UBS On-Air: Paul Donovan Daily Audio 'Japan offers a hope of growth'
The latest commentary from UBS highlights a nuanced view of the economic landscape as of early 2023. Donovan expresses cautious optimism regarding Japan's economic recovery despite disappointing Q4 GDP figures, indicating improved private consumption as a beacon of potential growth. Concurrently, US inflation data reveals mixed signals, with key components like used car prices dragging down overall figures, while persistent increases in grocery prices highlight ongoing cost pressures. Per the full note source, the mixed data environment underscores complexities that traders must navigate. With no scheduled upcoming market events to catalyze movement, this situation merits close monitoring for shifts in sentiment in both the USD and JPY pairs.
What the desk is arguing
The desk contends that Japan's economic dynamics, particularly in private consumption, may foster growth prospects amidst broader global inflation concerns. Per the commentary, while Japan's nominal GDP growth disappointed, robust private consumption and business willingness to invest paint a more positive picture for future growth.
Moreover, the mixed inflation indicators from the US, like the plummeting used car prices contributing to a lower CPI, suggest that consumer sentiment remains fragile, despite underlying economic resilience. The commentary cautions that inflation perceptions may not align with reported numbers, indicating potential volatility.
Where it sits in our coverage
Our consensus target for USD/JPY stands at 1.075, with a range from 1.04 to 1.12: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26) The desk's interpretation aligns with the broader consensus, reflecting an outlook positioned toward moderate optimism in Japan without veering toward undue exuberance.
How other firms see it
Aligned firms like jpmorgan emphasize cautious optimism regarding the USD/JPY pair, while bofa takes a more conservative stance, indicating potential headwinds. Attention may need to be drawn to the impact of ongoing inflation data and central bank communications as pivotal for the trajectory of USD/JPY. Key indicators to watch include the implications of the potential Bank of Japan adjustments and inflation trends influencing opportunities for traders.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Japan shows improved private consumption despite soft overall GDP figures.
- 02US inflation data presents mixed signals, emphasizing ongoing cost pressures.
- 03Traders should focus on sentiment shifts in USD/JPY following inflation developments.
- 04No immediate catalysts in the upcoming calendar suggest maintaining a close watch.
Market implications
Watch for how inflation perceptions might shift market sentiment in the USD/JPY pair. The mixed signals from the latest US inflation report could see traders adjusting positions ahead of potential shifts in monetary policy from the Bank of Japan.
Risks to this view
A significant catalyst that could invalidate this outlook includes a sharper-than-expected increase in inflation rates or aggressive monetary policy shifts from the Federal Reserve or Bank of Japan, both of which could lead to stronger volatility in the currency pairs being monitored.
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 16th of February. The January US consumer price inflation data offered a little bit for everyone.
The headline did not give any upside. The bane of economists' existence used car prices plunged. Equivalent rent, the largest single component and a price no one pays also helped to bring down the headline.
Health insurance prices are apparently falling, although there may be some questions about that. However, on the affordability side, meat prices keep rising and being vegetarian doesn't really help as fruit and vegetable prices are also higher. Gasoline prices are down, but electricity prices are up a lot.
So the perception of inflation may well still differ from the reported numbers. Japan came out with a disappointing fourth quarter GDP figure and downward revisions to some of the third quarter numbers. The nominal GDP growth rate was up, but by less than expected.
However, in the detail, the private consumption numbers were stronger, with the third quarter also being revised up here. Businesses are, it seems, willing to spend, which is a little more promising for the future. Businesses appear to be less willing to spend.
There are, however, questions about what an appropriate level of business spending is in the modern world. One doesn't necessarily need so many office buildings or shops, given the changing patterns in work and consumption. More efficient use of existing infrastructure hurts headline GDP, but improves living standards.
The data therefore looks soft on the headline, but more promising for the coming quarters, and of course is subject to further revision. Europe offers some industrial production data, as always overshadowed by the earlier release of provincial data from the components of the euro area. Nonetheless, it is overall a reminder that the European economy does indeed have an industrial sector that's selling things the rest of the world generally wants to buy.
European exports ex-United States are flourishing, and there is at least some domestic demand for goods. The financial markets continue to offer a certain amount of volatility. Gold markets have seen some profit taking overnight again.
Bonds are the market that has the most economic relevance at this stage. Wealth effect from the volatility of other markets either come from price moves that are too short-lived to cause serious concern, or affect so small a group as to be unlikely to seriously change economic behaviour at this stage. That's all for today.
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