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US financial conditions have tightened 180 bps since the start of the year, suggesting an equivalent ~2pp drag on US GDP growth in the year ahead. While positive tailwinds from normalizing imports and continued service sector reopening may partially cushion the impact, Goldman Sachs Global Investment Research (GIR) expects US GDP growth to decelerate to 2.4% in 2022. Meanwhile, in China, policymakers must carefully balance their growth objective with their zero-COVID-19 policy amid ongoing housing and external demand weaknesses. GIR now expects 2022 Chinese GDP growth to slow to 4.0%. Read More
GIR forecasts US Core PCE of 3.9% by 2022YE based on three potential drivers: 1) supply-constrained durable goods inflation falls to zero on net, 2) shelter inflation peaks, and 3) service inflation lessens via firm, but sustainable, wage growth. Still, the range of outcomes likely remains wide. In the Euro area, GIR now expects core HICP inflation to end at 3.3% on high energy prices, wage pressures, and euro weakness. Read More
GIR expects the Fed to deliver on current market pricing of Fed rate hikes to restore labor market balance and temper wage-price pressures. The Euro area inflation path is increasing pressure on the ECB to accelerate rate hikes despite weaker growth. GIR forecasts the first ECB rate hike to be delivered in July. Read More
US job openings have continued to outpace unemployed workers at ~2:1. US growth deceleration may reduce openings, especially in cyclically-sensitive industries. Still, a sharp rise in the unemployment rate may be avoided given strength of both household and corporate balance sheets. GIR’s year-end US unemployment forecast is 3.5%. Read More
We expect equity prices to move higher, though further rate upside and even slower growth have led GIR to revise their S&P 500 year-end price target down to 4300. Still, we think earnings strength will continue as companies navigate tighter financial conditions and defend margins, informing GIR’s upgraded 2022 EPS growth forecast to 8%. Read More
GIR raised their YE 2022 forecast for the US 10-Year Treasury yield to 3.3%, reflecting more front-loaded hikes, higher terminal rates, and reemergence of risk premia. Still, we think the tail risks remain wide with continued macro uncertainty. We find increasing comfort with duration as the hurdle remains high for additional outsized surges in yields. Meanwhile, the short-end of the curve may offer attractive yield per unit of risk while also providing a sizeable buffer to more rate hikes. Read More
Commodity markets have been on a hot streak since the start of the year, despite weak demand from China as a result of its zero-COVID-19 policy. Still, GIR thinks the rally in commodities has further to run as refiners and manufacturers begin to hoard the spare stocks as a hedge against future scarcity. This creates backwardated markets and signals a strong set up for the next leg higher in prices. Read More
Risk-off sentiment has captured financial markets, leaving few asset classes unscathed. Volatility is likely to continue given macro uncertainty and diminished liquidity—S&P 500 futures top-of-book depth is in the 3rd percentile since 2016. While the S&P 500 briefly entered bear market territory, history suggests that 69% of the index’s best days have come when the market was below its 200-day moving average. Read More
The last market cycle was characterized by trend growth, low rates, and yield scarcity, conditions that led investors to believe that favorable risk-adjusted returns could only be found in equities. While risk assets remain instrumental to delivering forward returns, we believe market characteristics today—reflation, high valuation, rising rates—support the case for broadening opportunities to fixed income. Across the bond complex, risk symmetry has improved, yields have risen by nearly two-fold, and coupons have reset to normal levels, all enhancing the relative value of bonds to equities.
Recent re-rating has challenged bond returns and renewed focus on duration and price. However, for long term investors, bond returns have historically been driven by coupons, not prices. With most of the re-pricing likely behind us, we believe yields now offer a healthy offset to rate volatility. In fact, at current yields, rates would need to rise by another 52 bps on the US Agg before generating negative returns in the next 12 months.
Absolute yields across credit sectors have also reset to higher levels, lowering the hurdle for the global search for yield. We believe this presents a catalyst for investors to rotate back into income. For corporate bonds, attractive yields have also been met with a sturdy foundation to navigate macro uncertainty through healthy revenues, liquid balance sheets, and low defaults.
Clipping coupons on non-US assets may be further enriched by our expectations for a weaker US dollar in the long term. We expect FX volatility to settle and US dollar strength against DM peers to unwind once Euro area monetary policy catches up and geopolitical risk stabilizes. With some growth downside priced in, we believe income delivered by international assets may become even more valuable when converted to US dollars.
Top Section Notes: As of May 31, 2022. “TINA” refers to “there is no alternatives,” a phrase indicating preference for equities. “US Agg.” refers to the Bloomberg US Aggregate Bond Index. Middle Section Notes: “Current” refers to data as of May 31, 2022. Bottom Section Notes: As of May 17, 2022. “FX” refers to foreign exchange or currency. Chart shows the relative value of the US dollar versus a broad equal weighted basket of G9 and EM currencies. The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved. Past performance does not guarantee future results, which may vary.
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