Apollo Global: US "no landing" argument strengthens, probability of the Federal Reserve staying put in November is increasing

According to the financial news app Zhitong Finance, Torsten Slok, Chief Economist at Apollo Management, stated that with the strong growth of the U.S. economy, the likelihood of Federal Reserve officials maintaining interest rates in November is increasing.

Slok believes there are many reasons for the strong U.S. economy. Factors such as the dovish Fed, soaring stock and housing prices, narrow credit spreads, and "broadly open" corporate financing in public and private markets are just some of them.

"The most important thing is that the economy is still expanding," he wrote in a research report on Saturday, emphasizing that the Atlanta Fed currently estimates a GDP growth rate of 3.4% for the third quarter. He believes the U.S. is still on track for a non-landing scenario, with continuous economic growth and rising inflation.

U.S. Treasury yields fell steadily on Monday, with yields in New York approaching or reaching intraday highs at the close. The yield on the two-year Treasury rose to over 4%, while longer-term bonds led the latest round of selling. Options-related trading put pressure on the 30-year bond, with yields just below 4.5%. The yield on the 10-year Treasury rose by 10 basis points to 4.18%, reaching levels not seen since the end of July.

Slok's views seem to be gaining trust from Wall Street and some policymakers. Dallas Fed President Kaplan also expressed on Monday at an event that he hopes the Fed will act cautiously. Minneapolis Fed's Kashkari reiterated in a speech later in the meeting that he supports a slower pace of rate cuts over the next few quarters.

The Apollo Chief Economist mentioned that the U.S. economy has "10 favorable factors," which "increases the likelihood of the Fed having to change course at the November meeting" and pause its rate-cutting plans.

The latest dot plot released by the Fed in September shows that after policymakers cut rates by 50 basis points at the last meeting, they are expected to cut rates twice more this year, bringing the target rate down from 4.75% to 5%.

Swap traders currently expect the Fed to cut rates by 21 basis points at the November meeting, with a total cut of 39 basis points in the last two meetings of the year, increasing the possibility of the Fed pausing rate cuts at one of the meetings. This view has gained more support following the strong September jobs report in the U.S.

The U.S. October jobs report will be released on November 1st, before the U.S. presidential election and next week's Fed interest rate meeting As data continues to show that the U.S. economy is hovering in a "non-landing" situation, the bond market experienced a heavy blow in October, with an index measuring U.S. Treasury bonds likely to see its first monthly decline since April. The hiring boom in September has pushed up the 10-year Treasury yield from a low of 3.69% at the beginning of the month.

The trigger for the sell-off is concerns about U.S. fiscal spending. For example, T.Rowe Price does not rule out the possibility that the 10-year Treasury yield could rise above 5% in the next six months in the event of rising inflation expectations and a "slight rate cut by the Federal Reserve".

According to Apollo's Slok, both consumers and businesses benefit from the "locked low interest rates" in the economic cycle. Other positives for the U.S. economy include continued government support through President Biden's economic development plan, chip and inflation reduction bills, and the "soon-to-disappear uncertainty of the U.S. election"