UBS On-Air: Paul Donovan Daily Audio 'Idle speculation'
Per the full note source, UBS Chief Economist Paul Donovan argues that the lack of economic data on May 27 leaves markets vulnerable to idle speculation, particularly around Iran-US tensions. Donovan notes that Brent crude remains below $100/bbl as markets price in Iran's narrative on negotiations, despite retail gasoline prices in the US being over 50% above pre-war levels. He also highlights Fed division, with Kashkari suggesting rate hikes if the Gulf War is lengthy, but Donovan rejects this absent second-round effects. The desk sees the Fed as unlikely to hike without profit-led inflation, a view that aligns with the dovish end of consensus.
What the desk is arguing
UBS Chief Economist Paul Donovan characterizes the May 27 data calendar as 'embarrassingly empty,' warning that traders may revert to emotion-driven trades instead of fundamental analysis. The desk frames this as a risk for speculative moves around Iran-US military exchanges, which have so far had limited market impact.
Donovan points to Brent crude futures staying below $100/bbl, attributing this to the market's optimism bias and pricing of Iran's negotiation narrative. He notes that US retail gasoline prices remain over 50% above pre-war levels, a memory that consumers hold for up to 18 months before recalibrating.
The alternative read would be that the market is correctly discounting a contained conflict, but Donovan implies that any escalation could trigger a sharp repricing, particularly if it feeds into profit-led inflation.
Key takeaways
- 01Empty data calendar raises risk of idle speculation and emotion-driven trading on May 27.
- 02Iran-US tensions have not moved Brent above $100/bbl as markets price in Iran's negotiation narrative.
- 03Fed divisions highlighted: Kashkari hints at rate hikes if Gulf War is lengthy, but Donovan argues this is unwarranted without second-round effects.
- 04US retail gasoline prices, up >50% from pre-war, create sticky consumer memory up to 18 months.
Market implications
Watch for speculative flare-ups in crude oil and USD during today's thin data session. The Brent crude level at $100/bbl is a key psychological barrier; a break above could trigger stop-losses and accelerate the move. Fed-speak later today (Kashkari, further speakers) will be closely monitored for any shift in the rate-hike rhetoric.
Risks to this view
The call is invalidated if a surprise economic data release (e.g., US weekly jobless claims, ISM manufacturing) refocuses markets on fundamentals. Any escalation in Iran-US military action that pushes Brent above $100/bbl would also shift the narrative. Donovan's dismissal of rate-hike risk depends on the absence of second-round inflation effects; a sharp rise in wage growth or consumer inflation expectations would force a rethink.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Wednesday the 27th of May. There is an embarrassing lack of real economic information scheduled for release today, which raises the risk that the financial market traders will start depending on emotions and animal spirits rather than the pure objective analysis that economists bring to the world.
Despite the fact that armchair generals have had no real luck in predicting anything that is happening in the Gulf War, there will be some speculation about the exchange of fire between Iran and the United States yesterday. The market's optimism bias and the fact that events are confirming the Iranian view of negotiations, which is what markets tend to believe and price in, has kept the benchmark Brent oil future below $100 a barrel. Of course, politically, the pressure is still on at the US administration, with US retail gasoline prices still up well over 50% from pre-war levels.
This memory lasts up to 18 months. That is to say, what consumers think of as being a fair price for a high-frequency purchase will stick in their mind as a benchmark for reference for up to 18 months before their brains recalibrate to the new higher price as being the fair price. We do have some central bank speakers on the agenda.
US Federal Reserve speakers are likely to be the more interesting, given evidence of unusually public divisions between the policy makers, and with a new Fed chair whose reputation within the organisation rather argues against an ability to exert strong leadership. Fed President Kashkari has already been speaking, suggesting the United States may have to have a series of rate hikes if the Gulf War is lengthy. This would only make sense if there were clear second-round effects, especially profit-led inflation.
Absent that, a series of rate hikes makes no sense economically. We have a couple of other Fed speakers on the agenda ahead. There have also been a series of comments from European central bank policy members, With the ECB seemingly careering towards a policy mistake without anyone willing to pull the emergency brake, the narrative has been skewed to the hawkish.
A June error now seems almost inexorable. The error will not cause too much damage, but it starts a journey towards a restrictive monetary policy for no good reason, and the rate hike will of course have no discernible effect on inflation or inflation expectations. The Iranian and US military commands are not waiting on tenderhooks for the ECB decision before they decide whether or not to continue with their war.
Lagarde announcing a 25 basis point rate increase is hardly likely to prompt the US Department of Defence to throw in the towel and retreat in the face of tighter European financial conditions. What little information there is on the data calendar is primarily sentiment data and therefore not worthy of much, if any, attention. Political partisanship and the daily gyrations of an ever more sensationalist news cycle rob opinion polls of any useful information.
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. It's subsidiaries, or affiliates, collectively referred to as UBS.
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