It’s no doubt the U.S. employment picture now looks much more positive than markets expected. However, investors shouldn’t forget last week’s weak GDP data.
Should we worry about this divergence?
According to chief economic adviser at Allianz and former PIMCO chief Mohamed El-Erian, the all-around positive jobs numbers and subsequent market reaction is “encouraging.”
Speaking with Bloomberg following the data release, he said, “the jobs numbers and last week’s GDP number tells you that the household is fine.”
“Consumption continues to grow, now we have strong job creation, higher wages, more hours worked, so the consumption side of the economy is holding up,” he added.
However, he did note that business investment is not following suit and that’s causing a disequilibrium in the marketplace.
“We’ve had quite an increase in inventory, which is likely to discourage business investment even more,” he said. “So this is about corporate risk-taking being down here
and household risk-taking and financial risk-taking being up here.”
How can the report affect Yellen & co?
El-Erian said the main factor holding back the Fed from raising interest rates is the global economy. He added that he thinks markets should be pricing in a 40-45% chance of a rate hike in September, instead of the current 22% chance.
What next?
“You’re going to see a stronger dollar. More generally, market participants should expect a pickup in volatility,” he said. “What you’re going to see is the fixed income and currency markets will start to import volatility in other markets.”
Any faith investors have in central banks, El-Erian continued, should dissolve.
“This notion that we are in a steady state equilibrium on the economy and that somehow central banks can somehow repress all volatility, that notion has to dissipate in favor of the reality,” he said. “We’re seeing much more economic divergence and much less effective on the part of central banks.”
Cover Image: Copyright World Economic Forum (www.weforum.org)/Photo by Norbert Schiller
Read more by Wall St. Whisperer
