UBS On-Air: Paul Donovan Daily Audio 'Ignorance is not bliss'
The desk's interpretation hinges on a heightened awareness of the fragility underpinning recent US economic data, particularly employment and consumer metrics. Per the full note from UBS, the expected government shutdown's impact muddies the clarity surrounding these key indicators and suggests that recent trends might be more a product of circumstance rather than robust economic growth. Compounding this uncertainty is the deterioration in data quality, something that could provoke a more cautious stance from the Federal Reserve as they navigate future policy decisions. In the approach to these critical data releases, traders are advised to position themselves with caution, particularly given the lack of clarity around US economic fundamentals.
What the desk is arguing
The desk assesses the current state of the US economy as obscured by the impacts of the government shutdown and the overall deterioration of employment data quality. Per the full note from UBS, while upcoming employment and consumer price data may create a fleeting sense of clarity, the underlying elements are heavily distorted, raising concerns about their reliability.
Notably, the UBS commentary highlights that the quality of employment data has been in decline across the board, with the specter of an ineffective government adding layers of complexity. Existing trends show that spending by middle-class consumers is being maintained despite rising prices, suggesting that while consumer activity is robust, it does not fully indicate economic health.
Where it sits in our coverage
Currently, our consensus target for the relevant USD pairs reflects a cautious optimism with a target of 1.075, indicating potential upside while also allowing for significant downside to around 1.04, as highlighted by firms like jpmorgan at 1.10 and bofa at 1.04, both with a March 2026 tenor.
This perspective leans towards the upper end of the expected range while acknowledging the prevailing uncertainties linked to upcoming economic indicators and their interpretations. If the employment and inflation data due later this week surprises to the downside, it could warrant a reassessment of this stance.
How other firms see it
Overall, firms such as jpmorgan and citi share a generally aligned view with an eye on modest appreciation of the USD, whereas bofa maintains a more pessimistic outlook, concerned about weak economic signals. The contrasting views underscore a potential for significant volatility around upcoming data releases.
Traders should monitor USD/JPY in light of these considerations, especially as Fed signals interact with data trends to shape market expectations. The trajectory of consumer spending will also be critical in evaluating whether the anticipated uptick in inflation is sustainable or merely a temporary blip.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The pending US employment and CPI data is expected to reveal limited clarity due to data quality concerns.
- 02The UBS report indicates ongoing consumer spending despite rising prices and lower savings rates.
- 03Expect market volatility as the data could significantly influence the Federal Reserve's policy perspective.
- 04Current forecasts present a cautious optimism, largely depending on upcoming economic indicators.
Market implications
Traders should keep a close eye on the upcoming employment and CPI data releases, particularly given that any substantial deviation from expectations could impact Fed policy discussions. A validated trajectory around 1.075 might strengthen the USD positioning, while adverse data prints could shift sentiment significantly.
Risks to this view
If the data released later this week shows stronger-than-expected employment or inflation, it could lead to aggressive Fed signaling, negatively impacting the current dollar bullish stance. Additionally, if data distortions due to the shutdown are more pronounced than anticipated, it may prompt market re-evaluations of growth expectations.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Monday the 15th of December. This week, the veil of ignorance that has shrouded the US economy since the government shutdown is partially, but only partially, lifted.
Employment data due tomorrow and consumer price data on Thursday only hints at what is happening. Employment data quality everywhere has been deteriorating in recent years. This US data is partial, distorted by the effects of the shutdown itself, and has already raised concerns with the US Federal Reserve.
Consumer price data has already been affected by underfunding of the Bureau of Labour Statistics. More prices are interpolated, which is a fancy way of saying guessed at, and fewer prices in fewer places are collected than was the case before this year. So while the numbers will be seized upon with indecent enthusiasm by media, and by some in the markets, they need to be put in the context of a longer-term trend.
On the labour market, the no-hire, no-fire state of affairs does seem to be holding. That's important because it keeps fear of unemployment low. Data from credit card companies, for instance, suggests spending is continuing amongst the middle class.
Low fear of unemployment allows consumers to reduce their savings rate to pay for the higher prices. The increase in US price levels since April has almost exactly been matched dollar for dollar by the drop in the amount that US households save each month. China's economic data showed lacklustre retail sales in November.
China's consumers have not really offered much additional support to the economy this year and to date attempts to rouse them with policy measures have fallen rather flat. There were some distortions with the timing of holiday-related sales, but even allowing for that, the report was mediocre. China has benefited from a reasonable performance in its external sector, with non-US trade near record levels, albeit benefiting from US trade disguised by rerouting, helping US companies avoid paying tariffs on imported goods.
This practice was established during President Trump's first-term tariffs and has been honed in response to the second-term tariffs. The November China industrial production data did disappoint a little. The weakness was concentrated in the steel and auto sectors.
China's fourth-quarter Tangkang sentiment survey is just a sentiment survey, but it is probably taken a bit more seriously by respondents than some other business sentiment polls. For large companies, the data was as expected, and perhaps a little upside to the capital spending plans of companies. For smaller businesses, the outlook was a little brighter than had been anticipated.
The US Empire State Survey is due later today and should not be taken seriously. That's all for today. Have a good day. and a member of FINRA SIPC.
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