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 1Q 2022 Market Update
The U.S. economy has been resilient in the face of ongoing COVID-19 headlines, but the surge of the omicron variant has been a near-term drag on economic activity. Persistently high inflation is becoming a bigger threat to the economy, and it is clear that monetary policy needs to reflect the current environment. Rising energy prices will likely further reduce consumer demand, acting as an additional tax on consumer spending. The U.S. economy is over 70% consumption-based, and rising gasoline prices are going to crimp some of the consumer’s ability to spend. Additionally, higher levels of inflation have started to significantly weigh on consumer attitudes. Fortunately, the outlook for the labor market remains strong; while wages have not kept up with inflation, they are rising at a relatively strong pace. Despite the headwinds consumers are facing, output in the economy is still likely to remain above potential for the year. Overall, we expect solid GDP growth in the range of 3% to 4% for 2022, albeit at a slower pace than we originally expected in our initial 2022 forecast.
Inflation has remained persistent with ongoing supply chain issues and labor shortages as the primary factors. Commodity prices continue to increase, and geopolitical tensions are causing upward pressure for energy inputs. This will further add to inflationary pressures for consumers. As we look ahead, we anticipate demand for durable goods to moderate. In turn, we expect that this will be offset by increased demand in the service sector as the post-COVID economy further normalizes. We increased our year-end inflation target due to the recent Russia/Ukraine situation and the resulting impact on higher oil and commodity prices. Our forecast for core PCE inflation at the end of the year is centered on 4%.
To argue the Fed is behind the curve on monetary policy tightening is an understatement. While finally wrapping up their bond purchase program on March 8, the Fed wasted no time in moving rates off zero with the first of a series of expected rate hikes at the March FOMC meeting. With persistently elevated inflation levels disproving the transitory theory from the Fed, the market recognizes the Fed has a lot of catching up to do. Throughout most of January and February the market was repricing rate hike expectations, and it felt like an arms race watching headlines on which dealers could price in the most hikes for the year. Given the recent history of the Fed, it is difficult to envision an aggressive policy-tightening path. The Fed has committed to an average inflation target, and even with the elevated levels of inflation today, the average of core inflation over the past 10 years is still below 2%. Overall, we expect the Fed will conduct a series of rate hikes throughout the year, but we suspect the bar is too high for the Fed to achieve the market’s expectations of seven rate hikes in 2022. As such, we think the Fed will be able to raise rates at 25 basis point increments four to six times this year, putting the Fed funds target between 1.00% and 1.50%.
The views, opinions and estimates expressed above reflect the views of Allianz Investment Management LLC (AIM LLC) as of 3/2022. 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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