UBS On-Air: Paul Donovan Daily Audio 'Losing jobs'
The ongoing US government shutdown and potential job losses frame a cautious outlook for the US economy, impacting consumer spending and business behavior. Per the full note from UBS, President Trump’s suggestion of job firings rather than furloughs could elevate unemployment fears, which historically has broader ramifications on consumer sentiment and spending patterns. While federal job losses might only modestly increase recession risks, as indicated, the psychological impacts on the labor market remain significant. Current market dynamics seem to lean towards these uncertainties, contributing to a more cautious trader sentiment as we observe evolving developments in fiscal policy.
What the desk is arguing
The US economic outlook is under threat as government shutdowns prompt rising fears of job losses. Paul Donovan from UBS highlights that the implications of potential firings among federal workers could amplify insecurity around unemployment, thereby affecting consumer spending habits. Such trends are critical, as confidence remains a significant driver of economic activity and could deter growth even if the immediate fiscal impact appears limited.
The linkage between fear of unemployment and changes in consumer behavior is well-documented; a high level of uncertainty generally leads to increased savings and reduced spending. UBS notes that the size of the federal workforce is relatively minor in the grand economic scheme, yet the social fabric—once frayed—could lead to distorted economic activity, drawing concerns for future growth phases in the US economy.
Where it sits in our coverage
Our consensus target for the USD remains at 1.075, with a range of 1.04 to 1.12 across firms. Specifically, jpmorgan has a target of 1.10 for a March 2026 horizon, while bofa sees a lower target at 1.04, indicating a potential divergence in expectations regarding dollar strength amidst the ongoing fiscal concerns.
This current outlook aligns with the sentiment reflected in our coverage, albeit leaning towards a more cautious stance than the broader consensus portrayed by jpmorgan and others, whose targets position higher than currently reflected market conditions.
How other firms see it
Several firms, including jpmorgan and citi, maintain a bullish stance on the USD, reflecting confidence in recovery trajectories. In contrast, firms like bofa present a more cautious outlook, potentially sensitive to employment and political developments.
Traders should remain alert to USD pairs, particularly focusing on USD/EUR movements as fiscal uncertainty plays a pivotal role in currency valuations.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Government shutdown risks highlight psychological impact on US consumer sentiment.
- 02Fear of unemployment could influence spending behaviors significantly.
- 03Fed policy remains distinct from immediate fiscal challenges, although uncertainty lingers.
- 04Consensus targets show a divergence in outlook across major firms.
Market implications
Monitor USD/EUR levels closely, particularly as market sentiment shifts in response to fiscal developments. Current key levels to watch are positioned around 1.075 as a critical psychological point.
Risks to this view
The reversal of this outlook would hinge on a swift resolution to the government shutdown, alleviating fears of widespread job loss and restoring confidence in economic stability.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time, on Thursday the 2nd of October. The US government shutdown continues, with Senate Republicans, overnight, failing to pass legislation to end the situation.
US President Trump has indicated that, rather than just being furloughed, some federal government workers may be fired this week. The legality of such a move would almost certainly be challenged, but courts take time to decide these things, and if people do lose their jobs in the interim, the fear of unemployment amongst federal workers is likely to increase. Fear of unemployment has been the dividing line between the current rather mediocre US economic situation and the risk case of a more significant economic downturn.
Fear of unemployment broadens the impact of labour market weakness, as if you know someone like you who has lost their job, you are more inclined to change spending habits and increase savings out of insecurity over your own employment prospects. In addition, those parts of the economy that rely on government interaction may experience increased uncertainty, changing the behaviour of companies. However, the US federal government is small, and it employs a relatively small number of people.
Firing federal workers would raise recession risks, but in a modest way. The US Supreme Court has affirmed that Fed Governor Cook should stay in their job pending a court hearing in January. This does not change the Federal Reserve's policy outlook in the near term.
Cook was part of the near unanimous decision to lower rates a quarter point last month and is on the more dovish side of the Fed spectrum. The bigger issue of whether monetary and quantitative policy remains independent of the electoral cycle is something that is unlikely to affect market pricing immediately. This issue has a bearing about the use of the dollar as a reserve currency, confidence in the long run of the bond market, and so on.
The concern would be that a Fed that is swayed by political considerations might allow higher inflation, and whether or not that actually happens, the fear would add an inflation uncertainty risk to bond yields. But an interim court ruling doesn't really affect these matters. They are structural, longer-term considerations.
Euro area inflation yesterday rose, but as expected by the market, and, just as relevant, by the ECB. By definition, the year-on-year change in inflation says as much about prices a year ago as it does about prices today. And this increase reflects the end of higher energy prices a year ago.
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