Economist David Rosenberg says he made a career out of not following the herd, and his mortgage forecast could be considered the latest example.
According to the Rosenberg research president, the interest rate shock this year around the standard 10-year treasury note is temporary.
“This bond market is so radically oversold,” Rosenberg told CNBC’s “Trading Nation” on Friday. “We’ll peel back to 1%.”
The ten-year yield ended the week at 1.41%. It is 55% higher so far this year and is about 52 weeks high. The yield moves inversely to debt prices.
The overwhelming fear on Wall Street is that the jump is due to inflation rather than a temporary push related to the economic recovery.
“The problem I have with this view is that all of this stimulus is temporary in nature and will roll off next year when we face the proverbial fiscal cliff,” Rosenberg wrote in a recent note.
Yet Rosenberg will not completely rule out a run to 2%.
“It will have a major technical overrun,” he said. “A 2% move in the 10-year note I would say will be the same as a 3% plus at the end of 2018. That’s something you want to buy.”
Although he expects inflation fluctuations to subside, he still sees problems for the stock market. Rosenberg, who served as Merrill Lynch’s best economist from 2002 to 2009, is known for his clumsy calls.
At the moment, Rosenberg is negative about large-tech and mega-paper growth stocks. However, he does not see rising rates as the main reason why the technological Nasdaq, which fell 5% last week, was under pressure.
“The reality is that most of them actually reached a peak and started rolling under the weight of their own overvalued co-payment a few months ago,” Rosenberg said.
Rosenberg’s watchlist
The market groups on its watch list are cars and housing because the pent-up demand during the coronavirus pandemic has been dramatically highlighted.
In the case of housing, Rosenberg is worried that it will eventually be hit by excess supply in the labor market. He predicts that this will suppress wage growth that will prevent inflation from accelerating.
Rosenberg warns that the impact could cause affordability problems with the house price to income ratios close to 2006’s bubble levels.
“We could end up with a 15% drop in stock prices and in house prices that is even more important,” Rosenberg said. “It would be a pretty negative shock on assets and create what we called the negative wealth effect on spending.”
This is a scenario he quite possibly mentions, and one that will put inflation fluctuations in the background.
“We are not going to hear the mortgage cattle talk about inflation much longer,” Rosenberg said.
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