UBS On-Air: Paul Donovan Daily Audio 'Another little cut'

Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 6.30 in the morning London time on Wednesday 20th October. The US Federal Reserve meets to decide on interest rates and for once Fed Chair Powell's data dependency mantra may have to be amended as there is virtually no reliable data available in the short term.

To be fair, even if the US government does happen to be functioning there's not a great deal of reliable short term data such as the state of economic measurement these days. It is to be hoped that the collapse of normal government in the States will allow Powell and other members of the FOMC to lift their eyes from their social media feeds and consider what is happening in the medium term. Markets are likely to be interested in the range of views expressed today and in what spin there is at the press conference.

Inevitably there will be speculation about Powell's successor as Chair, particularly in the wake of US President Trump's back and forth comments yesterday about the possibility of appointing US Treasury Secretary Besant. The reason the Fed is likely to cut rates today is not because of inflation. Inflation will continue to rise into the first quarter of next year and while a chunk of tariffs are being avoided enough are being paid to push up consumer price inflation still further once they've worked their way along long and complex supply chains.

Indeed the reason for restraint in the pace of cutting is some evidence of second round inflation effects, rising profit margins at retailers and US companies sneaking in price increases because their foreign competitors' products are being taxed. However, the US labour market has a brittleness to it. The labour market at the moment is not slowing growth particularly.

Fear of unemployment appears to remain quite low. But the secession of hiring does show the impact of uncertainty on the labour market and if the door to job losses were to open even a little this would raise risks of a rising fear of unemployment and then a reluctance to reduce savings in order to pay tariff costs which would then risk slowing consumption. A rate cut today should therefore be seen as an insurance policy against the labour market being struck a blow which in its brittle condition could shatter the comfortable outlook that remains clearly the base case.

In China the Communist Party has pledged to boost domestic consumer spending over the next five years. The idea that China will increase domestic consumer spending is not entirely original. There have been attempts to boost consumer demand this year, but the party does seem to be making a bigger deal of this than in the past.

As China's trend rate of economic growth has slowed, increasing the consumer share of GDP to levels more normally seen in middle-income economies will allow consumer living standards to grow faster than the more muted GDP growth will report. Politically that obviously makes sense. It also fits with the structural changes of the global economy.

As long and complex supply chains are phased out in favour of more efficient localised supply chains, China's role as a link towards the end of the long and complicated supply chains is likely to be threatened. Spain will be publishing third quarter GDP data today with the expectation that the growth rate will still hover around about 3% give or take. It's worth noting that the Spanish economy has outperformed the US for all but three quarters since the end of the pandemic, and the growth gap has been quite sizeable.

Different economies of course operate to different cycles, but this is a rather strong counterpoint to the idea that the European economy is permanently replaced by the regulatory burden and that the US has exceptional growth. If parts of Europe, on parading under the same regulatory burden as everyone else, can outperform the United States so significantly, perhaps this narrative is flawed. That's all for today.

Have a good day. This material has been prepared and published by the Global Wealth Management Business of UBS Switzerland AG, regulated by FINMA in Switzerland. It's subsidiaries, or affiliates, collectively referred to as UBS.

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