Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management, with 7 o'clock in the morning London time on Friday the 16th of October. US central bank policy is in focus again, with Federal Reserve Chair Walsh refusing to give forward guidance at the IMF meeting, and then giving forward guidance of a sort, but a forward guidance that has been shorn of some of its credibility. Walsh signalled no rush to raise rates at the October FOMC meeting.
On its own, the word of Walsh is not necessarily worth that much. The concern that the Fed Chair is a sock puppet still lingers in financial markets. However, this adds to comments from New York Fed President William, who is no one sock puppet, and so markets have been somewhat reassured on this point.
Less reassuring, Walsh still seems to believe in the productivity pixie of artificial intelligence, or at least is pretending to believe in the productivity pixie. The Fed has a delicate balancing act. It wants to move rates to the top of the neutral range, because that shows it is tough and intends to control an inflation that in reality it has no control over.
However, while the monetary policy testosterone is flowing, it does not want to veer into a restrictive monetary policy. The problem is that this is an attempt to engineer a precise landing without much precision in economic data in real time. Such a move would have been difficult 15 years ago, and it's much more complex today.
There are some warnings against going too far. US consumers have, for instance, continued to show their willingness to spend by using savings to counter the effect of tariffs and oil prices. But there are now some hints in the retail sales data that when companies pass on costs, there's a little more demand response nowadays than was the case in the first days of the current Gulf War.
There's nothing likely to derail the economy as such, but with no real income growth and a perception that real living standards are falling, the Fed needs to be very careful in this particular approach. There is some inflation data due today, albeit not necessarily of the first order of importance to investors. Final Italian consumer price figures for September will be ignored, as they're almost never revised from the flash data, and markets have already got the general idea that higher oil prices are the driver of the European inflation story.
While not tending to animate markets and the media, US import prices do give economists a frisson of excitement, because they're quietly exciting as data points. With so much of the shiny new toy of AI being imported into the United States, there is some relevance to technology import prices. As a reminder, these prices do not include the effects of tariffs which are paid after import by the importer.
The market AI narrative has also been of interest in recent days, meaning of interest economically. Yesterday's troubles in AI-related equities sparked a safe haven bid for bonds. That would seem to suggest that fears over fiscal policy should not be overplayed as a driver of recent bond moves.
To be a safe haven, an asset has to have at least the illusion of being safe, and fears of a fiscal implosion are not consistent with that illusion. Even French bonds had a good day, which rather emphasises the point. That's all for today.
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