Fed Rate Hike Still Priced In Despite Market Uncertainty Apollo Economist Says

I guess the real risk uh would be if you make the case that this investment in borrowing is crowding out other activity that would otherwise be happening and that it's not going to ultimately you know lead to this supply side productivity boost you know down the road. So that's why it's ultimately all about exactly Michael that it's about the ROI. Yeah. What are the returns on these investments? Are those returns going to be significant? Yes. But it's also about the timing because any stock price today is the net present value of future cash flow. So that means that if stock prices today assume that it's going to come very quickly and it comes slower. That still means that the

correction we're seeing at the moment exactly is a reflection that maybe the returns on the ROI on AI investments are going to come, but they're just going to come slower than what markets are. It feels as if it when we embarked on all this, it's it there was a sense of we have to have this investment search to get the models built and get this stuff to scale and then after that we reap the rewards and it becomes this kind of lower friction uh type of world. It's I guess it's unclear if that's going to be the case or if this is going to be just the ongoing these are going to be asset heavy companies now these tech companies. So that's why markets are now saying, "Show me the money. Show me the

returns of all the investments you have done." And that's why when we look at profit margins for the Magnificent 7 for the last five years, they have done incredibly well. But profit margins for the S&P 493 have literally done nothing for the last 10 years. So what we're really waiting for is to begin to see profit margins increase. Not in the Magnificent 7, they have done well and the hyperscalers, but in the rest of the economy. And this is the inflection point. When will that come? Is that coming soon? Does the market have the patience to wait for that? if it takes six more months that becomes the whole issue at the moment whether the innovation comes quickly which is why we talked so much about

tariffs last year and now t I mean uh import prices and the trade deficit that's not helping out on the on the certainly on the inflation front unfortunately not and that's why this is also part of the Fed's debate of course again it doesn't become more clear than when you have half of the FMC members saying we need to hike this year and the other half saying we don't need to hike I mean the split is very clear and given they don't provide much forward guidance at the moment well that just makes it really difficult even to go into the next FMC meeting here in July because where are the weights going to fall? Are they going to fall more and saying hey there are some other risks now from the downside from the AI trade

or should we on the other hand hike rates just like the Europeans did basically go against the inflation trends that we're seeing. So is the easiest call now to say they stay pat what's what's your call Sarah and I were in CRA here a few weeks ago and the Europeans have a very strong view on this and they said no we got to go against inflation going higher no matter what else is going on. Of course the Fed has a dual mandate. So they don't only look at inflation. They can also begin to say well maybe the labor market gets a bit weaker. So let's see what claims at 208. I know but that's why for them has not said that.

No but that's why they are really leaning more. They are the ones that should be hiking rates because they also have a strong labor market. So the bottom line is it is very clear that the FMC is really stuck in a difficult spot because they have so many arguments that they should begin to hike rates sooner. I mean the story this week has been lower yields uh certainly at the short end and the 2-year because there's just not that urgency to do that if the inflation starts to go continue to be negative here. So what ultimately do you think we've seen the peak in yields this year?

Well, there are two things in the Fed minutes that worries me about inflation. Namely, number one is of course oil prices going up is a worry and now they have started to go up again. But the other thing is that there was a Fed paper that showed a survey of companies asking have you been passing through tariffs completely and 50% of companies basically said no we still have more pass through to do. So the conclusion is it's not only energy prices that are going up there is still a delayed effects of tariffs on inflation also and several FC members this week even before the CPI print Waller was worried but even after the CPI print you also had Jefferson Schmidt also beginning to express

you think the market is wrong about what the Fed's going to do. So the market is still pricing that we'll get a Fed hike later this year. So it is still the case. Yeah. So I still think that the biggest risk is that the market is underappreciating that rates will stay higher for longer because inflation is higher. It's a pretty weakly held view by the markets that they'll gone to 50/50 in September. That means just confusion or ambivalence I guess. Well, but if we don't have no forward guidance, I mean, if you have lunch with hes friends, they will tell you that they may even go here in July because there's very little priced and given that we have no forward guidance and if

they turn European at the ECB, we could begin to see a surprise hike in July. That's not my expectation, but it's very clear here that uh we have a heck of a important discussion. I think it might be pricing 10%. Uh so if you think that's going to happen in two weeks, there's money on the table. Cheap way to do it. Yeah.