UBS Predicts Potential Fed Rate Cut Amid Strong US Economic Data

UBS strategists foresee the Federal Reserve implementing an additional 50 basis points (bps) rate cut later this year, despite persistent inflationary pressures.

Last week, US stocks dipped as a robust December jobs report fueled concerns over the Fed's pace of easing in 2025. The S&P 500 dropped 1.5% after data revealed a net gain of 256,000 jobs, surpassing the 163,000 forecast. The unemployment rate fell to 4.1%, its lowest since June 2024.

Bond markets reacted with the 10-year US Treasury yield climbing 10 bps to 4.77%, its highest since 2023. The jobs data followed strong economic indicators, including a six-month high in job openings and unexpected growth in the services sector, as reported by the ISM survey. Notably, the ISM’s 'prices paid' component hit its highest level since 2023, casting doubts on disinflation progress.

UBS strategists noted these developments likely confirm Federal Reserve concerns that inflation remains stubbornly above the 2% target, delaying further rate cuts. Minutes from the Fed's December 2024 meeting echoed this sentiment, reducing 2025’s easing forecast to 50 bps.

The US economy's unexpected resilience shifted investor sentiment in 2024 from recession fears to optimism about a soft—or even "no landing." UBS strategists, led by Mark Haefele, believe growth will moderate in 2025, aiding inflation control and paving the way for additional Fed easing later this year.

Key reports this week, including the CPI, PPI, retail sales, and industrial production data, are expected to provide further clarity on economic and inflation trends, keeping investors attentive.

This strong economic performance underscores the Fed's delicate balancing act in maintaining growth while addressing inflation.