UBS analysts have reiterated their confidence in a soft landing for the US economy, highlighting the downward trend in inflation and the Federal Reserve’s readiness to cut rates. They emphasize that consumer spending is playing a crucial role in bringing down inflation, despite some positive surprises in recent economic data. The Institute for Supply Management’s purchasing managers indexes indicate a slowdown in growth, affirming UBS’s view of below-trend growth.
Consumer demand remains a key variable in determining the economic outlook, according to UBS. The strength of consumer demand will ultimately shape the path the economy takes. UBS notes that softer demand is currently alleviating inflationary pressures, even though June retail sales and industrial production figures exceeded expectations. Anecdotal evidence, rising unemployment, and declining core inflation all point to a slowdown in growth.
UBS observes that inflation has started to cool off, as evidenced by the May and June Consumer Price Index (CPI) readings showing a downward trajectory. They highlight the expected moderation in rents, which is anticipated to continue in the coming months. This trend aligns with their long-standing prediction. The bank also believes that the Federal Reserve is closely monitoring the situation, with recent comments from policymakers indicating an inclination towards rate cuts starting in September, in line with UBS’s projections.
UBS predicts that the Federal Reserve will take a gradual approach to rate cuts, possibly reducing rates once per quarter. However, they acknowledge the potential for more aggressive cuts if economic conditions deteriorate further. Chair Powell’s remarks and the overall sentiment in the market support the expectation of a September rate cut, with high anticipation for additional cuts by the end of the year. The market currently places a near-100% probability on a rate cut in September, reflecting the consensus towards easing monetary policy.
UBS’s analysis underscores the delicate balance of factors influencing the US economy, from consumer spending to inflation trends and Federal Reserve actions. While there are positive surprises in economic data, the underlying theme of below-trend growth persists, necessitating prudent policy decisions to sustain economic stability in the face of potential challenges.
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