Bill Gross of Janus Capital spoke with Bloomberg’s Tom Keene and Michael McKee on Bloomberg Radio and Television this morning to respond to today’s jobs report. Link: http://bloom.bg/1NTL1zZ
Gross said there is a “100 percent chance” the Fed will raise interest rates in December after jobs surged. “They’re ready to go.” He said: “100 percent that they go in December and then try and tamp it down with mild, gradual language that will keep the dollar from strengthening even further.”
On dollar strength, Gross said: “I think the Fed fears it…They took it out of their statement last month. But prior to that, they were cognizant of the fact that a very strong dollar has negative implications for emerging markets… It’s certainly a negative for the global financial system because there are many bets and much dollar denominated debt in terms of emerging market corporations and sovereigns will be impacted by this.”
On gold, Gross said: “Gold is a mystery, we all know that, but to the extent that real yields rise, it’s a negative impact for a gold price because it makes it more expensive relative to other alternatives. So that’s one explanation. I can’t give you the total solution for why gold goes up or down.”
Bill Gross: Jobs Report Means Fed Is Ready to Go on Rate Hike
TOM KEENE: Bill Gross will be glued to his Bloomberg, won’t he?
MICHAEL MCKEE: He is glued to his Bloomberg. He is glued to our phone line now.
Bill Gross is joining us now from Janus Capital out in California. Bill, son not even up there, yet, but I’m sure there is a bright glow emanating from 20th and C Streets in Washington that you can see from there.
BILL GROSS: Well, I think so. And I’m glued to six of my Bloombergs and they’re all telling the same story, that it’s almost 100 percent that the yellow light changes in December to bright green.
Before going to bed last night, I calculated that any jobs number over 150,000 would be sufficient. And I think importantly because the Fed views the economy and future inflation through a Taylor Rule and a Phillips curve lens that speaks to low unemployment and a new NARU that somewhere around 5.25 percent, which is now below that at five percent.
BILL GROSS: And so I think they’re ready to go.
KEENE: Bill, they recalibrate. What are they waiting for?
Why not have a special meeting and say this was extraordinary and get out front and provide the leadership that the market is desiring?
BILL GROSS: Well, because that’s not the nature of the current Fed. I think we would agree with that, Tom. They’re gradual and they want to make sure that markets are prepared. And unlike Volcker who at one point in the late 1970s shocked the market with a two percent increase before telling anybody, I don’t think that’s the nature of this Fed.
But I think the market obviously is anticipating a rather quick increase of 25 basis points as evidenced by the rise in the two year to 91 basis points.
KEENE: I want Mike McKee to get back to the jobs report, Bill Gross. But I believe this is yields higher, bond prices down. How do you adjust in an unconstrained manner this morning?
BILL GROSS: Well, hopefully you go into it as we did at Janus with a negative duration. That’s the nature of unconstrained. And the beauty of it to prepare for a mild bear market I suppose. There is certainly a down day in prices like today.
And so, yes, earlier this week negative durations going short. The 30 year treasury as opposed to long, and obviously making money at the moment.
MCKEE: Well, here’s what I want to ask you, Bill. The Fed is going to raise interest rates likely in December. The whole goal of QE was to move investors out the risk curve, move you longer. You’re coming back in.
If everybody is doing that, how does that affect the curve, and how does that affect liquidity in the markets if everybody reverses a seven year trade right away?
BILL GROSS: Well, I think that’s a potential problem, yes. And I think since before the data the chances in the market of a December hike was about 60 percent or so. I think today’s report is going to tilt investors towards the reality of a Fed increase in rates for the first time since 2004.
I think you mentioned that previously Mike and Tom, nine years ago was the first time they increased rates.
BILL GROSS: And although the Fed has prepared markets for this, I think the markets may not be prepared because hedge funds and even retail investors will look at this headline and use ETFs and maybe even mutual funds as an exit vehicle.
BILL GROSS: And they all can’t get out at the same time. So it will be interesting to see today and obviously early next week in terms of how quickly they want to hit the exits.
KEENE: Bill Gross with us right now with Janus Capital. We welcome all of you on Bloomberg Radio and Bloomberg Television worldwide.
Bill, I look at the compensating factors and where you know you see that is the deepest market, foreign exchange. Euro 107; the yen blows out to almost a 123, 122.77. What does that dollar strength signal to you?
Is that a construct for the U.S. economy? Or is dollar strength something American manufacturing has to fear?
BILL GROSS: Well, I think so. And I think the Fed fears it, too. They took it out of their statement last month. But prior to that, they were cognizant of the fact that a very strong dollar has negative implications for emerging markets.
I mean I look at the Mexican peso at the moment, up by 18 ticks, and that’s 1.25 percent, meaning down 1.25 percent. And so if that’s typical of emerging markets across the world –
BILL GROSS: – and you spoke to the euro, then the dollar is strong and there are implications in terms of balance sheets for many of these countries.
I think it’s very much of a concern, something the Fed should think about but probably won’t in December.
MCKEE: Well, what could they do about it?
I mean it always comes back to the old John Connolly line about our dollar, your problem. But their mandate is the United States.
BILL GROSS: I agree. And to the extent that the global markets and the recognition that they’re the central bank of the world, which they refuse to acknowledge publicly, is down the list, then inflation and economic growth and wage growth, which we just talked about, become the dominant considerations.
So it’s just a question of priorities.
BILL GROSS: I think they’ll go. And then they’ll look around and see how strong that dollar is. But it’s certainly a negative for the global financial system because there are many bets and much dollar denominated debt in terms of emerging market corporations and sovereigns will be impacted by this.
KEENE: Right. Jason, come on