Top of the Morning: CIO Strategy Snapshot - Data concerns of a different sort
The UBS CIO desk interprets the July CPI prints as broadly in line with expectations, with core CPI rising 32 bps month-over-month to 3.1% year-over-year, while core goods ex-cars rose 22 bps—a potential easing from the prior month's 55 bps. The desk downplays tariff-induced inflation concerns, citing the sequential slowdown, and suggests the data keeps the Fed on track for a September cut. Chair Powell's Jackson Hole speech is the key near-term catalyst, with the desk expecting a balanced tone that reinforces data-dependency. The cross-firm consensus sees EUR/USD in a 1.04–1.12 range through year-end, with UBS at the upper end.
What the desk is arguing
The UBS CIO desk argues that the July CPI report is a 'clean' print that supports a narrative of gradual disinflation, with tariff impacts appearing contained. Per the full note [ubs-on-air], the desk focuses on the core goods ex-cars component rising 22 bps month-over-month, down from 55 bps in June, as evidence that tariff pass-through is not accelerating.
The desk highlights that headline CPI rose 20 bps month-over-month to 2.7% year-over-year, while core CPI rose 32 bps to 3.1% year-over-year—both in line with expectations. This suggests the Fed retains flexibility to cut in September, and the desk sees the data as supportive of a 25 bps cut.
The counterfactual the desk implicitly rejects is that the sequential easing in core goods prices is temporary or that services inflation—which is stickier—could re-accelerate. By focusing on the goods component, the desk signals confidence that tariff effects are fading.
How firms align with this view
consensus1.0750range1.0400–1.1200
Key takeaways
01July CPI data largely in line with expectations, with core CPI at 3.1% year-over-year.
02Core goods ex-cars slowed to 22 bps month-over-month from 55 bps, suggesting tariff effects are contained.
03UBS expects Fed to cut 25 bps in September; Chair Powell's Jackson Hole speech is the next catalyst.
04The desk sees EUR/USD supported in a 1.04–1.12 range, with UBS at the upper end of consensus.
Market implications
Watch EUR/USD for a break above the 1.10 level if Powell's speech leans dovish and confirms a September cut. The 1.04–1.12 range is the consensus year-end band, with UBS targeting the upper end. Positioning could shift if core services inflation surprises higher.
Risks to this view
A hawkish surprise from Powell at Jackson Hole—emphasizing persistent services inflation or tariff passthrough—would delay cuts and push EUR/USD toward the 1.04 floor. Alternatively, a sharp rise in core CPI in August would invalidate the disinflation narrative.
ubs
Hi, everyone. Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel.
We are in the homestretch of the summer and for summer vacations, but the markets haven't been quiet and they likely won't be this week either. Now, after digesting inflation data last week, the main focus for this week will be on Fed Chair Jay Powell's speech at the Jackson Hole Symposium coming up on Friday. So joining us today on a Monday morning to discuss this all, glad to welcome back Jason Draho, Head of Asset Allocation for the Americas with the UBS Chief Investment Office.
So, Jason, as always, nice to be at the table with you. Welcome back. Good morning.
Good morning. Happy Monday. So, Jason, let's begin with the July inflation data that was released last week.
What did the data tell us about the state of inflation, the impacts of tariffs and how it could evolve from here? Well, the headline for CPI inflation was kind of in line with expectations. So a good report from that respect.
You know, the key thing is to look at the core CPI data. It rose 32 basis points month over month, basically in line with expectations, which is around 0.3 or if you want to get to second decimal place, maybe slightly higher, but basically right in line with expectations. And that meant on a year over year basis, it rose to just over 3%, like you rounded up at 3.1%.
The headline inflation numbers, which won't include food and energy, up 20 basis points month over month, and it is at 2.7% year over year. If you look at your kind of core goods prices, which are probably the best indication of tariffs because we're importing goods. We're not necessarily importing services.
A lot of services are through different means. Those rose core goods prices, excluding cars rose 22 basis points. The prior month it was 55.
So you can look at it and say, well, perhaps that's a step down from prior month, therefore the tariffs are not having an impact. But the context is that goods inflation had been running negative or kind of flat for the past couple of years. So the fact that it's actually at this level is historically unusual.
