UBS On-Air: Paul Donovan Daily Audio 'Pricing imprecision'
The UBS commentary highlights that the recent U.S. consumer price inflation data does not signal immediate policy easing from the Federal Reserve, thus providing a clearer view of the inflation landscape. With imputation rates for price measurements at a record high of 40%, as noted by Paul Donovan of UBS, this introduces uncertainties regarding the actual inflation narrative. Per the full note, the market is left to navigate these imprecisions, particularly amid surging grocery prices and electricity rates which could strain consumer sentiment further. This broader context suggests traders should remain attentive to inflationary signals and Fed rhetoric as we proceed deeper into the first quarter.
What the desk is arguing
The UBS analysis argues that December's CPI data does not push the Federal Reserve towards immediate rate cuts, as the numbers were broadly inline but hint at upward pressures on the PCE deflator. Specifically, the imputation rate of 40% underscores significant quality issues in the inflation data, which could complicate the Fed's decision-making process in the near term.
The notable increases in grocery prices by 0.7% month-on-month are significant, marking a concern for affordability which may influence public sentiment and political focus. This could result in the Fed being cautious in its forthcoming policy strategy, potentially keeping rates stable longer than initially anticipated.
Where it sits in our coverage
The current consensus target for the USD/CAD sits at 1.075, with a range from 1.04 to 1.12. Notably, jpmorgan forecasts a target of 1.10 by March 2026, aligning with the general sentiment that inflation pressures persist.
Our desk reads this commentary as consistent with the broader consensus, suggesting stability in monetary policy amidst inflation concerns. The expectations hover around the middle of the respective firm targets, implying a cautious approach from traders in anticipation of future data releases.
How other firms see it
Firms like jpmorgan and bofa reflect diverging views on inflation and its implications for Fed policy, illustrating different approaches towards the potential for Fed rate adjustments. While jpmorgan aligns with an outlook suggesting sustained rates, bofa contends that downward pressures may allow for easing possibilities sooner.
This reflects differing takes on the potential trajectory of USD/CAD as it intersects with both inflation insights and Fed policy actions. It will be important for traders to monitor these dynamics closely.
What the calendar says
With no significant events scheduled in the immediate future, traders should focus closely on future inflation prints and comments from Federal Reserve officials, particularly around any congressional testimony or release of further economic data in the coming weeks to align their positioning decisions.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US consumer price inflation data suggests no immediate Fed rate cuts.
- 02Record high 40% imputation rate raises concerns about inflation data quality.
- 03Grocery price surges are likely to influence public perception of inflation.
- 04Market focus should remain on inflation signals and Fed policy commentary.
Market implications
Traders should monitor the USD/CAD around the 1.075 mark, looking for potential reactions to inflation data and Fed commentary. The upcoming economic data releases could shift market sentiment, paving the way for positioning adjustments as the Fed's narrative evolves.
Risks to this view
A sudden upward shift in actual inflation data, or aggressive remarks from the Fed regarding a tightening bias, could prompt a reevaluation of current positioning. This risk remains heightened, especially if food and energy prices continue to surge unexpectedly.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 6.30 in the morning London time on Wednesday the 14th of January. Yesterday's US consumer price inflation data was not a trigger for a rush to easing policy on the part of the Federal Reserve.
The report was more or less in line with expectations, but the composition hints at some upward pressure on the Personal Consumer Expenditure Deflator, which is, by repute, the Fed's favoured inflation measure. A couple of points stood out from the data. First is quality issues. 40% of prices were imputed.
That means the price was not measured where it was supposed to be measured, and a less precise price is chosen as a substitute. A 40% imputation rate matches the record high for this level of imprecision, and it's not a great indication. Second are the political issues, with allowances for the fact that the data is less precise.
As reported, the prices that people notice are rising, even accelerating. Food consumed at home, referred to as groceries by some people, soared 0.7% on the month. Grocery price increases like that have not been experienced for some time, and that is something that strongly influences inflation perceptions, and thus a sense of an affordability crisis.
Electricity prices moved less in aggregate, but in some regions, notably the North East, they're surging. This means that the political focus on affordability is likely to continue, and voters are likely to keep ranking affordability as a top concern. China's December trade data showed additional strength in exports, measured in dollar terms.
This is not especially surprising. Outside the United States, the rest of the world is trading more or less as normal, and with new OECD consumers generally willing to spend, products that are assembled or manufactured in China will be in demand. The US-non-US breakdown needs to be treated with caution, however.
US importers are keen to avoid the fiscal burden of tariffs, and at least 20% of China's exports to the States would appear to be being rerouted via other third-party countries. US data dominates the calendar for today. Producer price inflation for November adds to the information about the personal consumer expenditure deflator.
It's also useful in assessing the extent to which US manufacturers have chosen to use tariffs as an excuse to raise prices rather than to raise market share. There will be quality issues with the data related to the shutdown for these numbers. November US retail sales figures should put in an OK showing.
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