The market is fully pricing in a US recession by the end of the year as hot inflation grips the economy, Deutsche Bank says

• 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.

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.

On Thursday however, a day after data showed consumer inflation rising by 9.1% through June, futures traders brought forward the timing of a US recession to January 2023.

Recession chatter has been circling the markets for a while ,as red-hot inflation is forcing the Federal Reserve to raise interest rates more quickly. Last month, the Fed hiked rates by 0.75% to get a grip on inflation and with inflation shooting higher through June, investors see a 50% chance the central bank will raise rates by 100-basis points at its meeting this month.

Higher rates are a catalyst for slower economic growth as it erodes consumer spending and business investment, thereby raising the risk of a slowdown.

"Following yesterday's US inflation report, the market is now pricing a full US recession by the end of the year," Saravelos said.

Saravelos pointed out a few factors to be wary of in the market, including keeping an eye on the labor market and watching out for market bubbles.

"Weakening demand but outperforming labour markets is a recipe for collapsing productivity and profit margins," Saravelos said, adding that such a dynamic is especially negative for risky assets.