Economist David Rosenberg says he made a career out of following the herd, and his title forecast could be considered the most recent example.
According to the president of Rosenberg Research, the yield shock of this year’s rate around the 10-year Treasury Note is temporary.
“This bond market is radically oversold,” Rosenberg told CNBC’s “Trading Nation” on Friday. “Let’s go back to 1%.”
The 10-year yield ended the week at 1.41%. It is now 55% so far this year and is around 52 weeks. Yield moves inversely at debt prices.
The overwhelming fear on Wall Street is that the leap is due to inflation, not a temporary increase in demand linked to the economic recovery.
“The problem I have with this view is that all this stimulus is temporary in nature and will happen next year, when we face the proverbial fiscal chasm,” wrote Rosenberg in a recent note.
However, Rosenberg does not completely rule out a run to 2%.
“That would be a big technical mistake,” he said. “A 2% movement in the 10-year note, I will tell you, would be the same as 3% more at the end of 2018. It is something you want to buy.”
Although he expects the nervousness of inflation to subside, he still sees problems for the stock market. Rosenberg, who served as Merrill Lynch’s top US economist from 2002 to 2009, is known for his pessimistic predictions.
At the moment, Rosenberg is negative in high tech stocks and mega capitalization. However, he does not see the rate hike as the main reason why the Nasdaq, which fell 5% last week, is under pressure.
“The reality is that most of them peaked and started rolling several months ago, just under the weight of their own overvalued excess,” said Rosenberg.
Rosenberg’s Watch List
The market groups on its watch list are automobiles and housing, because the pent-up demand during the coronavirus pandemic has been dramatically pulled forward.
In the case of housing, Rosenberg fears that he will end up being hit by excess supply in the labor market. He predicts that this will suppress wage growth, which will prevent inflation from accelerating.
Rosenberg warns that the impact would cause accessibility problems in the relationship between house prices and income close to the 2006 bubble levels
“We can end up with a drop of at least 15% in stock prices and house prices, which is even more important,” noted Rosenberg. “That would be a very significant negative shock on assets and create what we used to call the negative wealth effect on spending.”
It is a scenario that he calls quite possible and that would put the nerves of inflation in a double boiler.
“We are not going to hear bond bears talking about inflation much longer,” said Rosenberg.
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