The world's biggest hedge fund: the 2019th will be hard for the economy

When the founder and head of the world's largest hedge fund, Ray Dalio, speaks, the market is silent and listening. And what Dalio says should bother all market players.
According to the head of Bridgewater Associates, next year will be difficult for stock markets and the economy. He is bearish for almost every asset class, Dalio commented in a recent letter to the clients of the fund he manages.
2019 seems to be a dangerous period for the economy, Dalio says.
Earlier in the month, the hedge fund manager said he was at the forefront of the stock market and this is a problem.
The company, which currently manages assets worth about $150 billion, believes the US bond yield curve should remain flat, in a range where oil reached $62 a barrel and the dollar fell 3.5 percent against the rest of the major currencies.
2019 seems to be a dangerous period for the economy when the financial stimulus is over, and the Fed's interest rate cycle will find its peak, Dalio said in the letter to the hedge fund investors. Given the fact that financial markets are ahead of what is happening in the real economy, the danger to investors is already present.

Inflation expectations in the US have fallen

Inflation expectations in the US declined over the past month, according to a report by the New York Fed, published yesterday. Financial markets traditionally look at these reports as evidence of what inflation will be.
The survey of consumer expectations indicates a further gradual rise in interest rates. However, inflation is expected to be 2.71% next year compared to 2.82 the previous month.
The three-year value of expectations was 2.79% in January, which was also down from 2.89% previously. Both values ​​last month were the highest in a long time.
Data largely contradicts the government's January wage increase report, which raised inflationary expectations of the market as well as expectations for interest rate hikes from the Fed.
The Fed raised interest rates three times in the past year, despite the fall in inflation. At the same time, the reserve is expected to do so three more times this year.
In addition, the Fed is expected to begin gradually reducing its record balance, which will also exert an upward pressure on interest rates.

GS: Stopping the US government will take 0.2% of the GDP growth

The US investment bank Goldman Sachs predicts that the US government's shutdown will reduce GDP growth by 0.2% in the first quarter, but will soon be lived thru.
The negative effect is expected to be offset in the second quarter of the year if it is assumed that the government's shutdown will be restored by then.
According to the bank, the impact of this event on the financial markets will be "minimal".
Such government stopovers will have a lesser impact on the US economy, GS predicted.
Now that the federal government has failed to negotiate a new increase in the debt ceiling, the GDP of the world's largest economy is expected to fall by 0.2 percentage points for each week in which this event is in place, GS said.
The bank, however, is clearly not worried that this will last too long, or that the damage to the economy will be excessive, predicting a minimal impact on growth for the whole year.

Morgan Stanley: International trade will support the dollar

Many foreign exchange strategists are calling for a further weakness of the US dollar because of expectations of good growth in the global economy and signs that the world's leading central banks are increasingly confident in normalizing their monetary policies and raising interest rates.
Still, greenback has its own supporters. One of the last comes in the face of analysts from the investment bank Morgan Stanley.
The bank expects some force for the dollar to come in the direction of international trade.
International trade is expected to be the topic of this year, beyond interest rates, which will continue to actively engage investor moods.
Fed's rhetoric has changed since Donald Trump became president by making a protectionist turn.
The expectation is that the new reserve manager nominated by Trump will continue to pursue a weak dollar policy to help and stimulate the US economy.
Other currencies that are more prone to downward pressure include those who are dependable on a potential change in their countries' trade relations, such as the Canadian dollar and the British pound, Morgan Stanley said.

UBS raised the number of expected US interest rates hikes

The Swiss UBS updated its expectations regarding the number of Fed interest rises this year. Now the bank expects three rises in interest rates in 2018 in the world's largest economy. So far, they have forecasted only two increases.
In fact, most of market participants predict two increases in Fed interest rates this year.
According to UBS, however, there is less concern about the state of the US and the world economy, which will make the Fed much more aggressive in normalizing monetary policy and raising rates.
The rise in the price of oil and other major commodities is a major factor that UBS says will initiate an increase in inflation earlier this year. Oil is traded at around $65 a barrel currently.
However, according to experts, the number of Fed interest increases will largely depend on the decisions of other leading central banks around the world.
If the ECB and the Japanese Central Bank become more aggressive in their speeches and politics, it can also help for a more aggressive policy by the US reserve.
However, according to Charles Evans, the Fed leader in Chicago, the monetary policy committee should wait until the middle of this year before considering a new rate hike. Evans voted against the latest interest rate hike that happened in December.

