2022 Outlook - Federal Home Loan Bank of New York
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2022 Outlook
The Next Stage of the Cycle
Presented as part of the
Federal Home Loan Bank’s
Webcast Series
For Public Use in the United States
US: Not a Deposit; Not FDIC Insured; Not Guaranteed by the Bank; May
Lose Value; Not Insured by any Federal Government Agency
Contents
1 Where are we in the cycle?
2 What’s the direction of the economy?
3 What are the policy implications?
4 What are the risks to the outlook?
5 What are the asset class implications?
2
Where are we in the cycle?
Historically 5-10 Years
3
Cycles tend to end with excess,
Central idea that wraps to multiple
inflation, and policy tightening
lines and sums up the big idea
Source: set in 8pt
Optional footer 4
Source: GettyImages-1131763915
The cycle is young when measured in years, although the economy had
recovered rapidly
US Business Cycles: Length of the cycles and the cumulative advance of real Gross Domestic Product
45%
Change in GDP Relative to Prior Peak
1991-2001
40%
35% 1982-1991
30%
Average
25%
2009-2019
20% 2001-2007
1973-1981
15%
10%
5%
0%
-5%
2020-Present
-10%
-15%
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46
Quarters since peak of previous business cycle
Sources: Bloomberg L.P. and US Bureau of Economic Analysis. As of September 30, 2021. Latest data available.
5Where are we in the cycle?
Leverage Policy Tightening Lending Slows
• Rises over the cycle • US Federal Reserve (Fed) hikes • Lending standards tighten due to
rates to control inflation credit concerns
• Economic growth slows due to
tighter policy
6
Source: Stocksy_txp0bffbbd277D300_Medium_2806554Leverage, on a relative basis, is low and lending standards are easy
US Nonfinancial Corporate Debt as a Percentage of the Senior Loan Officer Opinion Survey: Commercial &
Market Value of Corporate Equities Industrial (C&I) Loans for Large/Medium Businesses
Net % of Domestic Respondents Tightening Standards
100% 100%
80%
80%
60%
60%
40%
20%
40%
0%
20%
-20%
Shaded areas represent recessions
0% -40%
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2018
2019
2020
2021
1990
1991
1992
1993
1995
1996
1997
1998
2000
2001
2002
2003
2005
2006
2007
2008
2010
2011
2012
2013
2015
2016
2017
2018
2020
2021
Recessions C&I Loans Net % of Domestic Respondents Tightening Standards
Sources: Board of Governors of the Federal Reserve System, 7/21 and Bloomberg, 10/21. Latest data available.
7End of cycle dashboard
Inflation is elevated, but the other indicators are not flashing warning signs
US Consumer Price Index US Treasury Yield Curve (10-Year US Treasury Rate minus 2-Year US Treasury Rate)
8% 8%
Y/Y Percent Change
Recessions
6% 6% 10-Year US Treasury Rate
2-Year US Treasury Rate
4%
2% 4%
0% 2%
-2% 0%
2009 2011 2013 2015 2017 2019 2021 1995 1999 2003 2007 2011 2015 2019
US Corporate High Yield Bond Spreads US Dollar Index (DXY)
150
1,800 130
Basis Points
1,400
110
1,000
600 90
200 70
Shaded Areas Represent Recessions
Source: US Bureau of Labor Statistics, 12/31/21 and Bloomberg, 1/17/22. High Yield bond spreads are represented by the option-adjusted spread of the Bloomberg US Corporate Bond
Index. The option-adjusted spread (OAS) is the measurement of the spread of a fixed-income security rate and the risk-free rate of return, which is then adjusted to account for an embedded
option, such as calling back or redeeming the issue early. See appendix for index definitions. The yield curve plots interest rates, at a set point in time, of bonds having equal credit quality
but differing maturity dates to project future interest rate changes and economic activity.
