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Market strategist: Commodities have a ‘geopolitical premium priced in’

Citi Global Chief Economist Nathan Sheets and Principal Global Investors Chief Strategist Seema Shah join Yahoo Finance Live to discuss wages across the labor market, tech, energy, commodities, and inflation.

Video Transcript

[MUSIC PLAYING]

BRIAN SOZZI: Non-farm payrolls clocked in at an increase of 678,000 in February, really pounding estimates into the ground. The unemployment rate ticked down to 3.8%. Nathan Sheets and Seema Shah are still with us. Nathan, I want to go over to you on the health of the consumer here because we did have flat wages in the month of February at a time where inflation continues to rip higher. What's your read on the consumer are they about to head into a very dark place this spring?

NATHAN SHEETS: I'm watching that real wage number very closely. So how much are these average hourly earnings and other measures of compensation rising relative to inflation? And it feels like that wages are losing a little bit of ground here and that is likely--

BRIAN SOZZI: Nathan, why are they losing ground?

NATHAN SHEETS: --to be a headwind for the economy.

BRIAN SOZZI: Why do you think they're losing ground? Wages?

NATHAN SHEETS: They're losing ground--

BRIAN SOZZI: In this environment where labor's so short?

NATHAN SHEETS: They're losing ground in the sense that wages are rising less than inflation is rising. So they-- you know, headline inflation is at 7.5% and these average hourly earnings are at 5%. And that's suggesting the real wages are you know, falling some.

Now, there are some offsets. And I would say the major offset is the fact that the labor market is so hot. So yeah, real wages diminished a bit, but lots of folks are working and many others know that they want a job they can get one. So household incomes are holding in pretty well. So all in all, I'd say some risk from real wages but I still stay relatively optimistic on the consumer and that the consumer can continue to drive the recovery. But the risks around that are a little bit broader if we don't see strong performance in real wages, at least kind of a break-even.

JULIE HYMAN: I mean, Nathan, it's interesting, because even if you allow for the compositional effects that you talked about and the sort of hangover if you will, from January, to see a flat month over month change or not-- no change is still relatively alarming. And I wonder if you know, anecdotally at least, even if the unemployment picture is very tight right now, you still hear about people who can't find a job, right? They say, well the employment market is supposed to be so good, why can't I find a job? And so that makes me wonder if there are still some pretty profound mismatches here that are still putting a cap on wage growth?

NATHAN SHEETS: This is a very important point and let me call it the disjuncture between the macro and the micro. And when I look at the macro data in terms of labor market, I say wow, you know, this is a hot labor report that we're seeing this morning. It's a hot labor market. And when I look at other indicators there's lots of demand for labor. But then when we go out there you know, there are many people who are still looking around.

Now, I would ask well, are they looking for any job or are they looking for the job that they've kind of desired or wanted for a long time? Or another way to put it is how selective are they being? So I think that you know, there is even within a strong labor market there are micro issues of matching and they're creating problems for workers who can't find that job or one that they want to take and they're finding-- making it difficult for firms, particularly like in the services sector, restaurants to find the workers that they need. So lots of complexities underneath this. And I agree that that can create challenges for you know, broad swaths of the household sector. It seems we need more unskilled labor in this economy.

BRIAN SOZZI: Seema, if we're going to get a gradual move on rates like Nathan suggests, you have that hot labor market here, isn't one of the best places to be tech? This appears to be something of a similar environment to what we saw in the latter part of last year and tech worked well.

SEEMA SHAH: You know, I have to say we continue to be fans of tech. You know, it's had a challenged a month or two. From here, given the conflict that we're seeing it's very unlikely to see very significant upward pressure on bond yields despite that move in the Fed. And part of the reason is the market is already pricing it in.

Now as you have a challenging macro condition and because of the inflation pressures that we're expecting to see, you know, companies are going to be challenged with regards to their profit margins. So this is a time that you want quality. This is a time of big balance sheets, positive cash flow, and really a very, very strong business model, which has pricing power. And where do you typically find a lot of that is within technology. And of course, now that the banks have lost pretty much all of their gains from 2021, valuations are a lot more reasonable. Now, it's not going to be the top choice but I do think that having an element and allocation towards big tech at this stage probably does make some sense.

JULIE HYMAN: Seema, how are you thinking about energy stocks right now? I mean, this group is up some 30% thus far year to date because of the surge that we've seen in oil prices. How much further do you think that and I guess the commensurate rise in oil prices can still go?

SEEMA SHAH: Look, it's really difficult to give any kind of prediction on energy prices and commodity prices because it's currently being driven very much so by the geopolitical risk. When we look at commodities, they are so elevated, a lot of that is because it's got geopolitical premium priced in. So given that uncertainty and given the fact that we have got surging inflation in the US and globally. To us, we look at it and we say, look, if you are concerned about geopolitical risk, which of course, most of us are, if you're concerned about inflation, then commodities, energy, it serves pretty well as a hedge. So we do look at it as it's not putting a forecast out there on oil prices or commodity where things are going, but we do consider it as a pretty good hedge in this very, very uncertain environment.

BRIAN SOZZI: Nathan, isn't the only thing that's going to likely slow inflation, demand destruction, so when that consumer or that shopper goes to the mall and says I'm not paying $90 for a pair of jeans. They go to the gas station, I'm not paying close to $6 for gas, or I'm going to drive less, does that help bring down inflation, and do you see demand destruction on the horizon?

NATHAN SHEETS: Well, the answer to that is absolutely yes. And as prices rise, you know, you're on the demand curve and people demand less. I think what the Fed is hoping is that there are some other channels in the global economy that will manifest themselves and help bring inflation down.

And some of the factors that the Fed has pointed to in its minutes, one is some further progress on supply chain disruptions. Another one is further progress on a reduction in commodity prices. And I have to say, given what I'm seeing at the moment, both of those seem quite remote.

Now a third one that maybe is a little more hopeful is as we make progress in better managing the pandemic and it feels like maybe we're getting to a better place there and that that situation is better, it will allow a rebalancing from this red hot commodity-intensive goods sector more into the services sector and allow some of these goods prices that have been so elevated and rising so quickly, like autos, for example, to kind of come off the boil a bit. Of course, that may raise other issues about services inflation, what that might look like. But I think these are some of the kind of let me call them exogenous or outside processes that the Fed again is hopeful. The Fed has its fingers crossed that these things are going to come through and be supportive of lower inflation in addition to that demand destruction channel that you described.

BRIAN SOZZI: Incredibly helpful insights here to the Yahoo Finance universe. Thank you to you both. Nathan Sheets, Citi global chief economist, Seema Shah Principal Global Investors chief strategist have a great weekend.