1984: Jeffrey Gundlach’s Macro Outlook

In his webcast titled “1984” in remembrance of George Orwell’s dystopian novel, DoubleLine Founder and CEO Jeffrey Gundlach on Sept. 10, 2024, dives “into the subject of the Fed and some of the variables that will likely underpin their logic and their thinking” at the Sept. 18 meeting of the rate-setting Federal Open Market Committee (FOMC). In his analysis, Mr. Gundlach finds both components of the Fed’s dual mandate, employment and prices, support a rate-cutting cycle. If energy prices remain near present levels, he expects sub-2% Consumer Price Index (CPI) reports in a few months, and he cites new signals of an imminent recession. Other highlights include:

(1:06) Long-term U.S. Treasuries as the top-performing asset over the last several FOMC meetings, with gold the second best performer.

(1:59) Futures market pricing history of the federal funds target rate, with the market pricing in eight quarter-point rate cuts over the next 12 months.

(3:45) Very tight monetary policy as evidenced by the real fed funds rate at its highest level in almost 20 years, one of the factors behind the near certitude of the Fed easing Sept 18.

(6:01) A raft of inflation gauges, including CPI, Prices Paid Index, Personal Consumption Expenditures Price Index, commodity prices and export and import prices, “in declining mode,” leading to a sub-2% headline CPI “if oil stays in the mid-60s.” Mr. Gundlach wonders if the sharp decline in the CPI might “prompt the Fed to start talking about undershooting on their inflation target, because if the commodity structure stays where it is now, it’s going to stay below 2% for months at a time going into next year.”

(21:29) [here we are …] Surging home prices, their outpacing of disposable income, amid a dearth of supply coming to market as homeowners with low interest-rate mortgages have been reluctant to sell homes and buy new homes at higher mortgage rates.

(25:055) A steepening Treasury yield curve as an indicator of imminent recession.

(29:19) The employment mandate of the Fed and the state of play in labor markets, wages. Quoting Fed Chair Jerome H. Powell, Mr. Gundlach notes improved balance between labor supply and demand, further supporting the case for easing monetary policy, but with the risk that labor supply is set to exceed demand. The unemployment rate has crossed above its 36-month moving average as well as moved higher than 50 basis points above its low, Mr. Gundlach says. “We’re almost above the 36-month moving average by 50 bps – a virtual guarantee of recession.”