UBS On-Air: Paul Donovan Daily Audio 'Competitiveness considerations'
German December producer price inflation, due today, gains significance as trade taxes and manufacturing competitiveness become central market themes. Per the full note source, German PPI exited deflation in November, and further improvement could reinforce the narrative of a cyclical recovery in exports. The contrast with strong US industrial production and less-weak Japanese IP suggests goods demand is global, but tariff risk skews relative competitiveness. No consensus target or firm forecasts are available for this commentary's currency pair, leaving the desk's argument as a standalone call to watch the print.
What the desk is arguing
German producer prices are moving out of deflation, a shift that warrants attention given rising trade tensions and the focus on export competitiveness. Per the full note source, the November reading turned positive, and the December print will test whether this trajectory is sustainable. The desk frames this as a signal that German industry may be regaining pricing power, even as tariffs threaten to distort relative costs.
The evidence leans on the contrast between US industrial production, which surprised strongly in December, and Japan's industrial output, which was less weak than expected. This suggests underlying goods demand remains robust, bolstered by rising real incomes. The alternative read would be that the PPI uptick is noise, given the broader deflationary drag from energy and global overcapacity.
Where it sits in our coverage
No internal coverage data is available for the currency pair referenced in this commentary. The desk's argument is presented as a standalone observation without a consensus target or firm-level forecasts to benchmark against.
How other firms see it
No internal coverage data exists to identify aligned or contrary firms. The desk's view is not positioned relative to a cross-firm consensus.
Key takeaways
- 01German December PPI is due; November turned positive for the first time since mid-2023.
- 02Trade taxes and competitiveness concerns elevate the importance of the print.
- 03Strong US IP and less-weak Japanese IP support a global goods demand narrative.
- 04Tariff risk is the key asymmetric variable that could reverse the competitiveness calculus.
Market implications
Watch the EUR/USD reaction to the PPI print — a stronger-than-expected reading could bolster the euro on competitiveness grounds, while a miss may reinforce bearish sentiment. The US industrial production beat already tempers the relative growth story.
Risks to this view
The call is invalidated if German PPI disappoints, breaking the deflation exit narrative. A sharp escalation in US tariff rhetoric could also overwhelm any competitiveness signal, as trade policy distortion trumps cyclical pricing power.
Good morning, this is Paul Donovan, Chief Economist at UPS Global Wealth Management. It's 6 o'clock in the morning London time on Monday the 20th of January. German December producer price inflation is due.
This does not tend to be a major focus for financial markets, but at a time when competitiveness of different manufacturing economies is coming into focus, with the threat of trade taxes offering additional distortions, there may be a little more interest. Producer price inflation has slowly ground its way out of deflation, turning positive in Germany in November. Japan's final November industrial production data remains negative, which is not a surprise especially.
However, there is a contrast with the strong pick-up in US industrial production that came in stronger than expected for the month of December. Japan industrial production also showed more strength than had been expected, or to be more accurate, less weakness than had been expected. There is demand for goods out there, even with spending on having fun being favoured by consumers, goods demand is rising as real incomes rise.
Over in the United States, the popular social media app TikTok shut itself down and then opened itself up in voluntary actions. These are complicated political steps which seem to mimic the action of a TikTok dance. Slightly inept, slightly comic, but with serious money behind them if successful.
Why should markets care about this? In one way, the voluntary actions might signal how business is going to be done under the incoming US administration. In addition, US President-elect Trump has said that they will postpone the ban.
If this means the ban on the app being on platforms, that would be in defiance of enacted legislation. Given how important rule of law is to investors, the way in which this situation is handled is going to be relevant. The US Federal Reserve is in its communication blackout period which gives us a bit of peace and quiet on the central bank front.
However, the European Central Bank is always happy to rush to fill a vacuum and there are a cluster of ECB speakers today. Markets remain relatively confident in the pace of further ECB easing, however. That's all for today.
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