Need to Know: Ray Dalio says watch out for rates reaching this level, because Wall Street stocks will take a 20% hit


After that CPI shock earlier in the week, Wall Street is bracing for a fresh batch of data including retail sales, on Thursday, with a deepening yield curve inversion between 2- and 10-year bonds giving off ever gloomier economic signals. There’s good news though, as a disastrous rail strike may be averted.

There’s no cheering up billionaire investor and hedge-fund manager Ray Dalio who in our call of the day asserts the Fed has no choice but to keep driving up interest rates, at a high price to stocks.

And he’s putting some fairly precise guesswork out there. “I estimate that a rise in rates from where they are to about 4.5% will produce about a 20% negative impact on equity prices,” Dalio said in a LinkedIn post dated Tuesday.

Some are forecasting the Fed could hike interest rates by 100 basis points next week, a move not seen since the likewise inflationary 80s. The central bank’s short-term rate hovers between 2.25% to 2.5%, but Nomura, for one, sees that rate headed to 4.75% by 2023.

But Dalio thinks interest rates could even reach the higher end of a 4.5%-to-6% range. “This will bring private sector credit growth down, which will bring private sector spending, and hence the economy down with it,” he says.

Behind this prediction is the Bridgewater Associates founder belief that the market is severely underestimating where inflation will end up — at 2.6% over the next 10 years versus what he sees as 4.5% to 5% in the medium term, barring shocks.

Read: Why a single U.S. inflation report roiled global financial markets — and what comes next

As for what happens when people start losing money in the markets — the so-called “wealth effect” — he expects less spending as they and their lenders grow more cautious.

“The upshot is that it looks likely to me that the inflation rate will stay significantly above what people and the Fed want it to be (while the year-over-year inflation rate will fall), that interest rates will go up, that other markets will go down, and that the economy will be weaker than expected, and that is without consideration given to the worsening trends in internal and external conflicts and their effects.”

The markets

Stock futures ES00, -0.23% YM00, -0.04% NQ00, -0.44% have turned mixed, with Treasury yields TMUBMUSD10Y, 3.464% TMUBMUSD02Y, 3.868% climbing and the dollar DXY, +0.03% easing up some.

Oil prices CL.1, -1.39% are tilting south, alongside gold GC00, -0.91%. China stocks SHCOMP, -1.16% HSI, +0.44% slipped after the country’s central bank left rates unchanged. European natural-gas prices GWM00, +4.45% are on the rise again. Bitcoin BTCUSD, +0.96% is trading at just over $20,000.

The buzz

Shares of Union Pacific UNP, -3.69%, Norfolk Southern  NSC, -2.16% and CSX CSX, -1.05%  are rallying in premarket after the White House said it has reached a tentative railway agreement with unions. No deal by Friday would mean strikes and havoc for supply chains, grain markets and even the coming holidays. Read more here.

Apart from August retail sales, we’ll get weekly jobless claims, the Philly Fed and Empire State manufacturing indexes and import prices. Industrial production and business inventories will follow.

Adobe shares ADBE, +0.85% are dropping after a report the software company is mulling a $20 billion deal to buy graphic design startup Figma .

Vitalik Buterin, one of the co-founders of Ethereum, says the so-called merger is done, meaning the birth of a more environmentally friendly crypto. Ethereum ETHUSD, -0.89% is up just a little right now.

A new lawsuit claims Tesla TSLA, +3.59% has made false promises over Autopilot and Full Self Driving features. And move over Tesla, Apple AAPL, +0.96% is now Wall Street’s biggest short bet.

Ericsson ERIC, -3.32% ERIC.A, -1.78% ERIC.B, -3.19% is dropping after a double downgrade at Credit Suisse, who cited inflationary headwinds. Analysts lifted Nokia NOKIA, -0.37% NOK, -0.40% to outperform, though the stock is barely moving.

Cathie Wood’s Ark Investment Management went on a dip-buying spree after Tuesday’s market meltdown, scooping up chiefly Roku ROKU, +0.44%.

Opinion: Pinterest never considered itself a social network. Until now.

Patagonia billionaire Yvon Chouinard is donating his entire company — worth $3 billion — to the climate fight.

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The tickers

These were the top-searched tickers on MarketWatch as of 6 a.m. Eastern Time:

Ticker Security name
TSLA, +3.59% Tesla
GME, +1.01% GameStop
AMC, +1.95% AMC Entertainment
BBBY, +4.66% Bed Bath & Beyond
HKD, +311.78% AMTD Digital
NIO, -0.14% NIO
AAPL, +0.96% Apple
APE, +0.94% AMC Entertainment preferred shares
AMZN, +1.36% Amazon
NVDA, -0.02% Nvidia
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