Investors will confront excessive debt, high P/E levels and political uncertainty as they enter the Trump presidential era. In response, according to Jeffrey Gundlach, U.S.-centric portfolios should diversify globally.
Gundlach is the founder and chief investment officer of Los Angeles-based DoubleLine Capital, a leading provider of fixed-income mutual funds and ETFs. He spoke to investors via a conference call on January 10. Slides from that presentation are available here. This webinar was his annual forecast for the global markets and economies for 2017.
Before we look at his 2017 predictions, let’s review his forecasts from a year ago. His two highest conviction forecasts were that the Fed would not raise rates more than once, despite the Fed’s own predictions, and that Trump would win the presidency. Both predictions were accurate.
But he was also downbeat on emerging markets, and singled out Brazil and Shanghai as likely underperformers. Brazil turned out to be the best-performing emerging market last year, gaining 69.1%, but he was correct about Shanghai, which was the worst performing market, losing 16.5%.
Gundlach said he had a “low conviction” prediction that the yield on the 10-year Treasury would break to the upside. It began 2016 at 2.11% and ended at 2.45%. He said the probability was that U.S. equities would decline in 2016, yet the markets gained approximately 13%. Gold, he said, would hit $1,400 at some point in 2016. It began the year at approximately $1,100, hit a high of $1,365 during the summer and closed at approximately $1,150.
Don’t anyone accuse Brazil’s central bank of not being bold.
In a unanimous decision, the bank cut its policy interest rate by 75 basis points on Wednesday, exceeding the consensus call for a 50bps cut and sharply picking up the pace on an easing cycle it began with two back-to-back cuts of 25bps each in October and November
In a statement, the bank said economic activity had fallen below expectations and that a recovery would take longer than previously anticipated.
It also noted data released earlier in the day showing inflation falling faster than expected to 6.3 per cent in the year to December 31 – the first time in two years it has been within the central bank’s target range of 4.5 per cent plus or minus 2 percentage points. Market economists expect it to end 2017 at 4.81 per cent, according to the central bank’s latest weekly survey.
The size of the cut will be welcomed by many, given the economy’s stubborn refusal to return to growth. The rebound expected by many when congress ditched president Dilma Rousseff last year has failed to happen. GDP contracted by 8 per cent over the past two years under Rousseff’s watch; her pro-growth, market-friendly successor, Michel Temer, was expected to turn things round quickly.
Companies are going to face a potentially peculiar situation following demonetisation, if the recently released inflation data are any indication. While a demand slowdown following the cash crunch could force producers to either cut or hold prices, their input prices are tending to go up owing to rising global commodity rates.
Latest data revealed retail inflation touched a two-year low of 3.63% in November, while wholesale price inflation eased to 3.15% from 3.39% in October. However, the Thomson Reuters/CoreCommodity CRB Commodity Index, which tracks the movement of 19 major commodities, has advanced 11.1% in the past one year and 8.6% so far in 2016.
Pronab Sen, former chairman of the National Statistical Commission, told FE: “The demand slowdown following demonetisation should put a downward pressure on prices, while the increase in input prices due to rising global commodity rates will put an upward pressure on prices. And what the net effect will be is very difficult to predict now. But companies may have to recalibrate their (pricing) decisions accordingly.”
Key global oil-producing countries’ decision to cut back on output has already driven up crude oil prices. Also, although China’s appetite for raw materials has been strained since last year, a renewed focus on manufacturing (along with services) by the US under President-elect Donald Trump has only complicated outlook of global commodity demand. “As more firms shift from the informal to the formal sector following demonetisation, “there is also a risk that tax increases are passed to consumers,” Nomura’s Sonal Varma said.
The Bank of Japan revised its economic outlook for the first time in 19 months during the two-day policy meeting that ended Tuesday. But that is apparently the only step the central bank is taking at this time.
“The headwinds seen in the first half of this year have ceased,” BOJ Gov. Haruhiko Kuroda told reporters following the meeting. Markets were riled by heightened concerns directed at emerging economies at the beginning of 2016, only to be shocked in June by Britain’s referendum to exit the European Union. The BOJ was forced to loosen its policy in July, raising its target for exchange-traded fund purchases.
During the second half of 2016, the economic landscape has slowly brightened, beginning with U.S. readings. The Japanese economy has followed suit with increased exports and production. Consumption also recovered from a slump caused by a soft stock market and inclement weather at the beginning of the year.
“Japan’s economy has continued its moderate recovery trend,” the BOJ said in a statement published after the meeting. The central bank had previously qualified that view by highlighting sluggish exports and production.
Now that the US employment report is behind us, the new trading week will be dominated by central bank decisions (no the Fed decision is not one of them but it will be anticipated on Dec 14th).
