UBS On-Air: Paul Donovan Daily Audio 'Consuming savings'
The desk believes that while US consumer spending is likely to remain resilient despite inflationary pressures, broader misinterpretations may skew market perceptions. Paul Donovan from UBS highlights that real incomes face continued erosion, yet spending behavior remains buoyed by lower savings rates and a lack of unemployment fears (per the full note source). The anticipated PCE deflator and personal income data from September may not accurately reflect current consumer sentiment due to inherent delays and distortions in polling data. Current market consensus is projected towards the upper end of firm expectations regarding currency pairs, although no immediate catalysts are noted from the upcoming calendar.
What the desk is arguing
The desk anticipates that US consumer spending will show resilience in light of rising inflation and declining savings rates. Paul Donovan at UBS underscores that while inflation has returned as a pressure point, consumer behavior may remain stable as people prioritize spending (per the full note source).
Expectations are that the September numbers for personal income and expenditure will reveal a semblance of consumer strength, even though this data lacks timeliness and can mislead investor sentiment. This dynamic reflects an underlying vulnerability in real incomes for consumers, yet the external conditions, such as reduced unemployment fears, continue to support spending levels.
Where it sits in our coverage
Our consensus target for USD/EUR is 1.075, with a target range between 1.04 and 1.12. Key firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This stance aligns closely with the consensus, particularly leaning towards the higher side of the spread, indicating optimism about the US consumer's spending resilience in the face of inflationary pressures.
How other firms see it
Aligning with this viewpoint, jpmorgan and citi have similar takes on consumer resilience amid inflationary trends. Conversely, bofa holds a more cautious stance, indicating potential downside risks in consumer sentiment.
The dynamics of USD/EUR and its interaction with the forthcoming Federal Reserve policy discussions may also be influenced by consumer sentiment indicators, particularly in light of the upcoming wage data expected to affect consumer behaviors significantly.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US consumer spending expected to remain resilient despite inflation pressures.
- 02September data may misrepresent current economic conditions due to timeliness issues.
- 03Political polarization distorts consumer sentiment metrics.
- 04Lower savings rates play a crucial role in sustaining consumer expenditure.
Market implications
Traders should monitor the USD/EUR pair closely, particularly as sentiment data is released. A movement towards the consensus target of 1.075 may signify robust consumer confidence amidst ongoing inflationary challenges. Market reactions post-release of personal income and spending data are anticipated to provide further clarity.
Risks to this view
A significant shift in consumer sentiment, perhaps driven by geopolitical developments or unexpected swings in unemployment rates, could undermine this outlook. Additionally, a more aggressive stance from the Fed in response to inflation could shift market views and impact consumer behavior, necessitating a re-evaluation of projections.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Friday the 5th of December. The United States offers some insight into their consumer and some misdirection as to what the consumer is doing today.
The US consumer has a vulnerability that does not exist in most other developed economy consumers because real incomes have been under pressure. There is some limited and rather out-of-date insight into that in the form of personal income and personal spending data for today. This includes the PCE deflator as a broader measure of inflation which is less affected though still somewhat affected by the fiction of owner's equivalent rent.
Unfortunately all of this data is for September which is not exactly current information. The expectation is that the US consumer will have kept spending even as inflation pressures have increased somewhat. From April consumer durable goods prices have turned from pulling inflation lower to pushing inflation higher for instance.
What has enabled the US consumer to keep spending is a reduction in how much money is saved each month which in turn has been facilitated by a low fear of unemployment. So the spending numbers should be okay even if real incomes are still being eroded by rising prices. The misdirection is the University of Michigan Consumer Sentiment Poll.
This is for December which means it is up to date but up to date misinformation is still misinformation. The problem here of course is the extreme political polarization that exists in the United States today which means that any shift in the political bias of the selected survey respondents will distort both the headline and the detail. The only redeeming point about the survey is that it does publish the Democrat and Republican breakdown which is at least entertaining.
What about just focusing on the views of independents? Here too there is a potential risk. If the poll of independents contains more people who watch Fox News the results will swing one way.
If the poll of independents contains more people who watch CNN the results will swing in the opposite direction. Being a registered independent in a polarized environment of the United States and its highly partisan media does not guarantee independence of thought. The eurozone third quarter GDP is due for release and it is of not much interest in and of itself.
It is worth noting that the euro area has been operating at a brown trend growth recently. With two of its largest economies experiencing declining populations there is a limit to how high trend growth can go of course but some of its economies are performing very strongly leaving the US growth rate trailing some considerable way behind and that shows that strong growth can be achieved in the glittering wonder that is the euro with the right combination of economic sectors. Immigration also tends to help.
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