Apollo economist warns sub-$70 oil and high yields signal overheating demand
APO•Brent and WTI crude prices have slid below $70 while 2-year Treasury yields remain elevated, a divergence flagged by Apollo chief economist Torsten Sløk as a sign of overheating demand. Economists expect core PCE to rise to 3.4% in May, which could force the Fed into further rate increases.
1. Divergence between crude and short-term yields
Brent and WTI crude prices dropped below $70 after the April CPI report, but 2-year US Treasury yields did not follow oil’s decline. This break from the historical correlation has caught the attention of Apollo chief economist Torsten Sløk, who views it as an indicator of sustained economic momentum rather than easing inflationary pressure.
2. Inflation and overheating demand concerns
Lower oil prices traditionally alleviate headline inflation by reducing transportation and production costs, yet Sløk warns that the resulting boost to consumer spending and business margins could intensify demand in a market already running hotter than the Federal Reserve desires. His analysis suggests that cheaper crude now fuels economic activity, potentially offsetting any deflationary impact at the pump.
3. Potential Federal Reserve response
Markets await the May core PCE report, forecast to rise to 3.4%, well above the Fed’s 2% target. Should inflation remain sticky despite falling energy costs, the Federal Reserve may feel compelled to maintain or increase interest rates to temper demand and prevent further economic overheating.
