Top of the Morning: CIO Strategy Snapshot - Assessing the data
The desk posits that the recent economic data indicates a resilient U.S. economy, which may support USD strength in the near term. Recent GDP revisions and stronger consumer spending figures suggest that the economy is outperforming expectations, as highlighted in the latest UBS Market Moves podcast source. Furthermore, with the September employment report pending, traders should be vigilant about its potential impact on the USD, as robust employment data could reinforce bullish sentiment toward the dollar.
What the desk is arguing
The desk argues that the U.S. economy is showing resilience, which supports a more bullish outlook for the dollar. Recent revisions indicate that Q2 GDP was adjusted upwards from 3.3% to 3.8%, driven by substantial consumption growth. Specifically, consumption rose by 90 basis points to 2.5%, highlighting continued consumer strength beyond the second quarter.
In addition, August's personal consumption and income data exceeded market expectations, further confirming the positive momentum of consumer spending this summer. This information collectively paints a picture of a robust economic backdrop, as shared by UBS's Chief Investment Office discussion source.
Where it sits in our coverage
Current consensus targets for the USD stand at 1.075, with estimates ranging from 1.04 to 1.12. Notable firm insights include: - jpmorgan: target of 1.10 for Mar26 - bofa: target of 1.04 for Mar26
This aligns with our desk's bullish stance on the USD, sitting at the upper end of the forecast spread. This suggests that the $1.075 mark may represent a pivotal support level as economic indicators unfold.
How other firms see it
jpmorgan and bofa express divergent views, with jpmorgan favoring a stronger dollar outlook until 1.10, while bofa is more cautious, predicting a lower target at 1.04. This difference in sentiment highlights the ongoing debate around the dollar's strength amidst evolving economic data.
Traders should also be aware of USD/JPY and USD/CAD correlations, as shifts in U.S. economic sentiment broadly influence these pairs. Monitoring movements in these currencies may provide additional context for trading decisions.
01U.S. economic resilience indicated by upward GDP revision and strong consumer data.
02Upcoming September employment report could be pivotal for USD sentiment.
03Current consensus shows a USD target range of 1.04 to 1.12, with our desk positioning toward the upper limit.
Market implications
Watch for the upcoming September employment report, as strong data could provide an additional boost to USD strength. Also, keep an eye on key levels around 1.075 as this may act as strong support in the event of bullish momentum.
Risks to this view
The call could be invalidated if the September employment report significantly underperforms expectations. A weaker-than-expected figure could lead to downward pressure on the USD, altering current bullish sentiment.
ubs
Hi everyone, Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel. The S&P 500 had its first down week since late August, this after what had been a pretty relentless climb higher during the month of September.
Now this occurred despite good economic data and this week should bring another round of important data, but also the prospect of a government shutdown to be mindful of. So joining us today for the CIO Strategy Snapshot, glad to welcome back Head of Asset Allocation for the Americas with the UBS Chief Investment Office Jason Draho. Jason, as always, great to have you here with us on a Monday morning to begin the trading week.
Thank you for dropping by. Morning Dan. Happy Monday.
Good to be here. So Jason, let's perhaps begin with the economic data released last week. What does it say about the state of the U.S. economy at the moment?
Well, on the bottom line, I'd say the economy is resilient and sort of doing better than expected. And this is based on the data that we got last week, and I'll start with the second quarter GDP numbers that were revised higher. This went from 3.3 percent.
It was the second estimate for Q2 GDP. It was revised higher to 3.8 percent. And this was largely due to stronger consumption growth, which went up 90 basis points up to 2.5 percent.
Now, one could argue this is kind of really backward looking, that we're now close to or almost right at the end of the third quarter. So what happened in second quarter doesn't matter that much, but it is sort of a level set. It tells us, particularly for the consumer, that consumer spending was holding up stronger.
Then later last week, after that revision data, we got August personal consumption and personal income data. Both of those exceeded expectations in August. So they were good numbers.
So it shows that the strength of the consumer in the second quarter continued on throughout the summer. As a result of tracking estimates for third quarter growth, it went higher. Among economists, the expectations are now around a 2.5 percent range.
The Atlanta Fed GDP now tracking estimate, which is what they followed, is now up to 3.9 percent. It's often you can get the actual numbers can deviate from that, but it's usually not going to be more than a percentage point. So it suggests that GDP growth in the third quarter was likely to be at least 2.5 percent, if not considerably higher.
As a result of both of the revisions to Q2, but also the trend date for Q3, the consensus forecast for growth in all of 2025 has gone up about 10 basis points from about 1.65 to 1.75. This is Bloomberg data. It likely will go even higher because it's a bit of a lagging effect.
Economists maybe have not fully updated their numbers based off the data last week. And likewise, the impact for next year is almost like a bit of a level shift higher. So if the closer we get to 2 percent, the closer growth is actually at trend.
I think the expectation that we have, but also most investors, was that growth would be definitely below trend, maybe well below trend, and that's certainly not the case. So what we're seeing is evidence of growth being much more resilient than expected, almost looking like it's sort of accelerating from the second quarter onwards, or at least it's beating expectations. In addition, we got the PCE inflation data last week.
