Ahead of the curve with Ulrike Hoffmann-Burchardi
Lead — The desk sees significant implications from the recent U.S. job data, indicating a potential slowdown in the economy that could necessitate Federal Reserve easing ahead. Per the full note source, revisions to past job growth figures reveal a weakening labor market, which alongside increased capital expenditures in AI, paints a mixed picture for economic recovery. The upcoming week appears light on macro releases, which may allow time for these sentiments to digest in market pricing.
What the desk is arguing
The desk argues that the recent changes in U.S. labor market data suggest a slowdown that may require the Federal Reserve to reconsider its tightening stance. The revisions to job growth numbers, particularly in May and June, underscore this narrative of economic deceleration, as indicated by the source commentary.
In particular, the revisions show that job gains for May and June were overstated significantly, with a downward adjustment potentially signaling a broader economic slowdown. As noted, the strong secular momentum in AI represented by major firms like Meta and Microsoft might not be enough to offset the challenges posed by a declining labor market, meaning a Fed pivot may be on the horizon.
Where it sits in our coverage
Our current consensus target for the USD/EUR pair stands at 1.075, with a range from 1.04 to 1.12. Key targets from aligned firms include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This view suggests a divergence among firms, with jpmorgan positioned more bullishly at the upper end of the spread, while bofa aligns with a more bearish perspective, indicating fundamental divergence in outlook concerning U.S. economic performance and currency strength.
How other firms see it
There is a consensus among several firms that the USD may weaken if labor conditions continue to deteriorate, supporting the case for Fed easing. However, some firms argue for a stronger dollar based on continued capital investment growth, particularly in the tech sector, suggesting a split in sentiment concerning long-term economic policy.
Watch USD/EUR closely as developments unfold, particularly regarding Fed policy signals, which align with ongoing discussions around fiscal stability and infrastructure investment pivotal to recovery plans.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01U.S. job market revisions indicate potential economic slowdown.
- 02Capital expenditures in AI are providing some isolated strength but not enough for recovery.
- 03The Fed may need to pivot towards easing if employment figures continue to disappoint.
- 04Market participants should prepare for volatility as the economic outlook adjusts.
Market implications
Traders should monitor key levels around 1.075 for potential volatility stemming from further labor data and Fed commentary. The juxtaposition of labor market health against capital expenditures suggests watchfulness in positioning ahead of the ensuing economic data stream.
Risks to this view
Should future labor reports show unexpected resilience, this could invalidate the current bearish outlook on U.S. economic performance, prompting the Fed to maintain or even tighten its current policy. Additionally, political developments surrounding the Federal Reserve's leadership may also complicate messaging around future monetary policy.
Hello and welcome to Ahead of the Curve, where we look at the most important market drivers for this coming week and for investment insights beyond the consensus. My name is Ulrike Hofmann-Borchiati, CIO for the Americas and Head of Global Equities for UBS Wealth Management. Let's kick it off with our key market takeaway.
We face a weakening, broader U.S. economy that is sustained by CapEx to build out AI and power infrastructure. In the next few minutes, I'd like to share our takes on a headline-heavy week, what's on the radar for next week, and how we're positioning portfolios. Here is what mattered most last week.
Headline U.S. job gains on Friday came in below expectations, but the main news was that the revisions to May and June were substantial. The prior reported strong job growth for May and June turned out to be illusory, another data point that the U.S. economy is slowing. Also on Friday, President Trump dismissed the head of the Bureau of Labor Statistics, quoting a political bias in the number.
The degree of payroll revisions is certainly problematic. They are key input to Fed policy, but at the same time, the circumstances of the dismissal could undermine trust in the independence of U.S. institutions. This could pressure the term premium and the long end of the curve.
Also on Friday, Adriana Kugler resigned from the Fed. This gives President Trump the opportunity to appoint a new member who could also serve as a shadow chair until Powell's end of term in May 26. And lastly, strong secular momentum from AI continued.
Meta and Microsoft both increased their AI capex. So now U.S. hyperscaler capex amounts to 1% of U.S. GDP.
So all this data from last week shows a dichotomy between the broader economy and the small part that is at the center of innovation. For a broader cyclical recovery, we now need the Fed to cut. And here's what we expect for the week ahead.
The week will be light for macro releases. Though the initial jobless claims on Thursday will now be more closely watched following the disappointing nonfarm payroll numbers. On the earnings side, we expect next week to continue with the positive earnings and revenue surprises, similar to what we have seen with the two thirds of companies in the S&P that reported thus far.
And lastly, we anticipate the trade uncertainty to continue. All this punitive tariffs on a range of nations, including India and Switzerland, mean that outcomes remain fluid and deals with Mexico and China are still pending. So here's what we advise on the investment side.
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