Labor-market tightness, if it persists, could keep upward pressure on wages and inflation and push core inflation closer to 3% than 2% by the end of 2022. We expect most of these workers will eventually return, which would help moderate wage growth. Lower migration has also created labor shortfalls (a particular issue for post-Brexit Britain). Workers have been slow to rejoin the labor force due to a combination of generous lockdown payments, inadequate childcare and school closures that have affected working parents, and early retirement among those over 50. The main uncertainty is around wages and labor supply. could be near the Fed’s 2% target by year-end. Our modeling suggests core PCE (personal consumption expenditures) inflation in the U.S. Headline inflation could exceed 7% in the United States, but inflationary pressures should subside over the remainder of 2022 as the improving supply side of the global economy catches up with moderating demand. These issues are only slowly being resolved and inflation may not peak before the end of Q1 2022. Emerging markets (EM) will remain under pressure from the China slowdown and central bank tightening across other EM economies to contain inflation pressures.The value equity factor to outperform the growth factor.stocks, given their more cyclical nature and relative valuation advantage over U.S. developed market equities could finally outperform U.S. Federal Reserve (Fed) rate hikes are scaled back. dollar will weaken as expectations for 2022 U.S. 10-year Treasury yield by the end of 2022. Long-term bond yields should rise modestly.
Sentiment for equity markets is mixed with pockets of euphoria, such as single-stock retail investors, offset by caution from surveys of market analysts. The cycle is still supportive for equities, and it’s becoming a larger headwind for government bonds. is the most expensive developed equity market globally in late 2021 and the UK offers the best value. Our cycle, value, and sentiment (CVS) investment decision-making process continues to score global equities as expensive.
The new omicron COVID-19 variant, however, demonstrates that these risks can quickly return. Regarding COVID-19 risks, the success of vaccines and approval of pills to treat infections have made investors more relaxed. Meanwhile, Chinese authorities are likely to implement stimulus measures to soften the property slump, however the response may be too late and too small to prevent a deeper downturn. We expect the spike in inflation is mostly transitory, although it could reach uncomfortably high levels in early 2022 before declining as supply-side issues are resolved. Possible further COVID-19 lockdowns as infection rates increase again or new variants emerge.The extent and duration of the property market-driven slowdown in China.The durability of the spike in inflation.The three main uncertainties for 2022 in our view are: The global economy is poised for a second year of above-trend growth, although slower than 2021. Developed economies have spare capacity, households are sitting on accumulated savings from the pandemic lockdown, and central banks are planning to remove accommodation only gradually. 2021 was a year of rebound and recovery 2022 is likely to be a year of moderation for economic growth, inflation and investment returns.
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