Since we already had the CPI data, the PPI data, usually we have a pretty good sense of what the PCE data will be, and it came in sort of line with expectations. Actually, goods inflation was relatively contained. So not any sort of indications of inflation accelerating, evidence of the tariff impact, but not surging overall.
So if you look at it combined, growth is better than expected, inflation holding steady, relatively speaking, relative to expectations. The one thing that's a little bit maybe puzzling, given all this data, is that we have growth data that can used to be quite strong, exceeding expectations, yet we've had relatively weak labor market, or signs of a cooling labor market. The last three months of non-farm payrolls have averaged 25,000, so well below what would be considered a steady state level, like 75,000.
It does seem odd to have that level of labor market growth relative to that strong consumer spending, strong overall economic growth. You can kind of square the circle by saying, acknowledging that the consumer is a big part of the economy, but also there's a lot of capex investment related to AI. Those are also lifting the GDP numbers.
So it's not completely odd to have sort of a cooling labor market, but strong growth. But the overall takeaway from the data last week is that the economy continues to be quite resilient, and it looks like that's going to be the path going forward as well. So Jason, if we put economic data aside for a moment, another consideration top of mind for many as we're beginning this week is, of course, the prospects for a government shutdown midweek.
So what is the likelihood, as we're speaking here on a Monday morning, of a shutdown, and what impact, if any, will this have on the economy and markets, if it's to occur? Well, right now it looks like it's more likely than not that we'll get a government shutdown. It has to be done by Tuesday midnight to avoid any sort of shutdown, and barring some deal early Wednesday morning to have a shutdown that's more than a day long or hours long.
Congress has not passed any of its spending bills normally that's necessary to fund the government, so there's a lot of work to do to fund the government going forward. Most likely what happened is some sort of continuing resolution that temporary funds the government, perhaps into mid-November or towards later this year. It seems like one of the key sticking points is that Democrats want subsidies for Obamacare to continue.
Republicans are opposed to that. Now, the thing about government shutdowns, especially in negotiations going up to the last minute, things can look pretty dire. Then all it takes is a meeting between congressional leaders, the president, to suddenly unlock it and get a deal that's announced very quickly.
It's reported that President Trump will meet with Democratic leaders today at around 3 p.m. That could be the catalyst to unlock this and avoid another shutdown. But right now we'd have to say the odds look more likely than not we will get a shutdown given the intent of both sides to either reach a deal or not reach a deal at that time, considering what they think will be the political implications with each party believing that the other party would be more adversely affected.
As you mentioned, the impact of government shutdowns typically is very little for the overall economy. Government workers are furloughed. They're not paid, but then when they do return to work, they get back paid.
Ultimately, there's no real income lost, a little bit of disruption of economic activity during the shutdown, but that is often made up when the shutdown ends. We've seen this story enough times for the markets and for investors. They tend to look through all this.
Again, the market impact tends to be quite minimal. This time could be a little bit different for two reasons. One is that the Trump administration has talked about perhaps not just furloughing workers, but looking for situations where they'd actually have permanent layoffs.
If a government agency has not been fully funded, there's no work under means to be done. If the work that would be done is not aligned with the Trump administration's agenda, this would be an opportunity perhaps just to outright fire the workers. The magnitude of that is debatable how much they would do.
Roughly 900,000 workers could be furloughed if this were to happen. If they were to try to push forward permanent layoffs, you could see tens of thousands of workers potentially be impacted. Not too trivial, but also not in itself a game changer.
It does add a bit of an upside risk in terms of the economic consequences of the potential shutdown on the economy overall. The second thing that might actually matter more for the markets and for investors is that if the government shuts down, the release of economic data won't materialize. Most critically this week would be the September payrolls report that's going to come out on Friday, October 3rd.
That gets delayed until the government comes back. Or a day or two, that doesn't necessarily matter that much. But if it persists, there's just less data available for the markets and investors to assess what is the true direction of the economy.
But more significantly, if this were to persist a long time, the Fed wouldn't have the data they would need to make an assessment whether they should cut rates or hold steady at the end of October. If the shutdown were to last into mid to a little bit later October, this would also impact now the October's payroll report because work for assessment really begins around the second or third week of the individual month. All this could suggest the Fed path.
We think the Fed will cut the end of October, again in mid-December, and then the date of January. That could be at risk a little bit just because there's not enough data for the Fed to make a decision. That would also impact the markets, again, if this were to persist more than a few days to disrupt payroll's data this week, but also going into mid-October.
So typically, this is very much just headline noise, not real economic impact. That's still likely to be the case. But there are a couple of situations where it could impact the economy and the data that would have a market impact that could be a little longer lasting than is normal.
Well, Jason, very helpful clarity as to the potential extent of impact the economy and markets, a government shutdown, could pose. And we shall see what the next 24 to 48 hours deliver with respect to negotiations. If we turn over to the markets for a few moments, I had mentioned at the start that the S&P 500 last week had its first down week since late August.
