The notion of an ultra-aggressive Fed hiking rates into recession commands the spotlight in the bonds and equity markets, suggesting that risk aversion will likely stay in place for some time. European equity benchmarks continue their march lower, US futures fall, pointing to a red start for the NY session. The EURUSD rate sticks to parity as consensus strengthens that the ECB will raise rates by 75 basis points in September. Money markets have fully priced in this outcome, big investment banks such as Goldman have also made this outcome a base case, ECB officials openly say that “50 basis points is the minimum” and anything bigger will be discussed.

The US money markets estimate the terminal rate of the Fed (at the end of the year) at 3.6% (against 2.7% at the end of July) and the chances of policy easing next year are decreasing. Loretta Mester and Esther George were in favor of raising the rate to 4% by the end of the year and keeping it at this level for some time. In her speech yesterday, Mester also said that even if the economy is threatened by a recession, the Fed should regain control of inflation, hinting that the central bank may be less sensitive to signals of a moderate weakening of the economy in incoming data. Obviously, without the easing of the Fed rhetoric, the market is unlikely to rally in the short term.

Another factor of risk aversion is the negative trend in foreign trade data of countries where exports traditionally prevailed over imports. This includes Germany and the developed countries of Asia. Fluctuations in the economic activity and welfare of these countries correlate with trade balance. South Korea’s latest export-import data showed that the trade deficit approached $10 billion in August:

Less than a year ago, the situation was radically different – the surplus was $10 billion. Given that the countries are energy importers, the reason for the deficit suggests itself – a long period of high energy prices, which increases the cost of imports and suppresses the industry, and hence the volume of exports. Central banks are forced to fight this trend by raising rates, which only exacerbates the situation, since the tightening is carried out at a time when the economy, on the contrary, needs a loose monetary policy. Despite the fact that the Central Bank of South Korea raised the rate by 125 basis points, the country’s currency has depreciated by 12% this year.

The Eurozone economic data released today showed that consumer demand continues to be the positive driver that delays the onset of recession. Retail sales in Germany rose by 1.9% m/m, while the annual decline was much less than expected – 2.5% vs. 6.5% expected. Unemployment in the country fell from 6.7% to 6.6% in August as the sticky labor market is slow to respond to changes in the economic environment.

Initial claims for unemployment benefits in the US declined compared to the previous month and were better than expected. If Friday’s report shows that August payrolls also beat estimates, risk assets are likely to extend downside, as the chances that the Fed will stick to its aggressive tightening course will increase. However, the ADP report released yesterday missed estimates – job growth, according to the agency, amounted to only 133K. The main takeaway from the ADP report is that the economy is shifting from a high to a moderate pace of job creation.

Today the index of activity in the US manufacturing sector from the ISM is due. A slight weakening of expansion in the sector is expected (a decrease in the index from 52.8 to 52 points). The hiring sub-index is expected to indicate a slowdown in hiring rates since the previous month.