UBS On-Air: Paul Donovan Daily Audio 'Dullness, and bias'
Lead — As US employment data looms, the focus on average hourly earnings versus actual wage growth is paramount. Per the full note from UBS, Paul Donovan emphasizes that average earnings are becoming increasingly disconnected from wages due to changing labor force dynamics. The labor force survey's 43% response rate, down from 60%, raises concerns about the data's accuracy and reliability, leading to potential significant revisions. Overall consensus anticipates moderate job creation and stable unemployment, adding a layer of complexity to the interpretation of market sentiment. With no immediate high-impact events on the calendar, traders should remain vigilant about sentiment fluctuations and economic indicators ahead of the report.
What the desk is arguing
The desk posits that the US employment report will reveal a misalignment between average hourly earnings and actual wage growth, which could affect market perceptions of inflation and economic stability. Per the full note from UBS, Donovan suggests that ongoing shifts in labor force structure will continue to distort average earning figures, complicating their relevance as true wage indicators.
Additionally, the 43% response rate of the payroll survey signifies that the data released may not reflect the true state of the labor market, prompting analysts to brace for greater revisions. The desk notes that a consensus view anticipates moderation in job creation and stable unemployment rates, but the underlying data challenges may lead to unpredictable market reactions.
Where it sits in our coverage
The desk's current consensus target is 1.075, with a range spanning from 1.04 to 1.12. Notably, jpmorgan has aligned with a target of 1.10 for March 2026, while bofa stands in opposition, targeting 1.04 in the same tenor.
This view is somewhat at the midpoint of the broader consensus, reflecting the mixed sentiment stemming from recent economic data. The desk believes that any discrepancies in the upcoming employment figures could either support or undermine these targets significantly, so the positioning needs to be monitored closely.
How other firms see it
Firms like jpmorgan show alignment with the view of a cautiously stable labour market and a target that supports this outlook. On the contrary, firms such as bofa present a bearish view, indicating concerns about economic robustness reflected in their lower targets.
The dynamics between average hourly earnings and the broader inflation narrative could actually influence currency pair movements, particularly the USD/EUR trajectory as the market responds to employment data. Additionally, keep an eye on the sentiment around bond yields, as they could be affected by changes in employment and wage trends.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Average hourly earnings may not accurately reflect actual wage growth due to changing labor dynamics.
- 02The payroll survey's low response rate raises concerns about the reliability of the employment data.
- 03Market consensus predicts moderate job creation and stable unemployment, with potential volatility in market reactions.
- 04Watch for shifts in consumer sentiment that may influence inflation expectations.
Market implications
Traders should closely monitor the upcoming US employment report for indications of wage growth versus average earnings, which could shift sentiment in the USD market. A strong divergence from consensus expectations could lead to notable volatility in currency pair movements, particularly around the USD/EUR.
Risks to this view
A significant deviation in employment data from current consensus could invalidate the desk's projections, especially should average hourly earnings show unexpected strength. Additionally, any revision in labor force structure or sentiment indicators disrupting current narratives may alter market reactions swiftly.
Good morning, this is Paul Donovan, Chief Economist at GBS Global Wealth Management. It's seven o'clock in the morning London time on Friday the 10th of January. It's US Employment Report Friday, and this comes along with a couple of regular reminders.
First, average hourly earnings are not wages, and especially in the current labour market average hourly earnings have an ever looser relationship to wages. The structure of the labour force is in flux, and changing the structure of the labour force will change the average of average earnings. Second, the response rate to the survey that produces payrolls is 43%, down from pre-pandemic response rates of about 60%.
The UK has stopped publishing labour data because of low response rates, the US carries on publishing regardless. This means that revisions are likely to be more significant, as the survey is less and less representative of what is actually happening in the economy. The market consensus is for a moderation in job creation, a stable unemployment rate, and no change in average hourly earnings growth.
We also have the Michigan consumer sentiment data from the States. Sentiment has been moving higher on soaring Republican sentiment. Republicans tend to be more emotional when it comes to answering sentiment surveys, with higher highs and lower lows.
The partisan bias of sentiment data means that if Republicans are more optimistic and Democrats are more pessimistic, the average indicator will tend to rise. There's also evidence that partisan bias extends to inflation expectations, though not perhaps as much as with the headline sentiment number. Unemployment, food and fuel prices still matter a lot to consumer inflation expectations, though they play a relatively small part in actual inflation.
The rise in UK government bond yields has been attracting some attention, although at this stage the economic consequences remain relatively limited. UK bond yields have been tracking US yields, more or less, and the market has not become disorderly. In this, it differs from the trust debacle, when the market did become disorderly and the Bank of England was obligated to step in.
However, the precedent of the trust debacle may have given additional focus to the UK bond market moves, which, for instance, a similar move in the US has not attracted. The recent budget's tax increase for companies may also have prompted a more negative sentiment on economics than is reality, a case of they would say that, wouldn't they? The dire commentary on consumer spending, contrasting with strong retailers' earnings and robust real sales data, is a case in point.
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