Submitted by Taps Coogan on the 3rd of April 2019 to The Sounding Line.
Enjoy The Sounding Line? Click here to subscribe.
Allianz chief economic advisor Mohamed El-Erian recently spoke with CNBC about what he believes caused the enormous difference in markets between Q4 2018 and Q1 2019, namely central banks
“My basic view is that the US economy is in a good spot. We are going to grow by 2.5% to 3% and the problem is outside. China’s PMI is encouraging, but did you see Germany today (April 1st)? Germany revised down to the worst numbers since 2012.”
“And yet the stock market there, Germany, is the biggest advancer in the European continent today too (April 1st)”
“Because they are thinking two things. One is ‘China matters’ and two is the ECB is going to be even more dovish. It’s about central banks. If you look at what happened in Q1 (2019) versus what happened in Q4 (2018), the only significant difference is that central banks got much more dovish and that’s what it’s been all about… Fixed income also had a very strong (first) quarter. And you know what? Yields on government bonds came down. All the traditional correlations failed once again. This is about liquidity, not fundamentals. That’s where the argument comes in for rate cuts. I don’t think you need them. Why? Because I think the US economy is in a good place… This is the big irony… and this is a problem for markets going forward: The Fed solidified its u-turn on March 20th hoping to get off the stage. Not to be in the spotlight. What do we find now? A massive tug-of-war. On the one hand the White House pressing for 50 basis point cuts. Not only do they say cut, but they specify how much they should cut. On the other hand you have Fed officials saying ‘not only are we unlikely to cut his year but hikes aren’t off the table.”
As we discussed here, the real economy only matters to financial markets to the degree to which it justifies continued monetary stimulus. In other words, bad news is becoming good news once again.
If you would like to be updated via email when we post a new article, please click here. It’s free and we won’t send any promotional materials.