Tags: Pimco | El-Erian | Fed | Taper

Pimco's El-Erian: Fed Less Likely to Taper in September

Sunday, 04 Aug 2013 11:45 AM

Lower-than-forecast U.S. employment growth reduces the probability of the Federal Reserve announcing plans to decrease its bond-buying program next month, according to Pacific Investment Management Co.’s Mohamed El-Erian.

“If they’re going to taper, they have to taper not just because the economy is improving, but because they’re worried about the collateral damage,” El Erian, chief executive and co-chief investment officer at the world’s biggest manager of bond mutual funds, said Friday on Bloomberg Television’s “In the Loop” with Betty Liu. “I think net-net, today makes it less likely they taper in September.”

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The 162,000 increase in payrolls last month was the smallest in four months and followed a revised 188,000 rise in June that was less than initially estimated, Labor Department figures showed Friday. The median forecast of 93 economists surveyed by Bloomberg called for a 185,000 gain. The unemployment rate dropped to 7.4 percent from 7.6 percent.

The central bank has been buying $85 billion of bonds each month since January to put downward pressure on interest rates, and policy makers are discussing whether the economy has improved enough for them to start reducing the purchases. The Fed maintained its program at last week’s policy meeting.

The Fed’s “job is more complicated that you thought it was. And it was already complicated,” El-Erian said. “They are driving through a fog and trying to figure out the road.”

‘Modest Pace’

The benchmark U.S. 10-year note yield fell 9 basis points, or 0.09 percentage point, to 2.62 percent at 11:30 a.m. New York time Friday, Bloomberg Bond Trader data showed. The price of the 1.75 percent note due in May 2023 gained 23/32, or $7.19 per $1,000 face amount, to 92 17/32.

“The headlines tell you the labor market continues to improve but at a frustratingly modest pace,” El-Erian said. “The internals — earnings, long term employment, participation rate, youth unemployment — tell you the situation is very fragile.”

Average hourly earnings fell 0.1 percent to $23.98 in July from the prior month, and were up 1.9 percent over the past 12 months. The average work week for all workers fell to 34.4 hours from 34.5 hours. The number of discouraged workers, those not looking for a job because they don’t believe one is available, climbed to 988,000 in July from 852,000 a year ago.

El-Erian reiterated the forecast of Bill Gross, Pimco’s founder and co-chief investment officer, that the Fed won’t raise its target rate for overnight loans between banks until 2016. The Federal Open Market Committee has kept the benchmark interest-rate target at a record low zero to 0.25 percent since 2008 to support the economy.

Fund Returns

Fed funds futures show a 43 percent probability that the central bank will raise borrowing costs in January 2015 for the first time since the 2008 financial crisis.

The proportion of U.S. government debt in Total Return, the world’s biggest bond fund, rose to 38 percent in June, from 37 percent in May, according to data on Newport Beach, California- based Pimco’s website.

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Over the past five years, the $261 billion Total Return Fund has returned 7.4 percent, outperforming more than 91 percent of competitors. It gained 0.4 percent over the past year, placing it in the 60th percentile of its category, according to data compiled by Bloomberg. Pimco, a unit of the Munich-based insurer Allianz SE, managed $2.04 trillion in assets as of March 31.

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Lower-than-forecast U.S. employment growth reduces the probability of the Federal Reserve announcing plans to decrease its bond-buying program next month, according to Pacific Investment Management Co.'s Mohamed El-Erian.
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Sunday, 04 Aug 2013 11:45 AM
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