All eyes are on the May jobs report, which will get released at 8:30 AM ET.
PIMCO’s Mohamed El-Erian says that “a lot is riding on U.S. jobs data” in his latest piece in the FT.
“With global equities selling off, tepid job creation would end up creating more turbulence and uncertainty,” he writes. “And reaction to something else, that is a number on either side of the distribution of possible outcomes, depends in large part on the faith that investors retain in the unquestioned powers of central banks.”
El-Erian has long argued that liquidity unleashed by the world’s central banks has caused asset prices to disconnect from asset values based on fundamentals (see El-Erian’s hand gestures).
But the market sell-off seems to be bringing prices back to reality. It also shows that investors are becoming less willing to “ride the central bank policy wave,” to use El-Erian’s words.
All of this comes as the Fed has begun to talk about “tapering” quantitative easing, which could cause interest rates to start rising.
“The next 3-4 U.S. monthly employment reports will have a big say on how the majority view evolves from here,” said El-Erian, who offers three nonfarm payroll number scenarios. Here they are from FT.com: Specifically:
- “A tepid outcome – i.e., average monthly job creation of 125,000 to 200,000 – would fuel greater anxiety about both a growth handoff and policy effectiveness, placing greater pressure on the current artificial price levels of many riskier assets.”
- “A strong outcome – a monthly average in excess of 200,000 – would signal an ongoing growth handoff, enabling fundamentals to validate over time current prices as well as provide the scope for an orderly tapering of experimental policies.”
- “A weak outcome – a monthly average below 125,000 – would lead to a tug of war between the effects of growth disappointments and expectations that central banks have no choice but to venture even deeper into experimental policies, and stay there even longer. (I suspect that the former would ultimately prevail when it comes to market impact.)”
Economists expect 165,000 today. That’s right in line with El-Erian’s tepid outcome / greater anxiety scenario.
Read El-Erian’s whole piece at FT.com. Follow the jobs report live at BusinessInsider.com.
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