UBS raises the probability of a US economic recession, describing the outlook as "cloudy"

UBS Global Wealth Management raised the probability of a US economic recession from 20% to 25% on Monday, citing weak job growth and July's worsening unemployment data.

Brian Rose, senior economist at UBS America, said, "As excess savings accumulated during the COVID-19 pandemic are depleted, continued income growth is crucial to sustain expenditure growth, as a stable savings rate may be the best outcome we can hope for."

Last week, the US Department of Labor revised down the total employment figures for the period from April 2023 to March 2024 by 818,000, indicating that over the year ending in March, employers added far fewer jobs than initially reported.

Prior to this, the US unemployment rate in July surged to a nearly three-year high of 4.3%, with recruitment slowing significantly, sparking concerns about deteriorating labor market conditions and the economy potentially slipping into a recession.

Federal Reserve Chairman Powell stated last Friday at the Jackson Hole symposium, "It is time to cut interest rates now," leading to market expectations of a potential 50 basis point rate cut at the Fed's September meeting.

Powell also set a bottom line for the US job market in his speech, stating that any deterioration in the labor market would be unwelcome.

However, doubts have been raised by strategists led by Francis Yared at Deutsche Bank. They pointed out that while the resignation rate aligns with the 4.3% unemployment rate, the number of initial jobless claims has actually remained stable or even decreased in the past few weeks.

The strategists believe that the US economy may not be in dire straits and are shorting the 10-year US Treasury bonds, with a target yield of 4.1% and a stop-loss point of 3.65%.

They stated that the dovish stance of the Fed has already been fully priced in by the market, as it is expected that the Fed will cut rates by at least 50 basis points at one of the remaining three meetings this year, ultimately bringing rates down from the current range of 5.25%-5.5% to 3%. "Therefore, to price in more and/or faster rate cuts, there must be evidence that the labor market deterioration is accelerating. However, as mentioned above, this is not yet evident."

Furthermore, the strategist team believes that the term premium on US bonds (compensation for investors holding long-term bonds) is currently at the bottom of the range year-to-date, structurally speaking, due to changes in supply and demand.

Finally, they mentioned that the seasonal rebound typically seen in August near Jackson Hole usually reverses in early September. This significant risk will materialize next Friday when employment data is released.

The resignation rate aligns with the 4.3% unemployment rate