An employment report last week showed U.S. job growth accelerated sharply in January while the unemployment rate hit a more than 53-1/2-year low of 3.4%, pointing to a tight labor market that could be a headache for the Federal Reserve in its battle against inflation.
Tiffany Wilding, PIMCO North American economist, said the strong economic data suggests a recession may come later than previously expected, but remains likely.
"Recent data on net haven't caused us to change our outlook for a mild U.S. recession - we're only pushing the timing back a little bit," she said in a note.
PIMCO, which manages $1.7 trillion in assets, said last month it would focus on high-quality bonds this year due to their higher returns and the protection they offer should the global economy economic downturn be deeper than anticipated.
Some investors believe signs of strength in the labor market make a recession less likely and increase the chances of a soft landing, in which the Fed tames inflation without pushing the economy into a recession. Goldman Sachs now sees a 25% probability of the United States entering a recession in the next 12 months, down from a previous 35% forecast.
Markets have rallied over the past few months on the back of moderating inflation. In January, U.S. Treasury yields - a benchmark for borrowing costs on assets ranging from mortgages to corporate loans - declined by about 30 basis points.
That rally, however, stumbled last week as the jobs data raised the prospect of more interest rate hikes by the Fed.
"Although market-based measures of financial conditions have eased somewhat recently, financial conditions are still tight by historical standards," Wilding said.
"We think it's underappreciated how much tightening pressure the overnight rate actually puts on the economy."
(Reporting by Davide Barbuscia; editing by Jonathan Oatis)
