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A combination of U.S. economic weakness plus tighter monetary policy by the Federal Reserve is likely to push inflation below the expectations of many forecasters next year, at least temporarily, said Jeffrey Gundlach, chief executive officer and chief investment officer of DoubleLine Capital.
Speaking during a virtual panel on Monday, Gundlach said that the impact of the Fed’s rate hikes in 2022 and accumulation of monetary tightening that’s taken place so far “is going to make 2023 probably a recessionary year.” He said that the inflation rate will likely “come down in the next six months in a way that’s almost unavoidable,” and that many economic signals which are “flashing potential recession” — such as a deeply inverted Treasury yield curve — add up to “a lower inflation rate.”
Tuesday’s consumer-price index for November only seemed to buttressed the view that the worst U.S. inflation spell in 40 years is receding faster than forecasters expected. The cost of living rose a scant 0.1% last month, while the annual headline inflation rate fell to 7.1 % from 7.7% in the prior month — both coming in below the expectations of economists polled by The Wall Street Journal. Gundlach, described by some as “bond king,” became a widely followed figure following his June 2007 views on the subprime mortgage market, which he called an “unmitigated disaster.”
On Monday, Gundlach said 2022 will be remembered as the year in which the Fed went from being “almost scared to raise interest rates” to delivering four straight 75-basis-point rate hikes. With the Fed widely expected to hike once again on Wednesday, Gundlach said he would put the odds of a rate cut at some point at “greater than 75%.” He also said he sees the fair value of the 10-year Treasury yield BX:TMUBMUSD10Y at between 2% to 2.5%, versus Tuesday’s level of 3.5% — consistent with the likelihood of inflation coming down.
Given forecasts for inflation to fall to around 4% by the middle of next year, he said, “I don’t see any reason it [the drop in inflation] is going to stop there” if the Fed follows through with continued quantitative tightening while pushing rates to a higher terminal level and keeping them there. “I wouldn’t be surprised if it went lower— at least temporarily.”
“We entered this year very negative on bonds,” though DoubleLine started buying long-term Treasurys in September, he said. Bonds have helped to offset the performance of other investments and “will be reasonably well-supported given a falling inflation rate.”
On Tuesday, the 2-year Treasury yield
TMUBMUSD02Y,
was headed for its biggest drop in a month after the November CPI report. Stocks gained, with the Dow Jones Industrial Average
DJIA,
up by more than 300 points, or 1%, and the S&P 500
SPX,
advancing 1.8% in morning trading.
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