Jeff Gundlach Warns That "Something Changed" At The Fed

Something has changed according to Jeff Gundlach.  After claiming that a rate hike is "inconceivable" as recently as a month and a half ago, a stance which he softened somewhat in recent days, Gundlach said that the Fed has changed the conditions required for a potential interest-rate hike this year.

Cited by Bloomberg, Gundlach believes that the Fed's thinking has shifted from, 'if the data pattern improves we will have the green light to hike,' to 'unless the data pattern weakens we have the green light to hike.'"

Perhaps, but surely only as long as the S&P, pardon the "economy" remains above 2,000. The second the S&P, pardon the "economy" slides back under that critical for the Fed level, one can forget all about any rate hike for the foreseeable future as the Fed will never risk crushing the wealth effect it has built up over 8 years of careful micromanagement and market manipulation.

And that is precisely what the market, which understand the reflexive relationship with the Fed much better than the group of career academics locked up in the Marriner Eccles building ever could, is going for: pushing the S&P, pardon the "economy" back under 2,000 so that any hiking ambitions Yellen may have are promptly pushed back by another three months.

In minutes of an April Federal Open Market Committee meeting released Wednesday, officials used the word June six times, signaling the possibility of a rate hike next month. Odds of a move in June, which would be the second in a decade following December’s quarter-percentage-point increase, climbed to 28 percent, according to Bloomberg data.

Gundlach, whose $60 billion DoubleLine Total Return Bond Fund has outperformed 98 percent of its Bloomberg peers over the past five years, said May 12 that the odds were about 50-50 for an increase this year.

Bloomberg also reminds us that Gundlach previously criticized Fed board members who signaled intentions to increase rates as many as four times this year as "a suicide mission," given signs of weakness, such as slowing U.S. corporate earnings and negative interest rate policies pursued by central bankers in Japan and Europe.

But the biggest threat is how China will respond not so much to another rate hike but to the surge in the USD that will precede it. Ovenright Beijing already launched the warning salvo, when the PBOC not only devalued the Yuan by the most since the infamous August devaluation, but also pushed the Yuan to 2016 lows against the USD - a precursor to the market swoon observed at the start of the year.

 

And as even the Fed has admitted by now, once the emerging market starts turmoiling, then all bets, and certainly of a rate hike, are off.