Jeffrey Gundlach: I'm disagrees with Mnuchin and Powell economy view

On inflation and Fed policy, Jeffrey Gundlach disagreed with comments made by Treasury Secretary Steven Mnuchin and Fed Chairman Jerome Powell. But Gundlach’s views were in line with the consensus on those key issues – inflation will not spike dramatically higher and the Fed will continue with its planned rate hikes.

The key driver of capital allocation

The primary driver of Gundlach’s capital-allocation decisions is the outlook for recession. He said that he and his team look at a dozen or so indicators that predict the likelihood of a recession over the next year or so. None of them are signaling a downturn. The leading economic indicators (LEIs) are now at six and rising, he said. But they have decreased every time prior to a recession.

The FED and the deficit

Deficit problems will move to the forefront by the end of this year, he said. The deficit is getting a lot worse and there will be “a lot of bonds supplied to the market,” he said. The supply of bonds was about $650 to $700 billion in 2017, he said. It will be $1.2 to $1.3 trillion in 2018, in addition to quantitative tightening (QT) as the Fed contracts its balance sheet, according to Gundlach. There could be another $600 billion in tightening, he added.

Fed policy and inflation

The market-based forecast is 37% for four Fed hikes in 2018, and Gundlach said investors are “starting to take seriously” the possibility of quarterly hikes. The bond market is now aligned with the “dot” forecasts of Fed governors, he said. Gundlach does not expect a dramatic move in inflation, but cited a number of indicators to watch. The U.S. core CPI is at 1.8% (headline CPI is at 2.2%), but goods have been deflationary while service inflation is at 2.6%, he said. “Inflation is not trending higher,” he said, “and it is going sideways.” Powell said that inflation higher than 2% is okay, but Gundlach said the market would extrapolate further increases to inflation.

Source: Bloomberg Pro Terminal

Jr Trader Petar Milanov

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