UBS On-Air: Paul Donovan Daily Audio 'Affording a war'
The desk interprets the recent commentary from Paul Donovan at UBS as shedding light on the fragility of consumer affordability in the U.S. amidst rising inflation. Donovan's analysis highlights the discrepancies between perceived and actual consumer price impacts, specifically emphasizing essentials like food and fuel, which drive consumer sentiment and economic policy responses. The importance of consumer perception in shaping the economic outlook is pivotal, especially given potential political ramifications tied to President Trump's approval ratings on economic handling. Per the full note, consumer price fluctuations, particularly in gasoline, represent a key focal point for markets given their direct influence on consumer behavior and, in turn, policy decisions.
What the desk is arguing
The current consumer inflation landscape suggests a significant affordability crisis in the U.S., predicated more on perceptions than actual data. Donovan notes that essential purchases like food and fuel directly impact how consumers feel about inflation, which could compel policymakers to react to worsening sentiment.
Notably, the price of gasoline experienced a considerable increase, climbing from below $3 to over $4 per gallon in March. Such price volatility underscores the complications of measuring inflation accurately, as even a minor shift in data collection timing can deliver skewed results.
Where it sits in our coverage
Our current consensus target for relevant pairs suggests a range centered around 1.075, with contributions from various firms: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk's position potentially aligns with jpmorgan, falling towards the upper end of the predicted range. However, bofa holds a contrary stance, predicting a drop in value.
How other firms see it
Overall, firms like jpmorgan express a more optimistic outlook on consumer resilience amid inflationary pressures, while bofa suggests caution, expecting lower pair values. This divergence indicates a fragmented sentiment around the sustainability of consumer spending under current inflationary trends.
Investors should watch the U.S. CPI data closely as it correlates with broader economic projections and can affect positioning in major pairs like USD/EUR and USD/JPY, especially given the politicized nature of economic management at present.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Consumer affordability concerns in the U.S. are heightened by inflation perceptions influenced by essentials like food and fuel.
- 02The recent surge in gasoline prices complicates precise inflation calculations, which could prompt a political response if sentiments worsen.
- 03Volatile consumer price metrics can lead to significant market and policy consequences, particularly in election cycles.
- 04Discrepancies between perceived and actual inflation may impact the Federal Reserve's approach in upcoming policy announcements.
Market implications
Traders should focus on the upcoming U.S. CPI release as a potential catalyst that could sway market sentiment and impact positioning in USD pairs, especially if inflation perceptions worsen ahead of potential policy adjustments from the Federal Reserve.
Risks to this view
Should the affordability crisis deepen, leading to a notable decline in consumer sentiment or spending, this could trigger responses from the Federal Reserve that may shift the current economic outlook significantly. Any significant dip in President Trump's approval ratings due to economic mismanagement could also catalyze unexpected shifts in policy.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Friday the 10th of April. Today we get the first insights into how much the US consumer is paying for the war with the release of the March consumer price inflation data.
Caution is needed. A lot of this data is now guesswork because the Bureau of Labour Statistics lacks the resources to measure inflation as accurately as they did under the last administration. There are two related issues that are of relevance to markets.
The first is the affordability crisis. The affordability crisis does not depend on the headline inflation data, but instead on perceptions of inflation. That means that figures like owner's equivalent rent are completely irrelevant.
Actually in the real world owner's equivalent rent is always completely irrelevant as it's a price no one pays, has ever paid or ever will pay. What matters to affordability are the high frequency purchases of food and fuel. That is a little complicated because the price of gasoline in the States started the month below $3 per US gallon and rose in more or less a straight line to over $4 per US gallon by the end of the month.
Changing the day on which gasoline prices were collected, even by just 24 hours, will make a difference to that specific inflation rate therefore. The issue for markets around the affordability crisis is political, at least in the first instance. US President Trump's approval rating on handling the economy generally and on dealing with the affordability crisis specifically is extremely low.
If that is further damaged by perceptions that inflation is out of control, it may prompt a policy response, which is what markets will actually care about. The second issue around the consumer price inflation numbers is the practical one of how US households manage the actual, not the perceived, cost of living increase. The February personal consumer expenditure deflator showed some slightly troubling signs of fatigue on the part of the US consumer.
For now, there is an expectation of consumer resilience overall. If the actual cost of living starts to do some serious damage to spending power, then consumers might respond by scaling back spending where they can. Otherwise, savings are expected to take the strain, leaving consumption largely unaffected.
The February personal consumer expenditure deflator price measure did show that where inflation was occurring, it was generally quite narrow. That is to say it was more about a small number of items rising in price by quite a bit. That can be quite important when considering overall consumer spending power.
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