Soft Landing Scenarios: Base Case vs Alternatives in a Policy-Uncertainty Tape

When market participants price in a soft landing, scenario discipline becomes the essential framework for risk management. While the base case typically assumes disinflation continues as growth moderates, increasing policy uncertainty shifts the probability toward tail outcomes that the market often fails to price until they manifest in the tape.

The Base Case: Disinflation with Resilient Growth

Currently, the consensus baseline (estimated at a 55–65% probability) relies on a delicate balance where inflation persistence cools gradually without a significant spike in unemployment. In this scenario, labor markets loosen slowly enough to prevent a wage-price spiral, allowing central banks to begin domestic easing cycles cautiously. For a deeper look at how these dynamics play out globally, see our Global Market Outlook.

Evaluating the Risks: Upside vs. Downside Deviations

While the soft landing remains the primary narrative, two distinct tail risks are competing for attention in the current macro regime:

1. The Reacceleration Risk (15–25%)

This upside risk to inflation involves services inflation stalling and wages remaining firm. In such a case, rate cuts are delayed, and the front end of the yield curve reprices higher. Risk assets then face a significant duration headwind as the "higher for longer" narrative reappears. This often links back to core persistence channels that markets must track closely.

2. The Confidence Shock Risk (15–25%)

Conversely, the downside risk stems from trade and policy uncertainty hitting actual business activity. If PMIs weaken and hiring slows, central bank easing might accelerate. However, risk assets may fail to rally if credit conditions tighten simultaneously, stifling the transmission of lower rates to the broader economy.

How to Monitor Scenario Shifts

Forex and macro traders should focus on three specific pillars to determine if the baseline is shifting:

• Inflation Composition: Watch services and shelter prices for signs of stickiness. (Ref: Housing as a Lagged Inflation Channel).
• Labour Slack Indicators: Monitor total hours worked and participation rates rather than just the headline unemployment rate.
• Investment Intentions: Use business surveys to see if policy uncertainty is causing a pullback in capital expenditure.

Technical Watchlist: What to Watch Next

The path forward depends on the sequence of upcoming data. Traders should prioritize next-tier inflation prints and wage indicators to validate the disinflation trend. Additionally, global PMIs will serve as the early warning system for whether sentiment-led slowdowns are transitioning into real activity weakness. Keep a close eye on credit spreads and lending surveys, as these often provide the first signal of a regime shift into a harder landing scenario.

Related Reading

• Global Market Outlook: Inflation Anchors and China Trends
• US Inflation Regime Strategy: Tracking Core Persistence
• Credit Conditions: The Leading Indicator for Economic Growth
• Housing as a Lagged Inflation Channel