Top of the Morning: State of the US economy & Fed outlook
The desk views the current state of the U.S. labor market as solid but moderating, which reduces the urgency for the Fed to make aggressive policy changes. Per the full note from UBS's Andrew Dubinsky, the three-month job growth trend is now around 50,000 positions, comfortably sustaining the unemployment rate while suggesting a more sustainable economic expansion despite some monthly volatility. This signals that while the market may anticipate a Fed rate decision in the coming weeks, the central bank could still adopt a cautious approach without introducing substantial changes to policy. Additionally, with a stable unemployment rate and improving labor participation rates, the market should prepare for a potential continuation of this status quo in upcoming monetary policy discussions.
What the desk is arguing
The desk posits that the Fed will likely maintain its current policy stance due to steady job growth and an improving labor market, factors that provide less impetus for rate hikes. As noted by UBS, while the September jobs report showed a softer growth figure of 29,000 new jobs, the three-month trend remains stable at about 50,000—indicating that the labor market is not weakening significantly, which aligns with the Fed's broader objectives for employment stability.
Wage growth remained a point of concern but did not dampen UBS's overall optimistic outlook on labor market conditions. The unemployment rate's minor increase amidst rising labor force participation further reinforces the position that the economic fundamentals are stable enough to prevent drastic shifts in monetary policy from the Fed.
Where it sits in our coverage
Our consensus target currently stands at 1.075, within a range of 1.04 to 1.12, reflecting a moderately bullish view. The jpmorgan target of 1.10 aligns closely with our perspective, whereas bofa remains at a more conservative stance with a target of 1.04.
This outlook appears aligned with jpmorgan's view on the upside potential for the U.S. dollar, especially in light of stable economic indicators, while bofa's bearish stance suggests increased risks of a stronger dollar in the face of prevailing labor market dynamics. The desk's outlook rests near the midpoint of the spread, indicating caution amidst the current economic conditions.
How other firms see it
Firms such as jpmorgan and goldman are aligned in their expectation that the Fed will remain on hold, citing similar economic indicators. Conversely, bofa holds a contrary view, suggesting a more pessimistic outlook predicated on weakening economic signals.
Analysts should watch the EUR/USD trajectory as it reflects the broader implications of U.S. labor data, given how developments in monetary policy will likely influence this pair in the near term. The interaction between Fed decisions and U.S. economic performance is crucial to monitor as market sentiment evolves.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The U.S. job market remains stable, with a three-month average job growth of approximately 50,000.
- 02A moderate approach from the Fed is anticipated as key employment indicators remain resilient.
- 03Labor market dynamics, including a slight uptick in unemployment and increased participation rates, suggest health in the economy.
- 04Consensus among firms is slightly bullish, with targets indicating a stable outlook for the dollar.
Market implications
Market participants should closely monitor movements around the 1.075 level as a barometer of market sentiment towards the dollar amidst the impending Fed meeting. Additionally, insights from the upcoming U.S. labor reports could serve as catalysts for shifts in trading positions in the short term.
Risks to this view
Should the labor market show significant deterioration in subsequent reports or if wage inflation accelerates unexpectedly, this may lead the Fed to adopt a more aggressive tightening stance than currently anticipated, thereby reversing the bullish outlook in the dollar.
Hi, everyone, Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel. For today, we have a timely macro update, including a look at the U.S. labor market inflation picture.
We'll spend some time on monetary policy as well as we have yet another Fed policy meeting coming up in just a couple of weeks' time. Joining me here at the table for today's conversation, glad to welcome back from the UBS Chief Investment Office within UBS, FSI U.S. economist Andrew Dubinsky. Andrew, great to have you back here at the table, joining us here in studio.
And we're coming off, Andrew, the recent release of the September employment report. We're recording here today on Wednesday, October 7th. The jobs report, of course, came out last Friday, October 1st.
Andrew, as you look through the data, what did it tell you about the state of the U.S. labor market? Yeah, I think the key takeaway is it's still looking pretty solid. Not as hot as it looked through that August report, but still growing at a solid pace when we look at the three-month trends, smoothing through the volatility of the month-to-month data.
So, for example, the monthly data was softer than the consensus by about 60,000, growing only around 29,000 with a bit of a drag from government employment. But looking at the three-month trend, it's right around 50,000. That's clearly within the range of break-even job growth, enough to keep the unemployment rate stable.
And so nothing that's going to really generate a lot of concerns about the expansion. And I'd say the silver lining is it's slower and more sustainable. If we look at the unemployment rate, that's probably the most important indicator for the Fed.
That only edged up slightly, and the details were good in the sense we saw a reversal of the weak labor supply trend, we saw participation back up again. So that's, I would say, a good indicator. And the softest part of the report is just that the wage growth continued to slow down, so it's down to around 3%.
And the way that I would frame that is it's just another sign that we don't have inflation pressures from the labor market, and we probably have less income support as we look at spending as we get to the fourth quarter in the year ahead. Right now, GDP growth, and maybe we'll touch on this in a second, is pretty strong in the third quarter, and it just doesn't look like there's enough income to support the momentum of 3% growth with just those job growth and wage growth trends put together. From the sounds of it, Andrew, the U.S. labor market sounds to be on steady footing.
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