GS: Cryptocurrencies and loans will overshadow US growth (2)

Goldman is not the only financial institution that warns of "red flags" in cryptocurrencies. JPMorgan Chase & Co. executive Director, Jamie Diamond, has already described the bitcoin as a "scam". He said the bitcoin is a "highly speculative asset".
The bitcoin was determined by Japanese central bank chief Haruhiko Kuroda as a speculative tool.
Positive impacts are expected to be in the direction of initial housing, which will continue to have a good impact on the labor market.
The growth in pay for US workers is expected to accelerate and lead to an increase in inflation. The latter is expected to rise from its current levels to 1.5% and to reach 2% target from the Fed.
Markets are expected to start betting for more rapid interest rates next year, GS said. At the moment, two interest rates are pledged, but over time, market participants can expect to see three. And the Fed can surprise them with even more aggressive actions.

Jerome Powell expects interest rates to rise further

Federal Reserve Chairman Jerome Powell and President Donald Trump's nominee for Fed's head of office expects interest rates to continue rising from their current levels.
According to him, the FED's goal is to maintain a strong labor market and to move inflation to target levels. In this regard, FED expects the interest rates to rise further from their current values ​​and the size of the balance to gradually decrease.
Powell also said that the Fed's objectives would continue to maintain strong financial system, with financial and regulatory reforms being gradually made.
The key question facing Paul is most likely - how the Fed will continue to sustain and stimulate the third longest expansion in US history and how far the planned regulatory relief for the financial system will be stretched.
While Janet Yelan inherited a relatively weak state economy, still aware of the effects of the debt crisis, Powell will inherit a rather strong economy.
Powell also said that if he was appointed to the post, he would continue to support the growth and progress of the economy to full recovery.

GS: S&P 500 at 2 400 points by the end of the year

The US economy is growing at a healthy pace, which has already brought the US indexes to new record highs, commented GS chief financial analyst David Kostin. He acknowledged that a synchronized rise in economic activity around the world was a major reason for the appreciation of the stock.
Now, however, Kostin warns investors to be careful. He pointed to the ISM Manufacturing Index, which is at a 13-month high of 60.8 points in September. Indicator value is above 50 points, signaling growth.
In other words, according to Kostin, the current ISM index values ​​could signal a peak in the economy.
And as we know, expectations are being traded in the markets. When expectations begin to slow down, markets are also following.
Kostin predicts the blue chip index S&P 500 to drop to 2 400 points by the end of the year. Despite these expectations, he likes growth-oriented stocks.

P. Harker: Another rate hike this year and three in the next

Fed Philadelphia head Patrick Harker said last week he expects another increase in interest from the reserve and three next year.
This program, however, will largely depend on the performance of inflation, Harker said.
He still signed up for three interest rates next year, but again we need to see how market dynamics is developing, Harker said in an interview with CNBC.
Apparently the comments of the official representatives of the reserve are not convincing enough, as yet a little over half of the market participants expect a third increase in interest rates this year.
We can not fail to note the still low performance of inflation in the world's leading economy. It is at levels below the target of 2%, puzzling seriously the members of the Monetary Policy Committee.
And although Fed officials, in the face of Janet Yelan and Stanley Fischer, have said in the past two weeks that they expect inflation to accelerate over the coming months as a result of low unemployment, inflation has fallen since the beginning year.

Fischer: Soon we will see inflation

The current path of low inflation in the US will not last long, according to Fed Vice President Stanley Fischer.
He still believes we will see higher inflation, Fischer said in an interview with Bloomberg TV.
The fall in unemployment will lead to an increase in wages at one point, and that is to inflation behind, Fischer said.
Fisher's comments are in line with statements by Janet Yelan, who recently said that she expects inflation to gradually rise over time.
Some Fed officials want to first see signs of returning inflation to target 2% before continuing the policy of raising interest rates.
Fischer said he welcomed the gradual rise in Fed interest rates since 2015.
Currently, the level of short-term US interest rates is between 1 and 1.25%. Inflation measured through personal consumption is at a level of 1.3% on an annual basis.

Yellen: The gradual rise in interest rates will continue (2)

Yellen's comments are becoming reality in an environment of fierce disputes among economists and members of the monetary policy committee about how the rise in interest rates will affect on low inflation.
The level of consumer price growth is still far below the target of 2%, which is considered healthy for the economy.
According to Yellen, there is now a 30% probability that inflation will fluctuate between one and three percent, which could radically change the policy pursued by the reserve.
In fact, Yellen's message was very controversial, but was perceived by market participants as a complete lack of certainty as to what Fed's interest rate inflation and policy would be.

