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.”
Investors shifted into wait-and-see mode ahead of Tuesday’s consumer-price index for November, as optimism about the 2023 inflation outlook emerged in a New York Fed survey. Meanwhile, traders of derivatives-like instruments known as fixings expect the annual headline CPI rate for November to come in at 7.2%— or below the 7.3% median estimate of economists. 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.”
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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 a series of aggressive 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 Monday’s level of 3.6% — 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 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.”
Treasury yields rose Monday, with the 10-year
finishing the New York session at 3.61% after a soft auction, up from almost 3.57% at 3 p.m. on Friday. Stocks gained, with the Dow Jones Industrial Average
closing up by more than 500 points, or 1.6%, and the S&P 500