UBS On-Air: Paul Donovan Daily Audio 'Benign inflation; now, what about growth?'
At a Glance
The desk interprets the recent comments from Paul Donovan at UBS regarding benign US inflation as a signal for the resilience of consumer spending, despite the ongoing deflation in durable goods prices. Per the full note, Donovan highlights that consumer spending power has been bolstered by sustained falls in durable goods prices, which have decreased for 25 consecutive months. As the market prepares for upcoming retail sales data, this dynamic underscores a nuanced view of inflationary pressures and consumption patterns, particularly in the context of expected robust retail sales figures today.
Key Takeaways
- 01US consumer price data indicates benign inflation, enhancing spending power.
- 02Durable goods prices have deflated for over two years, boosting real incomes.
- 03Upcoming retail sales figures may confirm resilient consumer spending.
- 04Market reactions are increasingly sensitive to inflation data amid Fed policy uncertainty.
Full Analysis
What the desk is arguing
The desk asserts that benign inflation signals enhanced consumer spending power, which is likely to reflect in upcoming retail sales data. This perspective aligns with observations made by UBS regarding falling durable goods prices and their effects on consumer behavior.
Supporting this view, Donovan notes that while consumer prices remain stable, the deflation in durable goods has persisted through much of Biden's tenure, effectively increasing real incomes for consumers. This backdrop may foster a solid retail sales outcome, enhancing overall market sentiment.
Where it sits in our coverage
Our consensus points to a target of 1.075 for the USD/EUR pair, with a range between 1.04 and 1.12. Notably, jpmorgan aligns closely with this view, targeting 1.10 for March 26, while bofa positions itself at a contrary 1.04.
This outlook suggests the desk's call is somewhat toward the upper edge of the spectrum, reflecting a positive sentiment towards the USD based on the expected resilience of US consumption.
How other firms see it
Several firms align with the anticipated strength of US consumer spending; for instance, jpmorgan and others see value in this narrative. Conversely, bofa presents a more cautious outlook, reflecting potential vulnerabilities in ongoing consumer strength.
As related themes arise, watch the USD/EUR dynamic which is influenced by retail sales data and Fed policy. This interaction may highlight differences in growth trajectories between the US and Eurozone, especially with central banks in both regions assessing inflationary pressures.
Market Implications
Traders should monitor the USD/EUR movement closely, especially ahead of the retail sales data release. A solid print could further validate the desk's optimistic view for the dollar.
From the original
Yesterday’s US consumer price inflation data was benign. Consumer durable goods prices fell for a majority of the Biden administration. Although consumers do not focus on such prices when considering inflation, this deflation did boost consumer spending power. The abrupt market r