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 midyear insight on the economic and market outlook for the rest of 2021.
Allianz Investment Management LLC Midyear Market Outlook
The much-anticipated growth story continues to strengthen as surging consumer demand has paved the way for stronger economic activity in the U.S. Swift progress on vaccinations since the beginning of the year has allowed government officials to relax many of the COVID-19 restrictions that have been in place throughout the winter months. The combination of pent-up consumer demand along with low inventory levels has driven many economic data points to reach record levels. Both survey-based measures in the manufacturing and nonmanufacturing sectors have reached multi-decade highs in recent months. The bottom line is the economic recovery has developed faster and stronger than originally anticipated. As such, we are revising our forecast for 2021 U.S. GDP to 6.5%.
The debate among market participants around the path of inflation has started to heat up as inflationary signals continue to dominate market headlines. Supply chain issues along with elevated economic activity have resulted in upward price pressures in some sectors of the economy. The official message from the Fed is that higher consumer prices will only be temporary until labor market slack is diminished. However, some investors are starting to question how long inflation pressures can be considered temporary if they are expected to last into the following year. Focusing on the Fed’s preferred measure of inflation, core PCE, will likely lag core CPI due to composition, and that gap will likely widen further in the coming months. While we expect inflation to rise above our forecasted range in the near term, we expect core PCE will settle within our range by year-end.
Better-than-expected economic growth coupled with rising inflation pressures has some investors pushing back on the Fed’s ultra-accommodative policy stance. While it may be too early to determine whether upward consumer price pressures are temporary, the Fed appears to be holding the line on policy change until the labor market normalizes. Market expectations for Fed hikes have been pulled forward from what the Fed has been signaling. Despite this, we still believe the Fed is a long way from lifting policy rates, as the reduction of bond purchases is the first order of business from the Fed before rates can be lifted. The discussion on tapering bond purchases will likely pick up in the second half of this year with a decision likely by year-end. Thus, we expect the Fed funds rate to remain near zero for the foreseeable future.
The views, opinions and estimates expressed above reflect the views of Allianz Investment Management LLC (AIM LLC) as of 06/2021. 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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