UBS On-Air: Paul Donovan Daily Audio 'Ninety one days'
The desk believes the Federal Reserve's recent signaling reflects a marked shift towards a more cautious approach to rate cuts, as noted in the latest minutes. While a rate cut was considered appropriate back in December, the Fed under Chair Powell is likely to pursue a slower pace for future reductions, with inflation trends dictating the pace into 2025. Per the full note from UBS, the prospect of inflation risks tied to proposed trade policies under the new administration furthers the complexity of the Fed's outlook.
What the desk is arguing
The desk posits that the Federal Reserve is transitioning to a more tempered strategy regarding interest rate adjustments. This following the release of the December meeting minutes highlights the ongoing indecision and evolving perspective under Chair Powell. According to UBS economist Paul Donovan, the current trajectory implies more modest, measured cuts focused on tracking inflation trends over the coming years.
Supporting this view, the Fed has indicated a likely reduction in rates as inflation decreases; however, the pace is expected to slow. The minutes also noted potential inflationary risks due to proposed trade taxes and deportations, although uncertainty surrounding these policies suggests they are not yet central to the Fed's deliberative process.
Where it sits in our coverage
Our consensus target for the relevant pair is set at 1.075 with a range spanning from 1.04 to 1.12. Key targets from notable firms include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk's view aligns with jpmorgan's target near the upper end of the range. This suggests a more cautious approach to trading might be warranted as other firms show more conservative estimates relative to the Fed's evolving messaging.
How other firms see it
Most firms appear to echo the cautious sentiment, with jpmorgan aligned on this outlook. Conversely, bofa reflects a more bearish stance on the potential trajectory of interest rates and economic conditions.
This sentiment has broader implications for the USD, particularly against other currencies sensitive to U.S. economic policy changes. Observers should also consider the behaviour of the EUR/USD trajectory, which is closely tied to Federal Reserve actions and inflation expectations.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The Fed is likely to slow the pace of rate cuts while focusing on inflation trends.
- 02Future inflation risks from proposed policies under the new administration add complexity to the Fed's decisions.
- 03Key targets from other firms indicate a spectrum of confidence regarding the Fed's approach to rate adjustments.
- 04The interplay between U.S. monetary policy and global economic factors remains critical for markets.
Market implications
For traders, closely monitoring the implications of U.S. inflation data as it relates to Fed policy will be crucial, particularly with the upcoming speeches from Federal Reserve officials. Watch for any sudden shifts in market sentiment, particularly if new data points emerge that could influence the expected pace of interest rate decisions.
Risks to this view
Should inflationary pressures unexpectedly surge due to the implementation of aggressive trade policies, this could necessitate a rapid reassessment by the Fed, invalidating the desk's current outlook. Additionally, significant shifts in economic data from key indicators could lead to market volatility and a reassessment of current positions.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Thursday the 9th of January. The minutes of the US Federal Reserve meeting are a reflection on the rather chaotic swings of the Powell Fed.
From an emergency rate cut without an emergency in September, we've arrived in December at the point where slowing the pace of rate cuts was considered appropriate. Economies rarely change that much in the space of three months or so, although to be fair there were revisions to historical data in that period. Where this leaves us is pretty much where we were before.
The Fed is likely to continue to follow inflation lower in 2025. That implies rate cuts, but it does imply a slower pace of rate cuts. The upside inflation risk of US President-elect Trump's mooted trade tax on consumers and large-scale deportations was cited in the minutes, but does not appear to have been a central focus of inflation discussions.
That is probably appropriate, as there remains considerable uncertainty about what policies will actually be implemented, and in the case of trade taxes, whether there are second-round inflation effects arising from reduced competition and profit-led inflation. There are five Federal Reserve speakers scheduled today who will presumably tend to reinforce the message of the minutes. China's consumer price inflation in December was essentially stagnant at 0.1% year-over-year growth.
Producer prices remained firmly in deflation territory. The weak headline inflation figure owed much to food prices. For a country at China's stage of development, food prices loom very large in the calculation of an inflation basket, and normalising vegetable prices did much to lower the headline inflation figure.
Non-food price inflation is positive, but still very low. The demand stimulus measures, to date, seem to have had relatively little impact on prices at least, although the expectation is that a more meaningful demand stimulus will come at some point in the future. The trigger for that is likely to be the Trump trade taxes.
In the UK, the British Retail Consortium's shop price index fell by more than expected, with non-food items moving further into deflation. This may owe something to the timing of the Black Friday discount episode, which has a moderate impact in the UK. What it does mean is that all of the newspaper articles bemoaning stagnant consumer spending, produced in the wake of the British Retail Consortium's store sales figures, will now need to be revised.
Using this information, it is clear that the UK consumer increased their purchases in real terms during the fourth quarter. This is a contrast to the general sense of China's situation. It's something of a comparison of good deflation and bad deflation.
In the UK, consumers are responding to falling prices with an increased volume of purchases. In China, it is less clear that falling prices would then lead to a stimulus in demand. Germany is offering a load of regional inflation figures, which are not especially relevant as we already have had national data.
Trade figures for November are also due. These have not traditionally been a focus for financial markets, at least not since the days of fixed exchange rates. But with the rise of economic nationalism, trade data can now become a rather imprecise weapon for politicians to use against other countries.
That's all for today. Have a good day. and published by the Global Wealth Management Business of UBS AG or its affiliate UBS. This material has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient and is published for informational purposes only.
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