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 2022 Market Outlook
While it’s easy to associate COVID-19 headlines with weaker economic growth, the reality is that the current economy is more apt to handle new variants of the virus. Sure, growth is likely to moderate in 2022, but the tailwinds from the trillions spent on economic stimulus will ensure growth remains above potential for the next couple of years. Consumption spending will remain robust as consumers shift away from goods spending and back to services, which should in turn increase labor participation as more workers enter the service sector. Supply chain bottlenecks should start to normalize, but building back inventories will likely be a priority and should be supportive for growth in 2022. Overall, we are expecting another strong year of GDP growth in the 3.5% to 4.5% range for the U.S. despite shifting monetary policy from the Fed as the latter will take time to have a meaningful impact on economic output.
The persistence of rising prices over the past year has been surprising for some market participants including the Fed, but higher input costs from rising commodities, supply chain bottlenecks, and labor shortages have been pushed down to the consumer. While it’s widely expected that there will be some relief in upward price pressure as supply chains adapt, we do expect some price pressures to pick up in the service sector as higher input costs from wages become a factor. Inflation levels should peak at some point in 2022, but the overall expectation is that elevated inflation will persist throughout most of the year. Our forecast for core PCE inflation is centered on 3% with risks remaining to the upside should input costs continue to rise.
The Fed orchestrated a massive shift in monetary policy expectations in 2021 as many market participants were not contemplating a rate hike until at least 2023. Fast forward to today, and we have a Fed that recently doubled down on the pace of tapering bond purchases and has begun to prepare markets for rate hikes to start at some point in 2022. The pivot on monetary policy largely reflects the economic backdrop with much higher and persistent inflation as well as tighter labor market conditions. In terms of satisfying the dual mandate of price stability and full employment, it became clear that the Fed needs to react before they get too far behind the curve with regards to monetary policy. Thus, we expect the Fed to hike policy rates at least once in 2022, but likely not more than three times at a 25 basis point pace.
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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