It definitely is a sign that there is an impact of tariffs. On a month to month basis, sometimes there are issues with specific categories or areas that are really elevated that could be a certain part of a goods that causes inflation to go up. So month to month kind of volatility but the direction of travel still suggests that there's more in the pipeline for goods inflation that reflects the tariffs.
The inflation data we got last week that wasn't quite as good was the PPI data. This is the producer price index, more kind of thought of inputs as opposed to the final consumption. That is CPI.
Whether you look at the PPI number overall, PPI excluding food energy or even exclude trade services, it all increased significantly more than expected. The headline number was 0.9% month over month. Consensus going in was like 0.2, 0.3 in that range.
So sizable there overall. There's obviously a question of like, well, what's the correlation between PPI and CPI? If you have higher PPI, does that imply, well, this is going to feed through to lead to higher CPI down the line?
Historically, there's not a great relationship. So not a good number, certainly, but isn't indicative necessarily of a big surge of inflation coming. But it is kind of consistent with perhaps the tariff pipeline of inflation in a building overall.
So the takeaway is roughly in line with expectations. That's why you saw or we saw on Tuesday when the inflation data came out, the CPI data specifically, the markets rallied a lot on that news. You saw the S&P 500 was up over 1% that day.
Small caps, which tend to be more economically sensitive, were up over 2%. So that's more of a short squeeze. But again, the market viewed as we expect inflation to go higher, it will continue to go higher before it sort of rolls over.
But it's not rising dramatically in a way that is showing that perhaps the tariff impact will be even better than expected or higher than expected. So overall, the trend we expect, it's probably going to get worse before it gets better. But this is sort of well known by the markets at this point in time, and they reacted accordingly.
So Jason, on this question of data, there are new concerns about potential political interference and producing economic data. This after President Trump fired the BLS commissioner a couple of weeks ago. Now, in your recent blog titled data concerns of a different sort, you suggest that this risk is low, but that there are other reasons why data quality is deteriorating.
Can you elaborate on what those concerns are and their implications? So a common question I've gotten the past two weeks since Trump fired the head of the BLS, and this is the Bureau of Labor Statistics, they produce, among other data, the monthly payrolls reports, the unemployment rate data, but also CPI data. So probably the two biggest things that the investors care about is labor market inflation data comes from the BLS.
So the concern would be, is this can lead to some sort of political interference, adjusting of numbers, whatever might be that would call into question the accuracy of the data and reflecting what is going on in the economy. I think that risk is still low. There's institutional challenges to it.
It's also not necessarily in the president's or any president's best interest to do this, to be seen as manipulating the data. They may want to have better data, but ultimately there's other sources that would indicate if inflation is an issue or not. I think the point I would make in the blog is that this sort of adds to, at the margin, sort of already kind of current concerns and issues with data quality that have really grown in the pandemic and post-pandemic period, but to some extent even began prior to 2020.
You can break this down into different kind of ways of why there's issues with the data. One is response rates to surveys. A lot of the data, especially the first cut of the data, well actually all the data, but certainly the first cut is based on surveys.
This includes for the unemployment rate and the payrolls, there are surveys, the establishment surveys, surveying businesses, asking them a number of questions about their employment, hiring practices, things of that sort. The unemployment rate is a household survey asking people essentially if they are working, are they looking for work, things of that sort. In general, response rates to all sorts of surveys have dropped dramatically from pre- to post-pandemic.
To me, a good one is the JOLTS indicator, which is the job openings every month. The response rate for the 2010s, it was average was around 65%. Since then, during the pandemic, it felt as low as 30%.
Now it's gone to 35%. So a 30 percentage point decline. When you get sort of low response rates, it just means your sample that you're getting from is less representative of the overall population.
Therefore, your confidence interval is going to be wider. It can also lead to bigger month-to-month variations because it just do more to poor data sampling as opposed to actual changes in the underlying economy. So poor response rates have been already an issue.
Seasonal adjustment factors. We get seasonal patterns in data. People spend a lot and consume a lot in November, December.
Going into the holidays, it drops off in January, February. If you actually saw the raw data, you'd get this really hard to decipher sawtooth pattern, which would be noisy. So you try to smooth that out to say, account for these typical patterns.
The pandemic distorted a lot of that. Think of what happened in March of April of 2020. Businesses shut down, unemployment rate surged.
Fast forward a year later, vaccinations were rolling out, the economy was opened up, and suddenly hiring surged. So how do you adjust for seasonal patterns in that way? That's been an issue.
