2008, see chart below. Maybe one conclusion is that when investors are faced with extreme levels of uncertainty, the behavioral response in financial markets over time is relatively similar. Markets think the problems are over and want to go higher but as more data comes in, then realize that the shock is still here and the downside risks are still substantial. Our latest Slowdown Watch is available here.

    S&P500 is following a pattern similar to 2007-08
    Source: Bloomberg, Apollo Chief Economist

    See important disclaimers at the bottom of the page.


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