US stocks fall as investors fret over Fed tapering and economic recovery outlook

Stock Market Traders
  • US stocks fell Thursday as investors considered the impact of the Fed tapering asset purchases this year.
  • The number of Americans filing for unemployment insurance dropped to a new pandemic-era low last week.
  • Oil prices fell for the sixth straight day; gold was flat.

US stocks traded lower on Thursday, led by the Dow Jones industrial average, as investors fret over the possibility of tapering by the Federal Reserve towards the end of this year and mull the prospects for the economic recovery as Delta variant cases surge.

The Dow slipped nearly 200 points while the benchmark S&P 500 Index traded lower for the third straight third day.

Minutes from the Fed’s July meeting released on Wednesday indicate that the central bank may start tapering asset purchases before the end of the year.

Here’s where US indexes stood at the 9:30 a.m. ET open on Thursday:

The Fed, in response to the pandemic recession, began its bond-buying purchase more than a year ago in a bid to stabilize credit markets. But now, central bankers indicated that the employment benchmark they are observing to scale back support “could be reached this year,” according to minutes.

“The Federal Reserve should start taking away the punchbowl by tapering after the next strong jobs report, potentially as soon as early September,” Richard Saperstein, CIO at Treasury Partners, said in a note. “After some initial stock market volatility, the market will likely appreciate the Fed’s tapering.”

Saperstein added that market sentiment is growing less exuberant as it digests rising COVID-19 cases.

All eyes now will be on the high-profile annual Jackson Hole conference of central bankers from August 26-28. Some though, including economist Mohamed El-Erian, think this will offer little direction. Instead, El-Erian said he is looking to the Federal Open Market Committee meeting on September 22 for more signals.

US Treasury yields slipped, with the benchmark 10-year note hovering around 1.23% after hitting a session high of 1.30%.

In economic news, the number of Americans filing for unemployment insurance dropped to a new pandemic-era low last week.

Weekly jobless claims totaled an unadjusted 348,000 last week, the Labor Department said, lower than the 363,000 figure economists surveyed by Bloomberg expected. The print marked a fourth straight decline and places claims at their lowest level since March 14, 2020.

Oil prices fell for the sixth day. West Texas Intermediate crude was down as much as 3.06%, to $63.46 per barrel. Brent crude, oil’s international benchmark, dropped 2.87%, to $66.27 per barrel.

Gold was trading flat, down by 0.36%, to $1,787.14 per ounce.

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Mohamed El-Erian says the stock market won’t react to tapering speculation until the Fed’s ‘Big 3’ starts to take it more seriously

Federal Reserve Vice Chairman Richard Clarida, Federal Reserve Chairman Jerome Powell, and John Williams, Federal Reserve Bank of New York CEO John Williams (L-R)
Federal Reserve Vice Chairman Richard Clarida, Federal Reserve Chairman Jerome Powell, and John Williams, Federal Reserve Bank of New York CEO John Williams (L-R)

  • Economist Mohamed El-Erian said the market has not reacted to tapering speculation because the Federal Reserve’s “Big Three” hasn’t directly discussed it.
  • El-Erian was referring to Fed Chair Jerome Powell, Fed Vice Chair Richard Clarida, and Fed New York CEO John Williams.
  • “The market is still conditioned by the notion that the Fed … will not taper,” he told CNBC.
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Despite speculation that the Federal Reserve may tighten its monetary policies sooner than expected amid a robust economic rebound in the past months, the market has not reacted simply because the “Big Three” hasn’t spoken, according to Mohamed El-Erian on Monday.

“This migration to ‘let’s get going’ is from below,” El-Erian told CNBC Monday, referring to various Fed officials who have weighed in on the central bank’s asset purchases. “So as long as the ‘Big Three’ aren’t saying it, the market is not going to be listening to anything else.”

El-Erian was referring to Fed Chair Jerome Powell, Fed Vice Chair Richard Clarida, and Fed New York CEO John Williams.

“The market is still conditioned by the notion that the Fed … will not taper,” he told CNBC. “Why? Because it has been so influenced by what happened in 2013 the taper tantrum, from what happened in the fourth quarter of 2018 when the Fed was forced into a very embarrassing U-turn.”

