UBS On-Air: Paul Donovan Daily Audio 'Inflation (data) is coming'
As the U.S. government prepares to release the September consumer price index, regulatory requirements are emphasizing the necessity of this data publication, regardless of the ongoing government shutdown. Per the full note by UBS's Paul Donovan, the data is crucial for adjusting social security payments and indirectly feeding into Federal Reserve policy considerations. This release, although expected to be delayed, must occur by November 1 and will offer clarity to U.S. inflation-linked bonds, which are influenced by published CPI figures. Given the context of central bank policy and fiscal reactions to inflation metrics, the upcoming inflation data could have significant implications for market positioning.
What the desk is arguing
The desk believes that the imminent release of the September consumer price index is a pivotal moment for U.S. economic indicators, affecting not only social security adjustments but also monetary policy considerations. Per the full note by UBS, the legal requirement to publish CPI data means we can expect this release by November 1, regardless of the government shutdown. With inflation data being critical for various government expenditures, this unexpectedly delayed release could shift market expectations surrounding upcoming Fed actions.
Market observers should note that the accumulated data for September is ready to be processed by the Bureau of Labor Statistics, further underlining the importance of the inflation print. Donovan mentions that this publication will enhance clarity around inflation-linked securities — a key focus as the Fed prepares for its monetary stance adjustment. Higher-than-expected inflation could imply a hawkish tilt in Fed communications, making the CPI release a key event in the near term.
The alternative read would be that some traders expect lower inflation, potentially viewing the delayed publication as a signal of underlying economic weakness. However, this view might underestimate the legal and fiscal imperatives compelling the government to publish the CPI data.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The U.S. CPI release is legally mandated to support social security adjustments, set for publication by November 1.
- 02This inflation data will inform Federal Reserve policy discussions and will impact markets for inflation-linked bonds.
- 03Expectations of inflation could shift market sentiment significantly, particularly if the figures exceed projections.
- 04Market reactions are contingent upon how inflation data interacts with ongoing Fed policy debates.
Market implications
Traders should monitor the U.S. dollar's reaction as we approach the CPI release, particularly if inflation figures deviate from analyst expectations. A significant print could influence Fed rate expectations and offers a critical inflection point in the coming weeks.
Risks to this view
A lower-than-expected CPI print could undermine the hawkish narrative surrounding the Fed’s monetary policy, prompting a reassessment of rate hike probabilities. Additionally, if the data release is further delayed, it may create uncertainty in market positions tied to U.S. inflation metrics.
Good morning. This is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Friday the 10th of October.
Amidst the US data drought there is a small shower of excitement. The US government has announced that it will be publishing a September consumer price inflation number and it's calling back civil servants at the Bureau of Labour Statistics in order to work on this. This will enable the government to calculate the cost of living index which is used to index social security payments.
Huge swathes of US government spending automatically increase in line with inflation, a legacy of the Nixon administration. The underlying price data had apparently all been collected when the government shut down. The release was scheduled for next Wednesday and it seems unlikely the data will be ready by then but it will be coming at some point and legally it has to be published before the 1st of November.
Publication will also assist the Federal Reserve at its next policy meeting and of course it will help to offer some clarity to holders of US inflation linked bonds. US inflation linked bonds are not actually guaranteed to be linked to inflation, they are linked to whatever the published consumer price inflation number is. US Treasury Secretary Besant has thrown the might of US taxpayers' money behind Argentina's peso, using dollars to buy pesos and setting up a $20bn currency swap facility.
This is a very rare action by the United States and of course the only limit on the use of such funds would be political. The United States can provide as many dollars as it likes. Whether this was a good deal depends on your perception of whether the peso was overvalued.
If you think it was not overvalued and the market moves were a disorderly liquidity event then the US taxpayer has got a good deal. If you think the futures market was correct and the peso was overvalued against the dollar then the US will have to bear losses. The action has led to the peso strengthening and it has soared to levels not seen since the 1st of October when coincidentally the US government shut down.
Japan's September producer price inflation was a little higher than had been expected with the year-on-year rate holding steady at 2.7%. Export price inflation on a contracted currency basis was close to 0% but that disguises the drop in the price of cars being exported to North America which is almost the only area of global trade where exporters seem to have deliberately chosen to lower prices in order to offset tariffs on US consumers. Implicitly the price of other Japanese exports to the United States are not likely to be falling.
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