UBS On-Air: Paul Donovan Daily Audio 'European growth, US questions'
The desk maintains a cautiously optimistic view on the EU economic recovery, bolstered by stronger than expected German industrial production metrics, although U.S. trade dynamics complicate the outlook. Per the full note from UBS, German industrial production exceeded market expectations and previous months were revised higher, suggesting underlying strength despite November's weak export figures. This emphasizes the ongoing trend of initially pessimistic forecasts followed by positive adjustments. However, volatility in U.S. trade patterns, as importers seek to minimize tax liabilities, has introduced distortion in normal trade flows, which could pose risks to sustained recovery.
What the desk is arguing
The desk argues that recent German industrial production data suggest a resilient European economy, despite some headwinds from U.S. trade behavior. Recent figures indicate that German industrial production for November outperformed expectations, with revisions to prior months reinforcing the case for a stronger economic narrative. Per the note, weaker export data to the U.S. could be linked to importers adjusting practices due to tax considerations for 2025.
Support for this view comes from the overall rebound narrative in the Eurozone, with additional data expected from France's industrial production and Euro area retail sales indicating stable activity. The nuance here is essential, given that the revisions underscore a persistent pattern of initial underreporting in German economic data, a trend UBS highlights as significant.
Where it sits in our coverage
Our consensus target for EUR/USD sits at 1.075, with targets from notable firms such as: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This positioning aligns with jpmorgan, suggesting a bullish stance toward the euro, while bofa provides a more cautious outlook. The desk's call leans toward the upper range of forecasts based on the recent positive data from Germany, with a focus on how well these production numbers sustain upward momentum in the face of external pressures.
How other firms see it
Firms that align with the bullish outlook on the euro include jpmorgan, while those taking a more cautious stand include bofa. This divergence highlights a split in sentiment regarding the sustainability of the recent positive data points.
In terms of related influences, the EUR/USD trajectory could be closely aligned with upcoming ECB decisions and market reactions to U.S. data, particularly surrounding labor market metrics, which are critical to gauge the broader economic climate affecting the euro area.
What the calendar says
With no high-impact events scheduled on the immediate horizon, traders should focus on upcoming labor market data from the U.S., which remains a key determinant for future USD movements and their potential impact on EUR/USD valuations.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01German industrial production beats expectations, signaling potential economic resilience.
- 02Weaker export data to the U.S. indicates trade patterns may be distorted due to tax strategies.
- 03We anticipate a cautious yet optimistic market sentiment as revisions reinforce the recovery narrative.
- 04The split in target ranges among firms shows varying confidence in the euro's strength ahead.
Market implications
Watch for stability around the 1.075 level in EUR/USD as market participants digest U.S. labor market data. Any significant deviation could shift sentiment dramatically, particularly with tax-related trade adjustments still playing out.
Risks to this view
Key risks include unexpected negative revisions in German economic data or a stronger-than-anticipated impact from U.S. labor figures that could challenge the current positive outlook for the euro.
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 9th of January. Following on from stronger factory orders data yesterday, German November industrial production figures were also stronger than expected.
The October figures were, it almost goes without saying, revised higher. German data's bias to initial pessimism and subsequent positive revision remains intact. The November export data from Germany was weaker than consensus, although very few forecasts make up that consensus.
Again the October data was revised stronger. The October data details did show exports to the United States still weaker after an initial surge in the year. The normal trade patterns are not really working as US importers have been trying to change their schedules to minimise their tax liabilities over the course of 2025.
French industrial production data for November is also due. This is less of a focus than the German figures, but it's still quite important to the narrative of a European economy operating around its trend rate of growth, in spite of the external shocks that have hit it over the course of 2025. Euro area November retail sales should show a solid, if somewhat unexciting, performance.
And the ECB chief economist, Lane, is speaking, but no-one's expecting much from the ECB over the course of this year. We get US December labour market data today, the quality of which has of course been questioned more and more. The number of staff employed by the Bureau of Labour Statistics itself has been falling rapidly, which at least raises questions about the resources available for measuring the state of the US labour market.
There will also be revisions to the seasonal adjustment benchmark, but this sort of tweaking is normally too subtle for market traders to care about. Economists care about it, but that's because economists have a subtlety and sophistication that is not always apparent in the financial markets. The no-hire, no-fire trends are expected to stay intact, and the no-fire part of that is what is keeping the middle-income consumer willing to spend, by allowing them to cut savings rates in order to pay for the post-April 2025 price increases.
This is generally not good news for the younger generation, however, who are struggling to find work. The artificial intelligence narrative may make an appearance here, but it is worth reiterating that the US labour market's weakness is not being replicated in other countries with advanced AI and service sector orientation. That suggests that AI might be just a convenient excuse in the States.
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