UBS On-Air: Paul Donovan Daily Audio 'Payrolls without precision'
Per the full note source, the upcoming US employment data for August is expected to reflect deteriorating market conditions, but without a significant impact on middle-income consumer spending. The desk acknowledges that while data collection has become increasingly unreliable, this backdrop suggests a slow economic decline rather than an outright collapse, which reinforces the potential for a Federal Reserve rate cut. In light of these factors, positioning is crucial as traders navigate potentially imprecise data prints ahead of future policy decisions.
What the desk is arguing
The desk views today's US employment report as a vital indicator, albeit one fraught with data quality concerns. Paul Donovan from UBS highlights that falling response rates to surveys and diminished funding for data collection suggest that current readings may not accurately reflect the state of the labor market. This signals that although conditions are weakening, they are not severe enough to materially impact consumer behavior in the short term.
Historically, weak labor market indicators coupled with stagnant wage growth might signal an impending rate cut from the Federal Reserve. Donovan asserts that today's data is unlikely to derail this expectation, even if it presents an imprecise picture. The increasing employment of native-born workers contrasted with declines for migrant workers underlines the nuanced shifts in the labor landscape that could ultimately justify a dovish Fed stance.
Where it sits in our coverage
Currently, our consensus target for the USD/EUR pair is at 1.075, with a range from 1.04 to 1.12. For example, jpmorgan is aligned with this view, targeting 1.10 for Mar-26, while bofa projects a more conservative target of 1.04 over the same horizon.
This point of view aligns with the broader market expectation that economic indicators will lead the Fed towards a more accommodative monetary policy, positioning the desk within the upper range of expectations among tracked partners.
How other firms see it
Firms such as jpmorgan and ubs seem to share the desk's perspective on potential labor market weakness signaling dovish Fed movements. In contrast, bofa holds a more cautious outlook, anticipating a tighter monetary environment, which could contribute to volatility for pairs like EUR/USD and USD/JPY as market responses unfold.
Particularly, fluctuations in USD/JPY could indicate how risk sentiment is shaped by labor data impacts and Fed policy responses, making it a currency to watch closely.
What the calendar says
No high-impact events are scheduled in the next 30 days for this jurisdiction, so traders should carefully monitor upcoming labor data releases and Fed communications for potential shifts in market dynamics.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US employment report reflects deteriorating conditions but stable consumer spending.
- 02Unreliable data suggests risks for Fed rate decisions, pointing towards possible cuts.
- 03Strategists advocate vigilance ahead of labor data amidst varying perspectives in the market.
Market implications
Monitor USD/EUR around the consensus target of 1.075, as any deviation could indicate broader market sentiment shifts. Traders should also be aware of upcoming labor data releases which will likely influence Fed decisions.
Risks to this view
A surprising positive employment report could prompt a reassessment of the Fed’s dovish stance, forcing the desk to reconsider its outlook. Additionally, if consumers start to behave differently in response to economic signals, this could further complicate demand forecasts.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management at 7 o'clock in the morning London time on Friday the 5th of September. The US Employment Report for August is released today, along of course with the revisions for previous months. This data quality, along with most data quality in the United States, has been deteriorating for some considerable time.
People do not answer surveys. The world is changing rapidly. It costs money to understand a rapidly changing world and the US has not invested in collecting data.
That combination means that today's release will give an imprecise view of the US labour force but the imprecisions should not be biased and data is collated in an objective way. There is an overall sense of the US labour market taking a large number of imprecise data sources to bring together a narrative and that sense is of a labour market that has deteriorated over the course of this year but not in a way that is likely to cause middle income consumers to dramatically change their spending patterns. That signals economic slowdown, not economic collapse.
It also probably signals a US Federal Reserve rate cut. Fed Chair Powell's insistence on data dependency means that a single rogue number today could derail that expectation but the default position has to be that concern about US growth deterioration will outweigh concern about rising inflation pressures. What today's data cannot be relied upon for is any detail.
As one example, recent employment data has shown a significant increase in native born US workers gaining employment and declining employment for workers who have migrated to the United States. That however is a survey based evidence. It is increasingly unlikely that anyone asked a question by a government employee is going to admit to being anything other than native born US worker.
This is one example of the problems of survey based evidence from anywhere in the world on any subject. Responses to questions will reflect what people feel they should say or they feel safe saying whether or not that is an honest answer to the question. Over in the United Kingdom, we have had the release of retail sales data for July, which was part of the UK heatwave episode.
The numbers are inflation adjusted and they were stronger than expected. UK consumers seem content to continue to spend in spite of the periodic doom laden predictions of retail lobbying groups. The filter, they would say that, wouldn't they?
Should generally be applied to such forecasts. There was a sharp increase in non-store retailing, which is generally online retailing and that probably reflects weather patterns. Clothing sales might be a reflection of the UEFA Women's Football Championship.
As a reminder of data quality issues, there were corrections to this year's releases relating to a seasonal adjustment calculation error. This does not change the overall narrative of the UK consumer doing OK and the changes also do not affect the reported GDP to date. The euro area delivers second quarter GDP data, an event of supreme indifference to financial markets.
No one expects the euro area aggregate number is going to change anything about policy or the economic outlook. It is one of the presentation problems that the euro continues to suffer from. Although policy is conducted across the glittering wonder that is the euro empire, most of the time the market fixation is still on national level data. 27 economists make up the Bloomberg consensus for the euro area data released today, compared to 50 estimates for the last US GDP release.
Even allowing for some possible sample bias here, the US is nowhere close to being twice as important as the EU in economic terms. That's all for today. Have a good day.
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