Markets are still in shock mode, with the rapid rise in market-implied recession odds in the US considerably higher than in the UK or Europe. If the Federal Reserve delivers the interest rate reductions the market expects, then Sonia and Euribor look too high.
Last week’s jobs data was the trigger, but positioning was the real driver of the sudden lurch higher in the likelihood the market assigned to a US recession. As discussed on Monday, if volatility remains elevated and markets fractious, then recession odds will materially rise as the chance increases of a negative feedback loop developing between the real economy and the market.
