UBS On-Air: Paul Donovan Daily Audio 'Hiring and firing'
The desk argues that the UK labor market data shows unexpected resilience amidst tax increase fears, which could temper expectations for further monetary easing from the Bank of England. According to the UBS audio commentary by Paul Donovan, employment growth was notably strong, contradicting dire corporate predictions of mass layoffs due to tax adjustments (Per the full note source...). This strength may bolster consumer spending, particularly from middle-aged employees, reinforcing the economy's robustness despite external pressures. Such data prompts a reassessment of market sentiment towards potential rate cuts ahead of the Bank of England's discussions.
What the desk is arguing
The desk believes the stronger-than-expected UK labor market data signals a more resilient economy, which may mitigate the inclination for future rate cuts from the Bank of England. Per the UBS commentary, employment figures surpassed forecasts, indicating an upward revision in labor strength. This contradicts prevailing narratives surrounding corporate despair related to tax hikes, at least for now.
Donovan noted that the employment growth is largely concentrated among middle-aged workers—those who typically possess significant consumer purchasing power. This emphasizes the importance of this demographic in sustaining economic activity going forward, reinforcing the idea that the harsh corporate rhetoric may not be reflected in real-world employment dynamics.
Where it sits in our coverage
Consensus views are central to shaping market dynamics. The jpmorgan forecast places GBP/USD at 1.10 for Mar26, suggesting optimism about the UK economy's performance. In contrast, bofa anticipates a more pessimistic outlook with a target of 1.04 for the same tenor. These targets frame the discussion around market positioning in GBP-related pairs, considering the surprise labor data.
The desk’s view aligns with jpmorgan's more favorable outlook, suggesting market participants may need to adjust their expectations given the recent labor data, which runs counter to fears associated with tax increases. With the current consensus, the desk's stance appears to support the upper end of the prevailing estimates.
How other firms see it
Firm views are somewhat divided; jpmorgan and citi are currently aligned with a positive perspective on the UK labor market, while bofa remains more pessimistic about the implications of tax increases. This divergence could reflect differing assessments of the UK’s economic resilience following fiscal policy changes.
Investors should pay close attention to upcoming data on consumer confidence and other related economic indicators, as these could significantly influence GBP movements, especially in conjunction with the labor market strength discussed above.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01UK labor market data exceeded expectations, contradicting fears of mass layoffs.
- 02Employment growth is particularly robust among middle-aged consumers, critical for economic activity.
- 03The sentiment towards potential Bank of England rate cuts may shift due to stronger economic indicators.
- 04Market positioning may skew more optimistic in light of the latest data revisions.
Market implications
Watch for GBP/USD movements around key levels, particularly the central range around 1.075 where market sentiment could pivot. Given the improved employment figures, any noticeable shift in forecasts from key market players could signal broader changes in positioning ahead of the Bank of England’s next meeting.
Risks to this view
Should upcoming data points indicate a downturn in consumer sentiment or reveal unexpected weakness in economic indicators, the current bullish sentiment may be invalidated. Additionally, changes in political rhetoric or fiscal policies that exacerbate corporate concerns could also prompt a reassessment of the labor market's strength.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Tuesday the 18th of February. UK labour market data showed stronger employment than had been expected, with the previous month's data being revised to show additional employment strength.
This is in spite of the continual reported despair of employers who in the wake of a tax increase have been prophesying widespread job losses and employment benefit cuts. The economic data shows that this rhetoric is just rhetoric, at least so far. Moreover, employment growth and pay has been concentrated amongst middle-aged employees.
This matters because middle-aged consumers are key consumers, with the spending power to make a difference in overall economic activity. There are some sentiment surveys due today, both at risk of political bias. The German ZDW survey at least measures economic forecasters, but with an election around the corner even economists might be tempted by political perceptions.
Meanwhile, the US New York Empire State manufacturing sentiment survey is likely to be subject to bias given the increasingly divided nature of the political scene in the United States. The world according to Fox News bears no relation to the world according to CNN, and US citizens seem reluctant to find the remote and change the channel. There are several central bank speakers lining up today.
Bank of England Governor Bailey is probably the most interesting of the lot. As an actual economist, Bailey has the potential to offer intelligent insights. Not all central bank heads have that ability these days.
Moreover, the Bank of England is clearly dealing with a complex economy, and while the idea of further UK rate cuts is established in the mind of the markets, there is just enough uncertainty to make things interesting. From the US, we have Dalian Barr speaking from the Federal Reserve. There is perhaps too much uncertainty about the US economic outlook to make their remarks really interesting to markets.
The Fed's view of the world may be upended by an executive order, or reversed by a social media post. There is a television interview tonight with US President Trump, who will be accompanied by Trump megadonor Musk. Markets will be interested in signals of the balance of power between the two.
Meanwhile, media reports of federal government job cuts are getting some attention. These are unlikely to make much of a difference to the US fiscal deficit. Excluding the post office, civilian federal employees are less than 1.5% of the US workforce.
Similarly, with a relatively small number of people having been affected, it is unlikely that these job losses will change consumer behaviour when considered at a macroeconomic level. However, there are some supply chain issues that do need to be considered. If, for example, national parks do not fully open because of a shortage of staff, there would be implications for local private sector tourism business, for instance, which might then fuel a more widespread fear of unemployment.
That's all for today. Have a good day. UBS Chief Investment Office's investment views are prepared and published by the Global Wealth Management Business of UBS AG, or its affiliate, UBS.
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