Following the global stock meltdown earlier this week, JP Morgan raised the odds of a U.S. recession by the end of this year to 35 percent from 25 percent probability earlier, citing easing labor market pressures.
The rising odds came after recent data revealed a sharper-than-expected slowdown in labor demand and early signs of a labor market slowdown amid unwinding yen-funded carry trades sparking a sharp sell-off in global equities earlier this week.
Rate cut expectations
Markets are currently pricing a 100 percent chance of a 50 basis points interest rate cut in September by the Federal Reserve, according to CME’s FedWatch tool.
Meanwhile, JP Morgan now sees just a 30 percent chance of the Federal Reserve keeping interest rates ‘high-for-long’, down from a 50 percent chance two months ago, stating that the Fed will break away from its gradual easing stance and lower interest rates by at least 100 basis points by the end of the year.
On the other hand, Goldman Sachs raised its probability of the U.S. tipping into a recession by 10 percentage points to 25 percent for the next 12 months.
By H2 of 2025, negative phenomena in the economy may intensify, prompting JP Morgan to raise the probability of a recession during this period to 45 percent.
Market sentiment shifts
JP Morgan attributed its recent adjustment to signs of a weakening labor market and early indications of layoffs, a deceleration in wage inflation, and global stock markets declining significantly.
Despite rising concerns, market sentiment has shifted following the release of last week’s U.S. jobless claims which declined more than anticipated last week, subsiding fears of the unraveling of the labor market. This reversal came after the previous week’s unexpected sharp jump in jobless claims, prompting a rebound in U.S. and Asian stocks.
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