Yellen: The gradual rise in interest rates will continue (1)

Janet Yellen did not surprise the market by saying what everyone was expecting from her. Particulary, the gradual rise in interest rates will continue despite weak inflation.
Yellen's comments continue to indicate problems in predicting inflation in the future, which may be an obstacle to normalizing interest rate policy from the Federal reserve.
It is possible that the Fed has applied incorrect inflation models and failed to take into account key labor market facts, said Yellen.
And while there is still no clear evidence of accelerating inflation to strengthen the position of a gradual rise in interest rates, the central bank must be open to similar action, the most influential business lady said.
The current low inflation most likely reflects factors that will drop over time, Yellen said in a 37-page report.
Without further gradual increases in federal interest, according to her, over time, there is a risk that the labor market will gradually overheat, creating inflationary problems in the future that will be difficult to overcome without bringing a recession.

Will the ECB keep zero interest rates for at least another year?

Europe struggles successfully for the leadership of growth and will gradually shift the US as the engine of the world economy in the second half of the year.
The difference will not be significant, but it shows the advantage of zero interest rates and the cheap euro. The slowdown in US growth does not just come from the process of normalizing of interest rates.
Their change is still insignificant, but the economy is entering the late stage of growth, which will be characterized by a slowdown in investment activity and industry. Consumption remains the most serious factor behind GDP growth, backed by low unemployment and low inflation.
Negative trends in industry and construction do not stop the Federal Reserve in raising interest rates because the slowdown in these sectors is not strong enough. Does this mean that raising interest rates is intended to stop the stock market turning into a bubble? More likely, because the deflationary processes have not passed and the economy does not overheat. In this case, the question arises when the US stock market will become aware of the risks of expensive stocks and of rising interest rates.
According to some analysts, the risks to growth in Europe are much less than the barriers to the US economy. Inflation worries remain in the background, with the European Central Bank holding zero interest rates for at least another year. Political risks are weakening, but tensions between Brussels and London will have economic consequences for both countries, which will gradually increase in 2018.

Williams: The Fed aims to keep the markets stable

The state economy is close, or the Fed targeted level of full employment and stable prices, said Fed San Francisco head John Williams. Williams also added that the central bank's goal is to ensure the peace of the financial markets, with a gradual return to the normal interest rate policy.
According to the financial expert, the volatility is the last wanted thing to feed.
Employment in the US is at full employment, and inflation is expected to reach 2% target by the Fed by the end of next year. In such an environment, the Fed will most likely continue with its policy of normalizing interest rates. If the reserve does not do that, it risks the US economy "overheating seriously," Williams added.
The Fed raised the interest rate in March for the third time since the end of the financial crisis. Investors expect to witness two more interest rises by the end of this year, one of which is likely next month.
According to Williams, it is normal for the Fed to resort to a reduction in its balance sheet.

Employment data in the US above expectations

The report of employment in the world's largest economy were well above analysts' average expectations. The newly created jobs were 211,000 in April, and the unemployment rate was 4.4%.
However, wage growth, at a 2.5% annual rate, was slightly below analysts' average expectations.
In any case, the data suggest that investors are likely to witness a June interest rate rise as well as at least one more to year-end.
The data showed that the US labor market recovered after much weaker results in March. A month earlier, only 79,000 new jobs were created.
The result also exceeded the average expectations of analysts predicting 190,000 new jobs in April.
Despite the good data, the euro appreciated against the dollar as it was close to cross the psychological limit of 1.1000, days before the presidential elections in France.
And while similar levels of euro against the dollar indicate expectations for a near-certain Macron victory, a surprise result in favor of Le Pen, according to analysts, could send the euro between 3 and 6% down on Monday.

The head of the US Federal Reserve called "appropriate" the rate hike in March

The US Federal Reserve may raise interest rates later in March if the economic data about the state of the labor market and inflation will continue to remain at an acceptable level, said Fed chief Janet Yellen on Friday, indicating a likely imminent increase at the next meeting of the regulator.
Some of Yellen colleagues at the US central bank in recent days talked about the possibility of a rate hike at the meeting of 14-15 March.
The head of the regulator noted that this year's rate increase will be faster, because the economy this year for the first time since Yellen's FED presidency will not get any unavoidable complexity, either domestically or abroad.
Overall, the prospects for moderate economic growth are encouraging, partly due to a decrease in outbound from abroad risk, according to Yellen.
The target of the Fed about unemployment is reached and rising of prices revived.
The last time the Fed raised rates was in December, signaling of another three possible hikes in 2017.

