Markets need more data to confirm US economy is in or headed for a downturn: Citi

The recent rise in the U.S. unemployment rate has prompted markets to significantly increase their perception of a potential recession, but Citi analysts caution that more data is required to confirm whether the economy is indeed in or heading toward a downturn.

In their latest note, Citi emphasizes that while the markets have reacted strongly to the uptick in unemployment, a clearer picture will only emerge with upcoming economic indicators.

Next week’s reports on industrial production, retail sales, and initial jobless claims are crucial, according to Citi.

These data points have the potential to "show activity slowing," especially since June’s figures were unexpectedly strong.

However, Citi anticipates a softening in July, particularly in manufacturing production, which has been contracting for several months.

"Soft hours worked in manufacturing in the jobs report and the plunge in ISM should mean a decline in manufacturing production," the analysts note, reflecting concerns over continued weakness in the sector.

The investment bank said the labor market remains a focal point, with initial jobless claims dropping from 249,000 to 233,000.

However, Citi warns that this metric is volatile and may be influenced by residual seasonality, which could cause claims to decline steeply in the coming weeks.

Even so, they state that "the rise in continued claims and other signs of labor market softness" suggests that the situation may not be purely seasonal.

Additionally, Citi expects a modest 0.18% month-over-month increase in core CPI, which should keep the Federal Reserve's attention on jobs and overall economic activity.

They add that until more definitive data is available, the markets may continue to exhibit significant volatility as they reassess the state of the U.S. economy.