Signal over Noise with Ulrike Hoffmann-Burchardi
The desk interprets Ulrike Hoffmann-Burchardi's insights as signaling potential economic headwinds for the upcoming Federal Reserve decision on rate cuts. Following remarks from Fed officials suggesting resistance to further cuts, interest rates are now anticipated to remain stable or see a modest 25 basis point reduction in December. Per the full note source, the uncertainty stemming from delayed economic data, including CPI and non-farm payrolls, further complicates the Fed's position, highlighting a potentially slowing labor market as a key influence on policy direction.
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.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Expectations for the Federal Reserve's December decision on rate cuts are shifting amidst concerns over the labor market.
- 02Recent commentary indicates a divided opinion among Fed officials regarding the necessity for additional easing.
- 03Disrupted economic data complicates real-time analysis of labor market conditions affecting Fed deliberations.
- 04Potential volatility in equity markets as investors reassess AI momentum and economic fundamentals.
Market implications
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.
Risks to this view
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.
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.
Sources & References
How we cover this story