Allianz Investment Management (OTCMKT:AZSEY) Looks at the US & EU Markets
In Q-1, it appeared that inflation in the US would indeed move up, as the labor market continued to show signs of strength and job creation remained strong.
Economic growth in Q-1 was weaker than FY forecasts, but financial markets have come to expect weak Q-1 growth.
The yield curve flattened as short rates moved higher and long rates moved lower on demand for yield and on the belief that the Fed will continue to normalize rates, reducing the risk of inflation.
But not everything has worked out as planned.
The US consumer, while employed and enjoying modest wage increases, failed to spend enough money to drive growth in our consumer led economy at a fast enough pace to move inflation higher.
In addition, the glut of Crude Oil supply continues to put downward pressure on prices and investment spending has yet to pick up much.
Looking forward, Allianz Investment Management, a unit of Allianz Life Insurance Company of North America (OTCMKT:AZSEY), believes that the US labor markets will continue to strengthen and support economic growth and inflation.
The firm believes the Fed will continue to normalize monetary policy at a very gradual pace.
The recent drop in inflation may alter the timing of rate increases and may put more emphasis on Fed balance sheet reduction than Fed Funds rate increases.
That shift will cause the yield curve to steepen short term, but longer term we expect a continued flattening trend. With economic growth continuing in both the US and Europe, Allianz expects equity markets to move up modestly and expect credit spreads to stay around current levels.
Both stocks and bonds continue to trade at elevated marks limiting the Northside, however, it believes valuations are justified given growth prospects in a low inflation environment.
If The Trump Administration can successfully move its tax and infrastructure policies forward, Allianz sees better Northside potential for both stocks and bonds.
The most obvious risk is the expansion of credit throughout the world, led by China.
Economic growth is strongly associated with credit expansion and while Allianz expects a tapering of credit expansion in China, the firm believe the process will be orderly.
Allianz also see a risk of policy mistakes by central banks.
The last 8 years have been characterized by unprecedented central bank intervention. The impact of those policies has been positive, but the unwind carries substantial risk.
Allianz’s analysts are confident that central bankers will exercise appropriate caution but recognize that they are in uncharted territory.
Source: Allianz Investment Management LLC
Paul Ebeling, Editor
Editor’s Note: The views expressed above reflect the views of Allianz Investment Management LLC, as of 30/06/2017. These views may change as market or other conditions change. Allianz Investment Management LLC is a registered investment advisor that is a wholly owned subsidiary of Allianz Life Insurance Company of North America.