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Goldman Sachs Asset Management Statement on the Russia-Ukraine War. Read it here .

   
MARKET PULSE 
|
May 2022

MARKET PULSE | May 2022

Macro Views


Geopolitics

The war in Ukraine has led some European governments to reshuffle their budgets in attempts to reduce their reliance on Russia, with spending on defense and energy set to increase this year. Finland and Sweden are also expected to apply for NATO membership this year, likely boosting European security. Read More

Growth

Our 2022 forecasts for US and Euro area are 2.6% and 2.5%, respectively, as higher energy prices hurt consumer demand and production supply. Still, we believe the direct effect from oil prices is unlikely to trigger a recession on its own. In China, we expect growth of 4.5% as policymakers aggressively address COVID-19 amid a contractionary Caixin PMI print for the first time since 2020. Read More

Inflation

Commodity shortages and supply chain issues continued to raise prices. Energy prices in US core PCE jumped 186% above pre-COVID-19 levels and ~1.25mm tons of grains and oilseeds are still on vessels blocked in Ukrainian seaports. While the duration of supply problems is the immediate unknown, a truly persistent inflation overshoot would be driven mainly by high inflation expectations and wage growth. Read More

Monetary Policy

We expect the Federal Reserve (Fed) to hike 50 bps in May and June, with passive balance sheet runoff also starting immediately. Even still, we believe QT will have a more modest effect on money supply and financial conditions than those of QE, with signaling effect no longer applicable. In the Euro area, the ECB strengthened its guidance to end asset purchases in Q3, informing our view on multiple hikes beginning in July this year. Read More

Market Views


Equities

Market volatility has been driven by perceptions of geopolitical and monetary policy risks, but Q1 earnings have brought positive data into the mix. Additional equity market turbulence may come in the Fed’s quest to tighten financial conditions and tame inflation. We believe impacts will be disparate, but companies with durable growth and quality balance sheets may be poised to withstand the pressure. Read More

Rates

The speed of yield increases has surprised to the upside, though future movements may moderate. We expect rates to stabilize on the long end of the curve and shorter maturities to benefit from higher yield and lower duration. In our view, investors with time horizons greater than their duration will likely see improving carry and roll opportunities. Read More

Credit

Spread widening may persist as rate hikes and QT are underway. Still, fundamentals are strong and investment grade flows remain supported by foreign and liability-driven investors. In Europe, pressure from geopolitical conflict has crept into credit markets, which saw just one high yield issuance in April following a ten-week drought, the longest stretch in over a decade. Read More

Commodities

Oil prices have come off of recent highs, but we still see supply constraints outweighing demand loss from renewed lockdowns in China. Specifically, OPEC has failed to meet output targets for six consecutive months. Looking ahead, demand destruction may be delayed as recent policy relief across regions, most notably through gas tax suspensions, is elongating price normalization. Read More

Recession: Signal or Noise?


Tight labor markets and persistent inflation have invited an aggressive policy path, leaving investors worried about the Fed’s ability to engineer a soft landing. Rates have re-priced and parts of the yield curve have inverted. Yet, we remain constructive on the macro buffers—abundant wealth, high labor demand, and strong spending power—to withstand an economic slowdown and defend corporate earnings. Importantly, while curve inversions are a useful guide, we believe recessionary signals are most powerful when evaluated against a collection of indicators.

…BUT WE BELIEVE THIS CYCLE HAS MORE MACRO BUFFERS TO CONSIDER…

While mid-cycle conditions are upon us, we believe earlier pandemic relief has created macro buffers that allow households and corporations to absorb weaker growth and tighter policy. For instance, higher prices should slow consumption, but we expect purchasing power to be supported by wage growth and excess savings. As such, traditional signals, especially when considered in isolation, may offer less information now.

Source: Goldman Sachs Asset Management
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