What's takeaway 1 on Signal over Noise with Ulrike Hoffmann?

Expectations for the Federal Reserve's December decision on rate cuts are shifting amidst concerns over the labor market.

What's takeaway 2 on Signal over Noise with Ulrike Hoffmann?

Recent commentary indicates a divided opinion among Fed officials regarding the necessity for additional easing.

What are the market implications for Signal over Noise with Ulrike Hoffmann?

Watch for the December 10 FOMC decision as a key market catalyst, particularly given the recent changes in rate cut expectations. A strong performance in jobless claims could signify further deterioration in the labor market and impact equity trends.

What are the risks to this view on Signal over Noise with Ulrike Hoffmann?

Should the upcoming CPI and non-farm payroll data indicate unexpected economic strength, it would likely challenge the desk's bearish view on labor market health and increase the likelihood of a less dovish Fed stance, thereby invalidating the current outlook.

Signal over Noise with Ulrike Hoffmann-Burchardi

What the desk is arguing

The desk frames the uncertainty surrounding the Fed's upcoming decision on rate cuts as central to upcoming market dynamics. Recent commentary from the Federal Reserve indicates a split opinion on monetary policy direction, with two members openly voicing concerns about additional cuts despite prevailing market speculation.

Data interruptions from government shutdowns, particularly regarding employment metrics, have clouded the picture, potentially impacting the Fed's decision process. The desk points to estimated job losses reflected in jobless claims data as further evidence of a weak labor market that may justify a rate reduction in December.

Where it sits in our coverage

UBS stands alone in its current analysis while various banks maintain differing views about US dollar movement. Recent forecasts indicate: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)

The desk's call implies skepticism about aggressive monetary easing, contrasting significantly with the more dovish expectations reflected by bofa, suggesting a divergence in anticipated market responses.

How other firms see it

Several firms share insights indicating alignment with the tightening labor market perspective and its implications for monetary policy, notably jpmorgan. On the other hand, bofa presents a more cautious stance regarding immediate cut expectations, advocating for volatility in a potential downturn.

Key indicators relevant to the desk's thesis include upcoming jobless claims reports and the relationship between Fed policy and USD/JPY fluctuations, which may reveal broader market sentiment shifts and risk appetite.

Hello, and welcome to Signal Over Noise. I'm Ulrike Hofmann-Borchardy, CIO for the Americas and Head of Global Equities for UBS Wealth Management. Last week, two legs of the Equity Market Bowl thesis were challenged, the Fed rate cuts and AI momentum.

Let me share where we come out on both. On Wednesday, two voting Federal Reserve members voiced opposition to a third straight rate cut in December. This came after Powell sought to correct the market impression already at the October meeting that the December rate cut was already in the books.

The market now prices an equal chance of no cut and the 25 basis points cut in December. What's our take? The missing CPI and on-farm payroll data has muddied a real-time read on the economy, complicating the rate cut decision.

The FOMC is scheduled to announce its decision on Wednesday, December 10th. This is just after the supposed releases of the CPI data on the same day at 8.30 and the non-farm payrolls the prior Friday, December 5th. It is not clear, in fact, if the Bureau of Labor Statistics will be able to release these numbers as well as the October figures.

The data collection was disrupted during the government shutdown. There's a good chance that the Fed may have to decide without clear visibility. Our view is that the labor market will continue to remain the deciding factor for rates for the time being.

And alternative data sources, such as jobless claims, ADP and challenger reports, continue to paint a weak labor market picture. We hence still expect a cut in December. Contrary to the lack of data on the macro side, we got three new AI data points last week, all related to the AI data center built out.

At AMD's Investor Day on Tuesday, its CEO, Lisa Su, laid out a one trillion compute and data center market by 2030. AMD expects to gain about 15% share of this market, outpacing investor expectations. More demand for AI infrastructure also was the message from AI infrastructure vendor, Corweave, although their execution issues impacted guidance.

One of the largest private US AI companies, Anthropic, last week announced 50 billion for the built out of new US data centers. So in summary, we had three strong AI infrastructure data points, yet the NASDAQ closed low on the week. The likely reason is that the elephant in the room question has only grown louder.

How exactly will all this AI spend be monetized? The stock market does not seem to have a good answer. In fact, it gives rise to a public market AI puzzle.

How come the public markets have only rewarded the enablers of AI thus far? The AI7, the chip makers, NVIDIA Broadcom, AMD, Micron, and the hyperscalers, Google, Amazon, and Microsoft, have appreciated by more than $10 trillion since the launch of Chachapiti almost three years ago. Yet the users of AI have not seen comparable increases in valuation.

This is different from the internet boom where both the enablers of the internet, such as Cisco, Nortel, and Lucent, as well as the users of the internet, such as Amazon, eBay, and Priceline, saw their stock prices soar. There are many possible answers to this puzzle, just a few. One, there's too much uncertainty about how, where, and when the tangible ROI from AI will materialize, and hence too early to place any bets.

Or two, the enabling layer has a more concentrated market structure with fewer players, whereas there's more competition on the application layer. Hence, there are no margins from AI, just the need to stay competitive. Or three, the AI beneficiaries will largely be in the private markets, and hence the monetization trends of privates will be key to watch.

Or four, the AI beneficiaries on the application layer will be the same as the ones on the enabling layer as they're vertically integrate into the application layer. Hence, ship companies and hyperscalers will offer consumer and enterprise AI services. Time will tell if and to what extent these materialize.

In our view, it is plausible that at least some public non-tech companies reap the benefits of AI, especially at this stage where AI tools are under-monetized and losses of private AI tool companies, such as OpenAI and Anthropic, are funded by private market investors. So at this stage, the AI benefits accrue publicly, yet the losses are funded privately. In our 10 CIO AI views, we link the success in AI to two things, an AI-first mindset and differentiated data.

A promising area lies in the healthcare sector with vast datasets on clinical trials, genomics, and patient histories. The sector is also attractive on other grounds. The Pfizer deal with the US government on most favored nation pricing and tariffs has started the rewriting of the sector in September.

The five additional deals since then have cleared concerns around policy headwinds. In particular, the Eli Lilly and Novo Nordisk deals were important milestones, with the US government now endorsing obesity medication. Yet valuations remain below the sector's median valuations relative to the broader market.

So with a free call option on AI, yet a negative correlation to public AI stocks, US healthcare remains our top pick to diversify the AI monetization risk. So lastly, turning to this week, NVIDIA, the largest AI infrastructure provider, will report earnings on Wednesday after the close. Analysts expect another strong quarter, yet the NVIDIA numbers will not shed light on the key question, how will the math around AI monetization work?

For this, we need more data points on price elasticity of AI usage. This is the key signal the market is looking for. Just how much are consumers and enterprises willing to pay for AI services?

With this, stay well, stay diversified, 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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