The U.S.economy is currently at a critical juncture,with the last 120 years of economic data revealing a troubling trend: approximately 80% of the time,the economy has experienced a "hard landing," while only about 20% has seen a "soft landing." These figures suggest a significant possibility that the market may be underestimating the likelihood of an economic slowdown.As a result,the Federal Reserve could to make more dramatic cuts in interest rates than are currently being priced into the market.Given that the yield on 10-year U.S.Treasury bonds hovers around 4.5%,this presents an appealing option for investors looking to hedge against portfolio risks in light of upcoming economic conditions.

Despite the generally low level of unemployment relative to historical standards,the speed at which unemployment is rising is causing concern,particularly when measured by the widely recognized SAM Rule.According to this rule,a recession is deemed to have begun when the three-month moving average of the national unemployment rate exceeds the lowest three-month average of the past year by 0.50 percentage points or more.This raises alarms regarding the potential for an economic downturn.

Market participants frequently cite the expansion of the labor force as a key reason for the rising unemployment rate,with immigration being one of the factors contributing to this growth.Many believe that as long as hiring remains strong,the increase in unemployment will not pose a significant problem.However,a closer examination of recent employment trends reveals that job additions remain limited when excluding government roles,healthcare,and private education,which are generally classified as non-cyclical sectors.

While layoffs at this point have not been widespread,if they were to begin increasing significantly,the opportunity for a rare "soft landing" might have already slipped away.It's essential to underscore that during previous soft-landing periods—such as the mid-1990s—cyclical employment experienced robust growth.The current environment appears markedly different.

It's evident that there's a pronounced divide within the U.S.economy,with consumers feeling the pressure.After the pandemic,ongoing price inflation has severely restricted the ability of consumers,particularly those in lower to middle-income brackets,to purchase non-essential goods.Informal evidence indicates a shift towards more cautious consumption patterns,with rising delinquency rates for credit cards and auto loans acting as warning signs.A small number of large corporations have benefited from substantial profit growth driven by a select group of affluent consumers,while many small to medium-sized enterprises struggle with high financing costs and declining profitability.This disparity appears unsustainable,and could become increasingly problematic for overall economic demands and growth prospects.

Since the end of the pandemic,the performance of the U.S.economy has outstripped that of many developed markets,buoyed by strong government spending,excess savings accumulated during the pandemic,and a wealth effect tied to skyrocketing prices of stocks and other assets.However,those savings are now dwindling.Additionally,the capacity for further government deficit expansion is likely limited,particularly in light of the intense scrutiny on U.S.finances.A prolonged period of rising living costs has severely impacted households,driving up costs over the last three years.While overall economic data might paint a picture of resilience,the sentiments of the average American tell a different story.

On a global scale,lackluster performances elsewhere further hinder economic growth.The Eurozone's recovery seems to have faded,with recent PMI data indicating economic contraction.Although the UK's economy exceeded expectations in the first half of the year,it has recently shown signs of deterioration.Meanwhile,GDP figures for Australia and New Zealand appear weak when compared to historical standards.

The political developments affecting Europe's two largest economies,Germany and France,signal that policy initiatives may stagnate for some time.The UK has undergone a leadership change,prompting investors to reassess the long-term growth implications of government budget decisions.In the U.S.,protectionist rhetoric has come into focus.It may simply serve as a bargaining tool for tariffs to compel global trade partners to capitulate.

In terms of inflation,many developed nations have managed to maintain control,but the Federal Reserve might hesitate when considering further interest rate reductions.The structural factors that previously propelled inflation—like expansive monetary policy,significant money supply growth,supply-side constraints,and volatile commodity prices—have largely dissipated.As such,new external pressures that could contribute to inflation are currently absent.

More developed nations appear to be keeping inflation in check and nearing target rates.Core inflation remains slightly elevated,primarily influenced by service items in the inflation basket,while core goods experience deflation.With housing inflation (notably in the U.S.) gradually subsiding and wage pressures easing,overall inflation for services is expected to decline.However,a potential risk looms if inflation remains persistently above the Federal Reserve’s target,which could lead to hesitance during future interest rate cuts,even as the fundamental economy shows signs of weakening.Such hesitation might introduce volatility into the bond market,inflicting stress on risk assets.

Concerns within the market also extend to policy developments,including the commitment to roll out large-scale tax cuts,which could ignite inflation.Yet,in light of the price pressures that consumers have faced over the past two years,it seems unlikely that any major policies will be announced that could trigger inflation or economic overheating.

Alternatively,efforts aimed at scaling back government size and easing regulations could ultimately serve as a catalyst for inflation moderation.The appointment of figures like Elon Musk and Vivek Ramaswamy to lead the "Department of Government Efficiency" could mark a turning point,with the goal of reducing overall government spending.

Musk recently implied that Americans might need to endure a brief challenging period.Speculation is rising regarding increased scrutiny of the government’s fiscal position,as steps are anticipated to maintain control over expenditures.Furthermore,the popular candidate for the next Secretary of the Treasury,Basant,remarked during a recent visit that the notion of policies triggering inflation is "preposterous." He emphasized that easing regulations,decreasing energy prices,privatizing the economy,and gradually imposing tariffs would secure continued low inflation.Additionally,he stated that any tax relief measures would be supported through alternative funding sources.

Geopolitical concerns present another focal point for the government,where solutions could potentially alleviate inflationary pressures by tempering oil and commodity prices.Likewise,loosening environmental regulations could boost oil drilling activities in the U.S.,which may further help in lowering energy costs.

With elevated interest rates prevailing in the U.S.and other developed markets,the current condition calls for more policy easing.The labor market shows early signs of instability,with careful attention paid to ongoing claims for unemployment benefits as analysts seek indicators of a sharp economic slowdown.

It is crucial to remember that throughout the last 120 years,the U.S.economy has predominantly seen "hard landings." With the potential for market underestimation of economic slowdown evidence,the Federal Reserve may be compelled to make more substantial interest rate cuts than what is currently anticipated.Jupiter Asset Management notes that under these circumstances,a 10-year U.S.Treasury yield of around 4.5% is an attractive hedge against potential risks in investment portfolios.