A Quick Take on The H2 2022 Global Macro Outlook

The first half of 2022 brought record inflation and slumping markets, which appeared to anticipate an economic slowdown and potential recession. The GDPNow model projects negative economic growth (-1.6%) in Q2 and Q3 2022.1

However, a recent string of data pointing to a potential peak in inflation – with commodities down from their early June highs – together with a resilient labor market and consumer spending, may support a less negative outlook for the remainder of the year. Investors appear to have taken the cue, with the S&P enjoying its first positive month since April. 

US Markets 

While many consumers may be feeling the pinch of inflation, it shouldn’t be lost that the dollar is up over 10% this year compared to a basket of major foreign currencies, countering the effect of rising commodity prices. Notably, USD/EUR is now close to parity. 

Additional confidence boosting news – While the expectation is for unemployment to increase later this year on the back of a more hawkish monetary policy, the U.S. economy still added 372,000 jobs in June, with the unemployment rate holding constant at 3.6%.2 Jobless claims have ticked up in recent months but remain below 200,000, a historically low number, which may indicate reluctance by companies to let workers go. Average hourly earnings grew 5.1% in June from a year earlier, below inflation, which can make a price-wage rise spiral less likely. 

Additionally, 10-year Treasury rates are still hovering around 3%, which may point to lingering risks of an economic slowdown, but may also suggest investors are skeptical that inflation can remain at the current levels for a sustained period of time. Moreover consumer spending remains strong, although  credit card usage has increased materially. 

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On the fiscal side, investors appear to have widely priced in a Republican control of the House of Representatives after the November 8th midterm elections. While the current gridlock already makes additional fiscal expansion highly unlikely, the divided government after November is likely to make it close to impossible.

Despite clouds on the horizon in the US – namely a high inflation rate, the potential economic slowdown – and market volatility is likely to remain an issue – especially due to lower liquidity in the summer months – America appears to be in a relatively better position compared to its major trading partners and foes.

Pain in Europe and China

Europe and China are both undergoing crises that have the potential to be systemic, and thus impact the US economy. Europe is grappling with geopolitical risk stemming from Russia’s invasion of Ukraine, and is now in a fully-fledged energy war with Russia that can potentially fuel political risk, with citizens now gearing up for potential energy rationing this winter. The Chinese government appears to be facing some unusual internal protests, as it attempts to deleverage the real estate market – where 70% of the country’s wealth is stored – and eliminate widespread COVID while trying to keep the economy afloat. 

Against this backdrop, the US remains relatively insulated as it is energy independent and continues to rely on its resilient consumers. It also stands to benefit from a strong dollar, a typical by-product of slower global growth. 

What this means for investors 
While investors may lack confidence after months of market volatility, higher inflation and geopolitical turmoil, key economic data shows signs of resilience, and cause for potential optimism in the second half of the year. And as sentiment improves, private market investments are well-positioned to attract increasing flows from investors looking to diversify sources of risk-return and avoid over-exposure to public markets and macro factors.

1 https://www.atlantafed.org/-/media/documents/cqer/researchcq/gdpnow/RealGDPTrackingSlides.pdf

2 https://www.bls.gov/news.release/pdf/empsit.pdf

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