Exposure rates of the Dorval Asset Management Range – September 2, 2022

The million-dollar question on the world markets is still the cost of the adjustment between potential supply and demand in the United States. This alignment process has most definitely kicked off, but the Fed still sees the pace of rebalancing on the labor market as inadequate.

Expectations of a peak in United States inflation have started to translate into reality, with some prices taking a definite downturn, such as gasoline, ocean freight costs, used car prices, etc. (cf. chart 1). Meanwhile manufacturing supply is recovering on the back of electronic component deliveries, progressively smoother supply chains and stabilizing commodities prices. Two major inflation drivers in the US are therefore now easing considerably – energy prices and pressure on production chains – having probably accounted for some 50-70% of US inflation over the past two years.


Decrease in inflationary pressure in the United States

Unleaded gasoline prices / Used car prices / Freight cost (containers leaving LA)



This good news should stop the economy sliding into a recession in the short term, as falling gasoline prices offer support for consumers and improved supply bolsters output (cf. chart 2). By way of example, the automotive sector may experience an uptick in output and a fall in prices. The Atlanta Fed’s latest GDPNow model suggests a significant recovery in GDP growth, which it estimates at 2.6% in Q3.



United States: upturn in household confidence and manufacturing new orders in August

Consumer confidence (LHS) / ISM manufacturing new orders (RHS)


However, this good news may not be quite so welcome for the Fed, as persistently hefty imbalances between supply and demand on the labor market may well take their time to even out if the economy remains buoyant. Job openings are still close to record highs, while the private sector added a strong 308K new jobs in August, and new jobless claims have recently even decreased again slightly. Yet the August job report (cf. chart 3) does show some signs of an easing, with more subdued average earnings (+0.3% over the month), a drop in the number of hours worked and a welcome rise in labor supply, with a jump in the participation rate.


Labor market remains upbeat but shows some signs of moderation

Private sector job creation / Hourly earnings (MoM %) / Number of hours worked / Participation rate


Additional figures will be required to assess the full effects of the economy’s current moderation on both the labor market and inflation. Some economists remain extremely pessimistic – such as Larry Summers and Olivier Blanchard – and believe that only a clear-cut recession will offer an opportunity to push inflation back down to around 2%. Jerome Powell and the Fed seem increasingly receptive to this argument, but the central bank has not given up all hope of a softer landing for the economy: it would thus be surprising for it to take an extremely restrictive stance just as prices and wages may be poised to ease.


In the wake of the equity markets’ plunge since mid-August, renewed investor pessimism (cf. chart 4) could be somewhat alleviated by recent stats. In our flexible funds, we continue to actively manage hedging in response to economic figures and market momentum i.e. investor positioning, RSI, etc. We remain on standby on our equity allocation for now, while in our international funds, we continue to overweight Japan, which offers a haven of interest rate stability. Lastly, we maintain our approach to bond duration, with a fully divested stance.



Renewed pessimism after July rally
US surveys with individual and professional investors




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