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Gundlach: 75% Odds of Recession Next Year

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What You Need to Know

  • The Fed should slow rate hikes because monetary policy has lags and their tightenings will accumulate into a recession, DoubleLine Capital CEO Jeffrey Gundlach said.

DoubleLine Capital CEO and Chief Investment Officer Jeffrey Gundlach sees a 75% chance for a recession in 2023 and thinks the Federal Reserve needs to slow its interest-rate hikes.

Gundlach, speaking on CNBC’s Closing Bell Overtime after the Fed announced another 75-basis-point rate increase Wednesday, cited several recessionary signals in the market and in Fed Chairman Jerome Powell’s comments that day.

“I think they should slow down because … monetary policy has lags that are long and variable, but we’ve been tightening now for a while and the impact of these tightenings is going to accumulate into a recession,” Gundlach said, noting he thought the central bank should have done more earlier.

The strategist said he was surprised the stock market rallied during the Fed press conference, adding that he expects risk assets to remain under pressure.

Citing the Fed’s signal that it may raise the benchmark interest rate another 125 basis points this year to about 4.25%, Gundlach said, “I don’t think they’re going to be able to pull that off. I think the economy is going to be showing signs of weakening,” with unemployment rising.

”I do think we’re headed to a recession and I think the Fed should have paced this differently but now they’re so committed to this 2%, that I think the odds of a recession in 2023 are very high. I mean I would put them at 75%,” he said. (Powell noted the Fed’s strong commitment to achieving a 2% interest rate.)

Gundlach cited various recessionary signals, noting, for example, that Powell said the Fed expects unemployment to end the year at 4.4%.

“Well, a very strong indicator of recession is when the unemployment rate crosses its 12-month moving average, and the unemployment rate is at 3.7% and its 12-month moving average is at 4.07% right now,” he said. “So if the Fed is right and the unemployment rate rises to 4.4% by the year end, that will be a corroborative indicator of recession.” 

Consumer sentiment is very weak as well, which looks recessionary, Gundlach said.

The bond market’s action Wednesday after Powell’s comments “is very recessionary looking,” he said. 

“We’ve arrived at that moment of yield curve that is truly flashing red for economic problems, and of course Jay Powell acknowledged that’s the base case. Those data points are a 50-point inversion from the two-year (Treasury) to the 10-year and a 25-basis-point inversion from the five-year to the 30-year. These are really flashing recessionary signals,” he said.

“I was surprised when the stock market actually rallied during the (Fed) press conference,” Gundlach said. “I thought it was completely inappropriate. I think risk assets broadly are sort of going to be on their back feet for a while.” 

Gundlach also reads recessionary data from the leading economic indicators. (The Conference Board on Thursday released new figures for U.S. leading economic indicators, noting the index fell for the sixth straight month, “potentially signaling a recession.”)

One problem facing the Fed is that inflation “has gone up so much more than they expected and they’re trying to get it to drop just as fast as it went up,”  Gundlach said. “And the market pricing and the consensus of macroeconomists say that they’re going to succeed at getting the inflation rate down to 2% fairly quickly.”

The trajectory that’s priced into the market for the decline in inflation “is actually slightly faster than the increase was, from below 2% to 9.1%” on the Consumer Price Index. “What’s weird about the way the market and economists are thinking is they think the inflation rate is going to go quickly down to 2% and then somehow magically just stop there,” he added.