U.S. credit markets are not showing the same optimism on the economy as U.S. equities, suggesting that the recession will run far longer than most expect, Mohamed El-Erian, the chief executive of bond giant Pacific Investment Management Co., said on Friday.
For the recent equity rally to continue, markets need a significant and sustained improvement in fundamentals that is unlikely to materialize given current data, El-Erian said in an interview.
Friday's release on the latest employment figures underscores his point, he said. U.S. employers slashed 663,000 jobs in March, lifting the unemployment rate to 8.5 percent, the highest since 1983.
Unfortunately, the already worrisome employment picture continues to deteriorate, El-Erian said. While the numbers are in line with Wall Street's expectation, persistently high monthly job losses and the accelerating rise in the unemployment rate will further dampen Main Street's consumption and animal spirits in an economy already facing considerable headwinds due to massive wealth destruction.
The Labor Department also revised January data to show non-farm job losses of 741,000 that month, the biggest decline since October 1949, as the economy battles a recession that has entered its 16th month.
The decline in non-farm payrolls in February was unrevised at 651,000.
Since the start of the recession in December 2007, the economy has shed 5.1 million jobs, with about two thirds of the losses occurring in the last five months, the department said.
In general, credit markets have not demonstrated the same sense of enthusiasm as the equity market, El-Erian said, adding corporate credit spreads are still elevated.
I suspect technical factors are in play (in the equities market), and have been over the last few days, he added. The weakening correlations suggest that fundamental drivers are being overwhelmed, for now, by short-term technical repositioning.
(Reporting by Jennifer Ablan; Editing by Chizu Nomiyama)