The desk anticipates a nuanced market response to resilient U.S. growth juxtaposed against weakening employment metrics. Per the full note source, Evan Brown highlights that GDP growth is projected at 4% for the second quarter while labor indicators, such as the recent ADP report showing a negative print, raise concerns over economic stability. With inflation expectations climbing due to tariffs, the robust growth narrative may be challenged. Thus, institutional traders should remain vigilant in their positioning as the data unfolds.
What the desk is arguing
The current macroeconomic scenario reveals a duality of strong growth alongside deteriorating labor metrics, warranting a cautious investment stance. Per the full note source, while GDP growth is robust at nearly 4%, the labor market shows signs of stalling, as indicated by recent negative ADP payroll data. As the Federal Reserve's stance evolves amid rising inflation pressures, the narrative surrounding growth could shift dramatically.
The macro backdrop is complex, with inflationary pressures rooted in recent tariff impositions affecting market sentiment. Investors should monitor these developments closely, as the combination of strong GDP revisions and mixed labor indicators could lead to volatility in both equity and currency markets, highlighting potential shifts in investor sentiment.
Where it sits in our coverage
As it stands, consensus targets for the USD remain tightly grouped, with JPMorgan maintaining a target of 1.10 for the Mar-26 tenor, while Bank of America sets a more conservative outlook at 1.04 for the same period.
This desk's outlook aligns closer to the upper bounds of consensus forecasts, suggesting a slightly optimistic tilt as we incorporate resilient growth data against weaker employment metrics, notably diverging from the more cautious stance reflected by bofa.
How other firms see it
Several firms appear aligned with our optimistic growth narrative, including jpmorgan, which supports a higher USD outlook, while bofa adopts a more bearish perspective, arguing for a lower USD valuation amidst labor market concerns.
Trajectories for USD/EUR could mirror the ECB's response to inflation, indicating that monetary policy shifts in response to growth and employment data could significantly impact the cross-rate between the two currencies; similarly, watch the USD/JPY for potential volatility stemming from changes to U.S. monetary policy.
01The U.S. is experiencing strong economic growth despite labor market weaknesses.
02Inflation is resurfacing due to tariffs, influencing investor sentiment.
03Increased volatility is likely as mixed economic signals emerge.
04Expect potential currency shifts based on forthcoming labor data.
Market implications
As traders position for potential volatility, watch for significant shifts around the forthcoming employment data, particularly if it deviates from expectations. A level of 1.10 for USD/EUR could act as a pivot point for market sentiment, particularly in light of the latest inflation metrics.
Risks to this view
A sudden deterioration in employment figures or unanticipated shifts in inflation could invalidate the current bullish narrative. Traders should be cautious of external shocks, such as geopolitical developments or Fed policy changes, which may reshape the economic outlook.
ubs
Hi everyone, Dan Cassidy here. Welcome back to the UBS Market Moves podcast channel. We are back with another episode of the Macro Monthly Podcast Series with UBS Asset Management.
Each month we do look forward to hearing from top investment professionals from the UBS Asset Management multi-asset team. Joining us for this month's episode, glad to welcome back Evan Brown, Portfolio Manager and Head of Multi-Asset Strategy, as well as Fatou Conte, Multi-Asset Specialist, both joining us today from UBS Asset Management. So with that, Evan, Fatou, thank you for spending some time with our clients, our listeners on today's episode.
Fatou, let me now pass it over to you to lead the Q&A. Thanks, Dan. Welcome, everyone.
So for today's call, we'll touch on some macro, we'll discuss the latest market headlines, and then we'll close out with positioning in our MAPs portfolios. So we'll start with you, Evan. You know, growth has been quite resilient, but the labor market has lost a lot of momentum.
And in the meantime, inflation is starting to rise as a result of tariffs. You know, with this backdrop, how should investors interpret the current market, the current economic environment in the U.S.? Yes, thanks, Fatou.
And there is a lot going on with the economy. And as you say, we're seeing really strong growth, but weak employment. If you look at the GDP revisions that we had for the second quarter, showed growth at almost 4% annualized.
And what we're tracking, or Atlanta Fed has their tracking of GDP growth for this quarter, and they're tracking it at another 4% print annualized. And so really strong growth, but at the same time, the labor market has slowed to about stall speed. And we just had a negative print in the ADP report, which is a private measure of payrolls getting extra attention right now with the government shutdown likely to delay Friday's employment report.
So what's going on? I mean, I'd say number one, the driver of growth is that the U.S. consumer, even with employment slowing down, the U.S. consumer keeps spending, which is really a function of strong balance sheets. People in aggregate are wealthier, they have less debt, even as job growth is slowing.
And then the second thing has just been AI CapEx, which has been very strong and might be contributing anything from half a percent to maybe a full percentage point to GDP this year. And that has nothing to do with employment, nothing to do with interest rates. It's just rate spending and contributing to growth.
In terms of what we're seeing in the job market, a lot of it is the decline in labor supply as a result of Trump's immigration policies. But we're also seeing a decline in labor demand. And we see that with the unemployment rate rising a little bit.
And you probably link that to general caution due to the tariff uncertainty. But the key thing is we've seen a slowdown in hiring, but we have not seen a spike in layoffs as of yet. So where we are here mathematically, you have what is productivity.
