“Something is likely to break” as Friday’s US jobs report pushes the Federal Reserve to hold interest rates higher for longer, said Mohamed El-Erian, the chief economic adviser at Allianz SE and a Bloomberg Opinion columnist.
The data is “good news for the economy right now,” El-Erian said on Bloomberg Television, but it’s “bad news for the markets and for the Fed. The Fed is not going to welcome this report. Over the long term this may end up being bad news for the economy as well.”
Friday’s payrolls figures are “consistent” with his call for a possible recession, El-Erian said. “This is an economy that got used to ridiculously low interest rates and got used to liquidity injections. The regime change is happening really fast.”
The nonfarm payrolls release, which showed the US labor market added more than 330,000 jobs in September, compared with the 170,000 estimated by economists. August’s headline data was revised higher, while average hourly earnings growth increased 0.2% last month, the same as in August.
A resilient labor market has raised expectations for a rate increase from the Fed at the conclusion of its policy meeting this November, and led traders to push back the timing of future rate cuts as the US economy slows. On Friday, pricing in the swaps market pushed back expectations for the first 25 basis-point rate cut to September 2024, from July previously.
“It puts back on the table a hike for November,” El-Erian said. “Markets are having to internalize not just high for long, but higher for longer. When you fall behind right at the beginning of an inflation cycle, you pay the price when you get to the last mile.”
In the wake of the jobs data, yields on Treasuries from five- to 30-years soared more than 15 basis points on the day, with the 10- and 30-year rates heading back to the highest since 2007, before paring some of the advance. A Bloomberg gauge of the dollar rallied following the release.