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Where pleased to welcome Torsen Slock. He is chief econmist at Apollo for this macro conversation and Tordson, you heard what Mike was saying about inflation expectations, and we see that in some measures, what are you thinking about inflation expectations? Because there's market based measures, there's also survey based measures. It's not really time to worry until everything points in the same direction right well, And the.
Key issue is that, of course headline inflation is showing signs of high inflation. That makes total sense because headline inflation also consists of food and of course importantly energy. Call inflation expectations. We don't quite know yet what they are doing. But what we do know is that when you look at various other sensiment indicators, including today, we've
got consumer confidence also starting to go down. If you look at the daily indicators for consumer sentiment from morning consult is also going down for low income, middle income and high income households. But the key issue at this point is that if you look at the actual spending, the daily for how many people travel on airplanes is still good. The weekly data for red Book, same store retail sales meaning what was sales in Stars last week relative to the same week a year ago is actually
also still very strong. And what you're also seeing even hotel demand on a weekly basis from Star is also very strong. Both Red fire strong, the data readly strong, the occupants you're ready strong. So there's a very different divergence between what a consumer's saying relative to what are they actually doing. So at this point, the duration of the shark has simply not been long enough to actually create that demand destruction that we all worry so much about, right.
And in fact, if you look at longer term inflation expectations and you see that within University of Michigan Sentiment survey today, those are well anchored.
Absolutely so, both on a market basis and a survey basis, long term FLA inflation expectations are very very stable and have not shown any signs of going up. In fact, some of them have acually started to go down. So exactly the FIT would mainly worry about our markets getting
worried about inflation becoming out of control. Maybe yes, in the next year, we can call that transitory, temporary, whatever we want to call it, but it's very clear is saying this is absolutely something that's only here for a very limited time, and then we will go back and have inflation expectations at the longer run, more stable level.
Now, the one difference here between the Wall Street folks and the Fed folks is perhaps the inflation indicators are looking at CPI has been going down and it'll obviously on a headline basis, go up. But PCE, even without oil, has been rising, and that's the index that they follow.
When you listen to Fed folks. They're not talking about rate increases yet, but have they pretty much wiped out the idea of any rate cuts this year because the Bloomberg survey today showed economistink, we're going to see a rise in inflation, but we're still going to see two cuts before.
The end of the year.
Absolutely. Denill was also very interesting the ECFC GO Bloomberg survey was that they probabilits of recession actually went up from twenty five percent to thirty percent. So we're almost looking at more bifurcated distribution where either you worry a lot about inflation being higher and potentially above three now for a very extended period meaning at least the next level quarters all alternative to people begin to worry about the maybe there is a harder landing that is also
potentially an outcome. So that distribution tells you exactly what the problem is for the fit, Namey, they worry on the one hand about inflation being high, but they also worry about it the label market begins to deteriorrate, including of course also if AI puts up with pressure on unemployment,
and all those factors have of cost. The challenges for the fit, namely how much should they put up weight on inflation relate to how much weight should they put on the risk of the labor market might begin to deteriorate over the next seven months.
Well, let's stay with the labor market, because the job of claim numbers that we got this week ticked up slightly but remain pretty much in your historically low levels. Is the low higher low fire market still intact and at this point not an immediate source of concern.
Absolutely. I think it was low higher low fire because of the trade wall for most of last year, and now I think it's low higher low fire because of the energy shock. So that's why companies are responding in probably the most rational way by saying, we don't really know exactly how long time the shock will last. We
don't know what other prices will go to. So for that reason it makes sense that the labelmark continues show this fairly cautious overall properties, especially as you mentioned Scarlet, that jobless claims continue to be reatively low.
What we need to see in the jobs data, whether it's high frequency data or the monthly reports, to signal some kind of fed reliefs on the way.
