(Bloomberg) — Ray Dalio got here out with a dark prediction for shares and the financial system after a hotter-than-expected inflation print rattled monetary markets across the globe this week.
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“It seems to be like rates of interest must rise rather a lot (towards the upper finish of the 4.5% to six% vary),” the billionaire founding father of Bridgewater Associates LP wrote in a LinkedIn article dated Tuesday. “This can deliver non-public sector credit score progress down, which is able to deliver non-public sector spending and, therefore, the financial system down with it.”
A mere enhance in charges to about 4.5% would result in an almost 20% plunge in fairness costs, he added.
The speed market suggests merchants have absolutely priced in a 75-basis-point hike subsequent week by the Federal Reserve, with a slight likelihood for a full proportion level transfer. Merchants count on the Fed fund fee to peak at about 4.4% subsequent yr, from the present vary of two.25% and a couple of.5%.
Dalio famous traders should be too complacent about long-term inflation. Whereas the bond market suggests merchants expect a mean annual inflation fee of two.6% over the subsequent decade, his “guesstimate” is that the rise will probably be round 4.5% to five%. With financial shocks, it might be even “considerably larger,” he added.
Dalio mentioned the US yield curve will probably be “comparatively flat” till there may be an “unacceptable unfavorable impact” on the financial system.
A deepening inversion of key curve measures — seen by many as a possible harbinger of recession — has helped reinforce a extra downbeat view about financial exercise amongst traders.
Traders, speculating that the Fed will tip the financial system into recession subsequent yr within the combat to curb inflation, already see coverage makers easing charges within the later phases of 2023.
The S&P 500 is heading for its greatest annual loss since 2008, whereas Treasuries have suffered one in all their worst beatings in a long time.
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