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 2021.
Allianz Investment Management LLC Updated Market Outlook
The backdrop for economic growth has become quite favorable as significant progress toward vaccinating the U.S. population has also been accompanied by a decline in virus cases. In addition, Congress has approved a $1.9 trillion fiscal spending package that puts additional funds into the pockets of consumers, who already have the wherewithal to spend. As the economy begins to open back up and become less restrictive, we expect much of the household savings, along with fiscal stimulus, will be spent. In this setting, jobs will be returning to the economy, consumption will be strong, and temporary inflation pressures could persist. All of which would be more reminiscent of the post-war recovery rather than the economic recovery that dragged out following the last financial crisis. All in all, we are expecting the U.S. economy to grow between 5.00% and 6.00% in 2021, which is something that hasn’t happened in over 20 years.
There have been many debates on inflation in recent months which is dividing market participants into two camps. On the one side, some participants believe the U.S. economy is entering a new regime, one in which policy errors both fiscal and monetary will lead to higher inflation levels that we have not witnessed in decades. On the other side, some participants believe thematic forces such as rapid changes in technology will continue to weigh on inflation, and any demand-driven inflationary pressures in the near term will likely be short lived. Our view aligns more with the latter, and while we may see some demand-pull inflationary pressure on a temporary basis, it is yet to be determined how long this will persist.
With economic growth projected to be better than initially expected at the beginning of the year, market participants have begun to price a lift-off from the Fed sooner rather than later. The Fed has communicated that policy rates will remain at zero through 2023, but current market prices now indicate that a 25-basis-point hike in March of 2023 is more likely, and two rate hikes are fully priced in for 2023. Despite market participants pulling forward their expectations for rate hikes, the Fed has pushed back on that notion with Fed officials making a strong commitment to average inflation targeting. At any rate, we all can agree that policy rates are not going anywhere anytime soon, and thus we expect the Fed funds rate to remain at the zero bound throughout 2021.
The views, opinions and estimates expressed above reflect the views of Allianz Investment Management LLC (AIM LLC) as of the date of publication. 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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