ECB interest rate decision. Thursday December 8th at 7:45 AM ET/1245 GMT. The ECB is expected to keep their interest rates unchanged. However, they are expected to announce an extension of the QE program. ECB’s Draghi will have his usual press conference starting at 8:30 AM ET, 1330 GMT. You can expect that press conference to last one hour.
RBA interest rate decision. Monday December 5 at 10:30 PM ET/Tuesday December 6 at 0330 GMT. The Reserve Bank of Australia is expected to keep the rates unchanged at 1.5%. There has been more chatter recently, that the RBA may look to tighten in 2017. Goldman Sach recently said this, as did the OECD. However, Morgan Stanley was out with their trade recommendations that focused on shorting the AUD (see post here). So there is debate. The decision and statement will be eyed for any change in sentiment. The RBA last changed rates in July.
BOC interest rate decision. Wednesday, December 7th at 10 AM ET/1500 GMT. The Bank of Canada is expected to keep rates unchanged at 0.5%. Today the Canada employment report showed job gains of 10.7K vs -15K est. However, it was concentrated in part time jobs for the second consecutive month. The unemployment rate did fall to 6.8% from 7% (equaled the low for the year from June). This week, Gov. Poloz spoke cautiously saying:
All things being equal, need to have bigger shock when you’re in such a zone of uncertainty to prompt a move
At this stage too early to tell impact of Trump election; BOC won’t react to hypotheticals.
Big shock or accumulation of things, could change path
Canada has gone through downsizing phase and resources
Most of bad news for resources behind Canada
Capability may be more important than output gap
Uncertainty from Trumps victory
BOC does not make assumptions about US government policy
We have all the ingredients of divergence in monetary policy with US
If we hadn’t had oil price shock Canada and US economies will be in more similar situations
Bond yields have crept up in last few weeks.. That is something we have to build into calculus going forward
Sales by Canadian owned foreign affiliates are about the same size as total exports every year
Canada will set independent policy
4. Australia GDP QoQ. Tuesday December 6 at 7:30 PM ET/0030 GMT (Wednesday). The eestimate is for a gain of 0.2% vs +0.5% in Q2. The YoY is expected to rise by 2.5% vs 3.3% last.
US Employment. Friday December 2, 2016 at 8:30 AM ET/1330 GMT. The monthly US employment numbers for the US will be the top economic release for the week. The estimate is for a gain of 165K vs 161K last month. The unemployment rate is expected to stay unchanged at 4.9%. Average hourly earnings are expected to rise by 0.2% vs +0.4% last month.
US GDP for the 3Q. Tuesday November 29, 2016 at 8:30 AM ET/1330 GMT. This is the 2nd estimate for the 3Q ending September 30, 2016. The first release came in at 2.9% annualized (the US takes the QoQ change and annualizes that value – i.e. 4x).
OPEC meeting. Wednesday, November 30, 2016. The long awaited OPEC meeting will be held in Vienna with production cuts the focus. Expect officials to talk to reporters throughout the day with a formal statement released after the meetings are complete
China Manufacturing PMI and Caixin Manufacturing PMI. Wednesday, November 30, 2016 at 8 PM ET/ 0100 GMT on Thursday, and at 8:45 PM ET/0145 GMT (for Caixin). The Manufacturing PMI (survey of about 3000 purchasing managers) will be released with expectations of 51.0 vs 51.2 last month. The smaller Caixin survey (about 430 purchasing manufacturing managers) is also expected to fall from 51.2 to 50.9.
Canada Employment. Friday December 2, 2016, 8:30 AM ET/1330 GMT. The monthly employment report from Canada will be released along with the US employment report. The expectations is for the unemployment rate to come in at 7.0%. The Employment change is expected to come in unchanged vs. +43.9K increase last month.
Other noted releases/events:
UK bank stress test results. Wednesday November 30 at 2 AM ET. 0700 GMT
ADP non farm payroll. Wednesday, November 30 at 8;15 AM ET/1315 GMT. Estimate 161K vs 147K last month
Canada GDP MoM, Wednesday, November 30 at 8:30 AM ET/1330 GMT. Estimate +0.1% vs +0.2% last
Australia Private Capital Expenditures QoQ Wednesday 7:30 PM ET/0030 GMT (Thursday) Est -2.8% vs -5.4% last.
US ISM Manufacturing Thursday December 1, 2016 10:00 AM ET/ 1500 GMT. Est. 52.1 vs 51.9 last.
