March jobs report ‘highlights’ that Fed has focused on inflation over growth: strategist

Pimco Managing Director and Portfolio Manager Sonali Pier joins Yahoo Finance Live to discuss the March jobs report data, the Fed's interest rate hikes, inflation, and adapting investments to current economic conditions.

Video transcript

RACHELLE AKUFFO: Well, let's take a look at what's been happening with the broader market action today with Sonali Pier, PIMCO's Managing Director and Portfolio Manager. So I want to first start by getting your reaction to the jobs data-- one of, obviously, the key tenets that the Fed tracks in its decision making. Why do you think the markets are reacting this way? SONALI PIER: Well, first, thank you for having me. I think here, the jobs data really gave the Fed no need to change in terms of outlook. Hiring was strong. Wage growth was strong. And really, it highlights that the Fed has been focused on inflation here, even over growth to some extent. And what we're seeing with a stronger labor force participation rate is that it's important that the Fed navigate a soft landing here where while they raise rates, they're mindful that it doesn't lead to higher unemployment over time. RACHELLE AKUFFO: And so then how does this also tie in with the inflation picture? SONALI PIER: Sure. So inflation is, obviously, quite high. And the Fed, as a result, is looking to raise rates. Over the year, we're going to see several hikes. And the idea would be that as they move from quantitative easing to quantitative tightening, we'll be able to bring inflation from peaking levels to be more moderated. And hopefully over that same time too, we'll start to see some relief from supply chain interruptions as well. RACHELLE AKUFFO: Now, as we know, there is only so much that is within the Fed's control regarding inflation. But obviously, it was behind the curve in terms of really getting started on addressing inflation, beyond saying that it was transitory. And then add to that, you have the uncertainty from the Russia-Ukraine fallout. What does all this mean for high yield bonds when you step back and take a look at this picture? SONALI PIER: Yeah, that's a great question. Certainly, while there was-- while the inflation has turned out to be more persistent, part of that has to do with some of the interruptions, like supply constraints have been more persistent. In terms of the carryover to high yield, as we've seen this year, high yield has outperformed investment grade. But a large part of that has to do with high yield having less sensitivity to interest rates. So as interest rates have risen for high yield, some of the lower quality parts are a bit less interest rate sensitive. So within high yield, we've seen double-Bs actually underperform despite being higher quality within the high yield cohort, but because they have more interest rate sensitivity. In terms of opportunities here, we continue to look for companies that do have that pricing power where they can price-- they can push some of the inflationary costs off onto the consumer. RACHELLE AKUFFO: So then to that point, then, as you look at today's volatility, not just in the major indices but really across the markets there to kick off the second quarter, what does this signal about where we are in the cycle in terms of whether or when to focus on value stocks versus, say, growth ones? SONALI PIER: Certainly. I think it's very clear that we are late cycle. That said, you know, our base case is not for a recession at this stage. But we are late cycle. And as a result, we have to acknowledge that will lead to increased uncertainty-- and as we've seen so far, the interest rate volatility, and even to some extent equity volatility, although it's come off from the peak. RACHELLE AKUFFO: And what are some of the signals you're watching? If you're not really expecting a recession this year, what is it that's giving you that optimism? SONALI PIER: Yeah, and I think it's a question of initial starting conditions. When we look at the corporates, many of the balance sheets are pretty strong. Many of them had raised a lot of debt through the COVID crisis in order to weather the uncertainty. And so they have a lot more liquidity than they have in the past as we look at the fact that we are late cycle. And so with that, I think that we have a bit more time when it comes to these corporates adapting policies should we lead to more uncertainty, and maybe even a downturn, there's still a lot of opportunities that they have within their capacity, whether that would be to cut dividends, suspend a share repurchase program. There's still a lot of opportunity here, given starting valuations, to right size their businesses if needed. RACHELLE AKUFFO: And in terms of the fixed income marketplace, what are you keeping an eye on there? SONALI PIER: Yeah, absolutely. We're looking at certainly the level of rates, the curve shape, Fed speak, and the like. But you know, of course, jobs data, unemployment as well. But when it comes to the credit side of it, you know, as I mentioned, corporate balance sheets have been important. And then also the outlook-- you know, many times, outlooks get set towards the end of the previous year. And so now, as companies come to report, I think there's possibility of revisions, as we've seen a pickup not just, as we mentioned, in rate volatility, but also in geopolitics as well. RACHELLE AKUFFO: Indeed. Well, do appreciate your insights-- Sonali Pier there, PIMCO's Managing Director and Portfolio Manager. Thank you so much.