March jobs report: ‘Inflation not moving fast enough or far enough’ for the Fed, strategist says

Crossmark Global Investments Chief Market Strategist Victoria Fernandez joins Yahoo Finance Live to discuss the March jobs report, the state of the labor market, the odds of a recession, the power of the U.S. consumer, and the outlook for a 0.25% rate hike.

Video Transcript

BRAD SMITH: Well, many investors are ignoring a slowdown in the economy fueled in part by the Fed's aggressive rate hikes. We spoke with RSM Chief Economist Joe Brusuelas on Friday. And here's what he had to say about the next FOMC meeting.

JOE BRUSUELAS: The Fed is going to hike its policy rate by 25 basis points when it meets in May. I think that's the primary takeaway. Look, at 3.5% unemployment rate, pretty much status quo, a strong, albeit cooling job market, this is what you want to see. It's necessary, but not sufficient for the Fed to actually declare, hey, a peak.

BRAD SMITH: You can read all about the rising risk of recession in today's Morning Brief, written up by Brian Sozzi, up now on the Yahoo Finance home page. For a deeper dive, let's welcome in Victoria Fernandez, who is the Crossmark Global Investments chief market strategist. Victoria, great to have you here with us this morning. And thanks for taking some time. Help us break down some of the recession concerns, what Friday's jobs report and the employment situation really signals that the Fed will have no choice but to do at its next meeting.

VICTORIA FERNANDEZ: Yeah, I don't think the Fed wants to paint themselves into a corner here that says they have no choice. But when you look at the jobs report that came out, I don't think there was enough there to force the Fed to change their mind on what they want to do. They have all come out and said they think they're going to go north of 5%, that they're not done yet. Inflation is not moving fast enough or far enough for them to say that they're done.

So when you have a jobs report that comes out that had an upward revision to the prior month, yes, it was a little bit better than expectations in far as what the Fed is looking for. And we're seeing unemployment rate move a little bit higher. You're seeing some of these elements work through.

But, again, they're minor moves at this point. The Fed wants to see a lot of changes. And the JOLTS report, even though there was some negative reaction out of the JOLTS report, I think it still told you, look, we still have 9.8 million open jobs out there for people. The quit rate in the service sector was still elevated.

So you combine that with your labor report on Friday and it's telling you it's still a strong labor market. The Fed still has more work to do. So yes, I do think they're going to move 25 basis points at the May meeting, maybe then take a pause after that. Inflation reports later this week might help us see a better path there.

JULIE HYMAN: And, Victoria, in your notes following the report and in preparation for this morning, you talk about the odds of recession have gone up versus a few weeks ago. And you also say you don't want to be a bear. But it sounds like from some of your notes that you are one right now, at least for the moment.

VICTORIA FERNANDEZ: Yeah. I am, Julie. And, look, nobody likes to be the party pooper. That's fair. But I kind of feel like that's where I am right now.

Yes, we have a strong consumer. And let's go back to conversations we had nine months ago, right, last summer, when everyone was talking about the consumer was going to be crushed. And we said, wait, hold on. Don't underestimate the power of the US consumer.

And I think that is what has been the foundation for all of this time. But I'm not sure it's going to be enough with the tightening of the financial conditions that we have seen. The Fed tried to tighten financial conditions on their own for a long time.

And it wasn't until about a month ago when we saw SVB collapse and some of the other banks collapse as well, Signature Bank, that the financial conditions actually did start tightening. Lending is down lending was down with the last two weeks over $100 billion. So that means M2 money growth is going down. And growth is coming down.

So I think when you take that, you combine it with a consumer that's still strong but weakening from where they were before, and we think earnings are going to continue to come down. We don't expect a strong earnings quarter. You put all that together. and I think you're going to get a recession as the Fed continues to raise rates.

The one thing that we could see, if the Fed comes out and says, look, we're done, we think where we need to be, we're not going to keep pushing until we see inflation get much lower, then the story could change. But I just don't think that's what's going to happen.

BRAD SMITH: On a relatively diminished, I guess, consumer backdrop, is there any kind of portfolio pivot that you would be making right now?

VICTORIA FERNANDEZ: Yeah, we're not really pivoting at this point in time. Typically the market doesn't make a bottom before the recession hits. So we still think there's some downside here in this market. Again, it's my bearish viewpoint coming out a little bit, unfortunately. But we think there's still some downside here.

And when you have a market that is volatile and that we think is more down than up going forward, at least for the near future, you want to focus on those names that have strong balance sheets, the ones that have good cash flows, that have the pricing power. I think pricing power and margins is going to be a key component in this earnings season. And so we're sticking with some of those value type names. Or quality names maybe is a better way to say it, that quality factor.

Once we hit the recession, then you can start making that shift to those names that have really been hit hard and that will start to perform better. But at this point, stick with quality.

BRAD SMITH: OK, so still seeing downside, but does that downside also mean a retest of the Q4 2022 most recent bottom that we had seen?

VICTORIA FERNANDEZ: It could, right? Obviously, I don't have a perfect crystal ball to tell me exactly where we're going. But I think if you get three quarters in a row of negative earnings, which is negative earnings growth, which is what is anticipated right now, and you do have positive earnings growth priced in for the second half of this year, I think we're going to see that come down. I think we're going to continue to see the consumer pull back a little bit.

You combine all that with the uncertainty from the geopolitical issues we're seeing and lending coming down, then yes, I think we could get back down to those lows. Not 100% am I saying it's going to happen. Our probability of a recession is around 65% right now, up from where we were a month ago.

But there's still a probability we could have a soft landing. We just don't think that that's the base case. So yes, we see the market moving lower.

JULIE HYMAN: All right, Victoria, thanks so much. Good to catch up with you, even if it's not the best of news for bulls in this market.

VICTORIA FERNANDEZ: I know. Sorry.

JULIE HYMAN: No worries. We got to tell like we see it, don't we? Victoria Fernandez, Crossmark Global Investments chief market strategist, great to catch up with you.