"New Bond King" Jeffrey Gundlach: The Federal Reserve doesn't need to worry too much about inflation, the United States may have already entered a recession

"New Bond King" Jeffrey Gundlach believes that many economic data indicate that inflation in the United States is slowing down, but it will take time to return to the long-term trend line.

On Tuesday, September 10th, Jeffrey Gundlach, founder of DoubleLine Capital and "New Bond King," delivered an analysis of the Fed rate cut and the U.S. economy in a live webcast. He accurately predicted a 50 basis point rate cut by the Fed at the September meeting. How does he view the issues of the U.S. economy and market? The key points of the video are as follows:

• The Fed will definitely cut rates, with the federal funds rate minus the overall CPI currently reaching the highest level in nearly 20 years at 2.43. Using the current bond market yield curve shape for prediction, the Fed is expected to cut rates by 210 basis points over the next 12 months (equivalent to 8 full rate cuts), from the current 5.0% to 2.9%.
• Another reason is that most of the time, the two-year Treasury yield is higher than the Fed rate, but currently the Fed rate is higher, and the gap is further widening. Historically, the 10-year Treasury yield has never been significantly ahead of the Fed rate as it is now.
• Core services are the only area in the CPI where inflation is present, while inflation in other areas has tended towards zero. If core service prices decline, inflation will definitely be below 2%.
• Housing is currently the main factor driving up CPI, and excluding housing, the core CPI inflation rate is below 2%. Expectations are for a sharp decline in housing inflation.
• Considering the lag in housing components, the short-term annualized growth rate of PCE, although not as low as in the past three months, is still far below the Fed's 2% target.
• The Fed usually lags behind the market. With the current decline in inflation rates, the Fed is making progress in controlling inflation, but it will take time to return to the long-term trend line.
• Some economic indicators show a pessimistic trend, especially in terms of employment and budget deficits, indicating that by 2024, a recession may have already begun.

Multiple data indicate that U.S. inflation is slowing down

Jeffrey Gundlach believes that the Fed's inflation control target has been achieved - U.S. CPI is rapidly declining, and if the commodity structure remains the same, CPI will be below 2% next year. Currently, the three-month annualized CPI is already below 1%.

So where does inflation come from?

Jeffrey Gundlach says: "Core services are the only area in the CPI where inflation is present, while inflation in other areas has tended towards zero. If core service prices decline, inflation will definitely be below 2%."

Jeffrey Gundlach also points out that "housing is currently the main factor driving up CPI, and excluding housing, the core CPI inflation rate is below 2%." Currently, CPI housing inflation is at 5.05%, while the rent index for new tenants is -1.1%. This means that there will be a significant adjustment in the housing portion for urban consumers, as in the long term, they typically tend to converge During periods of high volatility, the housing component of CPI usually lags behind rental data. Therefore, Jeffrey Gundlach expects a sharp decline in housing inflation.

At the same time, the Federal Reserve is more concerned about the Personal Consumption Expenditures Price Index (PCE), which is also slowing down. Currently, the core PCE is at 2.6%, with core and overall PCE inflation almost the same, both showing a downward trend similar to CPI.

Jeffrey Gundlach believes that considering the lag in the housing component, the short-term annualized growth rate of PCE, although not as low as the past three months, is still far below the Fed's 2% target. Overall inflation rate is at 0.9%, with core at 1.7%. The data for the past six months is similar to CPI, with overall at 2.3% and core at 2.6%. Therefore, the U.S. is approaching the 2% target.

Jeffrey Gundlach also mentioned that currently PPI data is slightly high, but with the reversal of commodity prices, PPI is expected to decrease.

Currently, global demand is weak, and overall commodity prices are at a two-year low. Oil prices are following the trend of WTI crude oil prices, and Jeffrey Gundlach expects gasoline prices to decrease in the future.

In addition, the excessive printing of money in the U.S. in previous years led to a surge in money supply, driving inflation. However, in the past two years, the money supply has stabilized, reducing inflationary pressures.

Time Needed for Inflation to Return to Long-Term Trend Line

Jeffrey Gundlach pointed out that although multiple data indicate that inflation is slowing down, there is a significant gap between market pricing and the Fed's reaction, with the Fed usually lagging behind the market. While the inflation rate is falling, the Fed is making progress in controlling inflation, but it will take time to return to the long-term trend line.

As mentioned earlier, housing is currently the main factor driving up CPI. Jeffrey Gundlach stated that in recent years, house prices have risen significantly, while growth in disposable income for residents has lagged behind, leading to a soft real estate market. High interest rates have caused the market to stagnate, and if mortgage rates can drop below 6%, it may release some supply and lower house prices.

Apart from housing, car insurance has increased by 19% year-on-year, rising by nearly 40% in the past two years, imposing additional burdens on consumers

2024 may have entered a recession

Jeffrey Gundlach believes that some economic indicators show a pessimistic trend, especially in terms of employment and budget deficits. 2024 may have entered a recession, and the future trends of the market and economy need to be closely monitored.

In terms of the labor market, Jeffrey Gundlach stated that the supply-demand balance has improved, but the overall downward trend is still concerning. If this trend continues, it may put greater pressure on the Federal Reserve to more actively lower interest rates.

Regarding the employment market, many data points show negative signals: non-farm employment data is often revised downward, household surveys indicate a decrease in full-time jobs, average weekly hours in factories are decreasing, and the trend of initial claims for unemployment benefits is rising.

Jeffrey Gundlach pointed out that when the unemployment rate crosses the 36-month moving average line, it is strong evidence of an economic recession. Currently, it has almost exceeded the 36-month moving average line by 50 basis points, which almost confirms that the United States is in a recession.

In terms of fiscal matters, Jeffrey Gundlach believes that the current budget deficit has reached 5.5% of GDP and is expected to worsen further. If the budget deficit increases, it may put pressure on the bond market, leading to an increase in long-term interest rates