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Key Economic Data May Leave Markets Unfazed

Mohamed A. El-Erian

(Bloomberg Opinion) -- Every once in a while, a week comes along that that offers abundant data that should be greatly significant for markets, but aren’t — because investors and traders care only about how much liquidity central banks inject. This could be such a week, bringing continuing frustration for those who focus on economic fundamentals.

The influential data flow will begin with Tuesday’s release of the Chinese Purchasing Managers Index. These numbers will illuminate pressures facing the Chinese economy that intensify the tug of war between an immediate need for greater stimulus measures and a longer-term need to reorient growth engines.

The message in China’s PMI data is also likely to contrast with the most visible U.S. economic data: Friday’s jobs report. That can be expected to show a continued rise in employment, and wage increases remaining above 3% — confirming the message in last week’s preliminary estimate for GDP growth that the American consumer remains an important and reliable driver of the economy.

The difference in the two countries’ data highlights the continuing divergence between the most systemically important economies. This reality has pushed the dollar higher. It has also influenced the American hard-line approach to trade policy.

When trade negotiations resume in Beijing on Tuesday, the U.S. can be expected to continue to press its advantage. But the best that could emerge from these discussions would be a longer cease-fire that precludes further U.S. tariffs and corporate restrictions on China. 

With little prospect of either a negotiation breakthrough or a collapse in talks, the Federal Reserve, on Wednesday, will probably announce a 25 basis-point cut in interest rates. It will come wrapped in language that keeps open the possibility of further dovish measures in the months ahead, adding to a remarkable policy U-turn in the past eight months.

The Fed decision will disappoint market participants wanting a 50 basis-point cut to further boost record-high stock prices and drive down already-low interest rates, and it will puzzle the traditionalists who like Fed policy action to be guided more by economic rationale. As European Central Bank President Mario Draghi inadvertently revealed in his press conference last Thursday, policymakers are far from united, and many are uncomfortable with markets driving them toward actions that are insufficiently supported by data and policy conviction. And for good reason. There’s increasing recognition that persistently dovish central banks put future financial stability at risk, and that their short-term stimulus measures are ever less effective in promoting real and nominal growth. 

Also this week, the Bank of England’s Monetary Policy Committee will meet in the face of an even more complex economic and policy environment. On the one hand, the immediate growth and investment outlook is more uncertain due to the higher probability of a hard Brexit with Boris Johnson in 10 Downing Street. On the other hand, with the weaker pound, this central bank cannot rule out a possible rise in inflation in the short term.

Whatever unfolds this busy week, two contrasts are likely to persist. First, key data releases and policy meetings will fail to lift the extraordinary uncertainty in the global economy. And second, markets will ignore the competing signals, confident that central banks will continue to insulate them from economic reality.

To contact the author of this story: Mohamed A. El-Erian at melerian@bloomberg.net

To contact the editor responsible for this story: Mary Duenwald at mduenwald@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Mohamed A. El-Erian is a Bloomberg Opinion columnist. He is the chief economic adviser at Allianz SE, the parent company of Pimco, where he served as CEO and co-CIO. He is president-elect of Queens' College, Cambridge, senior adviser at Gramercy and professor of practice at Wharton. His books include "The Only Game in Town" and "When Markets Collide."

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