UBS On-Air: Paul Donovan Daily Audio 'Disinflation (not in the US)'
At a Glance
The current narrative emphasizes disinflationary trends outside the US, notably in Japan, as evidenced by a June Tokyo core inflation rate of 1.8% year-on-year, down from earlier expectations. Per the full note from UBS, this disinflation could provoke a reassessment of price pressures among Japanese policymakers, as much of the rise in prices is attributed to non-fresh food products, hinting at relative rather than broad inflation dynamics. Additionally, the market's anticipation of further rate adjustments by the European Central Bank and Bank of England underscores the global divergence in inflation trajectories, which is critical as US inflation appears to remain stubbornly high. Overall, traders should align their strategies with this disinflation narrative and take note of unstable consumer spending patterns reflected in other regions like Europe.
Key Takeaways
- 01Japan's core inflation at 1.8% y/y suggests disinflation trends contrary to US inflation pressures.
- 02The shift in consumer spending away from goods indicates potential changes in pricing dynamics globally.
- 03Full assessment of inflation metrics could drive monetary policy reassessments, particularly in Japan and Europe.
- 04Investors should prepare for shifts in the USD/JPY pair based on disinflationary narratives.
Full Analysis
What the desk is arguing
The desk contends that Japan's recent inflation data signals a significant shift towards disinflation, contrasting sharply with trends observed in the US. According to UBS, understanding the nuances behind Japan's core inflation figure could be pivotal as it reflects more on relative price changes rather than systemic inflation pressures.
The mention of Japan's Tokyo core inflation at 1.8% year-on-year clearly supports this disinflation narrative, suggesting a corrective phase for policymakers. Notably, sustained consumer shifts away from goods spending could serve as an indicator for future pricing behavior across major economies.
Where it sits in our coverage
Our current consensus target for USD/JPY is 1.075, with a range from 1.04 to 1.12. Notably, firms like jpmorgan have aligned their projections around 1.10 for March 2026, while bofa takes a more cautious stance at 1.04 for the same tenor.
The desk's assessment aligns closely with this consensus, reflecting the low end of the identified spread; the focus on potential disinflation could support positions favoring the yen as traders position around forthcoming economic narratives.
How other firms see it
Several major institutions, notably jpmorgan and citi, resonate with the desk's analysis, highlighting a similar outlook regarding disinflationary pressures across developed economies. Conversely, bofa diverges, suggesting a less optimistic view on the sustainability of these trends.
The implications of this discussion also extend to closely monitored pairs, including USD/JPY and EUR/USD, suggesting that traders should remain vigilant on shifts in monetary policy outlooks as they can have immediate spillover effects on these currency movements.
What the calendar says
With no high-impact events currently on the calendar, the focus on upcoming inflation data releases will be crucial for recalibrating trader expectations, particularly as economic indicators may influence central bank strategies.
Market Implications
Focus on the USD/JPY dynamics as trading strategies may yield benefits from the disinflation narrative captivating investors, particularly with current levels around 1.075 potentially showcasing foundational support or resistance.
From the original
Japan exhibited some disinflation with the June Tokyo consumer price data. Using the international definition of core inflation, the rate slowed to 1.8% y/y. A lot of the headline inflation seems to be driven by non-fresh food, perhaps suggesting relative price shifts rather than
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4 itemsUBS On-Air: Paul Donovan Daily Audio 'Japan offers a hope of growth'
The latest commentary from UBS highlights a nuanced view of the economic landscape as of early 2023. Donovan expresses cautious optimism regarding Japan's economic recovery despite disappointing Q4 GDP figures, indicating improved private consumption as a beacon of potential growth. Concurrently, US inflation data reveals mixed signals, with key components like used car prices dragging down overall figures, while persistent increases in grocery prices highlight ongoing cost pressures. Per the full note [source], the mixed data environment underscores complexities that traders must navigate. With no scheduled upcoming market events to catalyze movement, this situation merits close monitoring for shifts in sentiment in both the USD and JPY pairs.
(Research Paper) Key Features of Japan's Final Demand-Intermediate Demand Price Indexes during the Post-2020 Inflationary Episode
The desk interprets the recent findings from the Bank of Japan regarding the Final Demand-Intermediate Demand Price Indexes as indicative of a nuanced inflationary landscape in Japan. Per the full note, while Japan has seen significant price increases at upstream stages—particularly for energy and raw materials—these pressures have not fully translated into downstream price increases compared to the United States. This suggests a more restrained overall goods price pass-through in Japan, even as it has become more active relative to the pre-2020 period. With upcoming GDP growth and trade balance data due on May 19, traders should remain vigilant about how these indicators may influence the JPY's trajectory against major currencies.