Deutsche Bank says the market is pricing a 100% risk of a US recession by the end of the year. Futures traders are positioned for a recession to hit the US economy by January 2023. With inflation rising by 9.1%, markets expect the Fed to get tougher and spark a recession.
The latest US inflation reading has prompted markets to price in a 100% risk of a recession hitting the economy before the end of the year, according to George Saravelos, global head of currency research at Deutsche Bank.
In a Thursday research note viewed by Insider, Saravelos used the peak in the Fed fund futures curve as a measure for recession expectations.
He identified a major shift in the market’s view of when the next recession will hit the economy since February, when investors didn’t expected an economic downturn to materialize until December 2024.
Inflation has surged across many advanced and developing economies since early 2021 as strong demand for goods collided with shortages brought on by the pandemic.
Central banks spent months hoping that economies would reopen and shipping routes would unclog, easing supply constraints, and that consumer spending would return to normal.
That hasn’t happened, and the war in Ukraine has only intensified the situation by disrupting oil and food supplies, pushing prices even higher.
Global economic policymakers began responding in earnest this year, with at least 75 central banks lifting interest rates, many from historically low levels.
While policymakers cannot do much to contain high energy prices, higher borrowing costs could help slow consumer and business demand to give supply a chance to catch up across an array of goods and services so that inflation does not continue indefinitely.
The data, along with comments from Federal Reserve officials over the past two days, have helped calm some of the market’s jitters that the central bank would deliver an even bigger rate hike this month than the 75-basis-point increase in June.
Despite some promising economic data, Deutsche Bank said that markets are pricing in a 100% chance of a recession this year. Bank of America this week also updated its outlook to say that a recession will take hold this year and last through early 2023.
Famed economist Paul Krugman wrote in a New York Times op-ed that there are good reasons to believe that the worst of inflation is over, and that markets are signalling that prices will start coming down.
Europe is now the biggest customer for US oil, surpassing Asia as the continent deals with tight supplies amid Russia’s war on Ukraine. It’s the first time Europe has overtaken Asia since 2016.
The U.S. is shipping the largest amount of crude oil to Europe since Washington ended its ban on exports more than six years ago as buyers seek alternatives to Russian supplies.
In April, U.S. producers exported nearly 50 million barrels of crude to European buyers from major terminals in Texas and Louisiana, according to ship tracking data compiled by Bloomberg.
That’s nearly half of what was sent overseas last month from the Gulf Coast, the main U.S. export hub.
From January to May this year, Europe took an average of about 213.1 million barrels of crude while Asia received 191.1 million barrels, according to the latest available US Census Bureau data.
The last time Asia’s volumes fell behind Europe for the same five-month period was in 2016 when the US reversed its crude export ban, data show.
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