hero july market commentary

Allianz Investment Management LLC Market Outlook – March 2023

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 2023.

business team talking

Key points:

  • Economic data has played a more prominent role in shifting the market direction lately as Fed policy has been hinged to the outcome of several high-profile data points.
  • A shallow recession has always been on the horizon, but recent cracks in the banking sector have likely brought an economic slowdown much closer than expected.
  • While Fed policy continues to evolve, the most probable scenario is one with the peak policy rate coming in May and the Fed shifting into a wait-and-assess mode.
  • Inflation continues to move in the direction that the Fed would like to see, but the nonlinear fashion of its descent has shifted Fed expectations.
  • With persisting inflation remaining a theme throughout 2023, we expect long-term rates to remain rather elevated when compared to previous economic downturns.
  • Macro headwinds have yet to put a dent in corporate profitability as costs continue to be passed to consumers and equities were able to post a strong performance in the first quarter.

Seismic shifts

Navigating the murky waters of Fed policy as of late has proven to be a difficult task itself, but layer on a heightened sense of risk throughout the banking sector and it becomes nearly impossible. The challenge with data-dependent Fed policy is simply just that, as backward-looking data doesn’t offer a timely view of what lies ahead, investors are left with the interpretation of the data to decipher which direction Fed policy is headed next. As a result, the uncertainty surrounding policy decisions has brought about seismic shifts in the financial markets, and this was evident with the recent turmoil in the banking sector. With the Fed laser-focused on labor market and inflation data, they may have lost sight of the unintended consequences of their policy action. Many banks have been saddled with large unrealized losses on their balance sheet as a result from the rapidly changing interest rate environment. This elevates the risk around run-on-the-bank scenarios, and the recent community bank failures have left a lasting cautious sentiment for investors going forward. Consequently, the market view drastically shifted from pricing in no Fed rate cuts this year to the potential for three rate cuts as the probability of a recession increases.

1 Line GraphLine Graph

U.S. GDP Growth

Gross Domestic Product in the U.S. finished 2022 with +2.6% annualized for 4Q22, down from +3.2% in 3Q22, led by private inventory replacement and consumer spending. The labor market continues to be strong in the early stage of 2023, which is supportive of economic growth. However, layoff announcements are increasing and job openings are declining, a sign that the Federal Reserve’s tighter monetary policy is taking hold and is slowing the economy as intended. Additionally, the inventories that we saw get replenished in 4Q22 will likely not continue at the same pace, potentially providing less tailwind for GDP in upcoming quarters. The consensus view among U.S. economists is that economic growth will slow, but the probability and depth of any recession will likely depend on the consumer’s willingness and ability to spend. At this point in the cycle, we are unchanged in our GDP growth estimate with a range of -0.5% to +0.5% for 2023.


Fed funds rate

After 475 basis points of policy rate tightening since March of last year, many market participants are beginning to question how much further the Fed could possibly go. Indeed, inflation has been trending lower over the course of the hiking cycle, however the high level of inflation combined with the nonlinear path lower has made it a difficult environment for investors and the Fed alike to gauge how much policy tightening is needed. In addition, the swift increase in interest rates over the past year has also highlighted some risks in the banking sector. Rising interest rates have increased the level of unrealized losses on their balance sheets. While nobody wanted this to happen, the timing of the stresses in the banking sector and the failure of two community banks could not have come at a better time for the Fed. Cautious sentiment in the market will likely play a role in slowing the overall economy through tighter lending standards, which will be welcomed by the Fed. As a result, we are revising our expectation for the Fed funds rate to a range of 4.75% to 5.25%. This implies that the Fed has one more hike in May before it pauses, likely maintaining the policy rate at an elevated level until a mild recession hits in late 2023.

2 Sustain ValueSustain Value


Inflation measures have come down as tighter financial conditions have taken hold, but there is still further to go based on the Fed’s inflation target of 2%. One of the largest components, Energy, has retraced back to levels last seen before the Ukraine war. The Federal Reserve preferred inflation measure, Personal Consumption Expenditures (PCE), posted +5.0% (year over year) for February 2023, steadily declining from +6.1% just five months earlier. PCE excluding Food and Energy posted +4.6% for February 2023. Food prices continue to be stubbornly high, which is restricting declines in the Core measure. Shelter also continues to be persistently elevated despite high-frequency industry data showing declines in rent cost. With steady declines in PCE, it appears that the Federal Reserve’s plan to rein in inflation is working. While they seem to be coming to the end of their tightening cycle, it does not necessarily mean that the next move is to cut rates. We believe that the Federal Reserve will hold rates steady at an elevated level for some time, allowing inflation to further moderate toward its 2% target before easing monetary policy. Given this scenario, we are keeping our inflation forecast on Core PCE at +4.0%-5.00% for 2023.

3 SavingsSavings

10-year Treasury

Yields have bounced around quite significantly since the beginning of the year. Interest rate volatility has been driven by uncertainty around the path of Fed policy. Stronger employment and inflation data in January and February pushed the 10-year yield briefly above 4%, but yields quickly retreated on the back of bank closures and ongoing stress in the banking sector. More recently, market participants have focused on the economic slowdown, which, in turn, put more pressure on long-term rates. Despite a potential recession on the horizon, inflation is likely to remain quite sticky between the 3% and 4% level. This will make it difficult for the 10-year yield to drop into the sub-three-percent range. Given this thesis, our expectation is for extended inflationary pressures to keep longer-term rates relatively elevated, and we maintain our expectation for the 10-year yield to end the year between 3.50% and 4.0%. Unless the economic data turns around, the plot for higher Fed policy rates continues to fall apart, and a 4-handle 10-year yield will likely be in the rearview mirror.


U.S. Equities

U.S. equities continue to be volatile in response to the Fed tightening activity and market participants attempting to time the stock market turn. With styles, large-cap growth outpaced value for 1Q23 with Information Technology names leading the way and Financials lagging. We see tighter monetary policy continuing to be a headwind for U.S. stocks. This is already evident as 4Q22 S&P 500 earnings per share declined for the second consecutive quarter, and profit margins were down six consecutive quarters according to FactSet®. We expect U.S. equities to remain challenged with earnings and economic uncertainty in the spotlight. Higher input costs, particularly on the wage front, continue to be a challenge for most companies. While many companies have been able to pass along the costs leading to higher inflation, it appears that strategy is becoming long in the tooth. For these reasons, we maintain our 2023 target return on the S&P 500® Index to be -5% to 10%.


List of definitions

Here are the definitions of the key terms used in this market report.

The views, opinions, and estimates expressed above reflect the views of Allianz Investment Management LLC (AIM LLC) as of March 2023. 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.

Products are issued by Allianz Life Insurance Company of North America, 5701 Golden Hills Drive, Minneapolis, MN 55416-1297. www.allianzlife.com. In New York, products are issued by Allianz Life Insurance Company of New York, 1633 Broadway, 42nd Floor, New York, NY 10019-7585. www.allianzlife.com/new-york. Variable products are distributed by their affiliate, Allianz Life Financial Services, LLC, member FINRA, 5701 Golden Hills Drive, Minneapolis, MN 55416-1297. Only Allianz Life Insurance Company of New York is authorized to offer annuities and life insurance in the state of New York.