8Historically stocks have outperformed bonds throughout much of the
business cycle
Stock/Bond Ratio
Stocks Bonds
Recessions
outperforming outperforming
3.0
2.5
2.0
1.5
1.0
0.5
0.0
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Source: Bloomberg, 1/17/2022. Ratio of the S&P 500 Index level to the Bloomberg US Aggregate Bond Index as proxies for stocks and bonds, respectively. Index performance is shown for
illustrative purposes only and does not depict or predict the performance of any investment. Index definitions are in the appendix. An investment cannot be made into an index. Past
performance is no guarantee of future results.
9What’s the direction of the economy?
Recovery, Expansion, Slowdown, or Contraction
10Cycles tend to end with excess,
Central idea that wraps to multiple
inflation, and policy tightening
lines and sums up the big idea
From Expansion
Source: set in 8pt
to Slowdown
Optional footer 11
Source: AdobeStock_115822697The economy, in most areas, has been booming
Consumption: Housing: Business Investment: Employment:
US Retail Sales Building Permits Capital Goods Job Openings
New Private Housing Units New Orders Nondefense
$700 1,800 1679 $78 12,000
$626 $80 10,562
1547
$600 $65
$523 1,500 10,000
$60
$500 $60
$409 1,200 8,000
6,730
Thousands
Thousands
$400 938
Billions
Billions
900 $40 6,000
$300 4,630
600 4,000
$200
$20
$100 300 2,000
$0 0 $0 0
December 2019 2020 Low Current
Source: Bloomberg, US Federal Reserve, US Census Bureau, Bureau of Labor Statistics 11/30/21. Latest data available.
12A slowdown is likely in the offing
Household Savings Rate Fiscal Outlays
30%
Personal Income
35%
% of Disposable
25% Est.
20%
15% 30%
% of US Gross Domestic Product
10%
25%
5%
0%
1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 20%
US Real Wages 15%
8%
Y/Y Percent Change
6% 10%
4%
2% 5%
0%
-2% 0%
-4%
2007 2009 2011 2013 2015 2017 2019 2021
Sources: Bureau of Economic Analysis 11/30/21, Bureau of Labor Statistics 12/31/21, US Treasury, 9/30/21. Real average hourly earnings are derived by dividing the industry payroll by the
corresponding paid hours and then adjusting for inflation, as measured by the US consumer price index.
Optional footer
13Financial conditions are tightening, and leading indicators of the economy
appear to be rolling
Financial Conditions and Institute for Supply Management (ISM) Manufacturing Purchasing Managers’ Index
-6 70
Easy financial conditions
Year-Over-Year % Change, Inverted
support economic growth
65
-4
60
Diffusion Index (%)
-2
55
0 50
45
2
Tight financial conditions
40
restrict economic growth
4
35
6 30
1996 1999 2002 2005 2008 2011 2014 2017 2020
US Financial Conditions Index (Left-Axis) ISM Manufacturing PMI (Right-Axis)
Sources: Bloomberg L.P., Goldman Sachs, Macrobond, 12/31/21. Notes: The US Financial Conditions Index includes the federal funds rate, 10-year Treasury bond yield, BBB corporate
bond spread, S&P 500 and US dollar. PMI = Purchasing Managers Index. Shaded areas denote National Bureau of Economic Research-defined US recessions. An investment cannot be
made in an index. See appendix for index definitions. Past performance does not guarantee future results. 14What are the policy implications?
Optional footer 15Cycles tend to end with excess,
Central idea that wraps to multiple
inflation, and policy tightening
lines and sums up the big idea
Source: set in 8pt
Tighter
Optional footer 16
Source: AdobeStock_220293585_hire-resTighter policy is coming, as per the Fed’s mandate of price stability and full
employment
Inflation Breakeven Unemployed, Part-Time, and Marginally Attached to the
Labor Force, % of Total Labor Force
4% 3.55%
3.02% 20%
3% 2.84%
2.47%
2% 18%
1% 16%
0% 14%
-1% 12%
-2%
10%
-3%
8%
-4%
1-Year 3-Year 5-Year 10-Year 6%
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Nominal Yield Treasury Inflation Protected Security Yield Breakeven
Sources: Bloomberg 1/17/22, Bureau of Labor Statistics, 12/31/21. The breakeven inflation rate is calculated by subtracting the yield of an inflation-protected bond from the yield of a
nominal bond during the same time period.
