UBS On-Air: Paul Donovan Daily Audio 'Inflation, disinflation, and deflation'
The desk interprets the recent UK inflation data, which showed some upward pressure but also hints of disinflation, as indicative of a balanced economic context. Per the full note source, July's inflation rate slightly exceeded expectations, driven by a significant 30.2% month-on-month increase in airfares. This reflects seasonal effects rather than a sustained inflationary trend, suggesting that the UK economy may not warrant aggressive monetary interventions at this stage, especially in light of broader global economic trends.
What the desk is arguing
The UK inflation data presents a mixed picture, with July numbers rising slightly above forecasts while disinflationary trends are also becoming apparent. This nuance implies that although inflationary pressures exist, they may not be severe enough to lead to significant central bank policy shifts. Per the full note source, the increase in airfares, particularly related to school holiday timing, contributed significantly to this upward move.
While food prices witnessed an uptick, they signal the potential need for economists to revisit profit-led inflation models. Nevertheless, the evidence doesn’t point to alarming threats at present, giving the BoE room to maintain its cautious stance on interest rates.
Where it sits in our coverage
Our consensus target for the GBP/USD pair remains at 1.075, with the following ranges observed:
The desk's outlook aligns closely with that of JPMorgan, positioned at the higher end of the current target spectrum, suggesting confidence in the resilience of the GBP amidst evolving economic dynamics.
How other firms see it
Firms such as JPMorgan appear aligned with the desk’s assessment, suggesting a belief in the potential for modest GBP appreciation. In contrast, BofA holds a more bearish view, anticipating a drop towards lower bounds.
The dynamics of the GBP/USD may closely reflect the UK's trajectory regarding future inflation and the BoE's policy responses, making this pair critical for monitoring market sentiment and regulatory shifts.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01UK inflation rates show mild upward movement, but disinflation trends are evident.
- 02Airfare spike likely reflects seasonal factors rather than sustained inflation.
- 03Market sentiment towards GBP reflects cautious optimism via firm alignment.
- 04Potential for stable GBP/USD targets amidst varying firm projections.
Market implications
Watch for GBP/USD movements around the 1.075 level as market participants digest UK inflation data. The upcoming BoE meetings may provide additional context to the central bank's stance amidst this inflation backdrop.
Risks to this view
A significant shift in inflation towards sustained higher rates could prompt the BoE to adjust interest rates more aggressively than expected, challenging the current desk thesis. Additionally, any unexpected geopolitical developments or shifts in fiscal policy in the US could impact global liquidity, affecting GBP valuation dynamics.
Good morning, this is Paul Donovan, Chief Economist at GBS Global Wealth Management. It's seven o'clock in the morning, London time, on Wednesday the 20th of August. The UK July inflation data was published.
We should be grateful for that fact, as the UK Office for National Statistics has become so concerned about various statistics quality that they've almost become addicted to suspending or delaying data publication, retail sales being the latest victim in this process. The inflation numbers were a fraction higher than had been expected, but most items saw some kind of disinflation. Food prices were one area of increase, which may require economists to start looking at profit-led inflation models again.
Fairfares also pushed up prices a modest 30.2% month-on-month, but that is probably due to the timing of school holidays, a distortion that wasn't evident last July, which thus added to the year-on-year rate. There will be the opportunity for political posturing around the headlines, but the details are not necessarily that alarming. US Treasury Secretary Besant is apparently getting very excited about the possibility that stablecoins will help to finance the unsustainable US fiscal deficit.
If honestly run, stablecoins are supposed to be backed by proper assets, and Treasury bills may be one of those proper assets. However, Besant's wild enthusiasm should be tempered by the fact that there's no such thing as a free lunch. Stablecoins could certainly shift money about, but they represent a reordering of the money supply, not a magic money tree.
In other words, if individuals decide, for whatever reason, to purchase stablecoins, they must get the money from somewhere. Put at its most simplistic, if somebody sold T-bills to buy stablecoins, which then invested the proceeds back into T-bills, the process would be net neutral. Of course, that would not be a particularly sensible thing to do, necessarily.
If someone took money out of a bank deposit to buy stablecoins, the question would be where the bank had previously invested the bank deposit, and that would reduce demand for one part of money supply, but increase demand for the T-bill component of money supply. Japan's July export values fell on weaker exports of autos in particular. This is because, almost uniquely amongst global companies, Japanese auto manufacturers have cut prices of exports to the United States, offering discounts to US importers who are facing a higher tax bill.
This may be a temporary phenomenon as stocks of older auto models are run down, and it's certainly not being repeated elsewhere, but it does lower the value of Japanese exports to the United States in the near term. This, it should be noted, does not lessen Japanese real GDP, at least not directly. If the export slowdown is primarily about value, then the inflation rate, known as the GDP deflator, will be lower, but the real GDP need not fall.
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