El-Erian Warns Bond Market It's Underestimating March Fed OddsBy
Allianz adviser says he sees March chances at 50-60%
Futures indicate market-implied probability closer to 30%
Mohamed El-Erian, Allianz SE’s chief economic adviser, is warning traders not to get complacent about the prospect of a Federal Reserve interest-rate hike next month.
Given the minutes from the Fed’s Feb. 1 meeting and recent economic data, the market’s implied probability of an increase in March "seems too low," El-Erian tweeted Wednesday. He said a probability of 50 percent to 60 percent appears more appropriate.
Futures indicate traders aren’t nearly that confident, reflecting about a 34 percent probability that officials boost rates a quarter-point March 15, data compiled by Bloomberg show. It would be the third increase since December 2015, and traders are reluctant to price in the next hike in part because wage growth has slowed.
While the minutes showed many Fed officials saw a rate increase "fairly soon" if the economy was on track, policy makers expressed concern over potential headwinds from dollar strength and the uncertainty surrounding the outlook for fiscal stimulus. The market largely took the minutes as dovish -- the dollar fell while Treasuries gained.
El-Erian, also a Bloomberg View columnist, points to recent economic data as supporting a higher probability of Fed action.
The unemployment rate has been below 5 percent for nine straight months, and the 227,000 gain in jobs in January was the most in four months. But average hourly earnings rose 2.5 percent from a year earlier, the weakest since August.
Some traders may also be waiting on details of the Trump administration’s fiscal-stimulus plans.
"Given that the debate on the Committee revolves around the risk of a substantial undershooting of the longer-run unemployment rate, and the potential for inflation pressures to build, the inflation data are likely the key metrics to watch before the March meeting," Omair Sharif, an economist at Societe Generale SA, said in a note to clients after the minutes’ release. The minutes "do not indicate a sense of urgency to hike rates."
For El-Erian, the February jobs report, to be released March 10, will be significant.
The jobs report, especially wage growth, will have a "notable impact" on the Fed’s thinking at the March meeting, "one way or t’other," El-Erian said in a second tweet.