UBS On-Air: Paul Donovan Daily Audio 'Benign inflation; now, what about growth?'
The desk interprets the recent comments from Paul Donovan at UBS regarding benign US inflation as a signal for the resilience of consumer spending, despite the ongoing deflation in durable goods prices. Per the full note, Donovan highlights that consumer spending power has been bolstered by sustained falls in durable goods prices, which have decreased for 25 consecutive months. As the market prepares for upcoming retail sales data, this dynamic underscores a nuanced view of inflationary pressures and consumption patterns, particularly in the context of expected robust retail sales figures today.
What the desk is arguing
The desk asserts that benign inflation signals enhanced consumer spending power, which is likely to reflect in upcoming retail sales data. This perspective aligns with observations made by UBS regarding falling durable goods prices and their effects on consumer behavior.
Supporting this view, Donovan notes that while consumer prices remain stable, the deflation in durable goods has persisted through much of Biden's tenure, effectively increasing real incomes for consumers. This backdrop may foster a solid retail sales outcome, enhancing overall market sentiment.
Where it sits in our coverage
Our consensus points to a target of 1.075 for the USD/EUR pair, with a range between 1.04 and 1.12. Notably, jpmorgan aligns closely with this view, targeting 1.10 for March 26, while bofa positions itself at a contrary 1.04.
This outlook suggests the desk's call is somewhat toward the upper edge of the spectrum, reflecting a positive sentiment towards the USD based on the expected resilience of US consumption.
How other firms see it
Several firms align with the anticipated strength of US consumer spending; for instance, jpmorgan and others see value in this narrative. Conversely, bofa presents a more cautious outlook, reflecting potential vulnerabilities in ongoing consumer strength.
As related themes arise, watch the USD/EUR dynamic which is influenced by retail sales data and Fed policy. This interaction may highlight differences in growth trajectories between the US and Eurozone, especially with central banks in both regions assessing inflationary pressures.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US consumer price data indicates benign inflation, enhancing spending power.
- 02Durable goods prices have deflated for over two years, boosting real incomes.
- 03Upcoming retail sales figures may confirm resilient consumer spending.
- 04Market reactions are increasingly sensitive to inflation data amid Fed policy uncertainty.
Market implications
Traders should monitor the USD/EUR movement closely, especially ahead of the retail sales data release. A solid print could further validate the desk's optimistic view for the dollar.
Risks to this view
A significant downturn in consumer sentiment or an unexpected rise in inflation could challenge this view, potentially leading to a rapid reversal in USD strength if the Federal Reserve pivots unexpectedly to a more hawkish stance.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Thursday the 16th of January. Yesterday's market moves demonstrate the problems of having a non-economist running the US Federal Reserve.
The consumer price inflation data moderated and, at least until trade taxes are imposed, disinflation trends are intact. Durable goods prices marked their 25th consecutive month of deflation. For more than half of President Biden's presidency, durable goods prices were falling.
That may reverse with forthcoming trade taxes and, of course, these are not the prices that consumers care about when they consider inflation. However, falling durable prices do still increase consumer spending power. This was overall a benign report, but the market reaction was quite abrupt.
That is because of US Federal Reserve Chair Powell's insistence that policy should depend on dodgy data. That mantra, it could hardly be called a philosophy, means that markets will overreact to every data release because the assumption is that Powell will overreact to every data release. Today, we get evidence of that great engine of growth, the US consumer, with retail sales data.
This does not properly capture the trend towards spending on having fun, although there is an element of this in the restaurant spending category. This is a value measure, so those falling durable goods prices will increase the willingness to consume, but they will depress the value of the goods being sold. Nonetheless, the expectation is for a solid number today.
US consumers' spending power is enhanced by rising real incomes, meaning that at the end of the month, in real terms, US consumers have more money in their bank accounts. If a US consumer has more money in their bank accounts at the end of the month, there is practically a constitutional obligation to go out and spend it. The Federal Reserve's beige book of economic gossip, otherwise known as anecdotal evidence, reported better-than-expected holiday sales.
UK monthly GDP data showed a modest increase led by services, which were in turn led by having fun categories. The monthly data is too volatile to make much of a difference to financial markets, however, though the pattern of growth is certainly not particularly consistent with the doom-laden narrative of companies sulking after being asked to pay a modest tax increase. Over in Germany, final consumer price inflation did not change in terms of the year-on-year growth rates.
Finally, US Treasury Secretary nominee Besant has their confirmation hearings before the Senate Finance Committee today. How much this matters depends on how much one thinks Besant matters. Certainly, on the issue of aggressive trade taxes, Besant's views seem to be somewhat in the background.
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