Portfolios: Jobs Raise Chance of 3 to 4 Rate Hikes - PIMCO

The December jobs report raises the chance that the Federal Reserve will hike rates by at least three times, perhaps four, this year, "because the report increases the likelihood that U.S. economic growth will continue to run above the economy's growth potential and absorb excess economic slack, increasing the Fed's confidence that inflation will return to its 2% objective," PIMCO Market Strategist and Portfolio Manager Tony Crescenzi told MNI.

He said the bar for a rate hike at the March 15-16 meeting was "already low" to start with, "as the Fed doesn't want to be perceived as being in a one-and-done mode - therefore in and of themselves these data help leap over the March rate-hike hurdle."

The U.S. economy added a larger-than-expected 292,000 jobs in December, although the unemployment rate remained unchanged at 5.0%. Despite the strong jobs creation, the average weekly earnings were flat on the month, following a 0.2% gain in November.

With the Fed staff expecting U.S. GDP to grow above its potential through 2018, "any data that reinforce confidence in the forecast make it more likely the Fed will validate its projection for between 3 and 4 rate hikes this year," Crescenzi said.

Still, he does not anticipate any spike in the U.S. 10-year yield as a result of the Fed tightening, "owing to global influences, and widespread expectation that global policy rates will likely stay low through the rest of the decade."

"These forces, which are resulting from a confluence of factors, including debt dynamics, demographics, a dearth in investments in both human and physical capital, relatively weak credit creation, among other factors, are combining with a sharpened demand for a shrunken supply of safe assets, to keep downward pressure on rates and this is likely to persist for some time," he said.

"All of this said, the yield on the U.S. 10-year likely will at some point in 2016 move above where forward yields are currently pricing the 10-year to be a year from now."

PIMCO's base case scenario is that the Fed will raise rates three times this year by 25 bps each time, more than the two rate hikes priced into the markets, according to Crescenzi's latest Federal Reserve Outlook for 2016.

Therefore, he recommended underweighting duration on the shorter end of the yield curve.

The commentary added that the odds of five rate hikes in 2016 are "a lot lower" than the odds of two rate hikes.

In view of his longer-term view on rates, he recommends "keeping dry powder to take advantage of any market volatility that emerges in the rate normalization process, with an eye on adding to positions in credit instruments," citing non-agency MBS, investment grade and high yield corporates, bank capital as well as European peripherals.