UBS On-Air: Paul Donovan Daily Audio 'Labor weakness still beats inflation increases'
The desk interprets Paul Donovan's recent commentary as a reinforcement of the prevailing sentiment that labor market weakness overshadows inflationary pressures in U.S. monetary policy. Powell's reliance on potentially unreliable data due to the ongoing governmental dysfunction further amplifies the risk of policy missteps, leading to stronger expectations for rate cuts. Per the full note, labor market stagnation, underscored by reduced hiring and anxiety around unemployment, allows consumers to engage in increased spending despite rising prices. This environment suggests a tilt towards softer policy, potentially impacting currency positioning against the U.S. dollar as traders recalibrate forecasts in light of evolving economic fundamentals.
What the desk is arguing
The desk posits that current labor market vulnerabilities will likely drive the Federal Reserve's monetary policy objectives, overshadowing inflation concerns for the time being. This interpretation aligns with Powell's remarks indicating a preference for hiring freezes over layoffs, as he navigates decisions based on questionable data sources.
The Fed's dependency on private sector analytics points to a tense economic landscape in which firms remain risk-averse, apprehensive about future employment levels. Donovan emphasizes this sentiment by noting that U.S. consumers are resorting to lower savings rates and increased credit usage to manage rising prices, a dynamic that reinforces expectations for rate cuts.
Where it sits in our coverage
Our consensus target for the USD/EUR pair is 1.075, with a range between 1.04 and 1.12 set by various firms. Specific targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This view generally aligns with the bearish sentiment emerging in the broader market, as traders react to Powell's emphasis on labor market dynamics. Notably, should the Fed pivot towards more hawkish stances due to unexpected inflation data, it may challenge this consensus forecast.
How other firms see it
Several firms echo a similar caution regarding labor market indicators, reinforcing the idea that economic resilience is faltering. These include jpmorgan and citi, both adopting a cautious view on the dollar as growth metrics exhibit weakness.
However, bofa presents a contrasting perspective, suggesting that inflationary pressures could compel the Fed to maintain a tighter policy stance. Within this framework, the USD/EUR exchange rate remains a critical focus, particularly in light of ongoing U.S. economic signals and labor market evolutions.
What the calendar says
Given the absence of significant upcoming economic events on the calendar, market participants will need to absorb Powell's latest remarks and evolving economic data for any indications of potential shifts. The lack of fresh data prior to the next Fed meeting may leave traders in a state of caution while awaiting more definitive guidance.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Labor market concerns are currently outweighing inflation issues in Fed policy decisions.
- 02Dependency on less reliable private sector data could skew economic interpretations.
- 03Expectation for interest rate cuts strengthens amid labor market stagnation.
- 04U.S. consumers showing willingness to spend despite rising prices signals changing dynamics.
Market implications
Traders should closely monitor forthcoming labor market assessments and consumer sentiment indicators, particularly if any reliable data points emerge that could revise expectations for rate cuts or reinforce the prevailing economic narrative. Current levels around 1.075 may face adjustments depending on shifts in Powell's rhetoric or market sentiment regarding inflation.
Risks to this view
A significant reversal in labor market data or inflationary pressures could force a rethink of current expectations, leading to a hawkish pivot from the Fed. Should reliable government data be released showing stronger-than-expected employment gains or inflationary trends, it may prompt a reassessment of the current bearish sentiment in the currency market.
Good morning. This is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 3.30 in the morning London time on Wednesday the 15th of October.
US Federal Reserve Chair Powell reiterated the point that, for now at least, the US labour market's weakness outweighs the rise in US inflation in terms of the Fed's policy deliberations. We do not have labour market data or inflation data from the United States government at the moment as, of course, the US government is still not functioning. This does mean that the Fed is unduly dependent on private sector data and anecdotal evidence both of which let loose a klaxon horn of warning about data quality.
But to some extent this does not matter. Powell is used to taking decisions on the back of what is technically termed dodgy data. So if Powell is saying that, then those views will have disproportionate impact on the course of the Fed's policy decisions and the expectation of rate cuts has therefore been reinforced.
Powell did also state that, presumably on the basis of such dodgy data as is available, firms are still not hiring and not firing. Certainly, for now, fear of unemployment seems sufficiently contained that US consumers are prepared to cut their savings rate or dip into savings accounts or use credit cards to afford the higher prices that they are now being charged. China released September producer price and consumer price inflation data, both showing negative growth in year-on-year terms and overall very slightly weaker than had been anticipated.
The consumer price data is of almost no international interest as it is dominated by food which China does not export. It has marginally some bearing on the central bank's policy decision-making process. The producer price data is of limited international resonance as well as it is influenced by domestic utility costs.
The persistent deflationary tone to these releases is suggestive of a still struggling domestic sector of the Chinese economy, however. France's current Prime Minister and the Associated Government survived in office another day. The price of survival is the suspension of pension reforms until the presidential elections in 2027.
Students of European politics will be very familiar with this technique of kicking the can down the rows. It was very fashionable during the Greek fiscal crisis of a few years ago. The move will increase the fiscal deficit but should ensure that the Socialist Party supports the government during Thursday's votes of confidence.
So, an unsustainable fiscal position would seem to be the price for the possible illusion of a currently stable political position. French and Spanish final September consumer price inflation data is due for release but these are not numbers to move financial markets. In the general data drought of the United States, the New York Empire State Survey of Manufacturing sentiment is likely to be seized on by economists and cable news journalists with all the decorum of a pack of ravenous wolves.
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