Well, the key issue, of course is next Friday, and particularly for fixed income more abroady, that is the most
important number across the board, both for rates and for credit. Namely, is the economy still producing jobs or as we saw last month, are we still losing jobs the way that we did within ninety two thousand decline that we saw in the previous month, And the key issue therefore becomes the labor market data is just taking a very very prominent, more important role than usual because inflation is telling us
to hike. But now we certainly have that the other side of the dual mandate, namely label market might begin to show some more cooling, especially now that immigration restrictions and the label supply is also weighing down on the overall out of a nonfun payroll. So that's why next week is becoming very critical for thinking about what is the fit going to do because so far it's been easy for them in the SEP this week to just
say overly's up in and they also revised LOPGDP. But if the label market begins to show softness, then that would of course become more challenging for them.
I have to ask you, when I was studying economics, they taught us a couple of rules. One was it's never different this time and another was you can make a point forecast or a time forecast, but never two at the same time. But in your chart this week, and this has gotten a lot of play in social media, you say we're going to have a very short term disturbance in the bond market and fifty years of security in the Middle East that will keep down oil prices. That's quite a time forecast, that's true.
But I think the logic really here for investors is quite simple. We should all be stepping back and looking at this with a much more long term perspective. Let's agree that the situation we have today. It's not sustainable. We cannot have this. We can discuss for how long time, but we cannot have this for several years, definitely not and we cannot perhaps even have it for several months. And if that's the case, we should expect to have
some resolution. It makes sense that it's complicated for everyone to figure out what is the military strategy, what's going to response on both sides. But the conclusion must be that from a market perspective, we're getting closer to the midterm election in eight months. From that perspective, there's probably also some political considerations, both in Iran and in the US. That comes to the.
Conclusion fifty years.
But I do think that at the end of this we will probably have a situation that is quite different in the sense that we will probably have, at least from the GCC side in the Middle East, probably more connection with the US, probably more connection with Europe, and therefore probably also more stability more broadly, relative to where we were just a few months ago.
All right, well, I mean we have to get through the fog of the current next few months in order to get to that point. You did bring along a chart with you this time that shows that there's a lot of supply coming to market, investment grade supply. It combined fourteen trillion dollars worth of supply. How did you get to fourteen trillion?
Yeah, So the charge you look at here, it shows shoes from the Treasury. They put out data for what is the total amount of US treasury debt that needs to be refinanced in the next twelfth months, and as you can see in the yellow line, it is about ten trillion dollars that needs to be refinanced. In other words, uish government debt that rolls over. So this is bills, this is coupons, This is across the whole curve. If
you now add to that two other things. On top of that line, we also have two trillion in government budget deficit, so that brings us to twelfth trillion. And finally we're also have about two trillion in net gross issuance from the hyperscalers and the banks in IG So that means that the total supply of investment grade bonds that are coming to the market is about twelve trillion
from the government and two trillion from corporates. That brings you to a number that is roughly given US GDP is thirty trillion, roughly fifty percent of GDP that needs to be absorbed by financial markets. That's a very, very the highest number we've seen in history. That's a very substantial amount of bonds of investment grade credit and investment
grade bonds that are coming to the market. So the short answer is, if we already were about inflation going up because of Mike's child, with inflation expectations going up, we have tariff footing up bid pressure or the price of putting up boid pressure. We have a fairly strong economy also putting up with pressure, and now we also have significant supply coming to the market. That does bring the risk that there is some upside pressure on rates
in the front and the long end. And there's also on top of that, because of the significant increase in IGT, it also upward pressure on credit spreads. That means that both spreads in credit are under upward pressure for these technical reasons, and also the level of yields in rates is also on the upper pressure because of this supply being so significant.
So very quickly, how are you thinking about the demand dynamics then, because we already know what the supply is going to be. It's there's gonna be a ton of it.
Well, that's why a lot of the people who spoke just before we started here discussing exactly saying that this is actually an interesting time to look at the level of yields, especially if there is now an environment where other prices might eventually come down, and especially if people begin to worry about that the economy might also begin to slow a bit down. If that's the case, you both have a level of base rates that's higher temporarily at the moment, but you also have spreads in credit
that's also temporarily higher. And that's just given all in yield in credit, both in investment grade, but also some parts of high yield that actually looks quite juicy. Software has its own problems. For the rest of the high yield market is actually generally also looking at yield level that are at more interesting levels at the moment.
All Right, Tordson Slock, thank you as always for coming in towards the Slock of Apollo. The chief economists at the firm