Top of the Morning: CEO Macro Briefing Book Q3 update
The desk believes the US economy is transitioning toward a Goldilocks scenario characterized by moderate inflation and stable growth, as noted in the latest analysis from Paul Hsiao at UBS. Consumer spending has remained resilient, even as uncertainty stemming from geopolitical tensions persists. A focus on key inputs like energy and computer accessories underscores inflationary pressures still running above the Fed's 2% target. Per the full note, the expectation is for growth to outpace rising prices, which is generally favorable for risk assets and can impact currency pairs, especially USD-related ones.
What the desk is arguing
The desk asserts that the US economy might soon experience a period of Goldilocks conditions—where inflation is below 2% and growth exceeds target expectations. This perspective aligns with Paul Hsiao's insights from UBS, indicating that while uncertainty looms, consumer spending remains robust and inflationary trends are being monitored closely. The notion of moving towards a Goldilocks environment rather than stagflation is critical for traders preparing for potential shifts in risk appetite.
Supporting evidence for this view includes high inflation evident in producer price indices, influenced by import costs like energy and electronic goods. Consumer resilience is noteworthy, as spending continues to hold up amidst these pressures, offering a counter-narrative to fears of stagnation. Hsiao's insights highlight the importance of navigating these uncertainties as the economic landscape evolves.
Where it sits in our coverage
Our consensus target for USD pairs forecasts a range with a mean of 1.075; notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This analysis aligns closely with jpmorgan, positioning itself on the higher end of the consensus spread, which reflects optimism about US economic performance, signaling potential strength in the dollar.
How other firms see it
Major firms like jpmorgan and citi support a bullish outlook on the USD, suggesting confidence in growth and limited inflation. Conversely, bofa offers a more cautious stance, projecting lower USD strength, indicating divergence in expectations across market participants.
Key indicators to watch include the Federal Reserve's monetary policy decisions and inflation metrics, particularly related to consumer behavior, which will play a crucial role in shaping the trajectory of USD pairs going forward.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The US economy is expected to enter a Goldilocks phase, benefiting assets tied to economic growth.
- 02Resilient consumer spending remains vital amid persistent inflationary pressures.
- 03Key inputs, such as energy costs, are influencing inflation rates and producer price indices.
- 04Market optimism is reflected in higher strategic targets for USD pairs, particularly against the backdrop of shifting economic conditions.
Market implications
Traders should closely monitor US consumer spending data and inflation reports as indicators of economic health. A key level to watch is the Fed's inflation target of 2%, as sustained levels above this may prompt additional monetary actions. This scenario could drive further strength in USD pairs like EUR/USD and GBP/USD in the upcoming months.
Risks to this view
A significant risk to this bullish outlook would arise from a sudden deterioration in consumer spending or unexpected retaliation in the geopolitical realm that significantly escalates inflation. Should inflation persist at elevated levels well above the Fed's target without corresponding growth, it may prompt a recalibration of monetary policy and stall the anticipated Goldilocks transition.
Hi, everyone. Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel.
For today, we are going to spotlight the latest iteration of the CEO macro briefing book series, the Q3 update. Joining me here today at the 1285 Podcast Studio in New York, glad to welcome back the publication's lead contributor, Paul Hsiao, Senior Asset Allocation Strategist for the Americas from the UBS Chief Investment Office. Paul, great to have you back here on Top of the Morning.
Thank you for dropping by. Thanks for having me. So, Paul, picking back up with our conversation, as mentioned, this is the update for Q3.
At this stage of the year, Paul, what phase is the economy in right now? So we titled the most recent publication, Embracing Uncertainty. So while the economy, the stage of the economy hasn't changed from Q2 to Q3, I think there's a large degree of uncertainty that comes between quarter to quarter.
One of it clearly is what's the direction of markets and rates doing amidst the gyrations in the current geopolitical conflict and that's a question that businesses have to deal with since we're seeing the costs of the conflict come into the producer's price index, which producers very clearly watch. And for any importers right now, it's very clear that computer accessories and energy are very big inputs. So we have quite inflation being running ahead of what the Fed would like, ahead of the 2% target for both businesses and consumers alike.
But spending has also held up. So we're still in a reflationary part of the regime. We still expect that the next move to be towards Goldilocks instead of stagflationary.
So just a reminder to the listeners, Goldilocks is when inflation is below target, below 2% while growth is above target and then stagflation is where growth is below target but inflation is above target. So we're thinking that we're going into the Goldilocks portion, which tends to be good for investments as well as the market right now because we think that growth will start moderating in the second half of the year, which would also help bring down inflation as well. So helpful to have that broad economic picture as we're now in Q3 of 2026.
Picking up with the consumer for a few moments, getting a bit more granular there. If you were to describe consumer sentiment, perhaps the word gloomy would come to mind. Has that had any effect on consumer spend?
Right. So since the pandemic, if we take a look at different sets of consumer sentiment indices, they've been persistently dour even though the economy has been doing actually quite well in the first couple of years after the pandemic. So right now, consumers are complaining about affordability, the fast rise of prices.
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