17What are the risks to the outlook?
Optional footer 18We See Inflation Peaking in Mid-2022 and a Return Towards Trend Growth
With inflation effectively baked in, we turn our attention to policymakers’ response
• Following a period of
Base Case enormous policy actions to
address the coronavirus
pandemic, we find economies
More Inflation Less Inflation in a period of transition.
Less Growth Inflation peaks More Growth
in mid-2022, cooling • While there are a variety of
gradually into 2023 upside and downside risks,
we view inflation as the
Persistent Inflation DM central banks maintain current Transitory Inflation distinguishing characteristic
tightening expectations among our scenarios.
Inflation expectations Inflation gradually cools
become unanchored in light towards 2% or below.
of higher inflation prints. Economies glide toward trend real
growth rates Monetary policy proves less
DM central banks react with hawkish.
strong hawkish pivot,
prompting a significant risk of Growth remains above
ending the current economic potential for longer.
cycle.
Higher
Probability
Source: Invesco. For illustrative purposes only.
19Risk: Inflation
Inventory to Sales Ratio: Retail
$900
$700
Current 1.09
Billions
$500
$300
$100
US Retail Sales US Retailers Inventory
Source: US Census Bureau, 10/31/21. Latest data available. The inventory to sales ratio represents the relationship between the inventory value at US retailers and the total sales of US
retailers.
20Traditionally, consumers in inflationary environments, buy now expecting
prices to rise in the future. Currently, consumers appear poised to wait.
University of Michigan University of Michigan
Buying Conditions for Large Household Durables Buying Conditions for Vehicles
Do you think now is a good or bad time for people to buy major Do you think the next 12 months or so will be a good time or a bad
household items such as furniture, refrigerators, stoves, time to buy a vehicle?
televisions, and other household items like that?
180 170
160
160 150
140
% Balance Index
% Balance Index
140 130
120
120 110
(Good – Bad + 100)
(Good – Bad + 100) 100
100 90
80
80 70
60
60 50
2000
2001
2002
2003
2004
2005
2007
2008
2009
2010
2011
2012
2014
2015
2016
2017
2018
2019
2021
2000
2001
2002
2003
2004
2005
2007
2008
2009
2010
2011
2012
2014
2015
2016
2017
2018
2019
2021
Source: University of Michigan, 12/21.
21Supply chain challenges
Signs of hope?
Institute for Supply Management World Container Index Semiconductor Price Nonfarm Payrolls: Truck
Manufacturing Report on Business Composite Container Freight Transportation
Spot Price: Double Data Rate Fourth Generation, 8 Gigabyte
Supplier Deliveries (% Slower) Index Benchmark Rate
$5.0 1540
$12,000 Semiconductor Truckers
60% Freight costs
Have prices off peak returning to
peaking?
manufacturers 1520 labor force
$10,000 $4.5
50% reported the
$/40-foot box
worst of the
1500
Thousand
40% problems? $8,000
$4.0
30% $6,000 1480
$3.5
20% $4,000 1460
10% $2,000 $3.0 1440
0% $0
1420
Jan-16
Jul-16
Jan-17
Jul-17
Jan-18
Jul-18
Jan-19
Jul-19
Jan-20
Jul-20
Jan-21
Jul-21
$2.5
Jan-19
Jul-19
Jan-20
Jul-20
Jan-21
Jul-21
Jan-22
Oct-19
Oct-20
Oct-21
Apr-19
Apr-20
Apr-21
Nov-15
Nov-16
Nov-17
Nov-18
Nov-19
Nov-20
Nov-21
May-16
May-17
May-18
May-19
May-20
May-21
Aug-20 Feb-21 Aug-21
Source: Institute for Supply Management, World Container Index, inSpectrum Tech, and Bureau of Labor Statistics, 12/31/21.
