The debate between a soft landing and a potential recession has intensified, with recent economic indicators painting a mixed picture.
According to Evercore ISI analysts in a note Monday, the weak employment report, a correction in the NASDAQ, plunging bond yields, and declining commodity prices means "we’re seeing recession signals coming home to roost."
"In any event, this week, bad news was bad news for the stock market," the analysts noted.
Several factors could tip the balance towards a soft landing, according to the firm. If the current economic weakness in China leads to a more significant drop in WTI crude prices, inflation could decrease further, allowing the Federal Reserve to adopt a more aggressive stance.
One Evercore analyst is discussing a potential "-50bp cut." Moreover, if declining bond yields lead to higher house prices, this could also be beneficial.
Conversely, Evercore says the risk of a hard landing looms if China's economy weakens excessively, house prices fall sharply, or employment deteriorates further.
The recent Intel (NASDAQ:INTC) layoffs were an "eye-opener," according to the firm, while elevated geopolitical risks and the upcoming US election add to the uncertainty.
The analysts pointed out that productivity surged in Q2, causing unit labor costs to slow to just +0.5% year-over-year, which could help lower inflation. Weakness in China could also contribute to reduced inflation, enhancing the odds of a soft landing.
"Obviously, employment will be key," Evercore ISI stated, emphasizing the importance of monitoring unemployment claims, layoff announcements, and their own surveys of temporary and permanent employment agencies. They added that the EVRISI company surveys edged up to 47.8 this week, which is notably above the recession threshold of 45.0.