Indications are mounting towards an imminent economic downturn, with potential repercussions for employment across the nation, as highlighted by esteemed bond market expert Jeff Gundlach.
The CEO of DoubleLine Capital underscored this prognosis in a recent interview, pointing to the yield curve as a reliable harbinger of recessionary trends.
Gundlach shared his insights on CNBC's "Closing Bell," drawing attention to the current volatility of the yield curve. This market measure, which plots the difference between the returns on short and long-term Treasury bonds, traditionally presages economic contractions when it inverts. "Such inversion is a precursor we've observed before past recessions," Gundlach remarked, noting the prolonged period of inversion that typically precedes a downturn.
Historically, recessions have been precipitated by the yield curve's reversion to its normal state after an extended period of inversion, which generally lasts about a year. An inversion occurs when yields on short-term bonds escalate beyond those of their long-term counterparts, contravening the bond market's standard behavior.
The curve of US Treasury bonds initially inverted in the latter half of 2022 and has since moderated considerably. From a stark 109 basis point spread between the yields of 2-year and 10-year bonds in early July, the differential has contracted to a mere 24 basis points following the upheaval in the bond market in October.
Another troubling metric, according to Gundlach, is the national unemployment rate. Despite maintaining a figure below 4%, it has recently deviated from its 12-month moving average, signaling a potential shift towards "very recessionary" conditions.
Gundlach asserts that a tangible indication of an approaching recession would be an upturn in job losses. While downsizing has been prevalent in prominent technology firms and major investment banks over the last couple of years, the trend has largely bypassed other sectors.
"Layoffs seem to be on the horizon," Gundlach cautioned. "We've witnessed hiring freezes, and now the initial wave of layoff announcements has emerged, particularly within the financial and technological sectors. I anticipate this trend will proliferate."
