UBS On-Air: Paul Donovan Daily Audio 'After the data'
The commentary from UBS highlights that the July US consumer price inflation data came in line with expectations, lending credence to the current economic consensus of holding US rates steady through the year. Per the full note source, this aligns with economists' views that there is little urgency for the Federal Reserve to adjust interest rates in the near term, especially with the next inflation report poised to potentially be influenced by rising oil prices. Market participants should be mindful that while consumer prices remain relatively stable, the political landscape surrounding oil prices and ongoing geopolitical tensions may introduce volatility. Thus, the current backdrop supports a cautious stance on USD strength, given the backdrop of stagnation in rate changes amid global election dynamics as well.
What the desk is arguing
The desk interprets the UBS commentary as reinforcing the narrative of stable interest rates from the Federal Reserve for the remainder of 2023. Despite media excitement over "easing pressures," the central bank's position remains untroubled, with most economists forecasting no change in rates amidst benign inflationary readings.
The next inflation print is crucial, as it could alter assumptions if oil prices continue their upward trajectory. The commentary suggests that while gasoline prices were low during the July survey, they have since climbed above $4 per gallon, not reflected in the current inflation narrative. Economists are advised to look beyond short-term price fluctuations, supporting the Fed's cautious approach.
Where it sits in our coverage
Our consensus target for USD/EUR stands at 1.075, with a range of 1.04 to 1.12, reflecting expectations of contained USD strength. The following firms support this view: - jpmorgan: targeting 1.10 by Mar-26. - bofa: a contrary stance at 1.04 by Mar-26.
The desk's forecast aligns with jpmorgan's outlook, suggesting a potential upside tunnel towards the upper boundary as inflation remains stable but teetering on external pressures like oil and upcoming geopolitical events.
How other firms see it
jpmorgan and goldman share a bullish outlook on USD, aligning with expectations of steady rates, while bofa maintains a more bearish perspective, positioning for a downside towards 1.04.
Current positioning suggests a close watch on USD/EUR as geopolitical events, particularly those influencing oil prices, could pivot the current market sentiment and feed into inflation expectations, injecting volatility into FX pairs.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US inflation data remains stable, supporting the view of unchanged interest rates.
- 02Potential for rising oil prices to influence upcoming inflation reports.
- 03Political dynamics around oil pricing add a layer of complexity to market forecasts.
- 04Current consensus implies USD may retain strength, contingent upon external economic factors.
Market implications
Traders should monitor levels around 1.075 for USD/EUR, particularly as oil prices fluctuate. The geopolitical landscape could offer significant trading signals influencing investor sentiment leading up to year-end.
Risks to this view
A significant spike in oil prices could alter inflation expectations, prompting a Fed reassessment and potentially changing interest rate trajectories. A geopolitical event or escalated political instability tied to oil supply could also reverse the current market outlook.
Good morning, this is Paul Donovan, Chief Economist at GBS Global Wealth Management. It's 7 o'clock in the morning London time on Thursday the 13th of August. The US inflation data for July was exactly as expected.
That is, of itself, a little unexpected as most economies have been experiencing lower than expected numbers in inflation terms of late. Nonetheless, this has allowed for headline writers to wax lyrical about the easing of pressure on the US Federal Reserve. Actually amongst economists there was no pressure on the US Federal Reserve because most economists are expecting unchanged interest rates for the remainder of this year.
It's worth noting that the next inflation print, which will occur before the Fed meets, will be vulnerable to higher oil prices. Gasoline prices were lower when the surveys were carried out for the July inflation data and they've moved back above $4 per US gallon subsequently. Other prices continue to look benign and the economically literate members of the Fed will know to look beyond the gasoline price itself.
It's widely reported that US Vice President Vance has been pleading with Ukraine to stop attacking oil tankers moving Russian oil, which has something about the political sensitivity of the oil price to the US administration. The primary election season in the United States is almost concluded and the recent results have one important outcome for financial markets, namely that prediction betting websites have no link to reality. Prediction betting led to some spectacularly wrong estimates of what would happen.
There is a difference between plutocratic polls, which is what betting represents, and democratic polls, which is sort of what's happening in the States. With US midterms and a rash of European elections in the coming 12 months, it is as well to keep this in mind. The UK has its own election focus today as the far-right Reform Party leader Farage is being challenged by a slate of comedy candidates.
UK GDP data was somewhat stronger than expected in the second quarter, with consumption and investment notably strong and government spending one of the more noticeable drags on growth. The UK's growth is matching that of the European Union aggregate in the second quarter and it's the second highest of the G7 economies to have reported data to date. Ahead we've got more inflation numbers.
Spanish final consumer price inflation for July is absolutely not likely to change because final CPI numbers never do change. The only thing that can be said for the publication of final consumer price inflation data in the euro area is that the process does allow economists to automatically improve their forecast accuracy statistics. US July producer price inflation has rather lost its urgency in the wake of the consumer price data release, but it's something that is important in monitoring the risks of second round inflation emerging.
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