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"Watch the 2.6 percent level. Much more important than Dow
20,000. Much more important than $60-a-barrel oil. Much more
important that the Dollar/Euro parity at 1.00. It is the key to
interest rate levels and perhaps stock price levels in 2017,"
Gross wrote in his latest investment outlook to clients.
The 10-year Treasury note yield was around 2.37 percent late
on Monday.
Gross, who runs the $1.7 billion Janus Global Unconstrained Bond
Fund, said: "Happiness has dominated risk markets since early
November and despair has characterized global bond markets."
The 100 basis point move in the 10-year Treasury yield from 1.40
percent to 2.40 percent has stemmed from the hope for stronger
growth by way of Republican fiscal progress, reduced regulation
and tax reform, Gross noted. He also said Treasury yields have
edged higher on encouraged risk-taking as well as the potential
for higher inflation and a more hawkish Federal Reserve.
"Are risk markets overpriced and Treasuries over-yielded? That
is a critical question for 2017," Gross wrote.
Gross noted that U.S. President-elect Donald Trump "tweets and
markets listen for now, but ultimately their value is dependent
on a jump step move from the 2 percent real GDP growth rate of
the past 10 years to a 3 percent-plus annual advance."
Gross said 3 percent growth rates historically have propelled
corporate profits to a somewhat higher clip because of financial
and operating leverage dependent on higher growth.
"We shall see whether Republican/Trumpian orthodoxy can
stimulate an economy that in some ways is at full capacity
already," Gross said. "To do so would require a significant
advance in investment spending which up until now has taken a
backseat to corporate stock buybacks and merger/acquisition
related uses of cash flow. I, for one, am skeptical of the 3 and
more confident of the 2."
Gross said demographic negatives associated with an aging
population are now more at risk due to rising interest rates,
technology's displacement of human labor, and the deceleration
and retreat of globalization, posing threats to productivity and
GDP growth.
"Trump’s policies may grant a temporary acceleration over the
next few years, but a 2 percent longer term standard is likely
in place that will stunt corporate profit growth and slow down
risk asset appreciation," Gross said.
(Reporting By Jennifer Ablan)
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