UBS On-Air: Paul Donovan Daily Audio 'Rate cut speculation'
The current discourse surrounding a potential December rate cut, as advocated by Federal Reserve Governor Waller, indicates an underlying concern for US labor market stability and overall economic health. Per the full note from UBS, Waller's remarks highlight the delicate balance the Federal Reserve must maintain between stimulating growth through monetary policy and addressing rising inflationary pressures and employment fears. The market's reaction suggests a nuanced sentiment, where interpretations may vary based on confidence in the economic recovery trajectory versus inflationary dynamics. As economic indicators are released today, including retail sales and producer price inflation, these will provide critical context for gauging market expectations and Fed policy shifts moving forward.
What the desk is arguing
The desk views the potential for a December rate cut as a double-edged sword; while it signals an attempt to bolster economic activity, it raises red flags regarding employment health. Waller's reference to labor market concerns underscores the fragile state of consumer sentiment and spending, which is critical in the context of inflation trends. This aligns with the UBS insights indicating a reliance on robust labor conditions for sustained economic growth.
Historical data releases, including September retail sales and producer price information, are pivotal; both are expected to provide clarity on consumer spending habits amidst rising inflation. As Donovan noted, a slowdown in consumer behavior or job security fears could necessitate a more aggressive monetary policy response from the Fed, shaping market expectations significantly.
Where it sits in our coverage
firmId targets reflect a range of opinions on future price movements, with analysts positioning around 1.075 for the EUR/USD pair. The following firms contribute to this outlook: - jpmorgan: target at 1.10 for Mar26 - bofa: target at 1.04 for Mar26
The desk's alignment with jpmorgan places it at the upper bound of the spectrum, highlighting a more optimistic economic recovery view compared to bofa, which adopts a more cautious stance based on current data.
How other firms see it
Group aligned firms, like jpmorgan, are supportive of a proactive monetary policy response to bolster market conditions. Conversely, bofa presents a contrary stance, warning of overheating risks due to potential rate cuts. This divergence in forecasts reflects the broader uncertainty around inflation measures and consumer behavior patterns following government interventions.
Given the current sentiment, expect fluctuations in pairs such as USD/JPY that could provide additional insights on market risk versus reward. Central bank actions will greatly influence these movements as job growth figures are evaluated against rising inflation rates over the coming weeks.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Federal Reserve Governor Waller's advocacy for a rate cut emphasizes concerns about the labor market.
- 02Economic stability hinges on the balance between consumer spending, inflation management, and employment figures.
- 03The market reaction underscores uncertainty as historical data will gauge economic sentiment ahead of Federal Reserve decisions.
- 04Strong retail sales could mitigate fears, but any weakness may trigger a more aggressive Fed response to support growth.
Market implications
Investors should monitor the release of retail sales and producer price index numbers closely, particularly for signs of consumer behavior changes that may influence Fed policy. A significant deviation from expectations could push the EUR/USD near key levels of 1.075, influencing technical positioning.
Risks to this view
Should employment figures show unexpected strength or retail sales outperform forecasts, it could lead to an upward revision of growth expectations, thereby dampening the urgency for a December rate cut. Conversely, if inflationary pressures exceed Fed targets with sluggish growth, it would counteract the likelihood of further cuts, forcing market recalibrations.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management at 7 o'clock in the morning London time on Tuesday the 25th of November. US Federal Reserve Governor Waller, who US President Trump is considering as a candidate for Fed Chair, supported Trump's calls for more rate cuts yesterday. Waller advocated a December rate cut, which got markets somewhat excited, although Waller justified this with suggestions that the US labour market might perhaps be in trouble.
The increase in US consumer prices that has taken place since the 9th of April has been paid for by households cutting their monthly savings. That sort of thing requires a firm labour market, or at the very least a low fear of unemployment. So, if Waller is right, the US economy is at quite significant risk and this should be a major concern for financial markets.
If however this call is merely a subtly described cry of pick me, pick me, aimed at Trump, then markets will focus on the benefits of monetary accommodation and not the mooted risks it is purportedly offsetting. There are some historical data points out of the States today with the release of September retail sales and producer price inflation figures. Both of these still have some use.
The retail sales numbers show where the consumer is generally positioned and hint at the level of fear of unemployment. It's worth noting that credit card use statistics suggest that both the middle income and higher income groups in the States have continued to spend more or less happily, although not all of that spending would be captured by retail sales. Producer price inflation is useful as an indication of second round inflation effects arising from tariffs.
If US manufacturers have chosen to go for expanded profit rather than expanded market share, they may have raised prices as tariffs were imposed on buyers of foreign goods. That is something that might then add to the inflation concerns of the Fed, as the more the second round effects become apparent, the more likely it is that inflation will last for longer. It was second round effects that made transitory inflation more enduring a couple of years ago.
German final GDP for the third quarter offered no surprises in the headline numbers. Private consumption was revised to negative from positive, however, and it does seem that the government has had to do a little bit more of the heavy lifting to engineer growth. German exports fell on the quarter, but with the export boom that occurred in the first half of the year in anticipation of US consumers having tariffs imposed, this was hardly surprising.
The willingness of German companies to invest is likely to be seen as a more positive characteristic of the data. There is a smattering of confidence opinion poll data cluttering up the calendar today. Yesterday's Dallas Fed manufacturing poll contained the predictable hilarity in the comments section.
Although either because of a Democrat bias or because surveys tend to be filled out by people who want to complain, or because of genuine economic shifts owing to the government lockdown, there was a sense of companies still refusing to make any kind of expansionary decision. US consumer confidence is due today. The UK has the Confederation of British Industries Retail Sales Survey, which may also be subject to political posturing ahead of the government's budget.
High profits do not seem to have stopped retailers' shrill complaints about any and every possible fiscal move in the UK. That's all for today. Have a good day.
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