Exposure rates of the Dorval Asset Management Range – August 5th, 2022

A recession in the United States? What recession? The debate on the US economy’s growth/inflation mix rages on among economists and observers, although a clear consensus has so far failed to emerge.

Publication of a fresh uptick in the services ISM to over 56 jars with the services PMI, which slid under the 50 mark that indicates the threshold between growth and slowdown. Meanwhile the key job figure is also buoyant, with the jobless rate at 3.5% and particularly a 5.2% jump in annualized hourly earnings. Projections for the Fed’s rate hike therefore rose from 50bp to 75bp.


Is this enough to cast doubt over the Fed’s pivot narrative i.e. a forthcoming halt to interest rate normalization? Over recent weeks, investors – or at least those who are not on vacation – have taken positions on an ideal scenario of a soft landing for economic activity and a reduction in inflationary pressure. The US market has already retraced 50% of its decline since the high point in March, but is this realistic?


World economic activity is slowing and Germany – one of the countries most severely affected by the gas crisis – has probably already entered a recession. Meanwhile China is facing a major real estate crisis and confirmed that it would not achieve its initial 5.5% growth target in 2022 at the Politburo meeting to define economic policy.

The gradual resolution of supply difficulties, which likely account for almost half of inflationary pressure over recent months, is set to make a substantial contribution to the normalization of inflation. However, core inflation, particularly on housing, which has hit a peak of around 6%, is still pointing to excessive inflation on a long-term basis. Wage figures just out do not tally with the Fed’s inflation target. Several members of the Fed have spoken out over the past few days and toned down comments from Jerome Powell, which were seen as more accommodating at the last meeting. Projections for the high point in interest rates have therefore increased from 3.25% in December 2022 to 3.75% in March 2023.


It is therefore challenging to take a clear stance at this stage. We think that several scenarios are possible, including:

-     Moderation with a gradual slowdown in growth and inflation, and the Fed having practically completed its rate tightening cycle, the renowned pivot. This would be good news for equities, particularly US growth stocks;

-     Recession with a severe slowdown in activity, a sharp surge in unemployment, followed by a drop in inflation. The Fed would then need to halt its rate hike cycle. This would be positive for sovereign bonds;

-     Overheating of the economy, which slows little and where inflation remains too high. The Fed would have to step up monetary policy tightening and trigger a recession. This would be bad news for equities and credit.


There will be a clear impression of playing it by ear over the weeks ahead, with the risk of diametrically opposed economic scenarios materializing. Yet signs of a moderation are visible at this stage, and we therefore maintain moderate equity exposure, consistent with the risk framework for our various funds. We steer clear of rates, which are pricey and are hit by the latest economic figures. We will closely monitor changes in the main indicators to ensure we dynamically adjust our exposure accordingly.


We hope you enjoy a break this summer. See you in September!



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