UBS On-Air: Paul Donovan Daily Audio 'Employment report Wednesday'
The desk sees potential volatility stemming from the upcoming US employment data, as reported by Paul Donovan from UBS. Per the full note, the delayed employment report for January, along with benchmark revisions from the previous two years, could stir market reactions because of the historical context of the labor market and perceived economic stability. The expectation of downward revisions may align reported employment with a reality characterized by household adaptability in the face of economic challenges. This serves as a backdrop against a stable labor market perception that has, until now, mitigated fears of widespread unemployment.
What the desk is arguing
The desk predicts that the forthcoming employment data will incite significant market movement, particularly if revisions to previous employment figures paint a less favorable picture than expected. Per the full note, the key takeaway from the employment revisions is that markets should focus more on real economic conditions rather than the numbers presented, which might be politically charged but not wholly reflective of the underlying economic narrative.
A critical element is the slowdown in hiring, especially among younger demographics, suggesting that while established workers may be secure, younger job seekers face increasing challenges. This slowdown, attributed to uncertainty around government policy, could evoke caution among traders as it threatens broader economic momentum.
Where it sits in our coverage
Our consensus target for the USD is 1.075, hovering between a range of 1.04 and 1.12 in the next six months. Notably, jpmorgan has a target set at 1.10 for March 26, while bofa holds a contradictory stance at 1.04.
This view aligns with traders who expect that labor market weakness could influence currency valuations, particularly against the backdrop of anticipated revisions that may reflect a tightening economic environment. The desk's target is close to the upper bound of current is bounded expectations, suggesting an optimistic outlook but one shadowed by the potential for downward shifts based on employment data revisions.
How other firms see it
Overall, firms like jpmorgan are aligned with a cautious outlook, potentially anticipating shifts in market sentiment due to labor market signals. Conversely, bofa presents a more bearish stance that expects greater weakness in economic data to influence USD valuations.
Traders should keep an eye on USD/CAD and GBP/USD as these pairs may reflect the ramifications of the labor report and its potential revisions. The interplay between job market dynamics and currency behavior will be crucial as these relationships could pivot based on data releases and subsequent interpretations.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The delayed employment report may reveal a downturn in job numbers.
- 02Market reactions will hinge on how closely revisions align with economic conditions.
- 03Weak hiring trends among younger demographics indicate broader economic implications.
- 04The data could politically resonate but may not drastically alter the fundamental economic narrative.
Market implications
Traders should prepare for possible volatility in USD pairs, especially if the employment report shows significant downward revisions. Watching levels around 1.075 will be critical as market participants react to the new data, potentially impacting broader currency movements.
Risks to this view
A starkly weaker than anticipated employment figure could trigger a more aggressive market response, particularly if it reflects deeper systemic issues in the labor market. Should AI-related job losses manifest significantly, the narrative around employment and its effects on currency could shift dramatically.
Good morning, this is Paul Donovan, Chief Economist at GBS Global Wealth Management. It's seven o'clock in the morning London time on Wednesday the 11th of February. Today we get the delayed US employment report data for January, along with benchmark revisions for the last couple of years.
For the revisions, it is important to focus on how the economy reacted to reality, rather than how the economy reacts to reported data. That is to say, whatever the actual level of US employment last year, that actual level was sufficiently good to keep fear of unemployment relatively contained, and to allow US households to cut back on savings in order to pay for the tariffs. If employment over the past year is revised down, and that is the expectation, it is simply bringing the reported number into line with reality.
It will undoubtedly have political resonance, but it is not necessarily that relevant to the economic narrative. The latest data for January will obviously agitate financial markets. The numbers have already agitated US administration officials, who will not necessarily have known the actual data.
There has been, however, a flurry of comments about there being no need to worry if the numbers are lower. There is a need to worry if the numbers are meaningfully lower, and momentum in the labour market is weakening. The evidence to date does not suggest that US jobs are being lost to artificial intelligence, although AI is a convenient excuse for chief executives seeking to correct for past hiring errors.
AI may possibly be intensifying areas of work. For the most part, recent labour market data has been characterised by a hiring slowdown, reflecting the extraordinary level of uncertainty around government policy in the United States. That slowdown has primarily affected younger people who are struggling to find work, rather than established consumers who are already in work.
That, in turn, has some implications for economic patterns that are sensitive to younger age groups – slower sales of fast food, higher delinquency rates on student loans and so forth. It is worth noting the weakness in the US January retail sales data that was released yesterday, but these numbers do not necessarily herald a weakening of the consumer. Certainly, the US credit card use data is completely inconsistent with the reported retail sales numbers, so either consumers were spending outside of the items captured in retail sales, or the retail sales survey is less reflective of reality.
It may also be the case that the affordability crisis in the United States has caused some people to delay end-of-year spending in anticipation of price discounts in January. China is not facing an affordability crisis. It is facing very weak inflation at a consumer price level and still has deflation at a producer price level.
Producer prices have not risen in China since 2022. These prices do not translate into any kind of international price trend. There is a very limited relationship between producer or consumer prices and export prices, and China's export prices have only a very limited relationship to international consumer price inflation.
However, the prices are perhaps indicative of the ongoing, mediocre nature of domestic demand in China. Certainly, these are not consistent with a strong domestic demand story. As such, that places the emphasis on exports if China is to meet this year's official growth targets, and of course, China must meet its official growth targets.
That's all for today. Have a good day. This material has been prepared and published by the Global Wealth Management Business of UBS Switzerland AG, regulated by FINMA in Switzerland.
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