UBS On-Air: Paul Donovan Daily Audio 'Disinflation (not in the US)'
The current narrative emphasizes disinflationary trends outside the US, notably in Japan, as evidenced by a June Tokyo core inflation rate of 1.8% year-on-year, down from earlier expectations. Per the full note from UBS, this disinflation could provoke a reassessment of price pressures among Japanese policymakers, as much of the rise in prices is attributed to non-fresh food products, hinting at relative rather than broad inflation dynamics. Additionally, the market's anticipation of further rate adjustments by the European Central Bank and Bank of England underscores the global divergence in inflation trajectories, which is critical as US inflation appears to remain stubbornly high. Overall, traders should align their strategies with this disinflation narrative and take note of unstable consumer spending patterns reflected in other regions like Europe.
What the desk is arguing
The desk contends that Japan's recent inflation data signals a significant shift towards disinflation, contrasting sharply with trends observed in the US. According to UBS, understanding the nuances behind Japan's core inflation figure could be pivotal as it reflects more on relative price changes rather than systemic inflation pressures.
The mention of Japan's Tokyo core inflation at 1.8% year-on-year clearly supports this disinflation narrative, suggesting a corrective phase for policymakers. Notably, sustained consumer shifts away from goods spending could serve as an indicator for future pricing behavior across major economies.
Where it sits in our coverage
Our current consensus target for USD/JPY is 1.075, with a range from 1.04 to 1.12. Notably, firms like jpmorgan have aligned their projections around 1.10 for March 2026, while bofa takes a more cautious stance at 1.04 for the same tenor.
The desk's assessment aligns closely with this consensus, reflecting the low end of the identified spread; the focus on potential disinflation could support positions favoring the yen as traders position around forthcoming economic narratives.
How other firms see it
Several major institutions, notably jpmorgan and citi, resonate with the desk's analysis, highlighting a similar outlook regarding disinflationary pressures across developed economies. Conversely, bofa diverges, suggesting a less optimistic view on the sustainability of these trends.
The implications of this discussion also extend to closely monitored pairs, including USD/JPY and EUR/USD, suggesting that traders should remain vigilant on shifts in monetary policy outlooks as they can have immediate spillover effects on these currency movements.
What the calendar says
With no high-impact events currently on the calendar, the focus on upcoming inflation data releases will be crucial for recalibrating trader expectations, particularly as economic indicators may influence central bank strategies.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Japan's core inflation at 1.8% y/y suggests disinflation trends contrary to US inflation pressures.
- 02The shift in consumer spending away from goods indicates potential changes in pricing dynamics globally.
- 03Full assessment of inflation metrics could drive monetary policy reassessments, particularly in Japan and Europe.
- 04Investors should prepare for shifts in the USD/JPY pair based on disinflationary narratives.
Market implications
Focus on the USD/JPY dynamics as trading strategies may yield benefits from the disinflation narrative captivating investors, particularly with current levels around 1.075 potentially showcasing foundational support or resistance.
Risks to this view
A significant rebound in inflation prints or unexpected hawkish comments from the Bank of Japan could invalidate this disinflation thesis, compelling a reassessment of monetary policy stance and resulting in a stronger yen.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 6.30 in the morning London time on Friday the 27th of June. The data calendar today is focused on inflation or perhaps rather disinflation.
Outside of the United States, disinflation is the trend to watch and underlying disinflation forces have already encouraged the European Central Bank and the Bank of England to reduce interest rates. Overnight, Japan published the June Tokyo Consumer Price Inflation data which exhibited a little more disinflation than had been anticipated. Indeed, using the international standard definition of what core inflation is, the Tokyo core inflation price measure grew at 1.8% year over year.
Japan's May retail sales data was also a little below expectations, although in fairness, the consensus expectation does not do a very good job of predicting that particular number. A single inflation print is not, or should not be, a reason for change in the narrative of the Bank of Japan, but it might increase the focus of policy makers on just what is driving inflation and how sustainable those inflation forces are. A lot of the headline rate in Japan is due to non-fresh food and that suggests a relative price change rather than an underlying broad inflation pressure.
Over in the glittering wonder that is the euro, we have French and Spanish June flash consumer price inflation estimates. These are seen more or less stable for the month, but again, the question is what is happening to the underlying momentum. Goods prices are comfortably in deflation territory in France and barely have a positive rate in Spain.
That of course reflects expectations of the coming US economic slowdown. It also reflects some of the ongoing shift in consumer priorities away from spending on goods towards spending on having fun. In the United States, however, the story is skewed towards inflation rather than disinflation.
We get the May consumer spending data, which is of some note given that this is a post-trade tax figure. There was consumer front-running of durable goods purchases ahead of the imposition of trade taxes. That tended to be focused on Democrat consumers with Republican consumers not noticeably bringing their durable purchases forwards.
Distortions to consumer spending will be selective, therefore. Accompanying this data, we have of course the US personal consumer expenditure deflator. The expectation is for an uptick in both the headline and the core inflation rates.
The direct effects of trade taxes will still not be in this data. That's not likely to show up in full force at least for another couple of months. But the details of the data can be quite telling.
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