UBS On-Air: Paul Donovan Daily Audio 'How far, how fast is the retreat?'
The desk interprets recent comments from Federal Reserve Chair Powell as underscoring heightened uncertainty, which may delay any preemptive action from the Fed to curb inflation or unemployment. Per the full note , Powell's remarks suggest an ongoing reliance on lagging data, raising the prospect of policy errors as critical economic indicators become less reliable. As the Fed maintains its current stance, traders are urged to be cautious of a potential exacerbation in market volatility. This view aligns with a cautious consensus across the board as markets grapple with ambiguous signals around U.S. trade policy reforms influenced by President Trump's upcoming tariff announcements.
What the desk is arguing
The desk asserts that the Fed is increasingly trapped in a reactive stance, as articulated by Powell's assessment of rising economic uncertainties. This reactive approach could lead to policy shifts that are too late to make a substantive impact on inflation or unemployment, reflecting a critical juncture for traders.
Supporting evidence lies in Powell’s acknowledgment of the deteriorating quality of economic data, which complicates the Fed’s ability to make informed decisions. This inherently raises the risks of policy missteps, particularly as real-time indicators become less trustworthy due to underlying structural shifts in the economy.
Moreover, the desk implicitly contrasts this with a more proactive Fed strategy that could have employed forward guidance or evidence of preemptive tightening to stave off inflationary pressures. However, current dynamics suggest that such strategies are not being contemplated, given Powell's emphasis on a wait-and-see approach.
Where it sits in our coverage
Our consensus target for the USD is 1.075, with a range from a minimum of 1.04 to a maximum of 1.12, according to recent bank analyses. Specific targets that align with our view include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This viewpoint is moderately aligned with the prevailing cross-firm consensus, as many institutions also express concerns over the Fed's ability to adapt quickly enough to changing economic conditions. The bofa target sits at the lower end of the forecast spectrum, reflecting a more bearish stance amid rising uncertainties.
How other firms see it
Firms such as jpmorgan, citi, and hsbc echo the desk’s sentiments, leaning towards a cautious approach given the Fed's current data dependency. In contrast, bofa and nomura advocate for a different narrative, projecting a more aggressive tightening cycle on the horizon.
Traders should also pay attention to the USD/CAD dynamics, particularly in light of potential exports and commodities responses to U.S. trade policy announcements. The interconnections between these markets could provide revealing insights into broader USD sentiment in the coming weeks.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Fed Chair Powell highlights rising economic uncertainties and the limitations of data dependency.
- 02Current Fed strategy raises the risk of policy errors due to reliance on lagging data.
- 03Markets are positioned for heightened volatility as trade policy discussions surface.
- 04Consensus sees cautious outlook aligning with the desk's bearish inclinations.
Market implications
Watch for USD support around 1.075 in conjunction with responses to anything more concrete from Trump's tariff discussions. Potential shifts in policy or unexpected data releases could create sharp market movements.
Risks to this view
A reversal could occur if economic data begins to outperform expectations, prompting the Fed to consider a more aggressive tightening path. Additionally, more concrete developments in trade negotiations could also shift sentiment significantly.
Good morning, this is Paul Donovan, Chief Economist at GBS Global Wealth Management. It's 4.30 in the morning London time on Thursday the 8th of May. US Federal Reserve Chair Powell did the best that they could in the circumstances.
They noted that uncertainty had risen, which is something of a statement of the obvious. They noted that there was a greater risk of higher inflation and higher unemployment, which is also something of a statement of the obvious. Powell reiterated that the current policy stance was appropriate for now and doing nothing seems to be the right approach amidst the uncertainties swirling around policy, corporate reactions to policy and to the uncertainty, and whether the consumer is going to crack.
The problem with this approach is that it stresses data dependency. The Fed reacts to data, it does not pre-empt data in this cycle. If the Fed is reacting, it is likely to be too late with policy moves, up or down, because policy operates with a lag.
And if the Fed is data dependent, it's putting more emphasis on individual data points that have experienced declining quality for years and which are likely to become even less reliable as erratic policy and structural change conspire against statisticians. It's hard to see what else can be done, but there has to be a higher risk of policy error emerging today. Meanwhile, US President Trump has promised an announcement on trade with a big, highly respected country.
Like many economists, I'm hoping for the penguins of Heard and McDonnell Islands getting the justice that they deserve. For financial markets, aside from the size of the trading partner, there are only two things that matter. How much does Trump retreat on tariffs, and how quickly does Trump retreat on tariffs?
Vague promises to talk about significant cuts in taxes are not really helpful to financial markets. The point is that the economic damage to the United States has already been done, less by the direct effects of the tariffs and more by the uncertainty weighing on corporate decision-making. The shorter the period of that uncertainty, the less the additional economic damage is likely to be.
There are reports that the country concerned is the United Kingdom, which would make some sense. If you look at the UK trade data in a certain way, it's possible to claim that the UK doesn't run a mercantile trade surplus with the United States, and so removing the tariffs would seem to follow the US administration's logic. Any trade deal with the UK is unlikely to affect the Bank of England's decision today.
The Bank of England is expected to cut rates by a quarter point. Disinflationary forces in the global economy argue for rate cuts in the UK. The Bank does not want to be tightening real interest rates any time soon.
The UK has not indulged in retaliatory tariffs against the United States, so a trade deal is unlikely to change domestic inflation pressures very much, and indeed a full trade deal as such remains relatively unlikely at this stage. Sweden's Riksbank is not seen cutting rates any further. In contrast, Sweden's headline interest rate is already only half that of the UK.
The data calendar is relatively quiet. There's first-quarter productivity and first-quarter unit labour cost data from the states, but this represents data from the before times, which limits its usefulness to understanding the current economic and financial market landscape. The data is always subject to a lot of revision.
For the moment, the risks of inflation are not coming from higher labour costs in the states. Instead, it's the sales tax aspect of tariffs coupled with risks of profit margin expansion that are likely to concern the Federal Reserve. That's all for today.
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