Representatives from Allianz Investment Management LLC provide commentary on market and economic indicators, including Federal Reserve actions, interest rates, credit markets, and economic releases such as inflation, GDP, consumer confidence, housing, retail sales, and job unemployment news. Here is their updated insight on the economic and market outlook for the rest of 2022.
Allianz Investment Management LLC 3Q Market Update
Real GDP has shown declines the first two quarters of 2022. Many economists blame the weakness on a widening of the trade balance and supply chain constraints. Investors see two consecutive declines and think that we are in, or at least on the cusp of, a recession. However, unemployment remains at historic low levels not seen since December 1969, and the U.S. consumer continues to spend rather than retrench; both contradict what we would see in a recessionary period. While we agree that economic growth is likely slowing due to the Federal Reserve’s monetary policy tightening, personal consumption, the largest component of GDP, remains very strong and will support economic growth through year-end. Currently, we do not see a recession occurring in 2022, and we expect positive economic growth for the remainder of the year. We are unchanged with our year-end GDP growth estimate within a range of 1.75% - 2.75%.
Looking back to the beginning of the year, I don’t think anyone could have imagined the Fed being this aggressive with policy rates. The goal posts have been shifted three times as the Fed has embarked on an all-out-war against inflation. The recent rate hike in September marked the third consecutive 75-basis-point rate hike as the Fed continues to front-load rate hikes during this cycle. The swift tightening from the Fed has caused some challenges in relation to the shape of the yield curve as short-term rates have moved up much faster than long-term rates, which has led to a flatter yield curve environment. When it comes to the idea of peak hawkishness from the Fed, we think there is still some room to go. Market participants are now projecting Fed funds to rise above 4%, and the risk leans in the direction of a 5% Fed funds rate should inflation continue to stay well above the Fed’s goal of 2%. As a result, we expect more volatility in risk assets such as equity markets, and investors should prepare for choppy markets ahead.
While some are debating that inflation has reached a plateau, it is turning out to be a very stubborn opponent. For example, the price of gasoline, along with some other commodities, has declined over the summer, but others endure at elevated levels. The imbalance of natural gas around the world due to the Ukraine-Russia war has caused the price to more than double. This could negatively impact the amount of discretionary income U.S. consumers have to spend on other goods and services as we move into the fall and winter months. Americans continue to feel the inflationary prices in areas like rent, groceries, and medical care, which were cited by the Bureau of Labor Statistics as large contributors to their Consumer Price Index. The Bureau reported that their measure of inflation was +8.3% year over year in August. To combat these high prices, the Federal Reserve has increased their Federal Funds rate by 3.00% this year, including 0.75% at each of its last three meetings. Their goal is to slow the overheated U.S. economy to a more sustainable inflation rate of 2.0%. As a result, the U.S. will likely see higher unemployment, slower economic growth, and higher interest on business and personal loans than we have seen recently. We feel that the Federal Reserve’s tighter monetary policy will eventually take hold, but inflation will be more persistent in the near and medium term. Under that scenario, we are keeping our inflation forecast on Core PCE at 4.0% - 5.00% for 2022.
The views, opinions, and estimates expressed above reflect the views of Allianz Investment Management LLC (AIM LLC) as of 10/2022. This document is provided for informational purposes by AIM LLC, a registered investment adviser that is a wholly owned subsidiary of Allianz Life Insurance Company of North America. These views may change as interest rates, market conditions, tax rulings, and other investment factors are subject to rapid change which may materially impact analysis that is included in this document. This report does not constitute a solicitation or an offer to buy or to sell any security, product, or service. It is not intended and should not be used to provide financial advice as it does not address or account for an individual's circumstances. Consult with your advisor and tax professional before taking any action based upon the information contained in this document. Past performance does not guarantee future results and no forecast should be considered a guarantee. Any investment and economic outlook information contained in this document has been compiled by AIM LLC from various sources, including affiliated entities. AIM LLC takes reasonable steps to provide up-to-date, accurate, and reliable information, and believes the information to be so when provided, but no representation or warranty, express or implied, is made by AIM LLC as to its accuracy, completeness, or correctness.
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