Economy: Turbulence Ahead as U.S. Flies Solo
Mar 11, 2015 5:00 AM EDT
By Mohamed A. El-Erian
It is tempting to come up with complicated reasons for the unusual and outsize moves in financial markets in recent days, including a sharp appreciation of the dollar, large volatility in stocks and precipitous drops in European government bond yields.
Yet the simplest explanation may well be the best one: The U.S. jobs report Friday confirmed the multidimensional decoupling taking hold in the global economy. The resulting divergence in prospects for economic performance and monetary policy -- in the U.S. and across countries -- has consequences for prices in the bond, equity and foreign-exchange markets, both in relative and absolute terms.
Despite sluggish wage growth, the persistence of strong employment increases confirmed that the U.S. economic recovery continues to broaden and that it's highly probable the Federal Reserve will start an interest rate hiking cycle by, or at, its September policy meeting.
As a consequence, U.S. equity markets are no longer being powered by the twin engines of an improving economy and hyper-stimulus monetary policy. Instead, a tug of war is playing out between the influences of the economy's fundamentals and probable policy decisions. The result is higher price volatility as rather small changes to expectations -- in either direction -- result in large market moves.
The decoupling isn't limited to the U.S. economy. The report showing strong employment in February added to the international divergence. This is particularly true of the systemic differences between Europe and the U.S.
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http://www.bloombergview.com/articles/2015-03-11/turbulence-ahead-as-u-s-flies-solo