Global economy may avoid recession as inflation risks ease, JP Morgan analyst note says

The global economy could avert a recession as data points to a potential soft landing, JP Morgan analysts said, while adding that the Federal Reserve might have "over-reacted" with the 75 basis point rate hike in July.

A clutch of recent data from major economies is suggesting moderating inflation and wage pressures as well as stabilizing consumer confidence, the brokerage said in a note dated Monday.

"The probability for soft landing has ticked up with moderating inflation and jobs prints, while at the same time, positioning remains at extreme lows," the brokerage added.

Among stocks, the energy sector is trading at a heavy discount and offers a favorable investment opportunity, the analysts said.

The brokerage is also bullish on China as Covid-19 restrictions in the country ease and fiscal stimulus expands, boosting bets on risk assets.

Surveys from last week showed Europe is almost certainly entering a recession, with inflation running at more than four times the European Central Bank's 2% target. Deepening cost of living crisis and a gloomy outlook is also keeping consumers wary of spending. 

But JP Morgan said it was expecting European governments to act to shield consumers from biting energy inflation, as natural gas prices skyrocket after sanctions-hit Russia disrupted supply.

Corporate earnings in Europe are also "defying economic momentum", JP Morgan said.

The U.S. Labor Department's data last month showed consumer prices did not rise in July due to a sharp drop in the cost of gasoline, delivering a sign of relief for Americans who have watched inflation reach levels not seen in four decades.