JPMorgan Chase has adjusted its forecast for a potential U.S. recession, raising the probability to 35% from the previous 25%. This revision comes in response to signs of easing labor market pressures and economic uncertainties highlighted by recent data and market movements.
The reassessment by JPMorgan follows a weaker-than-expected jobs report for July, which has sparked concerns about the U.S. economic outlook. The report indicated a slowdown in job growth, raising fears of a recession and contributing to a decline in global equity markets earlier this week. This downturn was exacerbated by the unwinding of yen-funded carry trades, a financial strategy where investors borrow in a currency with low-interest rates, such as the yen, to invest in higher-yielding assets.
The implications of these developments are reflected in market expectations regarding the Federal Reserve’s monetary policy. According to CME’s FedWatch tool, there is now a 100% probability that the Federal Reserve will cut interest rates by 50 basis points in September. This anticipated rate cut underscores market concerns about slowing economic growth and the need for accommodative monetary policy.
In a note released on Wednesday, economists at JPMorgan highlighted the significance of slowing wage inflation in the United States. “US wage inflation is slowing in a way that has not been seen in other market economies,” they stated. This trend, combined with easing labor market conditions, has strengthened confidence that service price inflation will decrease and that the Federal Reserve’s current monetary policy is restrictive enough to warrant adjustments.
JPMorgan’s economists further expect the Federal Reserve to deviate from its gradual approach and implement a more significant interest rate reduction by at least 100 basis points by the year’s end. This proactive stance aims to mitigate potential economic downturns and stabilize market conditions.
In parallel, Goldman Sachs has also revised its recession outlook for the United States, increasing its probability by 10 percentage points to 25% over the next 12 months. This adjustment was communicated to clients in a note on Sunday, reflecting growing concerns among financial institutions about the U.S. economy’s vulnerability to recessionary pressures.
The prospect of a recession and the anticipated monetary policy adjustments are likely to shape market dynamics in the coming months. Investors and policymakers will closely monitor economic indicators and labor market trends to gauge the trajectory of the U.S. economy and the effectiveness of the Federal Reserve’s measures in addressing potential challenges.
