Jeffrey Gundlach: Powell's Relaxed Aura Overshadows Tough Talk

One reason for Powell’s confidence now is that he knows inflation, represented in the Consumer Price Index, is coming down, according to Gundlach. “He knows that the CPI’s coming down and he’s using the word disinflation,” he said, noting that if current trends continue, the June inflation data that will be released in July could show 2.5% headline CPI growth.

“The real question mark is going to be when will the market start worrying about inflation in the second half of this year? Because it’s quite possible that the inflation rate does go back up towards 4% in the second half,” Gundlach added.

The economy won’t get a bad inflation surprise before the next Fed meeting, and Powell “was feeling pretty relaxed, and the markets liked that,” he said.

Powell had an “aura of relaxation and yet he did still talk tough, ‘Job’s not done, job’s not done, we have to raise rates more, we’re not going to stop, we can’t stop too early,’ but for some reason the mood sort of trumped and that rhetoric just didn’t seem to have the teeth, or the intensity, that he had last fall, and I think the market was relieved to see that,” Gundlach said.

After heavy selling last year related to tax-loss harvesting, investors are buying things back now, Gundlach said, noting that the S&P 500, emerging market equities and long Treasurys are all up significantly this year.

“Unfortunately, I think that we’ve gotten a lot of return already for the first part of this year and as we move forward a couple of months, I think we’re going to start getting overvalued,” he said, citing an inflation narrative that’s supportive of markets.