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 2Q 2022 Market Update
From a headline perspective, the advance reading on Q1 GDP appears quite scary but the underlying demand components remain very solid. Real GDP declined by 1.5% during the first quarter and much of the weakness was attributed to the widening of the trade balance. In addition, the amount of inventory build was smaller than the previous quarter, which also subtracted from overall growth. Combining both the trade imbalance along with the decline in inventory build, there was a drag of about 4% to GDP. Referring to the strength in demand, personal consumption rose by 3.1% which was the strongest level since the second quarter of 2021. Overall, we don’t see a recession happening this year and growth should actually rebound with our year end estimate coming within a range of 1.75% - 2.75%.
Whether you consider it a policy mistake or not, the abrupt change in the Fed’s path of policy rates has been quite dramatic. Many Fed officials expected inflation to cool rather quickly as most of the elevated inflation from earlier in the year was driven by supply chain disruptions. However, it didn’t take long for inflation to become embedded within other parts of the economy. The persistence of high inflation led the Fed to take a more aggressive stance which was ultimately dictated by the market. In June, the Fed delivered a 75 basis point hike for the first time since 1994. The hawkish pivot from the Fed to combat inflation is out of the norm from the past couple hiking cycles, which is likely why markets have been so volatile. There is still some uncertainty around the path of policy rates, but with another 75 basis point hike expected in July, we forecast the Fed Funds rate to end the year within a range of 3.25% to 3.50%.
Supply chain shortages and the Ukraine-Russia war are only partly responsible for the higher prices Americans are paying. It still comes down to the imbalance of dollars in the U.S. monetary system and supply and demand of goods and services by the U.S. consumer. The Bureau of Labor Statistics reported that the Consumer Price Index (CPI) rose to a year-over-year rate of 8.6% during May. This is the highest level since December 1981. While this is a broad look at U.S. goods and services prices in the economy, some of the most important expenditures for Americans, such as food, energy, and shelter, made the largest contribution. According to the U.S. Energy Information Administration (EIA), the average price of gas has increased to $5.01, up 61.2% over a year ago (June 13). This CPI reading is likely one of the data points that led the Federal Reserve to take a more aggressive stance on stabilizing prices. At their June meeting, the U.S. central bank increased the Federal Funds Rate by 0.75% in an effort to tame the rate of inflation. This is the first time since Chairman Alan Greenspan in 1994 that the Federal Reserve has been this aggressive. This will affect financing costs in many areas from short-term business funding to new mortgages and auto loans. The goal is to bring supply and demand for goods back to an equilibrium, and raising interest rates has historically been the remedy. The Fed adjusted their forecast that will hopefully put the U.S. economy back on the road to their goal of price stability and normalization of monetary policy. We feel that tighter monetary policy will eventually take hold, but inflation will be more persistent in the near and medium term. Under those terms, we are increasing our inflation forecast on Core PCE to 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 7/2022. 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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