Ahead of the curve with Ulrike Hoffmann-Burchardi
The desk interprets recent signals from inflation and earnings reports as supportive of a likely Fed rate cut, framing this view amid broader economic trends. Per the full note source, stable inflation data has alleviated concerns surrounding previous politically motivated rate moves, suggesting the Fed's actions will be justified on economic grounds. The strength shown in Oracle's earnings, particularly its robust cloud revenue forecast, hints at underlying momentum in technology and AI sectors that could further affect economic growth trajectories. With no significant economic events looming in the short term, traders should remain vigilant to any developments that could shift this outlook.
What the desk is arguing
The desk sees the combination of stable inflation numbers and strong corporate earnings, particularly from Oracle, as a catalyst for justifying an upcoming Fed rate cut. As noted by Ulrike Hoffmann-Burchardi, inflation data indicates a deceleration in services prices, likely allowing the Fed to pivot without inciting volatility. The stocks' performance – Oracle climbing 36% – reinforces the positive narrative surrounding tech capex, driven by needs in AI infrastructure.
Recent inflation prints showing headline and core PPI consistent with expectations create fertile ground for the Fed's monetary policy adjustments. The anticipated rate cut is not only politically motivated but increasingly viewed as a necessary economic strategy as we move towards a tech-driven market recovery.
Where it sits in our coverage
Currently, our consensus target for USD/JPY is 1.075, with a range from 1.04 to 1.12. This includes alignments with several major firms: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk's perspective aligns closely with jpmorgan, projecting upward momentum that could push the pair towards the higher end of the stated range. This contrasts with bofa's more cautious stance, which positions for a potential downside.
How other firms see it
Firms such as jpmorgan and pnc share a bullish outlook reflecting the desk's view, anticipating sustained momentum driven by tech growth. Conversely, bofa and citi maintain a more pessimistic perspective on economic recovery.
Watching the trajectory of the USD/JPY pair is critical as it parallels the Fed's interest rate path, influencing trader sentiment and positioning throughout the coming weeks.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Stable inflation reports suggest a more economically justified Fed rate cut.
- 02Oracle's earnings and cloud revenue projections indicate strong momentum in AI and tech sectors.
- 03The desk's bullish outlook contrasts with some firms adopting a more conservative stance.
- 04USD/JPY will likely be influenced by future Fed policy adjustments and tech sector performance.
Market implications
Traders should monitor the USD/JPY pair closely, particularly as it approaches the resistance level around 1.075 where upward momentum may accelerate post-Fed announcements. This level can serve as a pivotal indicator for broader market sentiment.
Risks to this view
If inflation unexpectedly surges or economic indicators show signs of deterioration, the Federal Reserve may reconsider its rate cut plans. Such a reversal would likely lead to significant volatility in the currency markets, especially for USD/JPY.
Hello and welcome to Head of the Curve. I'm Ulrike Hoffmann-Borchati, CIO for the Americas and Head of Global Equities for UBS Wealth Management. Amid all the headlines from last week, let me share what signals stood out to me and what key market events lie ahead this week.
Two signals emerged from last week's data, from inflation numbers and from Oracle's earnings report. Signal one came from the latest inflation prints. August producer and consumer prices came in largely in line with expectations.
This, in our view, cements the rate cut on Wednesday. Higher month-over-month prices in core non-transportation goods are likely due to tariffs, which we think the Fed will largely deem as one of the effects. Also, both headline and core PPI showed services inflation starting to decelerate.
All of this makes the inflation picture look more benign. And what may initially have been seen as a politically motivated rate cut is now viewed as an economically justified one, a shift that likely helped flatten the yield curve more recently. The second signal was Oracle's earnings for its quarter ending in August.
Oracle stock gained 36% on Wednesday to post its best daily return in over 30 years. The reason? Its staggering cloud revenue projections, from 10 billion last year to 144 billion in annual cloud revenue by 2030.
Driven by its contracts with OpenAI and the private sector joint venture Stargate that plans to build out 500 billion worth AI infrastructure in the US in the next four years. This suggests a continued strong momentum in the build out of AI architecture. In our view, the capex intensity of AI is still underappreciated.
We estimate that we need five times the amount of compute than is currently installed to support consumer, enterprise and agentic AI by 2030. One signal that is starting to emerge and is worth watching is the increasing importance of Chinese open source models. Open source models are like recipes that are freely shared.
Closed source models on the other hand, are like recipes that are kept secret. You can taste the final dish, you can use the AI, but you can't see how it's made. The US maintains the top spot for large language models overall.
With closed source models by OpenAI, Anthropic and Alphabet leading the widely cited benchmarks on public leaderboards. On the other hand, Chinese open source models, DeepSeek, Alibaba's Gwen and Kimi are now the top open source models globally ahead of Metaslama and Europe's Mistral models. Also Chinese open source models are set to exceed the number of total downloads of other regional models this year according to Hugging Face data.
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