Pimco Says U.S. Growth Will Plateau Next Year as Job Gains Ebb

  • Fed may raise rates more than expected, according to firm
  • Manager likes TIPS, non-agency mortgages as 2016 investments

U.S. employers will slow the pace of new hiring in 2016 as the economy nears full employment, driving up wages while tapping the brakes on growth, according to Pacific Management Investment Co.

“The handoff from payroll growth to wage growth results in a slowing of consumption growth,” managing directors Richard Clarida and Andrew Balls wrote in an outlook published today based on the firm’s cyclical forum held in early December.

The Federal Reserve’s decision to raise interest rates Wednesday for the first time in almost a decade sets the stage for more of the same in 2016, according to the Newport Beach, California-based firm that oversees about $1.5 trillion. Investors are primed for two quarter-point hikes next year, Pimco said.

“We see the risks biased toward the Fed delivering more rate hikes than the market is pricing in,” the authors wrote.  “We do believe it will be a rate hike cycle -- the chances of a ‘one and done’ single-hike scenario are about equal to those of a zombie apocalypse.”

Pimco expects global expansion of 2.6 percent in 2016, similar to this year. The U.S. economy will grow 2 percent to 2.5 percent after a 2.5 percent increase in 2015. China will slow to a range of 5.5 percent to 6.5 percent growth from 6.9 percent in 2015, while Japan and the “BRIM” countries as a group -- Brazil, Russia, India and Mexico -- are expected to expand modestly faster next year.

‘Solid’ Credit

Among investments, the firm favors U.S. Treasury Inflation-Protected Securities, non-agency mortgages and other credit, even after U.S. debt markets were rattled this month by the closing of a $788.5 million high-yield and distressed asset mutual fund run by Third Avenue Management.

“Outside of the energy sector, credit fundamentals are solid, and we generally expect to add credit over the next year, taking advantage of periods of market weakness,” the Pimco authors said. “We see opportunities across investment grade, high yield, U.S. bank senior debt and bank capital in Europe.”

Oil prices, which fell to their lowest level on Wednesday in almost seven years, are expected to recover next year, according to the firm.

“Our outlook for 2016 is one of guarded optimism for energy,” Pimco said. “Recent near-record warmth is contributing to a sharp selloff into year-end, which will further speed up capital spending reductions and set the stage for higher oil prices in 2016.”

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