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 2023 Market Outlook
Real GDP appears to have settled around pre-COVID level after declines in the first two quarters of 2022. While the two quarterly declines have been attributed to technical imbalances and supply chain blocks, muted 3Q growth is being attributed to a decline from tighter monetary policy. The Federal Reserve’s primary focus is to bring down inflation at any cost. In turn, economic growth and unemployment could suffer as a side effect. While most economists are divided on whether the U.S. encounters a recession in 2023, there is a consensus that any slowdown will likely be shallow. We believe strong corporate balance sheets, flush household savings, and a strong labor market will buffer the economic resilience. Overall, it is our opinion that economic growth will slow and the potential for a recession go up as a result of the Fed’s restrictive monetary policy. Thus, our 2023 outlook for real GDP growth is for -0.50% to 0.50%.
As mentioned earlier, higher for longer appears to be the theme for the Federal Reserve this year as it lifts policy rates to a level is sufficient enough to bring significant improvements to the outright level of inflation. It is important for investors to note that due to the quick acceleration of interest rates, the economy has yet to feel the full effects of the tightening cycle. Additionally, contrary to previous cycles, a pause in rate hikes does not necessarily mean that the Fed is going to immediately cut rates. Looking ahead, the area of most concern for the Fed will be the service sector, where rising wage input costs and the outright lack of labor supply are major headwinds for the Fed to bring down inflation. As such, we think the main risk to our forecast for policy rates next year will be persisting wage pressures. That said, our outlook is for Fed policy to finish 2023 between 4.25% and 4.75% as the potential for a rate cut increases by year‑end.
We are optimistic that inflation has begun a trending path lower with both measures of CPI and PCE showing signs of easing in recent data sets. Most of the decline was around food and energy as the Core PCE (excluding food and energy) remained stable around 5% over the same period. Commodity prices have declined, supply chains have started to normalize, and shelter cost reversion all contributed to the improvement. Consumers have shifted spending habits to service sectors of the economy (hospitality and leisure) and costs in those areas continue to rise, buoyed by rising wages. The Federal Reserve’s goal is to slow the overheated U.S. economy and it will continue tightening interest rates until it believes overall inflation will reach its target. As a result, the U.S. will likely see higher unemployment and slower economic growth next year. We believe that the Federal Reserve’s tighter monetary policy is working, but there clearly is more work to be done. Under that scenario, our outlook for Core PCE (excluding food and energy) improves from its current level but remains elevated at 3.0%-4.0% for 2023.
The views, opinions, and estimates expressed above reflect the views of Allianz Investment Management LLC (AIM LLC) as of 12/2022. 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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