Q1 GDP came in negative for 2022 which means all it takes is a subsequent negative output report for the U.S. to slip into a recession. Goldman Sach’s Chief Economist David Mericle says this slowdown is all but inevitable, however it comes with a small advantage for markets. That is if the U.S. does slip into a recession or advanced slowdown, the Fed has no option but to stall rate hikes. All of this culminates in Goldman predicting a 75 bps hike in July, 50 bps in September, and slowing to just a quarter point in the final two meetings. Mericle is calling for a 30% chance of a recession with ultra-low 1.5% growth in the upcoming year. However, this would be quite a swing from the jobs report we have seen in recent months with strong numbers and positive growth.

Finsum: Most of Q1 GDP growth slowing was because of government spending, and consumer activity was remarkably robust; people may be too bearish about the economy. 

Emerging markets are constrained by a number of factors. The U.S.’s rapidly increasing interest rates are putting pressure on emerging market sovereign bonds. While seasoned investors in emerging markets are no stranger to volatility; these days it is coming from too many angles. War in Ukraine, political instability, oil prices, continuing covid-19 related problems, and currency pressures are all coming at once. This has caused a $52 billion dollar to pull according to JPMorgan. All of these pressures increase the spread in yields for emerging market bonds, and the rapid ballooning of these yields has sent their prices off a cliff. Many emerging markets are also facing real fiscal problems. However, there are resilient larger EM economies that can take the brunt of the shocks.

Finsum: If the global economy slows it could be detrimental to EM which can be export-dependent in an already volatile time.

With fixed-income securities starting to look attractive again, fixed-income ETFs saw the most inflows during the week ending July 15th. Over $7.6 billion flowed into ETFs last week with over 90% ($6.9 billion) flowing into U.S. fixed income ETFs. The iShares U.S. Treasury Bond ETF (GOVT) saw the highest weekly inflows with $2.4 billion. It appears investors are adding fixed income back to their portfolios as yields have risen above 3%. The June Consumer Price Index came at a scorching hot 9.1%, which means the Fed is expected to increase rates another 75 or even 100 basis points in their next meeting. This could drive bond yields even higher. That makes bonds more attractive to investors and money managers due to higher yields and lower prices which should result in more flows into fixed-income ETFs.

Finsum: Higher inflation combined with rate hikes are making fixed-income securities more attractive to investors leading resulting in fixed-income ETFs dominating fund flows.

According to a new survey by the alternative investment platform AssetTribe, the demand for alternative investments is expected to grow by up to 46% over the next 12 months. The research showed that the growth in demand for alternative assets is due to the current rate of inflation, an increasing need to diversify portfolios, and the potential for higher returns. The survey was conducted with over 580 sophisticated investors across the UK and Europe. According to the survey, the most popular alternative assets were real estate at 75%, long-term asset funds at 62%, and carbon net zero funds at 51%. The survey also showed that the wealthiest participants invested far more in alternatives than those with smaller portfolios.

Finsum: Due to inflation, diversification, and the potential for higher returns, the demand for alternative investments is expected to rise almost 50% over the next 12 months.

Even with the market up for a third straight day, don’t expect volatility to disappear anytime soon. That is according to two market strategists. In a recent media appearance, Citi's Institutional Clients Group chairman Leon Kalvaria warned that more market volatility is to be expected until inflation and rate hikes stabilize. In a separate media appearance, BlackRock Americas iShares Investment Strategy Head Gargi Chaudhuri also says he expects volatility to continue on the backdrop of higher inflation and increased politicization. Recent gains aside, with rates expected to continue to move higher and consumers feeling the crunch of higher energy and food prices, market volatility is likely here to stay.

Finsum: With more expected rate hikes to combat persistent inflation, don’t expect market volatility to disappear anytime soon.