UBS analysts are confident that the US economy will achieve a soft landing, despite recent weaker-than-expected economic data.
UBS states that "recent data on both inflation and the labor market has surprised to the downside," prompting the firm to adjust its forecast for Federal Reserve rate cuts.
Following disappointing labor market reports for July, including nonfarm payrolls rising by just 114,000—well below the anticipated 175,000—UBS now expects the Fed to implement more aggressive rate cuts. The unemployment rate increased to 4.3%, and the U-6 underemployment rate climbed to 7.8%.
Additionally, the bank notes that JOLTS data revealed declines in hiring and quitting rates, while wages in the Employment Cost Index slowed to 0.9% quarter over quarter in 2Q, the lowest since 2Q21. Weekly jobless claims rose by 249,000, the highest in a year.
UBS projects that the Fed will cut rates by a total of 100 basis points by the end of the year, with reductions of 50 basis points in September and 25 basis points each in November and December. This marks an upgrade from their previous forecast of 50 basis points in total.
The bank said, "We believe that the balance of risks favors more aggressive action by the Fed."
UBS remains optimistic about a soft landing for the economy, citing strong household and business balance sheets. However, they "see risks on both sides of our new base case," acknowledging that "upward surprises in the inflation data would likely slow the path of future cuts," indicating that the economic outlook remains fluid.