Gross Says Jobs Report Suggests Fed Won’t Taper Bond Buying
Bill Gross, manager of the world’s biggest bond fund, said the Federal Reserve is unlikely to reduce its asset purchases after the unemployment rate climbed from a four-year low in May.
“I don’t think today’s report says anything about tapering at all with unemployment going higher and metrics in terms of the work week and wages being very dour,'' Pacific Investment Management Co.’s founder Gross said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Mike McKee. Fed Chairman Ben S. Bernanke “won’t taper. But I think ultimately in order to get a more normal economy, the Fed has got to move interest rates up to more normal levels.”
Payrolls rose 175,000 last month after a revised 149,000 increase in April that was smaller than first estimated, Labor Department figures showed in Washington. The median forecast in a Bloomberg survey called for a 163,000 gain. The unemployment rate rose to 7.6 percent from 7.5 percent.
Bernanke said during a response to questions following congressional testimony on May 22 that the Fed could consider reducing the $85 billion in monthly Treasury and mortgage debt purchases within “the next few meetings” if officials see signs of sustainable improvement in the labor market.
Economists cut their estimates for how much the Fed will reduce the amount of its monthly asset purchases, a Bloomberg survey shows.
Fed policy makers trimmed their so-called quantitative easing program to $65 billion a month at the Oct. 29-30 meeting of the Federal Open Market Committee, from the current level of $85 billion, according to the median estimate in the survey of 59 economists this week. In a similar survey before the Fed’s April 30-May 1 meeting, economists expected the Fed to cut purchases to $50 billion in the fourth quarter.
While Americans are finding work in May, wage gains aren’t picking up. Average hourly earnings were little changed at $23.89 in May after $23.88 in the prior month. They were up 2 percent in 12 months ended in May, the same as in April.
“When I see wages flat versus 0.2 percent last month, and see the work week flat, and see unemployment going up, I see GDP in the U.S. of 1 to 2 percent,” Gross said. “These employment problems are structural in nature. They are due to globalization, demographics, and to technology, the race against the machine. From a monetary standpoint you recognize that at some point the quantitative easing and the low interest rates are distorting capital markets which are critical to the economy going forward.”
Global bonds had their worst month in nine years in May, led by Treasuries, as investors sold debt in anticipation central banks will eventually scale back their unprecedented asset purchases. The selloff left Gross’s Pimco Total Return Fund (PTTRX), the world’s biggest mutual fund with $293 billion in assets and one of the best performing, trailing 89 percent of peers in the past month as it declined 2.1 percent.
“This is a muddled middle number when it comes to the Fed and it comes to markets,” Mohamed El-Erian, Pimco’s chief executive officer and co-chief investment officer with Gross, said in an separate interview on Bloomberg Television’s “In the Loop” with Betty Liu. “It’s not strong enough to give the Fed assurances of this handoff that everybody wants, the growth handoff. But it’s not weak enough for it to say it’s going to increase QE a lot. The Fed is going to look left and right and left and right and we suspect it is going to be frozen.”
Gross, who has predicted that the three-decade bull market in bonds probably ended at the end of April, has raised holdings of U.S. government debt in his Pimco Total Return to 39 percent as of April 30, the highest level since July 2010.
Gross’s fund suffered the first client withdrawals since 2011 in May, with clients pulling $1.3 billion from the fund, according to estimates from Morningstar Inc. in Chicago. The fund declined 0.6 percent this year, trailing 53 percent of peers, according to data compiled by Bloomberg. Over the past five years, Gross’s fund has advanced 7.6 percent, ahead of 94 percent of rivals.
“We’ve tried to de-risk” and “to reduce carry to reduce risk, not just to the 10-year Treasury, but relative to the fed funds rate at 25 basis points,” Gross said. “There is too much leverage, not just in global economies, but in the financial system and too little return. As we’ve seen over the last few months, once currency stability is destructive then the funding of these traders are at risk.”
Carry trades are losing the most money in a year on speculation the Fed will pare stimulus measures and make it harder to profit from borrowing in low-interest-rate currencies to buy higher-yielding assets.
Deutsche Bank AG’s G10 FX Carry Basket index fell 3.3 percent last month, the biggest decline since May 2012. Traders who made 2.2 percent in March by selling U.S. dollars and investing in assets denominated in the Australian currency in May lost 7.5 percent.
The carry trade seemed like a sure bet for much of 2012 as weak economic data in regions including the U.S., Japan and the euro region led to speculation among investors that central banks would keep rates low and money pouring in to boost growth. With those expectations waning, volatility is increasing, which is bad for the carry trade because it depends on predictable interest rates across jurisdictions.
It has become more difficult for investors to exit trades, according to Gross, raising the risk of holding higher-risk assets.
“It’s definitely not business as usual,” Gross said. Liquidity as measured by bid-to-ask spreads is getting “wide, wide and wider” while the size of every bid for debt is getting “less, less and less. It’s not a panic mode necessarily.”
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