Top of the Morning: State of the U.S. economy & Fed monetary policy
The desk positions that the protracted U.S. government shutdown will critically dampen economic momentum, contributing to the anticipated weakness in the labor market which circles back to Federal Reserve monetary policy adjustments. Per the full note source, Paul Hsiao of UBS underscores an expected softening in job growth, supported by alternative indicators like the recent ADP employment report which shows signs of further economic sluggishness. As market participants anticipate this trend toward a dovish Fed, the lack of fresh economic data will likely keep volatility elevated in the FX space, particularly for dollar pairs as traders adjust expectations heading towards 2026.
What the desk is arguing
The current state of the U.S. economy is poised for more significant challenges, especially if the government shutdown persists, as articulated by Paul Hsiao. This scenario is leading the desk to expect that the Fed may pivot more decisively towards rate cuts, driven by labor market weakness and stunted economic indicators.
Supporting this thesis, recent revisions to job growth figures and disappointing ADP numbers have already confirmed a negative trend in employment data, which further strengthens the narrative of economic vulnerability as indicated by UBS. Consequently, the uncertainty regarding the government’s ability to report key economic data only adds to the climate of hesitation that traders are feeling.
Where it sits in our coverage
Currently, our consensus target for USD pairs is 1.075, encapsulated within a range from 1.04 to 1.12. Aligned firms include: - jpmorgan: targeting 1.10 for Mar26. - This view aligns closely with jpmorgan but sits at the upper end of the consensus spread, reflecting a more optimistic outlook compared to bofa, which is at 1.04 for Mar26, suggesting some divergence in sentiment among market participants.
How other firms see it
The general sentiment among firms like jpmorgan and others suggests a consensus towards a more dovish Fed policy influenced by labor market weaknesses. In contrast, bofa represents a more cautious approach, forecasting lower levels amid the ongoing uncertainty.
Watch the USD pairs closely against economic indicators such as the employment reports since they will likely drive market sentiment and positioning significantly, especially if jobs data remains subdued, echoing the Fed's cautious stance.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Prolonged U.S. government shutdown suppresses economic activity.
- 02Labor market indicators reveal weakness, pushing Fed towards potential rate cuts.
- 03Expect heightened volatility in FX markets as data becomes scarce.
- 04Market positioning will adjust as traders brace for near-term labor report impacts.
Market implications
Traders should watch for any movement towards the consensus target of 1.075 in USD pairs, as the ongoing government shutdown and weak employment data converge. The outlook remains sensitive to labor market updates, especially as the delayed jobs report could sway market sentiment considerably.
Risks to this view
A reversal in this outlook could occur if the government resumes operations and a strong employment report emerges, contradicting the current narrative of labor market weakness. Additionally, any unexpected hawkish signals from the Fed could cause significant volatility regarding USD pairs.
Hi, everyone. Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel.
For today, we will take a health check on the state of the U.S. economy, cover the road ahead for monetary policy, and speak about the overall impacts and implications of a U.S. government shutdown to economic activity. Joining me here for the conversation from the UBS Chief Investment Office, glad to welcome back Asset Allocation Strategist for the Americas, Paul Hsiao. With that, Paul, thank you for dropping by, for spending some time with our listeners, our clients.
Nice to have you back with us. My pleasure, Dan. Thank you for having me.
So, Paul, heading into the week, the intent was to cover the September jobs report on this morning's episode. However, with the U.S. government shutdown having taken effect midweek this week, there is currently a pause with respect to the release of government economic reporting. Though I am curious, do you have a sense for what the health of the labor market looks like with the data we do have?
And with respect to a prolonged government shutdown, what are some potential impacts, implications to economic activity? Yeah, thanks, Dan. I think when it comes to assessing the labor market data, the general story is that forecasters, market participants are expecting just general softness in the labor market, and that's been one of the large reasons why we believe the Fed's been more proactive in rate cutting, especially this year.
Job growth has been weakening for some time. We had that revision earlier this year that really put into question the trend of job growth, and without the official nonfarm payrolls report, a lot of market participants have to look at alternative indicators like the ADP employment number, where we had a pretty weak number that just came out, and the revisions also showed generalized weakness. So that's a private sector report that already confirms weakness, and we had the earlier numbers from nonfarm payrolls showing pretty prolonged softness in the official numbers, so that's what market participants were expecting going into this report this year.
In terms of a government shutdown, usually markets tend to look through that when it comes to the stock market and bond market, but real economic indicators like consumer confidence, spending to some extent, can be weakened around this time because you have hundreds of thousands of government workers who are either furloughed or they're having their next paycheck put into question. So the longer a government shutdown gets put into place, the more pronounced this weakness becomes. So outside of the labor market, which of course is a very significant component of economic activity, how would CIO currently assess the health of the overall U.S. economy?
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