Productivity is output over total hours worked. Total hours worked, that growth is slowing with the labor market, but growth is strong. And so we're in a high productivity environment.
And that's, I think, even before we're seeing the effects of AI improving productivity. I think we're just seeing corporate dynamism, better allocation of labor, moving around supply chains and such. And overall, just finding a way with fewer workers to drive growth.
So overall, I see this as a pretty good thing. I mean, we don't want the labor market to unravel. That's not what we're seeing just yet.
But overall, I think it's a solid environment. And just to wrap up, you mentioned inflation. We are seeing tariff-driven inflation starting to pick up.
And we've got UBS economists thinking it can start annualizing as much as 4% over the next several months before fading over the second half of the year. So given these mixed signals in the economy, how exactly does the Fed react? I mean, they just cut rates last month after holding off late last year.
And so do they keep easing, even if inflation is moving higher? Or would we see a resume of the wait-and-see approach? Yeah, we think they keep easing.
So I mean, the Fed has a dual mandate. And that's full employment and price stability. And note that their mandate does not include GDP growth.
It is full employment. GDP growth has been strong. Full employment has been weak.
And the Fed has decided to lead into that full employment part of their mandate. They see the slowdown in the labor market. And they're saying, A, we think rates are already in restrictive territory.
Their projection of what neutral is, the neutral rate, is around 3%. And we're just above 4%. So they're saying, OK, we can cut a little bit to get down to neutral.
And also, we don't want to see this slowdown in the labor market lead to a negative spiral where you have people getting laid off and then consumption coming down and more layoffs and recessionary forces taking hold. So they're taking out insurance against that kind of outcome. And on the inflation side, they see the tariffs as really a one-off price hike as opposed to the start of an inflationary spiral.
So they're looking through the near-term rise in inflation. And the fact that inflation expectations are not spiking, that's allowing them to do so. As you said, we've had one 25 basis point cut.
We expect them to cut two more times this year and then one to start next year, which will bring the Fed funds rate closer to 3% where they'd be neutral. The October edition of your Macro Monthly just titled Asia Reform, Innovation, and Room to Run just came out today. What were the main takeaways there?
Yeah. So the first thing is big picture when you're in an environment where the Fed is cutting rates and there's no recession and the dollar is going down. I mean, that tends to be a great environment for risk assets in general, but particularly for emerging markets and Asia.
And that's what we've seen historically. And certainly that's been the case over the last month. But that's the top-down view.
That misses a lot of what's happening on the ground in Asia. And start with China, where what's happening with technology in China is very, very compelling. I mean, in AI, just to compare with the US, here we're focused on winning the AI race.
We want the absolute best models. We want to reach AGI, superintelligence, all these buzzwords as quickly as possible. In China, there's more of a focus on the cost efficiency of the model and on really the applications of the existing technology.
And so it's kind of a different approach, but one that we're seeing be able to monetize pretty quickly. And you have still this technology, this competition on technology between the US and China and export controls US semiconductors to China. And so China's being forced to develop their own semiconductor stack and own infrastructure that's separate, but it is working for them.
And so that's something that is pretty compelling, what we're seeing going on out East. And then also in the region, you look at Korea and Japan, both countries driving really powerful corporate reform agendas, regulators, governments focused on improving governance of corporations that's leading to an increase in buybacks. And what's been the case for these countries and also for a number of emerging markets more generally has been this inability to channel better growth outcomes, both domestically and externally into shareholder returns.
And now there's this policy impulse to change that. And we're seeing that reflected in the buybacks. We're seeing that reflected in earnings per share.
And we think that's a structural theme that has a ways to run. Right. And then circling back to the mixed signals you're seeing in particularly the US economy, what risks are the team keeping an eye on right now?
Is it inflation sticking around? Is it corporate earnings coming in weaker or a softening labor market? Yeah.
So I'd say it's all of the above. I mean, we're always keeping an eye on risk. And obviously, it's been a very strong run over the last several months for risk assets.
And we're looking out for what could go wrong. And I would say there's two side of risk. One is that the labor market that hasn't unraveled yet starts to.
And you do see that spike in layoffs. And we head towards a recession. Fed cuts are coming too late.
Definitely not our base case, not what we see in the data. But it's possible that that happens. And we don't have the US official employment data, as I mentioned, coming out on Friday.
So we're having to look at other measures. And so keeping an eye on private sector measures of employment and the like. The second risk is that actually it's the GDP growth that's telling the true story.
And the labor market is actually going to accelerate. But you have kind of tighter constraints because the overall labor supply is lower. And you start getting a re-acceleration of wages and inflation.
And that leads to a sell-off in the bond market and the stock market. Again, not our base case here, but something that we're watching. So we'll have to see if that does turn out.
Does the Fed respond to it? Do they get more hawkish? Do they stay dovish?
And what's happening in terms of the nature of the new Fed shares? I think these are all things that we're going to have to be looking at next year. And we're going to have to look at the data and how it's playing out over the coming months.
And we're also just highly attuned to corporate commentary. We have earnings season coming up and we'll see what companies are saying about underlying growth. So we're keeping all these risks on top of mind here.
Thanks, Evan, for that comprehensive overview of our views. Thank you for tuning in. Be sure to visit UBS.com slash studios to view the entire UBS Studios suite of podcast channels, along with our video offerings, such as UBS Trending.
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