UBS On-Air: Paul Donovan Daily Audio 'Panem or Panglossian?'
The desk interprets recent comments from UBS's Paul Donovan as an indication that U.S. consumer sentiment reports are becoming increasingly distorted by partisan narratives, which may affect short-term market reactions. Donovan highlights a significant drop in the Conference Board consumer confidence index, asserting that this decline does not necessarily reflect the underlying economic outlook. Concerns around rising consumer prices and potential tax threats underscore a complex tapestry of uncertainty facing the U.S. economy, impacting both consumer behavior and investment sentiment. Per the full note , unless these distortive effects are addressed politically and economically, they could hinder growth projections despite limited immediate impact on growth metrics.
What the desk is arguing
The desk argues that consumer sentiment surveys, particularly in the U.S., are increasingly skewed due to partisan political influences, as noted by UBS in their latest economic commentary. Although the recent drop in consumer confidence may appear alarming, it should be viewed with caution due to its politically charged context.
Donovan mentions escalating concerns like soaring egg prices and erratic governmental decisions that could further unsettle consumers and impact their spending habits. By illustrating these economic stressors, he sheds light on the broader narrative that could disrupt long-term growth outlooks in the U.S.
Where it sits in our coverage
In our cross-firm consensus, the target for the USD/EUR pair sits at 1.075 with a range between 1.04 and 1.12, supported by firms such as: - jpmorgan: Target 1.10 (Mar26) - bofa: Target 1.04 (Mar26)
This stance aligns with jpmorgan, which advocates for a more bullish outlook on the USD given the potential for market volatility from consumer sentiment fluctuations, with a more pessimistic view from bofa suggesting a tighter range of 1.04.
How other firms see it
The broader market appears split; firms like jpmorgan and citi support a bullish USD sentiment, highlighting positive growth metrics in contrast to the bearish outlook from bofa and goldman sachs who cite risks associated with consumer sentiment and inflation concerns.
The USD and EUR dynamics could be profoundly affected as markets navigate through uncertainties stemming from inflation, alongside potential shifts in Federal Reserve policies and employment data releases, as these factors interlink with consumer sentiment assessments in the U.S.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Consumer sentiment is increasingly distorted by political narratives.
- 02The recent drop in confidence indicators may not reflect true economic conditions.
- 03Increased consumer prices are raising uncertainty.
Market implications
Traders should monitor the 1.075 level closely, as a decline through this point could indicate weakening consumer sentiment is gaining traction in markets. Additionally, shifts in positioning leading up to key employment data could also offer insights into market sentiments in the coming weeks.
Risks to this view
A more decisive market reaction would likely emerge if economic data points, such as inflation readings or employment figures, show unexpected weaknesses that align with the consumer sentiment trends. Should consumer confidence recovery indicate a more stable economic outlook, it could contradict current bearish perceptions.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 5.30 in the morning London time on Wednesday the 26th of February. U.S. equity markets seem to have been a little upset by the sudden drop in the U.S. consumer confidence measure published from the Conference Board yesterday.
However, this does seem to be an overreaction, at least on this data release alone. We know that political bias has made sentiment survey evidence even more useless than it normally is. One set of media tells its viewers that they're living in a version of Panem from the Hunger Games, only without the fun bits.
Another set of media tells its viewers that they're living in a Panglossian paradise and all is for the best in this best of all possible worlds. If surveys capture more viewers from one cable news channel than another, they will end up with a distorted view of the world. This does not mean that the United States' economic outlook is without risk.
Perceptions of inflation may disrupt consumer sentiment. U.S. President Trump has presided over soaring egg prices.
There is of course nothing they can do about that in the short term, but particularly after an election campaign full of promises on prices, it affects consumers' sense of well-being. The uncertainty deters investment, which does not affect near-term growth, but adds uncertainty about long-term growth. A random threat to tax U.S. consumers of imported copper appeared yesterday.
Some consumers may have adjusted their behaviour in the face of repeated threats to hike taxes on their spending in the form of tariffs. The rather random nature of job losses from the federal government risks disrupting the private sector by reducing the efficiency of government operations. But these have been evolving concerns and have a bearing over longer-term growth.
These risks need to be assessed in the right of legality, rule of law, and how many policy threats actually turn into policy reality. On the subject of policy uncertainty, U.S. House Republicans struggled to pass a vote on an initial budget resolution overnight.
Wavering Republicans were brought into line and deficit-enhancing proposals have been passed, implicitly cutting the Medicaid health care programme and reducing taxes. Markets had assumed that things like extending the 2017 tax cuts due to expire this year would be continued. The main risk is that some of the more fictional fiscal savings being cited are somehow incorporated into future budget plans, which would increase the deficit when exposed to the harsh light of economic reality.
The bond market seems quite unlikely to be convinced that a statement from Trump's mega-donor Musk equates to an actual fiscal position. The extent of opposition to increasing the deficit will be the focus as the process moves to the Senate, reconciliation, and then the committee stages. The data calendar is remarkably quiet today, which is always a little troubling.
Quiet data calendars encourage undue focus on random political comments, and even in normal times that's never really desirable. There are consumer sentiment figures for France and Germany, and it's a bit of a struggle to get too excited about those as they're subject to the same issues as the United States, only perhaps with a little less media polarisation. That's all for today, have a good day.
Bye.
Sources & References
How we cover this story