UBS On-Air: Paul Donovan Daily Audio 'Policy discussion in a data vacuum'
The desk interprets the current political maneuverings in France as crucially impacting fiscal policy and investor sentiment, driven by Prime Minister Lecornu's indication of reduced fiscal tightening. Per the full note source, this compromise may bolster the stability of French assets, yet investors should remain cautious due to underlying risk premiums. Taken alongside recent Fed discussions on monetary easing amid ambiguous inflation signals, this backdrop complicates market dynamics as traders navigate potential shifts ahead. Notably, current US inflation metrics have been paused due to the government shutdown, leaving a gap in data that could influence future Federal Reserve policies.
What the desk is arguing
The desk believes that the political developments in France signal a potential easing of fiscal constraints, which might be viewed positively by investors. Prime Minister Lecornu's comments suggest a willingness among the National Assembly to pursue a more middle-ground budget, which could lessen the frequency of political turbulence in the near term.
Despite this optimistic sentiment, Paul Donovan of UBS flags that French assets may continue to attract a risk premium from investors, adjusting the market’s expectations surrounding fiscal policy. The commentary highlights how this evolving political landscape needs to be contextualized alongside the ongoing uncertainties related to US inflation data, which may directly impact currency valuation.
Where it sits in our coverage
Currently, our consensus target for the EUR/USD pair is 1.075, with a range spanning from 1.04 to 1.12. According to projections, jpmorgan aligns with our outlook, targeting 1.10 for March 2026, while bofa diverges by setting a more conservative target of 1.04 for the same tenor.
This view appears to align with the general consensus among coverage firms, positioning among the mid-range of expected outcomes. As a result, the desk's analysis is safely within the prevailing forecasts, suggesting stability within the European economic narrative in light of the potential political developments.
How other firms see it
Firms like jpmorgan and deutschebank are aligned with this interpretation, reflecting a broader optimism about French fiscal policy. Conversely, bofa maintains a more restrained outlook amid concerns regarding macroeconomic stability in light of recent US economic data.
Relevant currency pairs to monitor include USD/JPY, reflecting the potential impacts of shifts in US monetary policy as signaled by Federal Reserve discussions surrounding inflation and balance sheet considerations, which will ultimately intertwine with euro dynamics following French fiscal policy movements.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Political developments in France suggest a shift towards less fiscal tightening.
- 02French assets may maintain a risk premium, influencing investor behavior.
- 03The suspension of US inflation data adds uncertainty to the Fed's policy outlook.
- 04The interplay between European and US economic narratives is becoming increasingly complex.
Market implications
Traders should be attentive to potential price movements around the 1.075 level in EUR/USD, particularly as the implications of French fiscal policies unravel and as the market digests any forthcoming data from the US Federal Reserve. The evolving situation may prompt strategic positioning ahead of future monetary policy announcements.
Risks to this view
The call may be invalidated should unexpected economic data emerge from the US that significantly shifts the Fed's stance towards aggressive tightening, or if political instability in France escalates, leading to investor anxiety regarding fiscal policy and the stability of French markets.
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 October. In France, politicians are continuing to politic.
This week's Prime Minister, Le Corneau, has said that a majority of members of the National Assembly are prepared to keep working on a budget. That reduces the chance of yet another set of elections, and it also implies that President Macron may appoint a new Prime Minister later this week. The current suggestion is that fiscal savings would be reduced from the original plan.
There would be savings, relative to the backstop position of rolling over the current budget, but less than had previously been proposed. French assets will still command a risk premium from investors, but the bond market is likely to continue to function in an orderly manner. Amidst the data desert of the US government shutdown, the release of the US Federal Reserve minutes has provoked perhaps even more interest than is normal.
There was a sense of an actual discussion, with a let's go easing camp, a slow and cautious easing camp, and even a do we really need to ease this month faction. The upside risk to inflation was emphasised by a majority. US inflation data has of course been suspended at just the moment when the inflation impact of tariffs might be supposed to show up.
Any inflation impact would operate with an average delay of about six months. As expected, concerns over the labour market were voiced. The US labour market is clearly looking more fragile, though as yet it does not seem to be threatening recession-inducing fears of unemployment.
There also appeared to be an ongoing discussion about the appropriate size of the Federal Reserve's balance sheet. This is relevant in several ways, not least the fact that the balance sheet represents quantitative policy and the act of the Fed buying bonds matters to US fiscal costs. Overall, there is nothing too dramatic to alter expectations about Fed policy, but there is perhaps a little less certainty about the level of conviction.
The European Central Bank will be publishing the account of its last policy meeting later today. Markets are likely to be far less obsessed with that. German August trade data showed weaker exports than had been expected, but imports were even more weak, creating a better trade surplus.
That is not, however, a great combination for the future growth picture, even with positive revisions to past economic data. Of course, the August trade data is complicated by the considerable uncertainty that existed around US trade policy at that time. The broader picture of European trade will also remain a focus, with tensions growing again between the EU and the EU over US demands around technology regulation in Europe.
Europe, with arguably the largest middle-income consumer market in the world, has a global influence with its regulatory regime. This clearly is proving a point of some contention with the United States, and it might conceivably reignite threats of increasing tariffs on US consumers of EU product, adding further uncertainty risk to the US economy in particular. That's all for today.
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