Investing.com -- The U.S. is still on track to avoid a recession and achieve a soft landing, UBS says, on bets that the consumer is set for hiatus from a spending spree that has helped sustain the economy and keep inflation sticky.
"Our base case remains a soft landing, with economic growth and inflation cooling off as consumers take a breather after a long period of strong spending, and the Fed starting to cut rates before the end of the year," UBS said in a Monday note as it shifted its call on first rate cut to September from June.
Concerns about stagflation rather than a soft landing were thrust into the spotlight recently following data showing economic growth slowed in Q1 -- to an annualized pace of 1.6% in Q1, well below expectations of 2.5% -- at a time when inflation continues to surprise to the upside.
But softer economic growth appears to be cure for sticky inflation, UBS suggests, underscoring recent business surveys indicating that consumers are "pushing back harder against further price increases."
The strong job gains in recent months haven't knocked the trend of slowing wage growth off course, UBS says, pointing to demand and supply in the labor market that is coming into balance that will likely pave the way for the Fed to cut rates and halt the risk of a hike.
"We believe that a cooling labor market will make it easier for the Fed to cut rates even while inflation remains above target, and we view additional rate hikes as unlikely even if inflation remains sticky in the near term," UBS added.
The expected delay to rate cuts have gathered steam in recent weeks, with December now seen as the start of the rate cutting cycle, according to Investing.com's Fed Rate Monitor Tool.
But with the Fed two-day meeting just a day away, many on Wall Street will now be focused on whether Fed chairman Jerome Powell endorses the market's view of less dovish path for interest rates.