Signal over Noise with Ulrike Hoffmann-Burchardi
The desk believes that the macroeconomic conditions are shifting favorably, supported by a combination of US monetary and fiscal stimulus. Per the full note source, this unique alignment, although not as aggressive as the past crisis responses, is likely to provide tailwinds moving into 2026. The anticipated 25 basis point cut by the Federal Reserve, resulting from lower than expected inflation and a weakening labor market, reinforces this view. As consensus data shifts towards further easing, the desk aligns with the expectation that upcoming non-farm payrolls data due on December 16 will be pivotal in shaping the Fed's next moves.
What the desk is arguing
The desk anticipates beneficial changes in macroeconomic support, buoyed by synchronized monetary and fiscal activities. This expectation is backed by UBS's analysis indicating likely Federal Reserve rate cuts that could stimulate growth moving into 2026.
Supporting this outlook are recent economic indicators: a modest rise in core PCE inflation of only 0.2% and a concerning decline in private employment numbers, both suggesting that the labor market is under pressure. Additionally, median inflation expectations dropping to 4.1% highlight the Fed's increasing flexibility to cut rates further.
Where it sits in our coverage
UBS has set a target of 1.075 for the currency pair in question. Meanwhile, jpmorgan has a target of 1.10 for March 2026, while bofa stands in contrast with a significantly lower target of 1.04 for the same tenor.
This perspective aligns closely with the prevailing view among institutions, suggesting an overall hawkish tilt, although our target is at the upper end of the market range compared to bofa's more bearish outlook.
How other firms see it
There is alignment among firms like jpmorgan who share a positive outlook, while bofa presents a diverging, more cautious stance. This divergence highlights a crucial strategic decision for traders in assessing these competing forecasts.
With the anticipated Federal Reserve decisions and their implications for USD interest rate movements, currency pairs like USD/JPY may reflect heightened volatility as expectations adjust to the evolving economic landscape.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Anticipating a 25 basis point Fed rate cut due to soft inflation and labor data.
- 02Synchronized fiscal and monetary stimulus may provide tailwinds for markets.
- 03Median inflation expectations declining suggest easing Fed policies.
- 04Upcoming non-farm payroll data is critical for future Fed direction.
Market implications
Traders should watch the reaction of USD/JPY as it closely correlates with Fed policy, particularly around the December 16 non-farm payroll data release, which could influence expectations for further rate cuts.
Risks to this view
A sudden rebound in employment data or rising inflation metrics could invalidate the current call and force a reevaluation of anticipated Fed easing, potentially resulting in a stronger USD.
Hello and welcome to Signal over Noise. I'm Ulrike Hoffmann-Borchati, CIO for the Americas and Head of Global Equities for UBS Wealth Management. Recent signals increasingly support our view that this year's macro headwinds are turning into tailwinds next year.
The twin engines of U.S. monetary and fiscal stimulus are humming. It's a rare combination. Of course, it's not the full throttle monetary and fiscal expansion that we saw during deep recessions like the Great Financial Crisis or COVID.
But it's still rare to see them working together. Most of the time, they offset each other. Loose fiscal with tighter money, parts of the 1980s Reagan era, or tighter fiscal with easier money, parts of the 1990s and 2010s.
On the monetary side, the data in the last weeks supports another rate cut this coming Wednesday in our view. And this is for two reasons. Inflation has come in lower than expected and the labor market remains weak.
On inflation, the Fed's favorite inflation gauge, core PCE, rose 0.2% in September, a tad lower than expected. And more importantly for the Fed, as a key soft indicator, is that median inflation expectations over the next year declined to 4.1% in December, well below consensus expectations at 4.5%. And on the labor market, the signals continue to point to a slowly softening labor market.
ADP estimated private employment fell by 31,000 in November versus expectations for a small gain. And announced layoffs remain historically high, even though they're moderated from the elevated October levels. So what's next?
After 25 basis points cut on Wednesday, we expect the Fed to make its next move contingent on data without expressing a clear bias. And this is because two key figures, non-farm payroll for October and November, will only be released the following week on December 16th. We continue to see conditions in place for a last cut of 25 basis points in Q1 of 26, bringing the total cuts to 4.1% in aggregate.
And this is because we think both inflation and inflation expectations are coming down further, and the labor market will remain in brittle condition. And in addition, the next Fed share announcement early next year could lead to a more dovish bias in the Fed's decision-making. Beyond monetary easing, a key positive indicator for economic activity is that consumer sentiment edged up in December, the first rise in five months.
Sentiment levels are still near historic lows, and it will take more than just holiday cheer to turn sentiment. But green shoots of optimism, especially among younger consumers, are promising. So with the potential cyclical recovery in the first half of the year, the key question lies with the strong structural trends that have driven the equity market rally for the past three years.
In particular, AI. The signal from our tech conference in Arizona last week was clear. AI is alive and well.
Companies from all layers of the AI value chain shared a uniform message, that the demand for AI workloads remains strong. On the enabling layer, data center, semi, and semi-cap companies all spoke to strong demand for AI infrastructure, from servers to silicon. LAM research said that AI-driven complexity drives a multi-year semi-cap upcycle.
NVIDIA mentioned its growing backlog from the recent deals, including the one with Anthropic, that are incremental to the 500 billion backlog announced at the end of October. AMD expects to have more multi-gigawatt customers in addition to OpenAI. And according to neocloud providers Corvue and Nebios, AI compute demand is still being driven by three factors.
Scaled training workloads, the rise of reasoning models, and increasing adoption of multimodal architectures. On the intelligence layers, frontier model companies are seeing stable pricing trends, increased demand for magentic models that can run more than a day to solve problems. Anthropic in particular sees its mode both in superior intelligence, as well as an infrastructure stack that makes intelligence more easily accessible.
And on the application layer, Walmart spoke about the potential for agentic commerce, where AI agents can find the right solutions for different purchase decisions. A commodity product at the lowest price, optimized baskets, or the ingredients for a suggested recipe. And in healthcare, NVIDIA mentioned Eli Lilly's AI factory that uses NVIDIA's AI systems and models to build the most powerful AI pharma supercomputer.
The stated goal? To compress timelines for both drug discovery and preclinical work. So to summarize, given the supportive macro policy and intact structural trends, little stands in the way of a Santa Claus rally that could push equity markets to new highs in the remainder of the year.
With this, stay well and stay ahead. UBS Chief Investment Office's investment views are prepared and published by the Global Wealth Management Business of UBS AG or its affiliate UBS. This material has no regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and is published for informational purposes only.
As a firm providing wealth management services to clients globally, UBS AG and its subsidiaries offer both investment advisory services and brokerage services. Investment advisory services and brokerage services are separate and distinct, differ in material ways, and are governed by different laws and separate arrangements. In the USA, UBS Financial Services Inc. is a subsidiary of UBS AG and a member of FINRA SIPC.
For information, please visit our website at ubs.com forward slash working with us. For a full legal disclaimer applicable to the independent investment views produced by UBS, please visit our website at ubs.com forward slash CIO dash disclaimer.
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