Mohamed El-Erian: 'Full-scale stagflation worries' on China Covid concerns slammed global stocks

Published Mon, Apr 25 20229:52 AM EDTUpdated Mon, Apr 25 20229:59 AM EDT

Kevin Stankiewicz @in/kevin-stankiewicz-b5593466 @kevin_stank

Concerns about stagflation are weighing on Wall Street sentiment Monday morning, noted economist Mohamed El-Erian told CNBC in an interview before the opening bell. Dow futures were down over 200 points as El-Erian spoke on "Squawk Box," while S & P 500 and Nasdaq futures also were firmly in the red. Stocks opened lower, with the Dow down about 0.5%, S & P 500 about 0.6% and Nasdaq about 0.3%. Asian markets were down sharply Monday, and the pan-European Stoxx 600 index was down about 1.3% as of 9:40 a.m. ET in New York. "It's full-scale stagflation worries," El-Erian, the chief economic advisor at Allianz, said, referring to when an economy is simultaneously experiencing stagnant growth and persistently high inflation. The U.S. economy experienced it in the 1970s — and in recent months, some investors have warned it could occur as the Covid recovery evolves. "Here's a simple way of thinking about what's going on: Last week was mainly about inflation, about the Fed being behind and the Fed being in the midst of a policy mistake," El-Erian said. "Those concerns remain — and this week, we start with China bringing in additional growth concerns, and we are now having both growth and inflation concerns," El-Erian said, alluding to reports over the weekend about Covid spreading undetected in China's capital of Beijing for about a week . "That's why you're seeing not just the moves in the equity market, but you're seeing some peculiar moves in the FX market and in the bond market," said the former co-CEO of investment giant Pimco. The Dow Jones Industrial Average notched its fourth straight losing week Friday, while the S & P 500 and Nasdaq closed lower for the third consecutive week. The Nasdaq closed Friday in bear market territory, as defined by a decline of 20% or more from recent highs. The tech-heavy index last closed at a record back in November. Here's where the three major U.S. stock benchmarks are month to date: Nasdaq: down 9.7% S & P 500: down 5.7% Dow: down 2.5%. El-Erian told CNBC he believes the Federal Reserve must raise interest rates by 50 basis points at its policy meeting early next month. However, he said the potential for stagflation may impact the U.S. central bank's tightening further down the road, and investors need to consider that. "At this point, they have no choice but to raise 50 basis points," El-Erian said, contending the half-percentage point hike is necessary to demonstrate the Fed's commitment to tamping down inflation. "But it will mean the marketplace itself is going to have to very revisit its very aggressive path of hikes that's being priced in and ask the question, 'Does that make sense?'" he said. The central bank raised rates by 25 basis points at its March meeting, the first hike in more than three years . The market expects rate increases at each of the remaining six Fed meetings in 2022.

Mohamed El-Erian, chief economic adviser of Allianz SE, listens during a Bloomberg Television interview on the sidelines of the Bloomberg New Economy Forum in Singapore, on Tuesday, Nov. 6, 2018.

Wei Leng Tay | Bloomberg | Getty Images

Concerns about stagflation are weighing on Wall Street sentiment Monday morning, noted economist Mohamed El-Erian told CNBC in an interview before the opening bell.