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Gundlach: Ignore Flattening Yield Curve Talk; Watch This Number Instead

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If the core consumer price index moves above 2.25%, “then you’ve got to believe that the entire inflation narrative is going to change” for the Federal Reserve, said DoubleLine Capital CEO and Chief Investment Officer Jeffrey Gundlach during a webcast Tuesday. He also took issue with the so-called flattening of the yield curve in 2018 and reiterated his view that stocks will be down for the year.

“We’ve not been [above 2.25 in the CPI] since ‘07 or ’08 … We’ve been sideways since ’11,” Gundlach said. “But if we break above that, I do not see people saying that it is not a problem … I think the Fed would say, ‘Houston, we’ve got a problem.’”

Still, he says, we shouldn’t get ahead of ourselves: “Let’s not forecast. Let’s watch the [core] CPI carefully, and let the market tell us.”

Overall, the economy has been expanding for 36 quarters, as measured by real GDP. It’s been rising recently, “but will it break up or down?” Gundlach asked, noting that the expansion has been greatly “aided and abetted by quantitative easing.”

Today is different. “We are now in the opposite [scenario] of raising rates and quantitative tightening,” he said.

“I do not think we’ll [necessarily] see a recession starting 12 months from now,” the bond guru explained, though he acknowledged that one is possible for 2019. “There’s some falling off in the [Purchasers Managers’ Index] now, and we’re watching this carefully. High yield spreads also serve as another indication of a coming recession.”

Flattening Fiction

As for the yield curve, “The idea that it has been flattening like a banshee all year is not true. It’s hardly changed year to date,” Gundlach said. “With the two-year Treasury yield up 63 basis points and the 10-year up 56, that’s all of a 7 basis-point flattening. The story of a flattening yield curve … is really a story that happened in 2017.”

The DoubleLine executive continued, “If we have flattening trend, we haven’t seen it for four months. It’s a false narrative for 2018 that is just not true. We are in a somewhat automatic rising rate environment. Watch the CPI. Core CPI is at 2.1%, and I believe it appears to be heading higher.”

The Dollar

While Gundlach says he’s “long-term negative on the U.S. dollar,” he’s bullish in the short term. “We’re overdue for a rally,” he explained, noting that the greenback is trading around $88-$90 but could go to $92 “and even $94 or $95.”

He reminded investors that a strengthening U.S. dollar — which he tracks using the US Trade Weighted Major Currency Dollar Index — is bad for gold. “That’s why [gold] is down around $1,300.”

Beyond gold and silver, commodities have a different story and are up about 10% this year. “What has done something [recently] is oil,” Gundlach said. “And commodities are cheap, cheap, cheap. We continue to see them as the best performer of 2018.”

As for bonds, “Duration is the only game in town. Duration is highly correlated to success given rising rates,” he said, referring to bank-loan ETFs, which he recommended in January.

“I am not really bearish on bonds,” Gundlach explained. “In certain sense, yes, we should break to higher yields, though it’s not a high conviction.”

As for junk bonds, “the market looks bad,” he said. “It’s not dangerous without a recession on the horizon, but it is not looking good.”

Responding to a question about JPMorgan CEO Jamie Dimon’s view that investors should prepare for a 4% yield on the 10-year Treasury, Gundlach said “probably yes.”

Gundlach has urged investors to watch the 30-year Treasury yield. “If it breaks to 3.22, we will see [a move from] 3 to 4% relatively quickly, and that will be relatively problematic for competing assets.”

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