US economy on track for soft landing, near-100% chance of a Sept cut: UBS

UBS analysts reiterate their confidence in a soft landing for the US economy, with inflation on a downward trend and the Federal Reserve poised to cut rates.

"We maintain our view that the US economy is headed for a soft landing," states UBS. They point to moderating consumer spending as a key factor in bringing down inflation.

Recent economic data has shown some positive surprises, but UBS believes these don't negate the underlying trend of below-trend growth. "The ISM PMIs appear to confirm that growth has slowed," they note, referring to the Institute for Supply Management's purchasing managers indexes.

Consumer demand remains a crucial factor, accoridng to the bank. "The strength of consumer demand will be the main determinant of how the economy develops," says UBS, noting that, fortunately, softer demand is currently easing inflationary pressures.

While June retail sales and industrial production figures came in higher than expected, UBS maintains its view of below-trend growth. They point to anecdotal evidence, rising unemployment, and falling core inflation as evidence of this slowdown.

Inflation has finally begun to cool, with May and June CPI prints showing a downward trend. "We are finally seeing the slowdown in rents that we have been anticipating for a long time," UBS reports, "and we expect this more moderate pace to persist in the months ahead."

UBS believes the Federal Reserve is taking notice, highlighting recent comments from policymakers, including Chair Powell, suggesting rate cuts are likely to begin in September, aligning with UBS's base case scenario. The market currently sees a near-100% chance of a September cut, with more cuts expected by year-end.

UBS predicts the Fed will adopt a measured approach, cutting rates only once per quarter. However, they acknowledge the possibility of more aggressive cuts if economic conditions deteriorate.