- Inflation spotlight: Inflation will likely govern the magnitude of central bank tightening in 2022. Cyclical forces and Covid-19 related distortions should help keep inflation elevated while employment indicators continue to improve. If supply chain issues clear in 2022, core inflation should moderate from very elevated levels.
- Macro drivers: The global expansion is likely to remain on track. Global and US growth forecasts could soften if pandemic disruptions escalate. But it appears vaccines will remain effective in preventing hospitalizations and deaths due to omicron. Demand for goods and services remains robust despite higher price levels.
- Government policy: Monetary policy will likely become less accommodative. Now that inflation has surpassed the Fed’s inflation target, we think the Fed will deliver four 25-basis-point rate hikes in 2022, starting near the end of the first quarter. The tapering of asset purchases should conclude in March, before the Fed’s anticipated lift off.
- Credit outlook: Loomis Sayles expects US and global credit to help deliver positive excess return potential over like-duration government bonds in 2022. High yield credit can offer value given the sector’s current nominal yield and shorter-duration profile relative to investment grade. Bank loans could benefit from rising rates in 2022, as well.
- Equities outlook: Earnings growth will likely propel global equity markets higher. US equity markets have upside potential based on earnings growth. Solid nominal GDP growth could help US large-cap earnings growth exceed 10% in 2022. Loomis Sayles currently prefers cyclical exposure in financials, industrials and energy over defensive sectors such as staples and utilities.