The 2013 taper tantrum was when collective panic prompted US Treasury yields to spike while the 2018 reversal was when the Fed signaled several rate hikes for that year then slashed them to none.

The Allianz and Gramercy advisor has for months been reiterating that he thinks the Fed should have tapered already given the inflationary setup.

Still, El-Erian thinks little to no direction will be offered during the high-profile annual Jackson Hole conference of central bankers from August 26 to 28. As for the Federal Open Market Committee meeting on September 22, he is a bit more hopeful.

“I think it’s really important for the chair to regain control of the narrative, otherwise he’s going to have a very split FOMC,” he said.

El-Erian, who is also the president of Queens’ College, Cambridge University, did add that once the Fed does taper assets, he thinks the market will not collapse.

“You will get some pullback, and you should, because we are at bubblish levels in certain places because of this massive liquidity, but I don’t think this is a collapsed situation,” he told CNBC. “This is a ‘let’s get more sober’ situation.”

El-Erian then discussed the two biggest risks he sees in the market right now: a big policy mistake for “not doing anything” or a market accident due to excess liquidity.

“If you look at really what the big risk to the economies are it is if they do not taper because then you increase tremendously … the high likelihood of this policy mistake or market accident,” he said.

The central bank slashed rates to historic lows at the start of the pandemic to stimulate economic activity and has signaled its intention of keeping interest rates unchanged until 2023.

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Mohamed El-Erian says the Fed should be tapering already amid inflationary signals – and recommends buying tech stocks in a rising-price environment

Mohamed El-Erian, Chief Economic Adviser of Allianz appears on a segment of "Mornings With Maria" with Maria Bartiromo on the FOX Business Network at FOX Studios on April 29, 2016 in New York City.
  • The Federal Reserve should already be tapering asset purchases amid inflationary signals, Mohamed El-Erian said Monday.
  • “The Fed is late,” he told CNBC. “They are going to be very dovish for very long. They’ve already proven it.”
  • The famed economist also said he prefers to be in the technology sector given the rising-price environment.
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The Federal Reserve should already be tapering assets purchases amid inflationary signals, Mohamed El-Erian said on Monday ahead of the figures for July CPI due this week. The famed economist also said he prefers to own tech stocks in such a rising-price environment.

“The Fed is late. It should have started tapering already,” El-Erian told CNBC on Monday. “I think the market continues to believe that the Fed will hold out from tapering as long as possible and, therefore, will not raise rates for a while. They are going to be very dovish for very long. They’ve already proven it.”

Given this inflationary setup, the chief economic adviser at Allianz laid out two reasons why he favors tech stocks.

First, he noted that tech companies have proven especially adept at navigating changes in a COVID-impacted environment. Some such examples are Facebook, Apple, and Microsoft, which saw explosive growth during the height of the pandemic.

Secondly, he said these very same firms are less impacted by inflation, and can keep revenues afloat better than any other industry.

“So, they have a revenue advantage and they have a cost advantage, and therefore they have a very strong earnings advantage,” he said.

El-Erian also touched on July’s stellar jobs report, which saw the US economy adding 943,000 payrolls in that month.

“The wage numbers on Friday’s report were really good for the US economy” but were “less good for input costs,” El-Erian told CNBC. “If the inflation proves to be tamed, then you’ve got the Goldilocks.”

A Goldilocks economy, he explained, comes from the combination of both approaches.

“Top-down has been continued ample, predictable liquidity,” he told CNBC. “Bottom-up has been strong earnings, and that has powered the markets through all sorts of things.”

El-Erian did say inflation will eventually “exhaust itself” though on a “much longer timeframe than what the Fed expects right now.”

He’s repeatedly pointed to people’s lack of understanding of how it is already spreading throughout the economy and has countered the Fed’s longstanding narrative that inflationary pressures are temporary.

The central bank slashed rates to historic lows at the start of the pandemic to stimulate economic activity and has signaled its intention of keeping interest rates unchanged until 2023.

