UBS On-Air: Paul Donovan Daily Audio 'Revising history'
The UBS commentary highlights a significant complexity in the forthcoming US employment data due to substantial benchmark revisions, which are anticipated to cause confusion among market participants. Per the full note, the lack of explanatory briefings from the Bureau of Labor Statistics only exacerbates risks surrounding data misinterpretation. As economists and traders rely increasingly on time series data for market correlations, this presents challenges if the revisions skew the perceived health of the labor market. With no major calendar events in the next month, traders must remain vigilant in deciphering how these shifts influence currency valuations.
What the desk is arguing
The desk underscores the heightened likelihood of misinterpretations surrounding the US employment report due to notable benchmark revisions expected this month. This view is anchored in UBS's commentary, which suggests that the absence of BLS briefings could contribute to greater confusion in understanding labor market dynamics.
With errors in economic data rising, the potential for misinformation could skew perceptions, leading to policy missteps from authorities. The UBS analysis suggests that the revisions to estimates will derive from factors such as immigration trends and evolving workplace practices, adding another layer of complexity to investor assessments.
Where it sits in our coverage
Given our current consensus on the USD, we see a target of 1.075 for USD/EUR, aligned with estimates from several firms: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk's view aligns closely with the broader consensus, particularly echoing jpmorgan's more optimistic outlook while diverging from bofa's more cautious stance. The consensus suggests that the nuances in upcoming data could play a pivotal role in moving the USD in either direction.
How other firms see it
Market sentiment appears to be divided, with firms like jpmorgan and db expressing alignment with a bullish view of the USD on the expectation of positive employment data. Contrastingly, bofa suggests a more bearish perspective, wary of higher unemployment figures impacting growth.
Traders should monitor the EUR/USD trajectory closely, as shifts resulting from this month's employment data could have significant implications for both the ECB's policy decisions and the broader USD trend.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US employment data is due with significant benchmark revisions that could confuse market interpretations.
- 02The BLS's cancellation of briefings raises concerns over data integrity and potential politicization.
- 03Revisions are expected due to factors like changing immigration patterns and work practices.
- 04Traders should prepare for potential volatility as models using historical data may be impacted.
Market implications
Watch the immediate market reaction to the employment data. If revisions are more substantial than expected, a volatile response in the EUR/USD pair could occur, reflecting shifts in trader sentiment around US economic health.
Risks to this view
A significant catalyst for reversing this call would be a major downward surprise in the employment numbers, which could reaffirm fears of a slowing economy and prompt a shift in Federal Reserve policy expectations.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management at 7 o'clock in the morning London time on Friday the 7th of February. Today we get all the hype and hysteria of the US employment report, this time for January. But this month is a more complicated report.
We get the benchmark revision. And this is the month that the Bureau of Labour Statistics has decided to cancel all external briefings explaining the data. That seems to be a rather weird decision.
Errors in economic data are rising. The potential for misunderstanding data is increasing. And gaps between perception and reality are growing.
The benchmark revisions to data are significant and complicated events. This weirdness is unlikely to do anything to allay concerns that US economic data might become more politicised in the future. Poor data quality is already becoming a problem and political partisanship already creeps in to survey responses.
If the structure and formation of economic data were to become politically partisan, then the risks of policy error would rise and the credibility of US data in financial markets would fall. The benchmark revisions to the 2024 labour market data are presumably still free from partisan bias. They are expected to be quite sizeable.
Changes to estimates of immigration and changing working practices will be behind that. Aside from sowing near-term confusion, this also adds to the complexities that investors are facing. A lot of models of financial markets, whether large and complex or simple correlations, will compare market reactions to economic time series.
This is as it should be. Markets should always be central to everything, all of the time, and economists should be revered. However, nearly always, the time series will be the revised time series.
That is what any database will naturally download. That data is of course post-revision, and the revisions are generally quite large. What that means is that the economic data that markets react to in real time is very different from the economic data that sits in post-revision databases and is used to plot pretty charts against market performance.
That is a challenge for investors. Germany's December trade surplus was somewhat larger on stronger export growth, although imports are also growing. The German consumer is actually spending quite reasonably at the moment.
Stronger exports are, however, a politically sensitive issue at the moment, as US President Trump seems to need to have a scapegoat to focus on, and with the US retreat from taxing US consumers of Canadian and Mexican goods, Europe, and Germany specifically, must be considered to be vulnerable. With the German consumer giving some support, what has been letting down the German economy has been industrial production in part, which again came in weaker than expected. Car production apparently has been a drag, although shifting trends in car purchases with an apparent German consumer boycott of Tesla may have a bearing on this data as the year unfolds.
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