A recession could be anywhere from one to six months away—at least that’s what’s suggested by economic indicators that have proved correct in the past, said DoubleLine CEO Jeffrey Gundlach, speaking on a webcast yesterday.
Gundlach addressed a number of issues suggesting recession was imminent and what it means for the bond market.
While the bond market expects the Federal Reserve to raise the fed funds rate to 5.0%, Gundlach was skeptical. “After [the Fed meeting] next week, we’ll be done with 75 basis point [rate hikes],” he said. “I don’t think we’ll make it to 5.0%.”
Indeed, signals embedded in bonds already reveal that their prices are starting to come around to Gundlach’s viewpoint. In early November, the bond market was pricing in a peak fed funds rate of 5.17%. Now it’s down marginally to about 5.0%.
“One thing that’s clear is that inflation is coming down,” Gundlach said. DoubleLine estimates that when May’s Consumer Price Index results are announced in June, they will be below 4.5%.
What the bond market maven finds striking is the market expectations for the declining path of inflation in 2023. He produced a chart of inflation expectations that bore out his doubts.
It displayed the anticipation that the inflation rate will “come down exactly as fast as it came up.” Then, somewhat “implausibly,” experts expect it to stay at 2.5%, and “stay there until 2026,” he said.
Markets and economists, it would seem, share an almost magical faith in the Fed. “If, and this is an ‘if,’ the Fed succeeds and inflation goes to 3% next year, I predict it won’t stop there,” Gundlach said. “If it goes to 2%, then it will go far below that.” He added that under this scenario, price increases might even turn negative, and we could enter at least a brief period of deflation.
The forecast of inflation returning to 2% “has been around a while." This time “it might come true, but I’m not convinced,” he told attendees.
However, he is far more confident that inflation will fall to around 4.5% by midyear 2023. “Nothing is happening in commodities,” he said. Twelve to 28 months ago, many of them were soaring as the world emerged from the pandemic.