J.P. Morgan has significantly heightened its forecast for a potential US recession, now estimating a 35% likelihood by the end of 2024, up from a previous projection of 25%.
This increase in probability stems from recent shifts in labor market conditions, which have sparked concerns among economists and market participants alike.
The revised forecast follows a disappointing July jobs report, which exacerbated fears of a looming recession.
The report revealed weaker-than-expected job growth, coupled with the unwinding of yen-funded carry trades, triggered a sharp sell-off in global equities earlier this week.
This market reaction underscores growing unease about the US economy’s health and its broader implications for global financial stability.
Shift in Federal Reserve policy
In response to these economic signals, market participants are anticipating a significant shift in Federal Reserve policy.
According to the CME’s FedWatch tool, there is now a 100% probability of a 50 basis points interest rate cut in September.
This tool tracks market expectations for Federal Reserve policy changes, reflecting heightened anticipation of monetary easing.
A critical factor in J.P. Morgan’s revised recession probability is the observed deceleration in US wage inflation.
Economists at the bank note that the slowdown in wage growth is unique compared to other developed markets.
This trend suggests that easing labor market conditions might help reduce service price inflation.
As a result, J.P. Morgan believes the Federal Reserve’s current policy stance is adequately restrictive to manage these inflationary pressures.
In light of these developments, J.P. Morgan anticipates that the Federal Reserve may shift from its gradual approach to a more aggressive stance, potentially lowering interest rates by at least 100 basis points by year-end.
This forecast indicates a growing consensus that more substantial monetary easing could be necessary to support the economy amidst increasing recession risks.
Goldman Sachs revises recession outlook
Goldman Sachs has similarly revised its recession outlook, raising its probability estimate by 10 percentage points to 25% over the next year.
This adjustment communicated to clients in a recent note, reflects heightened concerns about the potential for an economic downturn.
The prospect of a US recession has broad implications for both the domestic and global economies.
A downturn in the world’s largest economy could lead to reduced consumer spending, lower business investment, and increased financial market volatility.
Additionally, it could disrupt global trade dynamics, particularly affecting economies that rely heavily on exports to the US.
As the situation evolves, economists and market analysts will be closely monitoring future economic indicators to gauge recession risks and the effectiveness of monetary policy adjustments.
Key metrics to watch include employment data, inflation rates, consumer spending trends, and business investment patterns.
These indicators will provide crucial insights into the US economy’s health and the potential impacts of policy measures aimed at mitigating recession risks.
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