What was the driver behind this performance? And what are markets in general pricing at the moment? Well, the markets in the S&P 500 specifically, you could see it's become a little bit stretched.
Just in terms of the momentum, when you see that kind of strong momentum, you often get a bit of a refresher, pause. The market sort of consolidates, digests what's going on. It wasn't necessarily the economic data last week, which was, by and large, all good.
It was supportive of the markets and risk assets in general. I think the key catalyst that we saw the S&P 500 pull back, particularly on Tuesday, Wednesday, Thursday, was news that came out last Monday regarding an investment that, a relationship between NVIDIA and OpenAI. So, OpenAI announced that they will purchase upwards of $100 billion worth of semiconductors from NVIDIA, but it's financed through an equity investment that NVIDIA is making into OpenAI.
So, typically, this might be viewed as a positive story for the AI CapEx theme, that you have more investment, more demand for NVIDIA, more need for AI and models to run, given the demand for AI. But what the markets and a lot of investors interpret this as more a bit negative in that you have essentially vendor financing, where a company is providing a buyer with financing in order to buy the company's products, and that becomes sort of circular. So, is it real demand or is it sort of artificial demand to some extent?
This is what happened in pockets of the economy back in the late 1990s during the dot-com era, mobile telecommunications equipment, questionable accounting. So, it had these echoes of sort of a, you know, not exactly illustrious past of how these kind of relationships worked. So, I think the markets and investors kind of viewed that as a bit of a negative.
Also, given how much AI-related theme or AI-related stocks have been performing, this was a bit of an excuse to maybe devalue that position, pull back on this a little bit. And that's what we saw for the rest of the week, a bit of an unwind of this kind of momentum trade. Ultimately, I think the story still remains the same in terms of AI, but that was to me the kind of key catalyst for what we saw, a little bit of market indigestion last week.
And keep in mind, when we say the S&P was down, it was down a half a percent, so relatively modest, this wasn't a big kind of sell-off overall. Another notable thing in the markets last week, and this is kind of actually began the prior week after the Fed meeting, is that we're seeing Treasury yield, particularly at the back end, sort of back up a little bit, and rising higher. You know, the 10-year Treasury got to 4.17 in that range.
It had just a little bit below 4% before the FOMC meeting on the 17th. Better economic data suggests that perhaps the Fed doesn't have to cut as much as Fed rate cuts get priced out. You can see rates rise, especially at the back end of the curve.
And then as that happens also, just mechanically, higher rates, higher real rates overall, which have also been rising, should lead to lower valuations for risk assets, you know, equities in particular. So, it's a little bit of good news is driving yields higher, but it also takes a little bit of time for the markets to digest some of that. So, in the short term, that is a, you know, perhaps a slightly net negative for risk assets, especially given how well they've done.
But fundamentally, if rates are rising because the growth data is good, that ultimately will be good for risk assets overall. I think those are the two main things that are sort of driving the markets last week, the further developments and sort of, you know, a little bit questionable developments in terms of financing related to AI, you know, capital spending, and then also rates overall kind of going higher because of better growth news. But the markets haven't digested the fact that rates maybe won't be going as low as they expected, especially if it funds rate level.
So, Jason, with these considerations in mind, recent market drivers coupled with the macro considerations you had mentioned a bit earlier, what should investors be doing with their portfolios right now? Well, I'll highlight just a few of our key messages. One is, you know, buy the dips in equities.
Everything I said regarding the bull market, you know, being intact and the economic data sort of, it supports that. The AI story still remains intact, you know, even if there's a little bit of, you know, it wasn't ideal that financing relationships overall, buy the dip in equities, still in this technology, still lean into kind of AI themes. Financials can, you know, what can you do to benefit, especially if the yield curve actually steepens out a little bit.
Second message is put cash to work. You know, the Fed is going to be cutting rates. We expected to cut rates.
This is a good opportunity to move out of cash into fixed income, and that we favor higher quality fixed income with kind of shorter durations, meaning up to maybe three to five years. Avoid the possibility of extending your duration as rates back up. You know, going to my point of the chain, you're going from around 4% to close to 4.2, easily back up to 4.5%.
We think there'll be better opportunities to kind of re-engage at the back end of the curve. Spreads in general are very tight, so don't take a lot of, you know, kind of risk, you know, reaching for yield. And we favor securitized credit by large agency MBS, CNBS, or corporate credit, given what spreads are.
And the final message is buy gold. It continues to be, have a strong structural tailwind as investors around the world, including official investors and reserve managers like central banks want to diversify their portfolios, want to diversify against dollar assets, and gold is one of the key beneficiaries of that. So I think, again, it should perform, you know, a good function of portfolios is diversification and tied to a structural theme that is not necessarily tethered to the macro environment.
Well, Jason, as always, a very productive and informative conversation to kick off yet another trading week. So thank you for dropping by on this Monday morning to spend some time with our listeners and their clients. We will see how some of these items progress in the days ahead and do look forward to picking back up with our conversation next week.
You're welcome. Have a great week. within UBS Global Wealth Management. Visit ubs.com slash CIO to view the latest research. services and brokerage services.
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