By Mohamed El-Erian, chief economic advisor to Allianz
Given the rather quiet economic news flow away from Jackson Hole, market movements allow us to isolate the impact of what came out of the Symposium regarding the short-term outlook for Federal Reserve policy. Here are some observations on what generally constitute textbook market reactions:
1. Yields on shorter-term maturities have notably moved up, with 2-year US Treasuries now trading at 83 basis points compared to around 78 basis points immediately before Jackson Hole. This has contributed to what is now a 20 basis points rise over the last month, a sizeable move for such short maturity instruments; and it is consistent with market participants – rightly in my opinion – shifting up their expectations of interest rate hikes based on the string of comments made by Fed officials at Jackson Hole.
2. The dollar has strengthened against all major currencies, again consistent with a higher probability of Fed policy action. This has contributed to pressures on the commodity segment overall, with oil down more than 1 percent.
3. Financial stocks are out-performing. Again this makes sense as higher rates would tend to favor their expectations for their earnings.
4. Yields on longer maturity bonds have moved up by notably less than elsewhere on the yield curve. For example, the 30-year bond is up only 2 basis points in the last month. This continued flattening of the yield curve has been attributed to concerns about the US economic outlook and, an explanation that I think has greater merit, the notion that, beyond the short end, international influences are having a significant influence on Treasuries – and particularly the more fragile economic outlook in Europe and Japan, and the prospects for greater central bank stimulus there.
5. The overall stock market in the US is doing well, with major indices currently ½% higher. While this contrasts with is happening in Europe (where the German DAX and France’s CAC have fallen around ½%), it is consistent with the favorable US income growth numbers released this morning. Having said this, and given what came out from Jackson Hole, stock market behavior continues to suggest that, when push comes to shove, Fed officials will refrain from hiking rates and widening their divergence from central bank policy elsewhere around the world. I would not be so sure.
Mohamed A. El-Erian is the chief economic advisor to Allianz, the corporate parent of PIMCO where he served as CEO and co-CIO (2007-2014). He is Chair of President Obama’s Global Development Council and the author of two New York Times Best Sellers: the 2008 “When Markets Collide” and this year’s “The Only Game in Town.”