The US economy grew in the third quarter with a stronger pace compared to the previous assessment

The US economy grew in the third quarter with a stronger pace compared to the previous assessment, thanks to a better increase in consumer spending and business investment during the period from July to September.
Gross Domestic Product of the US, which is the most common measure of the production of goods and services, increased in the third quarter by 3.5% yoy in the previous estimate of growth by 3.2 percent. This is the most solid expansion of the US economy for two years after its anemic performance in the first half, as the average forecasts of financial markets were for more modest upward revision for growth by 3.3%.
The solid economic growth in the third quarter is due to stronger growth in consumer spending and better business investment in construction and intellectual property.
The costs of US consumers who are the main driver of economic expansion, increased in the third quarter by 3.0% instead of 2.8%, according to previous evaluation, but after their strong growth by 4.3% in the second quarter. Let me recall that the domestic consumption forms more than two-thirds of the growth of the leading economy in the world.
Business investment in non-residential construction rose by 1.4%, which is far above the previous estimate for their anemic increase by 0.1%, while investments in infrastructure grew by 12% and intellectual property - by 3.2%. Investment in residential construction, however, narrowed in the third quarter by 4.1%.
One of the main generators of economic growth in the third quarter is the increased exports by 10.0% after an increase by only 1.4% in the previous quarter, this represents the most robust growth in exports in nearly three years. At the same time, imports rose by 2.2% after an anemic increase by 0.2 percent in the three months, ending in June.

New jobs in the private sector in the US rose in November

A research by the company Automatic Data Processing Inc. (ADP) reported an increase of 216 000 jobs created by private businesses in the US in November with average forecasts of financial markets for an increase of about 165 000. At the same time it was announced some downward revision of data for October, according to which private sector of the US economy were revealed 119,000 jobs during a previous assessment of the ADP of 147 000.
Yesterday's stronger than expected data suggest a pretty good rate of improvement in the labor market, even though the US economy is getting closer to achieving the so-called "Full employment", analysts say.
The ADP report is unlikely to lead to a substantial revision of forecasts of financial markets for upcoming on Friday an official report on employment in November, they added.
According to ADP small US companies with employees between 1 and 49 already for the fifth consecutive month are not a major generator of employment in November, as they had opened 37,000 jobs, medium-sized companies, employing between 50 and 499 people, were hired extra 89 000 workers, while large companies, employing more than 500 people have launched 90,000 new jobs.
The service sector added in the eleventh month of this year 228,000 jobs, in the manufacturing sector were cut 10 000 jobs, only within the industrial enterprises were laid off 10,000 workers, while in construction the number of jobs had increased by 2000, shows the latest survey of ADP.
Let me recall, that ADP surveys pretty much show what to expect from NFP on Friday. If their results are close to the real data, we can expect serious rise in dollar after this week's NFP.

The new "stone in the garden" of the US economy

US economic data continues to disappoint market participants. Yesterday was published the index of activity in the service sector ISM in August. Its value greatly disappointed market participants - figure dropped to a mark of 51.4 from 55.0 in July. This was the worst result for the last 6 years.
US dollar responsed to the data with weakness on all fronts. The EUR/USD in a wave of purchases broke through psychological barrier near 1.1200 and it is now in the 1.1250-60 area, intending to continue to grow.
In the past few days, there was enough evidence, that the US economy remains far from being in the state, which would allow to successfully survive the increase in Fed rates. The labor market, according to the Friday's NFP, is growing with uneven pace, inflationary pressures are not observed, and economic activity is reduced. This may force the US Federal Reserve to postpone the resumption of the cycle of rate hikes until next year.
Any new signs of recession in the US economy would immediately lead to a selling USD, so the major currency pairs will be subject to high volatility.

How the employment report will affect the dollar?

In anticipation of today's release of the report on employment in the non-farm sector of the US, investors have started to fix profit on their long positions on the dollar. The release from positions has been associated with a weak index of manufacturing activity from the ISM, but today will be a tense day, so some traders also decided to reduce their dollar assets. Officials from the Federal Reserve made it clear, that the decision about raising interest rates in September will largely depend on today's labor market report. If the increase in the number of employees exceeds 200 thousand and the unemployment rate will remain unchanged or fall, expectations about rate hikes in the next month will increase, causing a full-scale dollar strenghtening, wich would bring USD/JPY at the highest level for the month. If the figures are quite high, USD/JPY could even reach 105. However, if the report disappoint, the dollar can meet a nasty correction after rising last month. Stronger than all the dollar would fall to the British pound and the New Zealand dollar - the two currencies, which showed particularly good results in the eve the publication of the report.