We already saw that just in the past couple months, where the June employment data was relatively strong, but half of that was due to education. It was a bit of a puzzle. Going into the summer, usually, teachers and people working in education are laid off or not working.
Why should there be a surge? The July data revised that down, but the initial reading led to this kind of quirk. So these kind of things are popping up more and more.
They just lead to noise in the data. Immigration surged June 21, 22, 23. It was contributing to ultimately in hindsight with why job growth is strong, yet the unemployment rate could rise because the labor force was essentially increasing.
That only really became apparent in the spring of 2024. Now immigration has slowed dramatically, deportations are picking up, but even just the risk of deportations, perhaps some people are not choosing to go to work. How is this impacting employment?
It's unclear. We've seen the last few months an average of 35,000 new jobs created per month, but the unemployment rate has basically stayed constant. So again, what's kind of going on there?
So these are examples, in addition to the fact that the U.S. economy today is very different than it was 50 years ago. A lot of the data is based more on goods and manufacturing production, yet that share of the economy has shrunk, whereas other activity, anything that is online perhaps has not been actually kind of accurately measured and captured. So all sorts of implications of the data sort of getting worse.
What does it mean for the markets? More volatility because you get month to month swings in the data points. Something I think a lot about is you get oscillations in the market narrative.
So the market will look at the economic data and investors say, oh, well, based on this, it looks like it's a reflation. Growth going higher, rate inflation going higher. It could be stagflation, growth going lower, inflation going higher.
Goldilocks go up, inflation's down. But some of this could be because of false inference of the data. You see the data and think, oh, this is one of these regimes.
Turns out that's just noisy data. Two, three months later, we get new data to change it. Last year in 2024, we went through a period of time where the market was sort of pricing Goldilocks, then to reflation, then it comes to stagflation, then ultimately kind of growth slowdowns, then by the end of the year back to reflation.
So this leads to big kind of market swings. So as an investor, it's something that you have to be acknowledged of, aware of it. This is the reality of what the markets are, what the data is like.
It's hard to time this kind of stuff. It's hard to kind of have confidence. So the best thing you can often do is just sort of have a more of a medium term view, 12 plus months, kind of trying to look through this noise.
And if you can, when the markets do oscillate a lot, if it creates opportunities and dislocations, you can step in. But I think this is just a reality. And so not overly emphasize some of the near term volatility noise, because a lot of cases will be noise given the data is just not as quite as good as it was before.
So a lot of considerations there, Jason, and data concerns, of course, matter to the Fed as well. On that point, what do you expect to hear from Fed Chair Jay Powell during his speech this week at the Jackson Hole Central Bank Symposium? Well, the title of Powell's speech is Economic Outlook and Framework Review, which is not exactly a barn burner title.
But there will probably be more interesting things that he says. The market will be most focused on any guidance he gives regarding the September rate cut. In recent years, he has been very explicit about or tipping his hand very clearly of the Fed's intention either to cut rates or if we go back to 2022, raise rates and raise rates perhaps more aggressively.
This time, he may disappoint the markets and not being overly definitive. The data and sort of the trend certainly seems to be towards the Fed looking to cut rates in September. There's definitely a valid case for them to do that, given some of the weakness in the labor market.
But there also is a full month of data to come up before then that could still kind of, again, given what I just mentioned on data quality, could certainly show a picture that is not as bad as investors fear, or actually worse, that would justify a bigger move. So Powell's unlikely to want to really commit to anything in particular and say that things are still sort of data dependent. If you look at market pricing for the odds of a September cut, after the CPI inflation data came out that was in line with expectations, last Tuesday, the probability for September cut in the market was around 95 96%.
As of Monday morning, it's down to 83%. But by year, it's still a little over, you know, two 2.1 cuts. So you're pushing a little bit out, you're given some of the more kind of recent data.
Now, one thing that Powell could do aside from giving guidance for September and beyond is that, you know, every five years, the Fed does a review of monetary policy strategy tools and communications. Five years ago, 2020, it began before the pandemic, you know, began, that this review did. Ultimately, that review led to the firm adopting average inflation targeting.
The idea being that while inflation was continually falling short of the 2% target for the 2010s. If you do an average inflation targeting, that means you allow inflation to go above 2% and below 2%. Now, in hindsight, that was probably an inopportune time to launch that given the pandemic and the inflation that ensued.
