UBS On-Air: Paul Donovan Daily Audio 'Market and non-market inflation forces'
The desk believes recent inflation data from China points to a shift in how global price pressures are influencing the domestic economy, rather than a surge in local demand. Per the full note , August saw a slight uptick in inflation, suggesting that while commodity prices are beginning to permeate into local pricing in China, domestic demand remains subpar. Market watchers should keep an eye on how these inflationary pressures evolve, as they may impact broader regional FX dynamics and commodity prices moving forward.
What the desk is arguing
The desk argues that the recent uptick in China's inflation data highlights the influence of global commodity prices rather than improving domestic demand. Per the commentary from Paul Donovan at UBS, the rise in consumer and producer prices still falls short of indicating robust local demand; instead, it's more about allowing external price pressures to seep into the domestic realm.
Specifically, while consumer prices rose slightly, the average print remained far from what would typically signal economic strength. For instance, pork prices show less deflation than before, yet remain indicative of ongoing issues within the agricultural sector. This paints a picture of an economy that is cautiously managing external influences rather than one buoyed by strong domestic consumption.
Where it sits in our coverage
Our consensus target for the currency pair in question is 1.075, with a range from 1.04 to 1.12. Specifically, jpmorgan holds a target of 1.10 for March 2026, while bofa is positioned at 1.04 for the same tenor.
This view of rising inflation in China influences sentiment among traders, aligning with the bullish stance from jpmorgan while diverging from the more cautious take from bofa. The desk maintains a viewpoint that falls closer to the upper end of the consensus range due to these evolving inflation dynamics.
How other firms see it
There is general alignment among firms like jpmorgan and deutsche that rising inflation could lead to stronger respective currencies, suggesting underlying optimism amidst external pressures. Conversely, firms such as bofa and citi exhibit caution, indicating skepticism about sustained inflationary impacts in the context of lackluster domestic demand.
Key indicators to monitor include the USD/CNY exchange rate, which is sensitive to developments in China's economic indicators, alongside broader trends in commodity prices, particularly crude oil—a major global driver of inflation dynamics.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01China's inflation rose slightly in August, driven by global commodity prices rather than robust domestic demand.
- 02Pork prices in consumer indices are falling less sharply, suggesting persistent inflationary issues.
- 03Political elements in the US, particularly around energy prices, may raise domestic inflation concerns.
- 04The observed inflation trends may influence FX market sentiment, particularly with regards to the USD/CNY pair.
Market implications
Traders should closely observe the USD/CNY pair for signs of volatility linked to these inflation dynamics. A breach of the 1.075 level may signal a stronger outlook for the yuan as global inflation pressures evolve.
Risks to this view
If domestic demand in China begins to show surprising resilience, that could invalidate current bullish assumptions regarding inflation. Additionally, unexpected geopolitical developments influencing commodity prices could shift market dynamics significantly.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Wednesday the 9th of September. China's inflation data for August was just slightly higher than had been expected, notable primarily because deflation has been such a dominant issue in China of late.
Some of this was simply due to less deflation. In the consumer price data, for instance, pork prices were still falling, but falling less than they did in July. The government signalled that some of the modest rise in inflation was due to the fact that some global commodity prices have been allowed to work their way through, particularly into producer prices.
Overall, this is not giving any convincing signals about improving domestic demand, which has remained mediocre at best, and it seems more a reflection of the government cautiously allowing global forces to trickle into the domestic economy. Oil prices are continuing to increase, with the Brent crude oil future straining to reach $100 a barrel in the wake of increased military action between Iran and the United States and attacks on Saudi Arabian facilities by the Houthi. US gasoline and diesel prices remain at very high levels, and this is starting to attract media attention.
That's relevant because the politics around domestic energy prices in the States will be a factor that may weigh on the decisions of how to prosecute the war. While it would be isolated cases and dependent on local taxation policies, some parts of the United States could conceivably reach $10 a gallon diesel. That would certainly heighten the political debate, but also raises a practical problem of whether US gasoline price signs are physically capable of showing double-digit prices.
US President Trump's executive orders yesterday, banning some Canadian goods from the States, were focused on alcohol and motorcycles. This marks another escalation in the trade war, but one with subtly different implications from Trump's earlier policies of aggressive tariffs. Tariffs have tended to be passed through to the consumer quickly and completely.
There is a direct impact to the US affordability crisis, therefore. However, a ban on imports simply means shortages in the first instance. In effect, Canadian goods cannot be bought, at least legally, at any price.
The impact on the cost of living then depends on how other suppliers of goods respond. Do they take advantage of the absence of a Canadian competitor to increase prices, or do they keep prices unchanged under the assumption that Trump will retreat from this position before too long? A US company would not want to risk alienating consumers by raising prices if Canadian competitors return within a week, for instance.
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