Optional footer 22Risk: COVID-19
Share of Population Vaccinated Against COVID-19 – Select G20 Countries
South Korea
Canada
Japan
Italy
France
Brazil
United Kingdom
Germany
European Union
United States
Turkey
Mexico
India
Indonesia
Russia
South Africa
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
Fully Vaccinated, Share At Least One Dose, Share
Sources: World Health Organization, Our World in Data, 12/10/21.
23What are asset class implications?
Optional footer 24Tactical Asset Allocation:
Macro Framework
Note: Economies can move backwards and forwards in this framework.
Recovery Expansion Slowdown Contraction
Growth ▼below trend & Growth ▲above trend & Growth ▲above trend & Growth ▼below trend &
▲accelerating ▲accelerating ▼decelerating ▼decelerating
Economic Regime
Monetary Policy
Still Easy Tightening Tight Easing
Direction
~ 15% of the ~ 35% of the ~ 35% of the ~ 15% of the
business cycle business cycle business cycle business cycle
Risk Credit Government Bonds
Equity Equity
• High Yield, Bank Loans • Long Duration
• Cyclicals, Growth/Value • Quality, Secular Growth
• EM Local Debt • Nominal Bonds
Equity Risk Credit Government Bonds High Quality Credit
• Cyclicals, Value, Small • High Yield, Bank Loans • Long Duration • IG Corporate
Market Leadership • Emerging Markets • EM Hard Currency • Nominal Bonds
(Ranked by
expected High Quality Credit High Quality Credit High Quality Credit Risk Credit
• IG Corporate • IG Corporate • IG Corporate • High Yield, Bank Loans
outperformance) • EM Hard Currency
Government Bonds Government Bonds Risk Credit Equity
• Intermediate Duration • Short Duration • High Yield, Bank Loans • Quality, Defensive
• Nominal Bonds • Inflation-Linked Bonds • EM Hard Currency • Low Volatility
For illustrative purposes only. We define policy easing as the US Federal Reserve lowering interest rates and/or expanding their balance sheet. Still easy suggests that
the US Federal Reserve is maintaining the lower interest rate policy and/or continuing their bond-buying program. Tightening suggests that the US Federal Reserve is
tapering asset purchases and/or beginning to raise interest rates. Tight policy suggests that the US Federal Reserve is raising rates in an effort to ease inflation 25
concerns.2022 Outlook
The cycle is still likely relatively young
The business cycle is progressing faster
than in past cycles but is likely to have
substantial room to run
The economy appears to be slowing
Growth rates are likely to moderate from
unsustainable levels resulting in
moderating inflationary pressures
Risk assets still likely to outperform
The backdrop is still conducive for risk
assets, although we would expect
leadership to shift away from the so-called
“recovery trade”
28
Source: GettyImages-1226216285Important information
The opinions expressed are those of the author, are based on current market conditions may be difficult to liquidate.
and are subject to change without notice. These opinions may differ from those of other Junk bonds involve a greater risk of default or price changes due to changes in the
Invesco investment professionals. These comments should not be construed as issuer’s credit quality. The values of junk bonds fluctuate more than those of high quality
recommendations, but as an illustration of broader themes. Forward-looking statements bonds and can decline significantly over short time periods.
are not guarantee of future results. They involve risks, uncertainties and assumptions;
there can be no assurance that actual results will not differ materially from expectations. Municipal securities are subject to the risk that legislative or economic conditions could
affect an issuer’s ability to make payments of principal and/ or interest.
This does not constitute a recommendation of any investment strategy or product for a
particular investor. Investors should consult a financial professional before making any The risks of investing in securities of foreign issuers, including emerging market issuers,
investment decisions. can include fluctuations in foreign currencies, political and economic instability, and foreign
taxation issues.
