The core basis for Gundlach's judgment comes from two dimensions: the continued inflation data exceeding expectations, and the clear signals emitted by the interest rate market.

Written by: Dong Jing

Source: Wall Street Insight

Jeffrey Gundlach, CEO of DoubleLine Capital, clearly stated that the possibility of the Federal Reserve cutting interest rates this year has basically disappeared, as stubborn inflation and signals from the interest rate market have jointly blocked the space for monetary easing.

On May 18, according to a Bloomberg report, during an interview on Fox News' "Sunday Morning Futures" program, Gundlach pointed out that the market had previously expected two interest rate cuts this year, but inflation data has consistently failed to cooperate. He bluntly stated:

“With the two-year U.S. Treasury yield nearly 50 basis points higher than the federal funds rate, a rate cut seems impossible to me.”

According to a previous article from Wall Street Insight, the U.S. April CPI jumped 3.8% year-on-year, marking the fastest increase since May 2023, and Gundlach warned that the next CPI data will "start with a 4."

Meanwhile, the Iran war has driven oil prices significantly up, further transmitting to U.S. inflation data, exacerbating already difficult price pressures. Gundlach also warned about several market risks, such as high valuations in the stock market and private credit risks, indicating that overall market risks are quietly accumulating.

Stubborn Inflation, Rate Cut Window Closed

Gundlach believes the Federal Reserve cannot cut rates this year, with the core basis coming from two dimensions: the continued inflation data exceeding expectations, and the clear signals emitted by the interest rate market.

The April CPI increased 3.8% year-on-year, the highest increase in nearly two years, far exceeding the Federal Reserve's 2% policy target. Gundlach stated that DoubleLine's models indicate that the next overall CPI data will "start with a 4," implying that inflation pressure has not only failed to show signs of retreat but is trending upward.

From the perspective of the interest rate market, the two-year U.S. Treasury yield is currently nearly 50 basis points higher than the federal funds rate.

Gundlach believes that this yield gap structure itself constitutes a technical obstacle to rate cuts—the market pricing already reflects expectations for sustained inflation, and if the Federal Reserve cuts rates now, it will face serious credibility risks.

The oil price shock brought about by the Iran war is another variable that cannot be ignored. Rising energy prices will directly permeate into the CPI components, adding new resistance to any decrease in inflation. Gundlach predicts that this upward trend will continue to be reflected in inflation reports over the coming months.

Gundlach gave a direct assessment of the situation for the new Federal Reserve Chairman Kevin Warsh: he has taken on this position during a "difficult time."

Upon taking office, Warsh immediately faced a complex situation where high inflation, oil price shocks, and divergent market expectations coexist. The Federal Reserve's policy space is constrained by multiple factors—it cannot rashly cut rates while ignoring inflation pressure, nor can it overlook the uncertainty in economic growth prospects.

Analysts point out that Gundlach's remarks suggest that Warsh has almost no room for implementing loose policies in the short term.

Speculative Concerns Behind a Strong Stock Market

Despite a turbulent macro environment, the U.S. stock market continues to perform "exceptionally strong." Gundlach provided his interpretation: it is precisely because the Federal Reserve is inactive on inflation issues that the stock market can continue to rise.

"When the Federal Reserve does nothing about inflation, the stock market will soar," he said. Corporate earnings have consistently exceeded expectations, further fueling speculative sentiment in the market.

However, Gundlach simultaneously pointed out that the current stock market has internalized a considerable degree of risk. "Market valuations are very expensive, and the speculative atmosphere is thick," he stated, noting that despite continuously exceeding earnings expectations, this situation itself is "fostering speculative frenzy."

In terms of asset allocation, Gundlach mentioned that he has been "very, very bullish on commodities for about the past three years." He pointed out that negative real returns on bonds and the predicted market have diverted some interest in speculative assets like Bitcoin, leaving investors with few attractive alternative options outside of stocks.

Gundlach once again warned about the private credit market in the interview, using direct language. When asked if he was concerned about that sector, he replied, "Of course, I am indeed worried."

He noted a disturbing structural characteristic of the private credit market: "This market seems to always need new investors to come in." He believes this might reflect the greedy logic of sponsors—"They just want to manage more and more assets."