Pimco's Erin Browne Says Rates, Equities 'Singing From Different Hymn Books' — Thinks Both Can't Be Right

Zinger Key Points
  • Browne said rates market is starting to price-in the economy is heading towards a recession.
  • Equities, however, still are priced for very rich valuations and continued growth, she said.
  • Browne pointed out that both markets can't be right at the same time.

Pimco Multi-Asset Strategies Portfolio Manager Erin Browne reportedly said that rates and equities are singing from different hymn books currently.

What Happened: Browne said that while the former is pricing-in accelerated rate cuts during second half of this year and into 2024, equities are priced for rich valuations. Browne told Bloomberg TV this indicates the rates market is starting to price-in the economy and is heading towards a recession.

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"Equities, however, still are priced for very rich valuations, continued growth and expansion this year and even more so in 2024, and are really not focused on the fact that we are heading into a recession. So, I don’t think both markets can be right at the same time. Either we are not heading into a recession and rates need to reprice higher or we are and equities are really primed for too much growth and are going to have to re-rate lower," Browne explained.

Why It Matters: U.S. equity markets have registered gains since the beginning of the year while treasury yields have cooled down.

For example, the S&P 500 has gained over 7% since the beginning of the year. Meanwhile, yield on two-year Treasury notes have cooled about 50 basis points in the same period.

If yields are coming off, it indicates the market's expects the Federal Reserve may cut interest rates at some point in time during the year — a scenario that factors-in the possibility of a recession. In contrast, the equity markets reflect higher valuations, indicating recession possibilities are not being factored-in.

The SPDR S&P 500 ETF Trust SPY gained 7.31% in 2023 while the Vanguard Total Bond Market Index Fund ETF BND gained 2.82%.

Banking Woes: Browne said she doesn't think the banking woes may be over yet.

"I don’t think it’s in a rear view mirror. Certainly the immediacy of the sort of heightened period of fear is behind us. But I do think we’re going to have more drips of this as we move through the rest of this year," she said.

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Posted In: Macro Economic EventsEconomicsFederal ReserveMarketsErin BrownePIMCORecession
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