Read more: Credit Suisse says buy these 21 growth stocks now as it’s the perfect time for them to thrive while rates fall – and to minimize the risk of losses

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There is a fundamental misunderstanding of inflation and its spread throughout sectors of the economy proves it is not isolated or transitory, Mohamed El-Erian says

Mohamed El-Erian, Chief Economic Adviser of Allianz appears on a segment of "Mornings With Maria" with Maria Bartiromo on the FOX Business Network on April 29, 2016 in New York City.
Mohamed El-Erian.

  • Mohamed El-Erian said there is a fundamental misunderstanding of inflation because few people have lived through it.
  • “I always laugh when people say, oh, it’s isolated, it’s transitory,” El-Erian told CNBC on Monday.
  • He also disagreed with the Federal Reserve’s view that inflation is transitory.
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Economist Mohamed El-Erian in an interview Monday took aim at assessments of inflation that describe rising prices as “transitory,” stating that there is a fundamental misunderstanding of what inflation is and how it is already spreading throughout the economy.

“I always laugh when people say, oh, it’s isolated, it’s transitory,” Allianz’s chief economic adviser told CNBC. “I think there’s a fundamental misunderstanding about inflation today because … most people haven’t lived through it for a long time and certainly most traders on Wall Street haven’t traded through it.”

El-Erian pointed to the surge in used cars prices to their highest in more than 60 years, which has been followed by an increase in prices of new cars, and a rise in the price of rental cars. This, he said, shows inflation is not contained.

“There is a logic to these inflation chains. They take time, and most people, unfortunately, haven’t seen them,” El-Erian told CNBC. “So they think everything’s isolated. Actually, it’s not. It’s interconnected.”

El-Erian, who is also the president of Queens’ College, Cambridge University, countered the longstanding narrative of the Federal Reserve that inflationary pressures are temporary.

The central bank slashed rates to historic lows at the start of the pandemic to stimulate economic activity and has signaled its intention of keeping interest rates unchanged until 2023.

Fed Chair Jerome Powell has repeatedly said that inflation will pass as the economy settles into a new normal. However, updated rate-hike projections six weeks ago signal that the central bank could see inflation posing a larger risk than initially thought. Powell is expected to issue a new statement this week, on July 28 at 2 p.m. ET.

“I don’t expect fireworks, El-Erian said. “The Fed has adopted a new framework that is backward-looking. They’re no longer forecast-based; they’re outcome-based.”

El-Erian also maintained that inflation will continue to run higher.

“The big question for me is not whether inflation will be higher than what the Fed expects,” he told CNBC. “It is whether the system is wired loosely enough to adjust to that – and that’s what we going to learn.”

The Consumer Price Index rose 0.9% between May and June, much more than the consensus estimate of 0.5%.

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Mohamed El-Erian says the supply bottlenecks causing inflation aren’t going away anytime soon

Mohamed El-Erian
  • Mohamed El-Erian said supply bottlenecks will continue in the near term in a CNBC interview on Monday.
  • The chief economic advisor at Allianz criticized the Fed for its lack of “humility” and “open-mindedness.”
  • “These bottlenecks that have to do with raw materials, other inputs, and labor are not going away anytime soon,” El-Erian said.
  • See more stories on Insider’s business page.

Mohamed El-Erian, the chief economic advisor for Allianz and president of Queen’s College, Cambridge, sat down with CNBC on Monday to talk markets and the topic of inflation quickly came up.

El-Erian said that he believes supply bottlenecks causing inflation will persist.

“I’m of the view that these supply disruptions, these bottlenecks that have to do with raw materials, other inputs, and labor are not going away anytime soon,” El-Erian said.

The chief economic advisor for Allianz added that based on conversations he is having with CEOs, there is considerable input pressure from rising commodity prices on corporations that are going to be passed onto the consumer in the form of higher prices.

“The thing I’m hearing most commonly from companies’ CEOs is: we’re having problems securing inputs, and we’re looking to increase prices and wages,” El-Erian said.

In El-Erian’s view, over the short-term, the Fed won’t change its position that inflation is transitory because they have stated they need “unambiguous evidence” of inflation before tapering asset purchases or increasing interest rates.

