UBS Morning audio comment: Shifting expectations
The desk interprets the recent US midterm election results as a pivotal moment that could ease fiscal tensions and shift geopolitical expectations, particularly around the Gulf war. Per the full note from UBS's Chief Economist Paul Donovan, market sentiment has reacted positively, suggesting a reduced likelihood of further fiscal damage while enabling a potential retreat in oil prices. This aligns with the narrative that political gridlock may stabilize rather than destabilize the current fiscal landscape in the US, which is echoed by improved German economic data and expectations of increasing Eurozone producer prices. Looking ahead, there's reason to monitor how these dynamics will affect major currency pairs, particularly in light of the upcoming Fed data releases which could influence market positioning significantly.
What the desk is arguing
The desk frames this as a potential turning point for fiscal policy and market expectations, given the recent positive market response to the US midterm elections. Donovan highlights a notable decline in oil prices as a result of altered perceptions regarding US military engagement in the Gulf, which contributes to a less hawkish outlook for inflationary pressures.
Data suggesting that German factory orders have met expectations and show upward revisions compounds this narrative, as the upward trajectory reinforces confidence in European economic resilience, albeit with warnings about the relentless rise in producer prices due to energy costs.
Where it sits in our coverage
Our consensus target for the EUR/USD is set at 1.075, with a range of 1.040 to 1.120. Specific firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This view aligns closely with jpmorgan’s optimistic target, while it contradicts bofa, which holds a more cautious stance at the lower end of the spectrum.
How other firms see it
Aligned firms, such as jpmorgan, suggest a bullish outlook consistent with signs of easing geopolitical tensions and positive data revisions, while bofa presents a more bearish perspective, indicating skepticism around sustainability.
Keep an eye on the EUR/USD trajectory as it reflects broader market responses to central bank decisions, particularly those made by the ECB in light of rising producer prices.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The midterms have shifted market expectations favorably regarding US fiscal policy.
- 02A drop in oil prices may follow perceived shifts in US military strategy in the Gulf.
- 03German factory order data supports a resilient Eurozone economic outlook amid rising inflation.
- 04Increased focus on productivity data is anticipated, shaping market sentiment.
Market implications
Watch the EUR/USD as it approaches key technical levels around 1.075, especially with upcoming productivity data that may sway Fed monetary policy. A strong productivity report could provide further support to the bullish sentiment from recent political developments.
Risks to this view
A reversal of this thesis could occur if Fed data releases significantly disappoint market expectations, leading to a rethink of productivity assumptions and a subsequent risk-off sentiment that impacts both fiscal outlooks and currency valuations.
The US midterm elections have impacted market expectations about fiscal inertia, and the direction of the Gulf war. View this email in a web browser Shifting expectations UBS morning audio comment by Paul Donovan Markets responded positively to the US midterm election results. Expectations of policy gridlock do not solve the unsustainable US fiscal position but reduce politicians’ ability to inflict further fiscal damage.
US Vice President Vance blamed Republican losses on the Gulf war. That, amplified by the optimism bias, shifted expectations of a US retreat and allowed oil prices to fall. German September factory orders grew in line with expectations.
Inevitably past data was revised stronger. This tendency to revise data higher may do real damage. In a world when spin often triumphs over substance, the repeated initial pessimism of German data weakens the narrative about the economy.
Eurozone producer price inflation is expected to continue to rise (as the consumer price data did). Producer prices are obviously more vulnerable to the ongoing energy price issues—consumer prices are dominated by labor costs, which dilute the effects of the Gulf war. US preliminary productivity and unit labor cost data are due—productivity numbers (being what is left over when everything else is explained) are very vulnerable to data revision.
But Federal Reserve Chair Warsh believes in the magic of the productivity pixie, so the figures assume a little more importance. Read important disclaimer 〉 Listen to today's Thursday, 5 November update Listen now 〉 Recommended content Listen to past recordings in Paul Donovan's daily updates 〉 Nobel Perspectives - Exploring the questions that shape our world 〉 You have received this email because you registered at . Unsubscribe #end --> | Edit profile Publication data: UBS AG, P.O.
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