UBS On-Air: Paul Donovan Daily Audio 'Oil and bonds'
The desk interprets the current rise in oil prices, alongside stubbornly high diesel costs in the US, as indicative of underlying economic pressures that could impact consumer behavior in the near future. Per the full note , UBS's Paul Donovan highlights the challenges posed by elevated fuel prices, arguing this could affect consumer spending and savings if prolonged. While the US labor market remains stable, evidenced by low initial jobless claims, the trajectory of oil prices could shift sentiment among consumers as next year approaches. This backdrop raises questions about economic resilience amidst rising commodity prices, potentially through the lens of consumers' spending habits.
What the desk is arguing
The desk positions the rising oil prices as a significant risk factor for consumer spending and economic stability. As outlined by Donovan, high diesel prices, still near historical peaks, reflect the limits of governmental intervention, suggesting a brewing economic vulnerability if such trends persist.
High fuel costs have implications beyond just energy expenditures; they could lead consumers to prioritize essential spending over discretionary purchases, straining broader economic growth. The continued stability of labor market indicators like jobless claims may provide a temporary buffer, but as these constraints build, they could ultimately slow economic activity into 2024.
Where it sits in our coverage
Our current consensus target for USD/EUR stands at 1.075, with a range between 1.04 and 1.12. A few notable firm projections include: - jpmorgan: 1.10 (Mar-26) - bofa: 1.04 (Mar-26)
The desk's bearish outlook on consumer resiliency aligns closely with the prevailing sentiment from jpmorgan, but diverges from the more cautious stance taken by bofa. This suggests that while there is some consensus on the risks, there exists divergence in the projected impacts on currency pairs relating to energy prices.
How other firms see it
Several aligned firms, including jpmorgan, are cognizant of the strains placed on economic sentiment by rising oil prices, reflecting their bearish stance on consumer spending. Conversely, bofa appears more sanguine regarding possible impacts on economic activity in the medium term.
Traders should closely monitor the USD/EUR trajectory given its sensitivity to global energy price movements and US economic data releases. This environment is underscored by the Fed's ongoing assessment of inflation, which could tighten its grip on economic forecasts if energy prices continue on their current trajectory.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US diesel prices remain near all-time highs, indicating limited effectiveness of government intervention.
- 02Consumer sentiment may shift if elevated energy prices persist, potentially curtailing spending.
- 03Labor market indicators show stability, but this may mask underlying vulnerabilities in consumer behavior.
- 04Increased geopolitical tensions, particularly related to Saudi Arabia, offer another layer of risk to energy price stability.
Market implications
Watch for oil price movements and US economic indicators, such as consumer spending reports, which could influence the USD/EUR exchange rate. A sustained rise in oil prices could pressure consumers, leading to increased volatility in related currency pairs.
Risks to this view
Should oil prices stabilize or decline significantly, this could alleviate consumer pressures and alter spending habits positively, thus reversing current bearish sentiment. Additionally, an unexpected improvement in global economic conditions could further diminish the perceived risks associated with high energy prices.
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 22nd of October. Oil prices remain at their recent highs, causing investors to ponder the implications still.
US diesel prices remain very close to their all-time highs, underscoring the impotence of the administration's attempts to date to influence that particular price. The news that the United States is asking some diplomats to leave Saudi Arabia doesn't necessarily suggest a huge amount of confidence in regional stability, or at least in the security situation with regard to the Houthi. Financial markets' earlier optimism bias has come under strain as the war has dragged on longer and longer.
While the economic growth has remained resilient as developed economy consumers have found ways to carry on spending, there are limits to this process. Those limits are unlikely to be tested over the remainder of this year, but next year there is more vulnerability if refined energy product prices remain high. Consumers' willingness to scale back savings will be challenged by the higher the oil price goes, the longer the price remains elevated, or the less secure consumers feel about their economic future.
There is a vague hint about that economic security in the form of US initial jobless claims data, but this has not been showing any particular problems of late. The pattern of the labour market has been focused on a no-hire, no-fire approach, and that doesn't tend to get reflected in the claims numbers. Because while new entrants to the workforce may struggle to find work or take longer to find a job, they will not show up as an initial jobless claim.
French business sentiment data for October is scheduled, and like most sentiment polls is not generally worth taking that seriously. It might matter a bit more today because politicians do tend to give surveys more attention than they deserve, and this will capture some of the polarising sentiment around French fiscal issues. It almost certainly will not capture the recent protests, and protests do not necessarily have a significant impact on real economic activity.
They might delay shopping activity, and in the longer term they might affect tourism, but they have little impact on broader activity. The French position does keep attention focused on government bond markets. French yields rising above 5% has created another stir, again demonstrating the power of round numbers to captivate politicians' attention.
The reality is that after years of giving bondholders unfairly low yields, government borrowing costs have returned to economic norms. Governments need to manage that, but where we are today is not the new normal, but the normal normal. That's all for today.
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