UBS On-Air: Paul Donovan Daily Audio 'Hints of labor market weakness?'
The desk sees potential hints of labor market weakness in the upcoming employment report, which could impact market dynamics significantly. Per the full note from UBS, the fragility of the labor market is evident, compounded by political pressures highlighted by Trump's recent call for Fed Chair Powell to resign. This backdrop raises alerts about potential shifts in economic sentiment. As traders assess these developments, expectations for a weaker-than-expected labor report could influence USD positioning ahead of the holiday gap.
What the desk is arguing
The desk argues that the upcoming US employment report may show signs of labor market weakness, potentially leading to a broader reevaluation of economic stability. This interpretation draws on Paul Donovan's commentary, which suggests rising policy uncertainty is creating a less favorable hiring landscape for firms.
The concern is underscored by Donovan's observation that many companies appear hesitant to hire amid worries stemming from the shifting political landscape and the recent public comments made by President Trump regarding the Federal Reserve. The implication here is that a potentially disappointing jobs report could catalyze market movements, particularly in FX.
Where it sits in our coverage
Our consensus target for USD/EUR is currently 1.075, with a range from 1.04 to 1.12. Notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This desk's perspective on potential labor market weakness suggests a shift in sentiment that leans toward a more cautious outlook, somewhat aligning with bofa's lower target of 1.04, which may indicate diverging views on macroeconomic health.
How other firms see it
Firms such as jpmorgan and others are generally aligned with the notion that the labor report could affect the currency landscape, anticipating a range of outcomes contingent on data. In contrast, bofa holds a more bearish outlook, potentially reflecting differing assessments of economic resilience.
Market participants should pay close attention to USD/EUR dynamics as employment figures are released, especially given their potential influence on Fed policy outlooks and risk sentiment. This backdrop also intersects with expectations for equilibrium in interest rates, layering additional complexity to market reactions.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Labor market fragility may signal weaker employment data.
- 02Political pressures could lead to broader economic implications.
- 03Watch for USD/EUR reactions to labor data changes.
Market implications
Traders should closely monitor the upcoming US employment report, as any signs of weakness could lead to USD depreciation. Key levels to watch include the 1.075 mark in the EUR/USD pair, which may become pivotal depending on the data's outcome.
Risks to this view
A stronger-than-expected labor report would likely invalidate the desk's thesis, potentially prompting a comprehensive reassessment of growth expectations and complicating the current USD outlook. Furthermore, if political pressures escalate or result in significant policy changes, this could also affect labor markets and economic sentiment.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 6.30 in the morning London time, on Thursday the 3rd of July. Because the United States is taking time off tomorrow to celebrate being the minority of Britain's North American colonies that declared independence, today we get the US employment report.
The US labour market has appeared somewhat fragile. Policy uncertainty is clearly worrying firms. Even Republican-leaning sentiment surveys focus on this.
Worried firms may not fire, but they are certainly less likely to be hiring. There is a hint that the employment data may be weak today as well. US presidents are normally shown the data a day before publication when the final numbers are ready.
Yesterday evening, US President Trump put out a social media post calling for the Fed chair to resign. The timing is certainly suspicious. Of course, the rise in US unemployment would have more to do with wild swings in policy and the largest tax increases in modern economic history than anything the Fed has done per se.
On the tax side, the US did announce a trade agreement with Vietnam. Vietnam's offer of 0% tariffs on US imports, which was made three months ago, has finally been accepted by the United States. The US will tax its citizens 20% for goods from Vietnam, its sixth largest trading partner, and 40% for goods deemed to have passed through Vietnam without much being done to them.
That might matter to China. China ran rings around Trump's first-term trade taxes by routing about 30% of its trade via third-party countries in order to avoid US consumers being taxed. Trump suggested that by accepting Vietnam's 0% tariff offer, Vietnamese consumers may like to buy US-made sports utility vehicles.
In 2023, the average personal income of a Vietnamese employee was just over $3,500 a year. That's the equivalent of somebody in the bottom 3% of US income distribution. The bottom 3% of US society is not noted as being big sports utility vehicle buyers.
We also get May US trade data. This has never normally concerned markets, but it is a concern now. Bear in mind that some of the imports into the States in May will not have been subject to the April trade taxes.
If goods were already on their way to the United States when the 4th of April taxes were imposed, they are not then subject to those taxes. Given how long it takes the penguins of the Herd and McDonald Islands to ship to the United States, some of their vast amount of exports would have arrived in May. The same thing applies to goods from Asia and Europe.
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