In general, stock values fluctuate, sometimes widely, in response to activities specific to
the company as well as general market, economic and political conditions, currencies, Investments in financial institutions may be subject to certain risks, including the risk of
political and economic instability, and foreign taxation issues. regulatory actions, changes in interest rates and concentration of loan portfolios in an
industry or sector.
Larger, more established companies may be unable to respond quickly to new
competitive challenges such as changes in consumer tastes or innovative smaller Investments in real estate related instruments may be affected by economic, legal, or
competitors. Returns on investments in large capitalization companies could trail the environmental factors that affect property values, rents or occupancies of real estate. Real
returns on investments in smaller companies. estate companies, including REITs or similar structures, tend to be small and mid-cap
companies and their shares may be more volatile and less liquid.
Stocks of small-sized companies tend to be more vulnerable to adverse developments,
may be more volatile, and may be illiquid or restricted as to resale.
Fixed-income investments are subject to credit risk of the issuer and the effects of
changing interest rates. Interest rate risk refers to the risk that bond prices generally fall
as interest rates rise and vice versa. An issuer may be unable to meet interest and/or
principal payments, thereby causing its instruments to decrease in value and lowering the
issuer’s credit rating.
There is a risk that the value of the collateral required on investments in senior secured
floating rate loans and debt securities may not be sufficient to cover the amount owed,
may be found invalid, may be used to pay other outstanding obligations of the borrower or
29Index Definitions
Gross Domestic Product (GDP) is a measure of all of the goods and services Institute for Supply Management (ISM) Manufacturing Index is an index measures
produced within an economy during a year. manufacturing activity based on a monthly survey, conducted by ISM, of purchasing
Consumer Price Index (CPI) program produces monthly data on changes in the prices managers at more than 300 manufacturing firms.
paid by urban consumers for a representative basket of goods and services. The Bloomberg U.S. Aggregate Bond Index is designed to measure the performance of
The Goldman Sachs US Financial Conditions Index is a weighted average of riskless investment grade bonds in the United States.
interest rates, the exchange rate, equity valuations, and credit spreads, with weights that The Bloomberg US Corporate High Yield Bond Index tracks the performance of below-
correspond to the direct impact of each variable on GDP. investment-grade, US-dollar-denominated corporate bonds publicly issued in the US
The S&P 500 Index is a market-capitalization-weighted index of the 500 largest domestic domestic market.
US stocks. MSCI ACWI Index is an unmanaged index considered representative of stocks of
The Russell 1000 Growth Index measures the performance of those Russell 1000 developed and emerging market countries. The index is computed using the net return,
companies with higher price-to-book ratios and higher forecasted growth values. which withholds applicable taxes for nonresident investors.
The Russell 1000 Value Index measures the performance of those Russell 1000 The World Container Index reports actual spot container freight rates for major East West
companies with lower price-to-book ratios and lower forecasted growth values. trade routes, consisting of 8 route-specific indices representing individual shipping routes
The Russell 2000 Index measures the performance of small-capitalization stocks. and a composite index. All indices are reported in USD per Forty Foot Container.
The Russell 2000 Growth Index measures the performance of those Russell 2000 The U.S. Dollar Index (USDX) indicates the general international value of the US dollar.
companies with higher price-to-book ratios and higher forecasted growth values. The U.S. Dollar Index does this by averaging the exchange rates between the US dollar
and major world currencies.
The Russell 2000 Value Index measures the performance of those Russell 2000
companies with lower price-to-book ratios and lower forecasted growth values. The Credit Suisse Leveraged Loan Index is a composite index of senior loan returns
The Russell 1000 Growth Index measures the performance of those Russell 1000 representing an unleveraged investment in senior loans that is broadly based across the
companies with higher price-to-book ratios and higher forecasted growth values. spectrum of senior bank loans and includes reinvestment of income.