Noted central banker speeches and testimonies
ECB Draghi (Monday November 28th at 9 AM ET/1400 GMT) is due to testify on economic and monetary developments and the consequences of Brexit before the European Parliamentary Committee in Brussels
RBNZ Financial Stability Report. Tuesday November 29th at 3 PM ET/2000 GMT. A media conference call is scheduled to take place at 7:10 PM ET/0010 GMT with RBNZ Governor Wheeler
BOC Gov Poloz speaks. Monday, November 28th, 8 PM ET/0100 GMT (Tuesday). Bank of Canada Governor Poloz is due to speak titled “The Role of Services in Canada’s Economy”. Poloz will hold a press conference after the speech.
Yellen testimony ahead of Appearance at Joint Economic Committee 17 November 2016
FOMC judged in Nov that a rate increase could well become appropriate relatively soon
Delaying rates too long could encourage excessive risk taking and force a faster pace of increases
Holding steady in Nov did not reflect lack of confidence in economy but a judgement that the jobs market had more room to grow than Fed expected earlier in the year
There appears to be scope for some further improvement in the labour market
Further employment gains may well help support labour force participation and wage gains
Expects growth to continue at moderate pace with global growth firming further and a return to 2% inflation over the next couple of years
What a load of flannel. The jobs market has never looked so good and what did they really expect to happen to the jobs market over the course of one or two months? Suggesting that they held in Nov for jobs means they really have no excuse not to hike next month. For me that’s nothing but an excuse to get through the election.
Goldman Sachs: The week ends with the October US employment report, which we expect to show that the US economy added 185kjobs last month, 4.9% on the unemployment rate and 0.3% on average hourly earnings.
BofA Merrill: We look for nonfarm payroll growth of 170,000 in October, in line with the recent 6- month trend and up from 156,000 in September. We expect private payroll growth to have constituted 165,000 of this gain with a modest 5,000 gain in government payrolls. Our equity analysts have only seen mixed signals related to holiday hiring so far, but there have been some news reports of stronger seasonal hiring, presenting upside risk to our forecast. The underlying rate of job growth should remain robust based on our forecast for October and especially given the possibility of an upward revision to September jobs. As we argued in Nonfarm payrolls myths and realities, there tends to be a pattern of upward revisions to September in the order of about 30,000 jobs. We expect the unemployment rate to remain unchanged at 5.0% with the labor force participation rate holding at 62.9%. The labor force participation rate will be an important indicator to watch given the 0.1pp increase last month. We expect a trend-like 0.2% mom gain in average hourly earnings, leaving the year-over-year rate to fall to 2.5% from 2.6%, and we think average weekly hours will remain unchanged at 34.4.
Barclays: we look for nonfarm payrolls to rise by 175k. We expect 165k of these gains to come from the private sector – in particular, service-providing employers – with government payrolls adding the remaining 10k. Elsewhere in the report, we expect the unemployment rate to decline by one-tenth, to 4.9%, average hourly earnings to rise by 0.3% m/m and 2.6% y/y, and the average workweek to remain unchanged at 34.4 hours. On balance, overall job growth of 175k would confirm ongoing strength in the labor market. The increase in payrolls, combined with the ongoing improvement in wages, should boost household income and keep consumption on track. We also believe at these numbers employment growth is sufficient to keep the Fed on track for a December rate hike.
Information received since the Federal Open Market Committee met in September indicates that the labor market has continued to strengthen and growth of economic activity has picked up from the modest pace seen in the first half of this year. Although the unemployment rate is little changed in recent months, job gains have been solid. Household spending has been rising moderately but business fixed investment has remained soft. Inflation has increased somewhat since earlier this year but is still below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation have moved up but remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat further. Inflation is expected to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.
Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The Committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of continued progress toward its objectives. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.
With the US economy bouncing back in the third quarter, investors turn their attention to the Federal Reserve’s monetary policy meeting and the latest US jobs report.
Here’s what to watch in the coming days.
With the uncertainty surrounding the fast approaching US presidential election, the Federal Reserve is expected to sit pat when it meets next week, despite fresh data that show the US economic recovery remains on track.
Economists expect the Fed on Wednesday will leave interest rates unchanged and federal fund futures currently imply just a 17 per cent chance of move in November. There will be no press conference with Fed chair Janet Yellen after the statement. Again economists suggest there are two areas of focus in the statement, namely comments on the balance of risks and forward policy guidance.
“The November 2nd FOMC meeting should be considered a placeholder meeting,” Michelle Meyer, economist at Bank of America, said. “If the Fed is successful, the meeting will likely come and go without much action in the markets.”
She added: “We think the Fed’s objective is to signal that a hike is highly likely in December but that the path thereafter will be extraordinarily shallow. The market is pricing in a 70 per cent chance of a December hike, which the Fed is likely to perceive as appropriate.”