But you know, this is not somebody that they, you know, had foresight to know that was going to happen at the time. In practical terms, sort of what it meant is that the Fed was basically saying our models to predict inflation weren't great, we actually need to see actual inflation above 2%. And then we will adjust accordingly.
Now, they don't need to sort of, you know, follow this anymore, because inflation is continuing to run above 2%. It's going to be forecast by the Fed itself to be above 2% for the rest of the next two years. So they will probably make some adjustments in terms of that, in effect that they already have.
There could be further adjustments in terms of Fed communication, you know, the use of the dot plot, the SEP, the summary of economic projections. Also, even if the review doesn't do it, you know, the prospect of a new Fed chair and sort of changes, you know, from that could also impact sort of, you know, the approach to Fed policy. What Powell also might do, and since it's very likely his last speech would be kind of very, very surprising if this wasn't, is follow what his predecessors as Fed chair Alan Greenspan, Ben Bernanke, Janet Yellen, they all use their last speech at Jackson Hole to kind of offer a bit of reflection, you know, on, on, you know, monetary policy on the Fed, you know, describing some of the positive contributions that monetary policy has to the nation's fortunes.
Given concerns about Fed independence, that could be also a part of like, the importance of the Fed being able to conduct it without political interference. So that that is sort of, you know, possible. So as much as investors want a definitive, here's what we're going to do, that's unlikely.
Instead, there could be guidance of like, here's, you know, the role of the Fed, here's the role of the Fed going forward, as you know, we think our policy framework should be. Well, it will be interesting to hear from Chairman Powell on Friday. I'm sure we'll cover some takeaways during our conversation next Monday, Jason.
To close out for today, let's end with a recap of CIOs investment recommendations. What are the key ideas that you want to highlight to our listeners this week? Well, you know, sort of, you know, similar to what we've been saying the past couple weeks, the fundamental story had, you know, it did not change the inflation data set in line with our expectations.
We think that's still playing out from an economic, from an equity market perspective, still believe this is a bull market with good upside of it, you know, the medium term horizon, even though in the near term, there could be volatility disappointment, whether it's because the data doesn't, you know, proceed as expected, the Fed disappoints, political geopolitical issues of all sorts. So kind of thinking about that narrative and the volatility, just kind of, you know, kind of look through that on a 12 month basis, you're relatively constructive. So if you happen to be underweight equities, a lot of cash, you know, you know, think about putting that, that to work and not trying to get overly acute on the timing, because with the markets could keep grinding higher before there is a pullback.
The same sort of secular stories and themes that we like, whether it is, you know, AI, you know, energy transition, you know, are attractive, but also more tactically, things like financials, you know, continue to sort of benefit, and we expect will benefit from sort of a deregulation push that is ongoing, and changes of the Fed could further kind of accelerate that as well. Within fixed income, you know, I would note that as of this morning, investment grade corporate bond spreads are like at a 25 year tight that applies to much of credit. So to take a lot of risk and sort of fixed income feels like you're not necessarily getting rewarded.
So kind of stay up in quality is kind of a key message there by quality bonds. And while the rates, you know, have kind of oscillate a little bit, we do think, you know, sticking more in the intermediate part of interest rate exposure, like a four or five years is the prudent way to go. Because while the Fed may cut, we did see like last year, where rates actually rose a lot, other concerns about inflation and growth didn't kind of slow down.
And the final thing is, given a lot of geopolitical issues going on on Friday with President Trump meeting President Putin, again, a meeting today in the White House with Trump, Zelensky and other European leaders, there is geopolitical risk gold has proven to be a fairly effective hedge. So it is the same kind of message. But you know, the takeaway over the past week is some way the main story has not changed.
Well, a helpful touch base, Jason, as always, thank you for keeping us current on what's happening in markets, CIOs interpretation and of course, guidance when it comes to positioning, it will be a busy week ahead. So looking forward to continuing with our conversation next Monday. You're welcome.
Have a great week, Jason. Thank you. And again, I want to highlight Jason's latest blog, which Jason has been making reference to this morning, data concerns of a different sort is now available up on UBS.com forward slash CIO for clients of UBS.
Please reach out to your UBS financial advisor if you would like to receive a copy of Jason's blog directly from UBS studios on Dan Cassidy. Thank you for joining us. Thank you for tuning in.
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