Jeffrey Gundlach, CEO of DoubleLine Capital and known as the "new bond king," recently released a heavyweight viewpoint, clearly stating that the possibility of the Federal Reserve cutting interest rates this year is basically zero. In an interview with Fox News' "Sunday Morning Futures" program on May 18th, Gunlak bluntly stated that the stubborn stickiness of inflation data, clear signals from the interest rate market, and the impact of the Iran War on oil prices have jointly sealed all space for monetary easing. The market's expectation of two interest rate cuts within the year has now completely fallen into thin air.

As one of the most influential opinion leaders in the global bond market, Gundam's judgment has always been regarded as an important indicator by the market. The core basis he provided this time is straightforward and powerful: "In my opinion, it is impossible to cut interest rates when the two-year US Treasury yield is nearly 50 basis points higher than the federal funds rate." This statement not only denies the possibility of a rate cut this year, but also points out the core dilemma facing the current Federal Reserve policy.

Core basis: Stubborn inflation and interest rate signals, double blocking the window for interest rate cuts

Gunlak's judgment that the Federal Reserve cannot cut interest rates comes from two dimensions, and the core support comes from the combination of the two, completely closing the channel for interest rate cuts. The latest inflation data further confirms the rationality of his judgment.

Firstly, inflationary pressures continue to exceed expectations and have the potential to further rise. According to data released by the US Bureau of Labor Statistics on May 12th, the US Consumer Price Index (CPI) jumped 3.8% year-on-year in April, marking the fastest growth rate since May 2023 and a significant increase from March's 3.3%, far exceeding the Fed's long-term policy target of 2%. From a sub item perspective, the energy index has become the main driving force behind the rise in CPI. In April, the energy index increased by 3.8% month on month and 17.9% year-on-year, with gasoline prices rising by 5.4% month on month and 28.4% year-on-year, directly reflecting the significant transmission effect of energy prices on inflation. Gunlak further warned that DoubleLine's model shows that the overall CPI data for the next period will "start with 4", meaning that inflationary pressures are not only showing no signs of subsiding, but will further intensify.

Secondly, the interest rate market sends a clear signal of anti interest rate cuts. The current two-year US Treasury yield is nearly 50 basis points higher than the federal funds rate, and this spread structure itself constitutes a technical obstacle to interest rate cuts. Gunlak explained that behind this interest rate spread, the market has already fully priced the expectation of sustained inflation. If the Federal Reserve rashly cuts interest rates at this time, it will not only fail to alleviate economic pressure, but also seriously damage its policy credibility, further exacerbating market concerns about uncontrolled inflation.

To make matters worse, the significant increase in oil prices caused by the Iran War is further exacerbating inflationary pressures. The rise in energy prices will directly penetrate into various sub items of CPI, from transportation, housing to industrial production, comprehensively pushing up the price level and adding new resistance to the decline of inflation. Gunlak expects that this energy driven upward trend in inflation will continue to be reflected in inflation reports in the coming months, further squeezing the policy space of the Federal Reserve.

Gunlak gave a direct evaluation of the newly appointed Federal Reserve Chairman Kevin Warsh: he took over the position at a 'difficult time'. As soon as Walsh took office, he was caught in a triple dilemma of high inflation, oil price shocks, and divergent market expectations - unable to ignore stubborn inflation and rashly cut interest rates, while also dealing with the uncertainty of economic growth prospects. There is almost no room for loose policies in the short term, which indirectly confirms Gundam's judgment on the possibility of interest rate cuts.

Market warning: Stock market hype and private credit risks quietly accumulate

Despite the volatile macro environment, the US stock market has shown an "exceptionally strong" performance. This seemingly contradictory situation, in Gundam's view, hides strong speculative concerns behind it. He interpreted that the sustained rise in the stock market is essentially the result of the Federal Reserve's inaction on inflation issues: "When the Federal Reserve does nothing about inflation, the stock market will soar all the way." The continued exceeding of corporate profits further fuels speculative sentiment in the market and drives valuations higher.

However, Gunlak also issued a warning that the current strength of the stock market lacks a solid foundation, and "market valuations are very expensive, with a strong speculative atmosphere." Although profit data continues to exceed expectations, this situation itself is "fueling speculative frenzy," internalizing a large amount of risk. Once the macro environment experiences further fluctuations, the stock market may face a significant pullback.

In terms of asset allocation, Gunlak revealed that he has been very, very bullish on commodities for the past three years or so. He analyzed that the current actual return on bonds is negative, and the predicted market has diverted some interest in speculative assets such as Bitcoin, making it almost impossible for investors to find attractive alternative options outside of stocks, which has also supported the high-level operation of the stock market to some extent.

In addition to the stock market, Gunlak also emphasized the risks of the private credit market, using extremely direct language. When asked if he was concerned about the sector, he bluntly said, "Of course, I am." He pointed out that there is a disturbing structural feature in the private credit market: "This market always seems to need new investors to enter." In his view, behind this feature, it reflects the greedy logic of sponsors - "they just blindly want to manage more, more assets. This concern has also been confirmed by the International Financial Stability Board (FSB), which released a report on June 6 stating that the size of the private credit market has rapidly grown to $1.5-2.0 trillion, with multiple vulnerabilities such as deep ties to banks, low credit quality of borrowers, and opaque valuations. Moreover, it has not been fully tested in the long-term economic downturn, and potential risks cannot be ignored.

Summary: The expectation of interest rate cuts has completely fallen through, and the market needs to face the risk adjustment directly

The statement of "New Bond King" Gunlak completely shattered the market's illusion of the Federal Reserve cutting interest rates this year. The stubborn stickiness of inflation, the anti interest rate cut signal in the interest rate market, and the continuous transmission of oil price shocks, combined with three factors, have completely blocked the monetary easing space of the Federal Reserve, and the new chairman, Walsh, is also in a dilemma.

What is even more alarming is that the current market is in a critical stage of risk accumulation: the stock market is rising at a high level, valuations are high, and speculative sentiment is rampant; The structural risks in the private credit market are becoming increasingly prominent and have received attention from international regulatory agencies; The inflationary pressure brought about by the rise in energy prices is still continuing to spread throughout the entire economic system.

For investors, Gundam's warning is undoubtedly a wake-up call - the asset allocation logic based on the expectation of interest rate cuts needs to be adjusted in a timely manner; In the face of continuously accumulating market risks, caution should be maintained, with a focus on the allocation value of anti inflation assets such as commodities, while being alert to potential risks in stock market corrections and private credit markets. For the Federal Reserve, finding a balance between curbing inflation and stabilizing the economy will be the most central policy challenge in the coming months.