The Russell 1000 Value Index measures the performance of those Russell 1000 The Bloomberg Aggregate Corporate Bond Index represents primarily investment-grade
companies with lower price-to-book ratios and lower forecasted growth values. corporate bonds within the Bloomberg Aggregate Bond Index.
The Russell 2000 Index measures the performance of small-capitalization stocks. The Bloomberg US Treasury: 7-10 Year Index measures US dollar-denominated, fixed-
The Russell 2000 Growth Index measures the performance of those Russell 2000 rate, nominal debt issued by the US Treasury with 7-9 years to maturity.
companies with higher price-to-book ratios and higher forecasted growth values. Polyethylene spot price represents the price in US dollars of polyethylene.
The Russell 2000 Value Index measures the performance of those Russell 2000 Semiconductor spot price represents the price in US dollars of Double Data Rate Fourth
companies with lower price-to-book ratios and lower forecasted growth values. Generation, 8 Gigabyte semiconductors.
The Russell Midcap Index measures the performance of mid-capitalization stocks. US Employees on Nonfarm Payrolls-Trucking Transportation represents the number of
The Russell Midcap Growth Index measures the performance of those Russell Midcap people on business payrolls employed by trucking transportation businesses.
companies with higher price-to-book ratios and higher forecasted growth values.
The Russell Midcap Value Index measures the performance of those Russell Midcap Indexes are unmanaged and cannot be purchased directly by investors. Index
companies with lower price-to-book ratios and lower forecasted growth values.
performance is shown for illustrative purposes only and does not predict or depict the
performance of any investment. Past performance does not guarantee future results.
30Index Definitions
The Credit Suisse Leveraged Loan Index is designed to measure the performance of Indexes are unmanaged and cannot be purchased directly by investors. Index
leveraged loans in the United States performance is shown for illustrative purposes only and does not predict or depict the
Bloomberg Barclays EM Hard Currency Aggregate Index is designed to measure the US performance of any investment. Past performance does not guarantee future results.
dollar performance of emerging market bonds
The Bloomberg Barclays US High Yield Bond Index is designed to measure the
performance of US corporate high yield bonds
The Bloomberg Barclays 1-3 Year US Treasury Index is designed to measure the
performance of US Treasury bonds with maturities of 1-year up to (but not including) 3-
years
The Bloomberg Barclays 7-10 Year US Treasury Index is designed to measure the
performance of US Treasury bonds with maturities of 7-years up to (but not including) 10-
years
The FTSE NAREIT All Equity REITs Index is a free-float adjusted market capitalization-
weighted index that includes all tax qualified REITs listed in the NYSE, AMEX, and
NASDAQ National Market.
The Bloomberg Barclays High Yield Municipal Bond Index measures the non-investment-
grade and nonrated U.S. dollar–denominated, fixed-rate, tax-exempt bond market within
the 50 United States and four other qualifying regions (Washington, D.C.; Puerto Rico;
Guam; and the Virgin Islands).
The Bloomberg US Corporate Bond Index measures the investment grade, fixed-rate,
taxable corporate bond market. It includes USD denominated securities publicly issued by
US and non-US industrial, utility and financial issuers.
The Bloomberg Commodity Index tracks the performance of a diversified basked of global
commodities.
Gold spot price tracks the price of gold in US dollars.
Bloomberg US Treasury Inflation-Linked Bond Index tracks the performance of Treasury
bonds indexed to inflation to protect investors against a decline in purchasing power.
Bloomberg Intermediate US Government/Credit Bond index is a broad-based benchmark
that measures the non-securitized component of the US Aggregate Bond Index with less
than 10 years to maturity. The index is comprised of the Intermediate and US Agency
indices.
31Disclosures
For US Audiences:
All data provided by Invesco unless otherwise noted. Invesco Distributors, Inc.
©2021 Invesco Ltd. All rights reserved.
WMI22-PPT-1 1/22 NA2005197 32Thank you
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