UBS On-Air: Paul Donovan Daily Audio 'Polls and politics'

Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 6 o'clock in the morning London time on Monday 3rd November. There are some business sentiment opinion polls due today, including the US ISM.

The danger with this data is that its message will be given unwarranted credibility by the absence of proper economic data. Falling survey response rates and increased political polarisation have conspired to undermine the reliability of survey evidence. Unfortunately, the frequency of surveys already means that they get more attention than they deserve.

Frequency bias means that we automatically pay attention to less important things that are paraded before us more often. Remove alternative US data sources and there is a temptation to say, well we'll use this inaccurate number because there are no accurate numbers available. There's also quite a lot of central bank speak today.

While ECB Chief Economist Lane should be listened to with the reverence that all chief economists naturally command, the real interest is likely to be in the US Federal Reserve's Cook and Daly. The very unusual three-way vote at the last policy decision, Fed Chair Powell's caution on the prospects of a December easing, and recent comments from non-voting Fed members disagreeing with the last rate cut, combine to raise questions about the future direction of policy. Financial markets, used to carefully scripted theatre productions around US monetary policy, will have to adjust to a performance that is more ad-lib nowadays.

Political noise will also have some resonance in financial markets. There are several state and local elections to be held in the United States tomorrow. Investors sometimes use presidential approval ratings and electoral performance as a signal for how well the economy is doing.

While it can be dangerous to extrapolate from local politics into federal politics, investors will start to think about the US mid-term elections next year and what that might mean for US fiscal policy in particular. One aspect of fiscal policy also comes under scrutiny, with the US Supreme Court to hear arguments about US President Trump's trade tariffs. This is not the ruling, of course, but the tone of the questioning at the hearing is something that will be hyper-analysed in financial markets.

The assumption is that if these tariffs are overruled, new tariffs will replace them under different authority, but that could still mean a sizeable tax rebate to US companies for the tariffs already paid, and a recalibration of what tariff rates are applied. That would also temporarily increase uncertainty amongst US companies again, although the economic impact of uncertainty should generally diminish over time. The OPEC Plus Group have announced that there will be a slight pause in official output increases in the first quarter of the year.

Oil prices have risen slightly on this, but it's not an economically significant move. Inflation forecasts are tending to assume a range trading oil price going into next year, and there's no reason to revise that yet. That's all for today.

Have a good day. Finma in Switzerland. It's subsidiaries, or affiliates, collectively referred to as UBS.

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