- Mohamed El-Erian sees the recent stock rally, after the fifth fastest post-WWII correction, as having absorbed much of a growth scare and technical sell-off, with sustainability tied to containing growth fears and the Fed maintaining two rate cuts amid rising inflation concerns.
- He flags a “whiff of stagflation” with growth near a 1% stall speed and surging inflation expectations, while the OECD’s cut to 1.6% U.S. growth for next year suggests a prolonged slowdown driven by Trump tariffs.
- Despite a weaker dollar and global trade war risks, El-Erian favors U.S. investments for their structural edge, though he notes a 50-50 split on whether tariffs and deregulation will ultimately strengthen or erode that advantage.
Mohamed El-Erian, Allianz’s Chief Economic Advisor, offered a nuanced take on CNBC’s “Closing Bell Overtime” on Monday as stocks rallied for a second day, with the U.S. economy facing a mix of growth scares and inflationary pressures. He views the recent market correction – the fifth fastest since World War II – as having largely worked through its technical overhang, driven initially by a growth scare and then exacerbated by fast money exiting crowded positions, leaving the focus on whether growth fears will ease and if the Federal Reserve’s anticipated rate cuts will materialize. With consumer sentiment souring and growth forecasts likely to be trimmed in coming weeks, El-Erian believes much of this is already priced into markets, though the Fed’s Wednesday meeting looms large, with markets banking on two rate cuts rather than a single one, scrutinizing language on price dynamics amid rising inflation expectations.
The specter of stagflation – a term El-Erian dubs a “whiff” rather than a full-blown reality – hangs over the discussion, fueled by survey data showing weaker activity and higher inflation, a tricky duo for the Fed to navigate. He pegs 1% GDP growth as the economy’s stall speed, a threshold to watch as households cling to income confidence and businesses wrestle with a wait-and-see stance, while inflation’s surge poses a thornier challenge if growth softens further. The OECD’s latest outlook, slashing next year’s U.S. growth projection to 1.6%, surprised El-Erian, signaling a prolonged economic slog rather than a fleeting bump, a view not yet fully echoed by others, amplifying concerns over Trump-era tariffs dragging down growth in the U.S., Canada, and Mexico while stoking inflation and risking a broader trade war.
El-Erian remains cautiously optimistic about U.S. investment appeal, despite a weakening dollar, falling crude oil prices, and pressured yields, arguing that the nation retains structural advantages over Europe and a stagnating China. The debate over whether tariffs, deregulation, and initiatives like DOGE will sharpen or erode America’s edge splits opinion 50-50, but he sees the U.S. as still dominant, even if its pristine investment thesis has dulled. With the Fed’s next moves pivotal – balancing a hoped-for two cuts against inflation worries – and growth teetering near 1% if conditions worsen, El-Erian frames the current rally as fragile yet grounded, with the U.S. economy’s path hinging on confidence, policy clarity, and global trade dynamics.
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