Apollo's Torsten Slok: Peak uncertainty is behind us, but these risk factors are still on horizon

Summary of CNBC Interview with Torsten Slok

Key Concepts:

• Tariffs and their impact on inflation and corporate earnings
• GDP growth slowdown and consensus view
• Stagflation risk
• US Dollar outlook and hedging activity
• Federal Reserve (Fed) policy and interest rate cuts
• Global growth outlook and US exceptionalism

1. Economic Outlook and Risks:

• Near-term Uncertainty: Torsten Slok highlights several near-term risks, including the "big beautiful bill" (potential fiscal policy changes), upcoming tariff deadlines, and the Fed chair decision.
• Trade as a Major Risk: The primary concern revolves around trade, specifically the potential $400 billion in revenue from tariffs.
  • Impact on Earnings: Slok notes that if companies absorb the tariffs, it could reduce S&P 500 earnings (which were approximately $2 trillion last year) by 20%, significantly impacting growth.
  • Impact on Inflation: Alternatively, tariffs could lead to higher inflation if passed on to consumers.
• GDP Growth Slowdown: Slok agrees with the consensus view that GDP growth will slow down in the coming quarters. This is attributed to tariffs, the resumption of student loan payments affecting consumption, and other headwinds.

2. Stagflation Concerns:

• Stagflation Risk: Slok maintains his view on stagflation, arguing that tariffs will either lead to higher inflation or lower earnings, both characteristic of stagflation.
• Fed's Inflation Expectations: He references Fed Chair Jay Powell's expectation of a "meaningful increase in inflation" in the coming months.

3. US Dollar Outlook:

• Dollar Weakness and Hedging: The dollar has weakened by 10% in trade-weighted terms over the past six months, while the S&P 500 has reached all-time highs. Slok attributes the dollar's weakness primarily to hedging activities related to Section 899.
• Section 899 Impact: With Section 899 behind us, Slok believes the outlook for the dollar in the second half of the year is "much brighter." He notes that foreign holdings of US assets have not decreased, suggesting the dollar's decline was not driven by asset sales.

4. Federal Reserve Policy:

• Fed Rate Cut Expectations: Slok believes that market pricing for Fed rate cuts this year is "too aggressive." He does not anticipate any rate cuts this year, arguing that it would be difficult for the Fed to justify cutting rates as quickly as the market expects.
• Committee Decision-Making: Slok emphasizes that Fed decisions are made by a committee of 12 voting members, not solely by the Fed chair. This committee votes on both interest rates and quantitative easing (QE).
• Fed Chair's Influence: While the Fed chair is important, they do not have absolute veto power. The committee must agree on the need for rate cuts.

5. Global Growth Outlook:

• US Exceptionalism: Despite a potential slowdown in the US, Slok believes the US will remain "exceptional" in the long run due to its stronger growth outlook.
• European Potential: He sees some potential for growth in Europe, particularly with infrastructure spending ($500 billion) and unlimited defense spending.
• Draghi Recommendations: Slok notes that the US has made little progress on implementing the Draghi recommendations (170 points), further supporting his view of US exceptionalism.

6. Conclusion:

Torsten Slok's outlook is cautious, highlighting near-term risks related to trade and fiscal policy. He anticipates a slowdown in GDP growth and remains concerned about stagflation. He believes the dollar's outlook is improving and that the market is overestimating the likelihood of Fed rate cuts. Despite potential global growth opportunities, Slok maintains that the US will continue to be an exceptional economy in the long run.