Expect “a lot of noise around tariffs” but some compromise and resolution, keep an eye on inflation, and look out for “bumps in the road” for the global economy and markets, PIMCO Group CIO Daniel J. Ivascyn said.
In the opening presentation at Pacific Investment Management Co.’s media day in London, Ivascyn, who is also a managing director, noted that it’s no surprise that U.S. risk assets have been more expensive than other parts of the world, given the economy’s prowess in artificial intelligence and technology innovation, as well as the U.S. dollar remaining as the global reserve currency.
But he noted there’s been “a tremendous amount of volatility so far this year, with the Trump administration driving a lot of that. It’s going to continue,” he said.
The $1.95 trillion asset manager’s base case is that “there’s going to be a lot of noise around tariffs. We do think there’ll be some compromise and some resolution, and we do think that there’s enough of a Republican majority in Congress to push tax cuts through, and there will be some incremental cost improvement,” Ivascyn said. But “there’s going to be a lot of bumps.” The manager does think growth will slow but that a recession will be avoided; global growth will be positive albeit slowing, “and inflation is going to be with us for longer now because of this policy approach,” he added.
Ivascyn added, though, that there’s a difference between policy approach and style. “The style so far is making consumers and business professionals a bit nervous,” and there’s the potential for a self-fulfilling-type dynamic where we do end up with a more meaningful slowdown or a crisis of confidence, enough to continue to see some weakness in those assets that are most expensive,” Ivascyn warned.
Then there’s the fact that inflation remains above central bank targets. The question remains to what degree the Trump administration “will read the market, read various surveys, look at the data, understand what other policymakers — like the Fed — may do, and calibrate that policy,” he said.
From an investing point of view, “yeah, there’s a lot of noise, but there’s also very, very attractive starting yields in high-quality bond markets,” Ivascyn said. There’s a great opportunity for active management and to invest “on a global basis. … We do think global bond investing makes a lot of sense.”
PIMCO on April 1 published its latest cyclical outlook, titled “Seeking Stability,” in which it warned that, with declining business and consumer confidence, “the U.S. economic and financial-market exceptionalism of recent years could be fading.”
In a separate briefing, Ivascyn did not rule out the potential for a downgrade of the U.S. due to its fiscal deficit of between 6% and 7%, adding that rating agencies “are going to be looking very closely at the nature of any tax extensions. … Debt levels over the long term are going to cause problems … create more volatility,” he added.
There’s also a “meaningful nonzero” chance — around 10% — that the Federal Reserve will hike rates this cycle, although “we think there is a strong preference, particularly for the U.S. Fed, to stay on hold longer,” he said. “But there are certainly scenarios where it could go higher.”