El-Erian argued the Fed’s conviction that inflation is transitory comes despite evidence from every corner of the market.

He also noted that the University of Michigan’s index of consumer sentiment released last Friday showed a sharp increase in consumers’ expected inflation rate for the next year in May(4.6% compared with 3.4% in April).

The Consumer Price Index posted its largest most month-over-month jump since 2009 in April as well, while “core” inflation jumped the most since 1982.

Further, El-Erian pointed out that the Bank of Canada and the Bank of England have already started to discuss addressing inflation via tapering quantitative easing policies, and said he worries the fed might be “late” to action.

When asked what would happen if the Fed is “late,” El Erian said, “the market may start getting nervous, and then the Fed will have to slam on the breaks. The last thing we need is the Fed slamming on the breaks because experience shows when that happens, we end up with a recession.”

El-Erian went on to criticize the Fed for its lack of humility and open-mindedness in crafting policy.

“Why is it that you can dismiss all this evidence both from the top-down and bottom-up and hold onto a conviction? You should be more open-minded have a bit more humility about the fact that we don’t understand well supply bottlenecks,” El-Erian said.

“Economists typically lag when it comes to supply bottlenecks,” he added.

Read more: Goldman Sachs says these 23 stocks have strong pricing power and rock-solid margins that could protect against soaring inflation

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Top economist Mohamed El-Erian warns of a jobless recovery – and recommends investors ride the liquidity wave

Mohamed El-Erian
Mohamed El-Erian.

  • Mohamed El-Erian warned the US economy could rebound without a jobs recovery.
  • The Allianz economist suggested workers might lack the skills employers want.
  • El-Erian predicted an “everything rally” and advised investors not to cash out.
  • See more stories on Insider’s business page.

Leading economist Mohamed El-Erian raised the prospect of a jobless recovery and advised investors to hold their nerve in a CNBC interview this week.

Pointing to the disappointing US employment data last week, Allianz’s chief economic adviser questioned whether workers have the necessary skills to fill the jobs available. Employers may have embraced new technologies such as AI, robotics, and automation faster than the labor market, he added.

“That’s the biggest fear we have because what we don’t want is a jobless recovery,” El-Erian said. “There’s a massive question mark as to how many will actually be able to get jobs again, or be willing to get jobs again.”

He cited improved unemployment benefits, insufficient childcare, and school closures as other potential drivers of the weak jobs data. If people are earning more by staying home instead of working, and if parents can’t leave their kids at daycare or at school, they might not be filling the jobs available.

El-Erian also recommended investors resist the urge to cash out as inflation fears and signs of market excess mount. “You will get the everything rally,” he predicted, arguing that monetary and fiscal stimulus will continue pumping liquidity into markets and boosting asset prices in the weeks to come.

“Leon Cooperman captured it really well: “Even if you’re worried about the world, you want to be a fully invested bear,'” he added, referring to the billionaire investor’s current stance on markets.

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Mohamed El-Erian says the Archegos blow up is a ‘one-off’ but it may lead to tightening financial conditions as banks become more cautious

Mohamed El-Erian
Mohamed El-Erian, Chief Economic Advisor of Allianz and Former Chairman of President Obama’s Global Development Council, speaks during the Milken Institute Global Conference in Beverly Hills, California, U.S., May 1, 2017.

  • Mohamed El-Erian said the Archegos blow-up is a “one-off” in a CNBC interview Monday.
  • The Allianz chief economic adviser added he doesn’t believe it will lead to a “fast-moving contagion” in the markets.
  • El-Erian did warn investors about “tightening financial conditions” if banks become more cautious as a result.
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Mohamed El-Erian says the Archegos blow-up is a “one-off,” but it may lead to a tightening of financial conditions as banks become more cautious.

Over the weekend reports came out that showed Archegos Capital Management had been behind roughly $20 billion worth of block sales of companies like ViacomCBS and several Chinese tech stocks including Tencent and Baidu.

The sales came after the hedge fund failed to meet margin calls from Credit Suisse, Nomura, and Goldman Sachs.

