UBS On-Air: Paul Donovan Daily Audio 'The politics of price expectations'
At a Glance
The desk views the Michigan consumer sentiment data as politically powerful despite its weak economic signal, with a focus on the emotional connection consumers have to frequent purchases like food and fuel. Per the full note from UBS, Paul Donovan suggests that rather than raw inflation figures, voters are likely to retain a 'fair price' threshold that significantly affects sentiment. This underscores the importance of tracking gasoline prices closely, particularly relative to the recalled fair price of around $2.50, as fluctuations here can spell political implications for administration approval ratings and broader market sentiment.
Key Takeaways
- 01Consumer sentiment data should be viewed through a political lens, especially regarding inflation perceptions.
- 02Gasoline prices remain a key psychological threshold for voters, impacting sentiment and approval ratings.
- 03The Michigan survey's inflation expectations may not reflect broader economic conditions but will influence political risks.
- 04Monitoring consumer responses to price changes in essential goods will be crucial ahead of upcoming economic data releases.
Full Analysis
What the desk is arguing
The Michigan consumer sentiment data, while not necessarily predictive of economic performance, carries significant weight due to its political ramifications. Donovan notes that this sentiment hinges on consumer perceptions of price, particularly on essential goods, which have a 'fair price' that remains fixed in the public's mind regardless of actual inflation data.
This fixation is compounded by rising gasoline prices, which loom large over consumer sentiment, particularly as they hover above the psychologically impactful $2.50 mark. With recent declines in overall gasoline prices, the sentiment measures could become more volatile, but unresolved pricing levels are likely to maintain pressure on public perception and thus political performance.
Where it sits in our coverage
Currently, our consensus target for the USD is 1.075, with estimates from various firms suggesting a range as follows: - jpmorgan: 1.10 by Mar26 - bofa: 1.04 by Mar26
The desk's focus aligns with jpmorgan's target, reflecting a somewhat optimistic outlook compared to bofa, which sits at the lower end of the spectrum.
How other firms see it
Firms such as jpmorgan and bofa express contrasting views on the EUR/USD trajectory, with jpmorgan anticipating stronger performance due to perceived economic resilience, while bofa is more cautious. As the consumer sentiment data unfold, keeping an eye on the correlation between gasoline prices and broader market sentiment metrics will be crucial.
Key indicators that might reflect this thesis include volatility in rates around the Federal Reserve's next monetary policy meeting and changes in commodity prices, particularly those related to food and energy.
Market Implications
Traders should monitor the USD/EUR movements, particularly as sentiment data is released, since changes in gasoline pricing could signal broader shifts. The current levels around 1.075 could face pressure if consumer sentiment continues to falter, particularly with major economic indicators looming on the horizon.
From the original
US Michigan consumer sentiment data is a weak economic signal. It does have political punch, via the inflation expectations measure. Consumers focus on the price of frequent purchases (food and fuel), and tend to fixate on the price level. Most consumers will have a “fair” price
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