Gundlach, Pimco Sour on Reflation Trade as Price Pressures Peak
They correctly picked last year’s uptick in price growth, but two bond-market heavyweights are now signaling inflation may have seen its zenith.
Pacific Investment Management Co. is scaling back its outlook for U.S. price growth, saying an increase in job-market participation will dent wage growth and oil’s pullback will also be a damper. For DoubleLine Capital LP’s Jeffrey Gundlach, inflation this year has passed its peak, meaning the reflation trade that’s dominated markets in 2017 could peter out.
Both firms made prescient calls last year on consumer-price gains, recommending the profitable trade of buying TIPs, or Treasury Inflation Protected Securities. They’re not the only ones questioning the outlook for inflation, though, with Australia & New Zealand Banking Group Ltd. to BNP Paribas SA flagging the prospect that a halt in the commodity rally could put a lid on inflation over the next few months.
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“Longer-term risks to inflation are skewed to the upside, but at the same time the momentum behind the recent reflation trade is likely to ebb temporarily in the near term,” Pimco’s Global Economic Advisor Joachim Fels and chief investment officer for fixed income Andrew Balls, wrote in a report dispersed via Twitter this week.
In a webcast Tuesday, Gundlach all but called time on the reflation trade, which has seen equities to emerging-market debt and raw materials rally on bets Donald Trump’s presidency will usher in a period of fiscal spending-fueled growth.
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It’s a view that largely runs counter to the consensus, with U.S. consumer-price growth expected to quicken to 2.5 percent by the end of this year, from 1.3 percent in 2016, according to the median of economists’ forecasts compiled by Bloomberg.
Brent crude has rallied more than 7 percent from a 2017 low reached March 23, but remains below this year’s average price after a selloff at the start of last month. Pimco also cited a shift in China’s focus from growth to stability in their reasoning, saying “the strong Chinese credit impulse that supported global reflation in 2016 and into 2017 is likely to wane in the course of this year.”
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Hao Hong, a China markets strategist with Bocom International Holdings Co., last month flagged the prospect of a cyclical slowdown in Asia’s largest economy that would prick inflationary pressures and skewer reflation trades. Consumer-price growth in China may be slower than expectations amid cuts to overcapacity, the Economic Information Daily reported Wednesday, citing Bank of Communications Co.’s chief economist, Lian Ping.
If Pimco and Gundlach are right, it’s bad news for trading in TIPS, which have climbed 1.6 percent over the past year, versus the 1.5 percent loss for nominal Treasuries.
“There’s starting to be some concerns about actually whether the global economy can pick up any more,” Richard Yetsenga, chief economist at ANZ in Sydney, said on Bloomberg TV Tuesday. ”Commodity prices are up a bit but they don’t seem to really be going on with that kind of trend.”
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