Jeffrey Gundlach Doubleline Capital Q4 LetterVW Staff
Jeffrey Gundlach Doubleline Capital’s commentary for the fourth quarter 2014.
Jeffrey Gundlach Doubleline Capital: Overview
During the first two weeks of December, weakness in the Energy sector spread through global markets as market participants were trying to find an answer for the precipitous decline in oil prices. As energy prices continued to fall, the strength of global economic growth came into question. This uncertainty, coupled with accelerated elections in Greece and the extreme volatility in Russian financial markets led to a decline in most risk assets. On December 17, investor confidence received a boost following a benign outcome from the Federal Open Market Committee (FOMC) which centered on new language stating that the FOMC will be “patient in beginning to normalize the stance of monetary policy.” With everything seemingly back to normal, risk assets moved higher as if nothing ever happened.
During the second half of the month, a strong third Gross Domestic Product (GDP) print calmed any lingering concerns. According to the final release of third quarter GDP, the economy grew 5.0% quarterover- quarter (QoQ) marking the strongest growth in 11 years. As a result, the American consumer appeared to be more comfortable spending as personal consumption contributed 2.2% to GDP. Despite the strong figure, GDP is up 2.7% year-over-year (YoY) outperforming most developed countries. By comparison, 2014 GDP growth is projected to come in below 1.0% in both the eurozone and Japan.
The European Central Bank (ECB) and the Bank of Japan (BoJ) continued to reiterate accommodative monetary policy in support of weaker than expected growth.
Domestically, the U.S. economy appears to be on better footing as employment figures continued to improve. Total nonfarm payrolls increased by 252,000 during the final month of the year as job additions rose unexpectedly in the construction industry. The increase in hiring combined with a contraction in the civilian labor force led to the drop in the unemployment rate which fell to a multi-year low of 5.6%.
Although the data appears strong on the surface, a majority of job gains have gone to older cohorts. The Energy sector has been another bright spot for employment which may face a headwind if energy producers continue to cut back on capital expenditures.
Global commodity prices were the loser during December as the energy sector led the decline. Commodity prices as measured by the S&P GSCI Index fell 13.63% to the lowest index level since 2009. Lower energy prices impacted inflation data points in the U.S. as the Consumer Price Index (CPI) and the Producer Price Index (PPI) for final demand fell to 1.3% YoY and 1.4% YoY, respectively. Transportation and raw material costs continue to decline. Traditional markets such as U.S. equities were rather unchanged for the month, down just 0.26%. The fixed income market as measured by the Barclays Aggregate Bond Index rose just 0.09%. The U.S. Dollar (USD) remained strong with the consensus viewpoint pushing the U.S. Dollar Index (DXY) to a new 8-year high of 90.27.
Jeffrey Gundlach Doubleline Capital: Emerging Markets Fixed Income
In Emerging Markets Fixed Income (EMFI), the three sectors of the market – the external sovereign, corporate debt and local currency bonds, represented by the JP Morgan Emerging Markets Bond Index Global Diversified (EMBI), the JP Morgan Corporate Emerging Markets Bond Index Broad Diversified (CEMBI) and the JP Morgan Government Bond Index Emerging Markets Broad Diversified (GBI-EM), respectively – posted negative returns for December 2014 and the fourth calendar quarter. For the fourth quarter, EM debt as represented by the EMBI declined -0.55% as robust gains in October and a nearly flat November were overwhelmed a strong selloff in December.
In contrast to the U.S., many developed economies abroad are struggling with sluggish growth, and many commodity-linked EM counterparts are forced to rebalance their economies due to the sharp impact from energy and metal price declines. The International Monetary Fund (IMF) cut its 2015 global growth outlook 20 bps to 3.8%. In the eurozone, third quarter GDP barely edged up 0.2% and the ECB cut its 2014 growth forecast to 0.8%. The European Central Bank (ECB) is rumored to consider a 500 billion euro quantitative easing (QE) program to purchase sovereign debt of member nations in early 2015. This attempt to boost growth comes as Greece once more returns to headlines and raises the possibility of geopolitical instability as the ruling center-left coalition was forced to call elections scheduled for late January in the face of rising popularity for an extreme anti-austerity left-wing party. Amid the potential for Greece to once more exit the monetary union, as well as the ECB’s aggressive easing stance, the euro sank to lows versus the USD not seen since the euro sovereign debt crisis emerged in 2010.
See full PDF below.