The yield curve no longer sends a “do not worry, be happy” signal, warns bond king Jeffrey Gundlach

S&P 500 SPX,
took a losing streak of five sessions on Tuesday, after the central bank’s chairman Jerome Powell promised that the central bank would use its “tools” to gain control of inflation without hurting the economy. And stock futures are rising, even after data showing the fastest annual increase in consumer prices since 1982.

A rebound with teeth on it may not be quite here yet, some say. “Bounces from oversold levels tend to be hard and fast, and yesterday’s 150-point intraday reversal definitely counts as hard and fast,” noted Jani Ziedins, from the CrackedMarket blog. “That said, more often than not, the third return is the real deal, which means we can see a couple of tests of the downturns before this is said and done.”[ads1];


On to spring today’s conversation from the so-called DoubleLine bond boss Jeffrey Gundlach, who unveiled his predictions for the coming year. And he sees headwinds for a stock market that has been “supported by QE [quantitative easing]”And now faces the downsizing of the Fed, with Powell sounding” more hawkish “every time he speaks.

“Today [Tuesday] sounds like Jay Powell repeating the 2018 formula: quit QE and raise official short-term interest rates. in Gundlach in a webcast to customers who were tweeted live late Tuesday. He said he did not “predict a recession yet”, but saw that the pressure was increasing.

He said that the yield curve had seen “fairly sharp flattening” and “approached the point where it signals economic weakening. At this stage, the yield curve no longer sends a “do not worry, be happy” signal. It sends an “beware” signal, he said.

Gundlach highlighted a chart that showed consumer sentiment “free fall”, which “looks like a recession.” He said Rising car prices can be one of the culprits since prices have risen so much “people do not think this is a good time to buy a car if they can find one.” That increase in prices has even made it possible to make money by turning around and selling, he said.

Fund manager and CEO of ARK Invest, Cathie Wood, has warned of a “bloodbath” in the used and new car market.

The money manager said that the housing market is strengthened by low supplies and should remain supported provided that mortgage rates are low. He is neutral on gold and sees that the dollar continues to weaken.

US stocks are expensive compared to just about everywhere else, Gundlach said, pointing out that European markets, his favorite in 2021, looked good again for 2022.

Looking back at Gundlach’s 2021 forecast, the manager recommended a “winning” formula with half of cash and government bonds, 25% in equities, mostly emerging markets and Asia, and 25% in real assets such as gold or real estate to secure towards higher inflation. He expected US equities to lag behind the rest of the globe, along with rising inflation and volatility.

iShares MSCI Emerging Markets ETF EEM,
lost 5% in 2021, against a 27% rally for SPDR S&P 500 ETF trust SPY,
a popular exchange traded fund that follows the index. Real estate proved to be a smart investment spot, although gold fell 3% in 2021, and government bonds had a gloomy year.

The fuss

The data are in and December consumer prices rose 0.5% for the month and 7% on an annual basis, with both figures stronger than the forecast. Figures for federal budgets are still high and the Fed’s beige book will come later.

The European Medicines Agency has warned that too many COVID-19 boosters could end up damaging the immune system, reflecting comments from the World Health Organization. Meanwhile, the omicron coronavirus variant could reach the top in the UK, giving hope to the US and elsewhere. And the White House is getting ready to send millions of COVID-19 tests to public schools.

Biogen BIIB,
the stock is down 9% on news Medicare will limit coverage of biotechnology’s controversial and expensive Alzheimer’s medicine Aduhelm and future others like it.

Shares in Immuron IMRN,
is sky high, after the Australia-based biopharmaceutical company received $ 4.5 million from the US Defense Dept to evaluate a key drug for military use.

A 19-year-old German teenager said he managed to hack into 13 Tesla TSLA,
cars all over the world via a software bug that allowed him to start the cars, unlock doors and windows and disable security systems.

And a reminder that Friday will mark the start of the earnings season, with banks – including Citigroup C,
JPMorgan JPM,
Wells Fargo WFC,
and BlackRock BLK,
– due to report. (See preview.)

The markets


Shares are higher, led by Nasdaq COMP,
as bond yields remain stable, while the dollar DXY,
falls. Oil prices CL00,
ladders, with natural gas futures NG00,
up over 4%.

The diagram

Where does a rise in real interest rates start to hurt equity investors? A team of strategists at UBS, led by Bhanu Baweja, said that when returns rise by more than 40 basis points over three months, “the impact on the market becomes significant and becomes non-linear.”

“This is the area we are looking at as the gross threshold for real pain
for the market. An incremental increase of 10 bp in real interest rates from here causes
the market falls by approx. 0.8%, ceteris paribus. But what about something else
things are not the same? A 5.2-point increase in PMIs will counteract the hit
the market from a 50bp rise in real interest rates, “the strategists said in a note to customers.

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