Queen’s College President and Allianz chief economic advisor told CNBC on Monday that he believes the incident was a “one-off,” caused by Archegos’ “highly concentrated positions”, “massive leverage”, and “derivative overlay on top of that.”

El-Erian said that he doesn’t see a “fast-moving contagion” spilling over and creating a significant market sell-off, adding that “for now it looks contained.”

The Allianz chief economist did say investors should be keeping an eye on “slower-moving contagion forces” which might cause a “tightening in financial conditions” forcing banks to become more cautious.

“There’s been so much liquidity sloshing around the system that there has been excesses and we’ll get fender benders like this one, but what we don’t want is a pile-up, and that’s why it’s really important to look at these slow-moving contagions,” El-Erian said.

El-Erian said he hoped the Archegos blow-up would lead to “better discipline in the marketplace because we’ve lost a lot of discipline.”

He added that Archegos’ positions, overall, are a “small” portion of the market, but said it could cause banks to make changes.

“I can tell you that in a lot of investment houses right now, and banks, people are being asked look how we are positioned, who are we exposed to, do we have enough margin, is the collateral moving or not, and all that causes somewhat of a slowdown in the system,” El-Erian said.

When asked what caused Goldman Sachs to force the liquidation when it did, the Queen’s College President said that “price action”, “how big was the margin overall”, and desire to move first and catch other banks “offsides” was the reason Goldman made its liquidation call.

Goldman Sachs told Bloomberg that its losses from the Archegos liquidation were “immaterial” while Nomura and Credit Suisse both face “significant” losses after the blow-up.

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Stocks are in a ‘rational bubble’ as long as investors remain confident in continued Fed support, economist Mohamed El-Erian says

Mohamed El-Erian
  • Mohamed El-Erian told CNBC stocks are in a “rational bubble” and asset prices will continue to rise as long as the Federal Reserve signals to investors that it will continue to support the markets. 
  • “It’s rational because the Fed and the ECB keep on signaling that they will continue to inject massive liquidity, and as long as the market is confident that that’s the case, it will drive prices higher,” the Allianz chief economic adviser said. 
  • El-Erian said that the US will continue to see a contrast between what the market is doing and what the broader economy is indicating because of the liquidity in the market.
  • Visit Business Insider’s homepage for more stories.

Mohamed El-Erian told CNBC on Wednesday stocks are in a “rational bubble” at the moment and asset prices will continue to rise as long as the Federal Reserve signals to investors that it will continue to provide support for the markets.

“This is not an irrational bubble. This is a rational bubble,” the Allianz chief economic adviser said. “It’s rational because the Fed and the ECB keep on signaling that they will continue to inject massive liquidity, and as long as the market is confident that that’s the case, it will drive prices higher.”

Typically, a stock market bubble is created when asset prices surge to levels that greatly exceed the their intrinsic value. Legendary investor Jeremy Grantham said on Tuesday that the stock market is in a  “fully-fledged epic bubble,” driven by extreme overvaluations, explosive price increases, frenzied issuance, and “hysterically speculative investor behavior.” 

For El-Erian, there is a rational reason why stock prices keep going up, and it’s investor confidence in support from the Federal Reserve.

Read more:Deutsche Bank says buy these 14 beaten-down financial stocks poised for a bullish recovery from 2020’s ‘savage sell-off’ – including one that could rally 30%

Stock prices ballooned in 2020: the S&P 500 gaining 16%, while the tech-heavy Nasdaq soared 43%. El-Erian said there’s so much liquidity “sloshing around the system,” that stock prices will continue to move higher this year.

The result is that stock prices continue to rise despite political and economic turmoil outside of Wall Street.  On Wednesday as protesters stormed the US Capitol building, the stock market remained unbothered. The Dow Jones closed at a record high, while the S&P 500 closed up 0.5%. 

El-Erian said that the US will continue to see a contrast between what the market is doing and what “conditions on the ground” are saying because of the liquidity in the market.

Also on Wednesday, the ADP monthly employment report revealed that the US lost 123,000 private payrolls in December. The reading marks the first contraction in nationwide hiring since April. El-Erian said that the report was a “big miss” and demonstrates the “power of liquidity.” 

 

 

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