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A key reason inflation remains so high is that households still have significant savings left, and the market underappreciates this strong tailwind for consumer spending, see charts below. Combined with solid job and wage growth, it will take many quarters before the level of household savings is back at pre-pandemic levels.
Source: FRB, Haver Analytics, Apollo Chief Economist 
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Liquidity is getting worse in government bond markets, credit markets, and equity markets see charts below. The sources of low liquidity in financial markets are passive investment strategies, high-frequency trading, and less risk-taking by some brokers.
Source: Bloomberg, Apollo Chief Economist (Note: The index displays the average yield error across the universe of government notes and bonds with remaining maturity 1-year or greater, based off the intra-day Bloomberg relative value curve fitter. When liquidity conditions are favorable the average yield errors are small as any dislocations from fair values are normalized within a short time frame. Average yield error is defined as an aggregate measure for dislocations in Treasury securities across the curve.) 
Source: FRB of New York, Apollo Chief Economist (Note: Corporate bonds are a key source of funding for U.S. non-financial corporations and a key investment security for insurance companies, pension funds, and mutual funds. Distress in the corporate bond market can thus both impair access to credit for corporate borrowers and reduce investment opportunities for key financial sub-sectors. CMDI offers a single measure to quantify joint dislocations in the primary and secondary corporate bond markets. Ranging from 0 to 1, a higher level of CMDI corresponds with historically extreme levels of dislocation. CMDI links bond market functioning to future economic activity through a new measure. 
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Tomorrow, Thursday, we get inflation data for September, and the Fed’s forecast is that headline inflation will decline from 8.3% to 8.1%, and core inflation will rise from 6.3% to 6.6%, see chart below and here.
These numbers are all significantly above the FOMC’s 2% inflation target.
For financial markets, the implication is that the FOMC will continue to raise rates until inflation starts to move meaningfully down toward 2%.
Based on the consensus inflation forecast in the chart below, the Fed will likely pause rate hikes once we get to the middle of 2023. Seen from this perspective, the equity bear market will continue for now, but we could get a sustained rally in stocks and credit starting in 2023.
Source: Cleveland Fed, Bloomberg, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The first chart below shows that the corporate debt-to-equity ratio is low.
The second chart shows that corporate debt is high as a share of GDP.
In other words, corporate debt levels are low relative to equity prices. But corporate debt levels are high as a share of GDP.
A different way of looking at this is that a decade of low interest rates and QE boosted both debt levels and equity valuations. But easy monetary policy did not boost GDP by nearly as much.
One important conclusion is that there is more financial engineering, i.e. debt and equity outstanding, in the economy than ever before. And this increase in debt and equity outstanding has not yielded a corresponding boost to GDP.
The bears see high levels of debt and equity outstanding as a future risk to financial stability, in particular in a situation where inflation is high and interest rates are rising. The bulls argue that a more developed financial system is positive for growth and risk management in the economy for households, firms, and investors.
Source: FRB, Haver Analytics, Apollo Chief Economist 
Source: FRB, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Central banks are withdrawing liquidity, and it is having a negative impact on credit and equity markets, see chart below.
Source: Bloomberg, Apollo Chief Economist (BBG ticker: .GLMOSUPP G Index, SPX index See important disclaimers at the bottom of the page.
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As the Fed raises rates, companies with floating rate debt have higher debt servicing costs, and companies refinancing their debt will pay higher interest rates, see charts below.
The good news is that many companies during the pandemic have termed out their debt into later years, and just 9% of fixed-rate debt is scheduled to mature by the end of 2023.
High yield debt usually is more vulnerable to rising interest rates, but high yield only makes up 19% of US corporate debt maturing by the end of 2023.
With the consensus expecting and the market pricing that Treasury yields will peak by the middle of 2023, the bottom line is that the maturity wall looks manageable for both IG and HY.
Source: S&P Global Ratings Research, Apollo Chief Economist. Note: Data as of July 1, 2022. Includes issuers’ investment-grade bonds, loans, and revolving credit facilities that are rated by S&P Global Ratings 
Source: S&P Global Ratings Research, Apollo Chief Economist. Note: Data as of July 1, 2022. Includes issuers’ speculative-grade bonds, loans, and revolving credit facilities that are rated by S&P Global Ratings. See important disclaimers at the bottom of the page.
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The current trading pattern seen in the S&P500 and VIX is very similar to the pattern seen in 2007-08, see charts below. Our weekly Slowdown Watch with daily and weekly economic indicators is attached.
Source: Bloomberg, Apollo Chief Economist 
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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European energy prices continue to decline, see chart below.
Source: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The idea with QE was to lower rates and create a rally in stock markets and credit markets. The idea with QT is the opposite: To push long rates higher, widen credit spreads, and lower stock prices. As QT gears up over the coming months, see chart below, investors should be positioned accordingly.
Source: Bloomberg, Apollo Chief Economist. Pace of purchases for 2021: BOE: £3.4bn per week till mid December 2021, FED: USD120bn per month with wind down from December with purchases ending in March 2022, ECB: Euro 90bn per month (20 bn APP + 60 bn PEPP), PEPP till March 2022, Euro 40bn in April, Euro 30bn in May and Euro 20bn in June, and only redemptions reinvested from August. BOJ: USD 70bn per month. For 2022: All programs are expected to wind down linearly from January 2022 to December 2022. Fed QT $ 95bn per month from May 2022. BoE starts to sell GBP80 bn in the next 12 months and ECB starts QT in 2Q23. See important disclaimers at the bottom of the page.
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The Fed is not going to pivot anytime soon because if the Fed pivots to dovish with inflation at 8%, it will push up inflation even more. The FOMC wants to lower inflation from 8% to 2%, and it has to happen through a tightening of financial conditions via higher rates, wider credit spreads, and lower equities. Our latest credit market outlook is attached.
Unless otherwise noted, information as of October 2022. Confidential and Proprietary – Not for distribution, in whole or in part, without the express written consent of Apollo Global Management, Inc.
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