The US stock market snapped its longest run of weekly declines in two decades in part as investors latched onto hopes the Federal Reserve may ease up on hiking rates in the face of new economic data.
The Federal Open Market Committee will meet later this month with indications that US inflation is cooling. The core Personal Consumption Expenditures Index rose to 4.9% in April from 5.2% in March. The report highlighted investor hopes that the Fed might not be so aggressive in raising rates.
Policy makers should have started hiking rates nine months ago to put the economy in a better position for a soft landing or a recession, according to El-Erian.
The best you can hope for is a soft landing. What is the probability of that happening? The adviser said that it was not as high as he wanted it to be.
The most recent consumer price inflation report for April produced a headline reading of 8.3%, down from 8.5% in March but inflation was still sticking around 40-year highs. The first quarter GDP was worse than initially estimated by the Commerce Department.
The longest losing streak since 2001 ended this week with the S&P 50 0. The Federal Open Market Committee's March meeting minutes spurred the gains.
They said that moving quickly on rates would leave the FOMC well-positioned to assess the effects of policy firming and the extent to which economic developments warrant policy adjustments later this year.
El-Erian said that the Fed's decision to stop hiking rates in September would be an example of a stop-go pattern by the central bank. The idea of a Fed pause has been held up by other voices on Wall Street, but Goldman said the sell-off in stocks could find a bottom if the Fed indicates it is ready to stop tightening monetary policy.
Global equity funds experienced their largest inflow in 10 weeks this week and the summer rally bandwagon is growing, according to Bank of America. US equity funds experienced their biggest inflow since March. Despite a 32% decline in the value of their portfolios, retail investors were buying into the stock market downturn, according to Vanda Research.
El-Erian said there are people who are finding bargains and there are single-name bargains. He said that an upside technical reaction to a run of weekly losses is understandable.
I don't understand the idea that the Fed will be able to hike twice and then take it easy. If demand collapses, that's the only reason. If demand collapses, equities are not going to do well.
He pointed out the slide in stocks last week after Target missed earnings expectations due to inflationary pressures.
He said that Target had announced that they were being impacted not just on the cost side but also on the revenue side because of high inflation.
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