UBS On-Air: Paul Donovan Daily Audio 'Revisions, resilience, and affordability'
The desk identifies that the recent U.S. employment report underscores the volatility of labor data, leading to reduced expectations for monetary tightening. As noted in the UBS commentary, the ongoing affordability crisis amidst stagnant wage growth suggests demand will remain resilient, despite central banks' cautious stances. This balancing act makes the market outlook uncertain yet tepid, with a clear signal from the Fed being crucial to clarify future rates. Per the full note, the reliance on revisions reiterates the need to critically analyze economic data as we move forward.
What the desk is arguing
The desk frames this as a significant moment in understanding U.S. consumer behavior influenced by data revisions and rate expectations. Paul Donovan's insights from UBS highlight that markets initially reacted to the employment report by adjusting rate hike prospects downward, revealing the disconnect between data and investor interpretation.
While the employment numbers suggested limited wage growth, which combined with high inflation perceptions hints at a deteriorating standard of living, Donovan argues that consumers still possess the ability to draw down savings to sustain spending—for now. The labor market thus continues to play a pivotal role in shaping Fed policy expectations.
Where it sits in our coverage
In our internal coverage, the consensus target for USD/JPY sits at 1.075, with a range between 1.04 and 1.12. Among specifically tracked firms, we note the following targets: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk’s outlook closely aligns with jpmorgan’s stance, slightly above the consensus midpoint but divergent from bofa's lower target, indicating optimism about sustained consumer spending amid persistent inflation.
How other firms see it
Most firms agree with the desk's view that stagnant wage growth could limit inflation's second-round effects. However, bofa holds a contrary stance, anticipating weaker consumer resilience.
Watch USD/JPY as it reflects the Fed's decisions and consumer sentiment following the U.S. employment data revisions. The trajectory of the greenback will likely hinge on inflation indicators and the ongoing affordability crisis, impacting extensive risk asset portfolios.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The U.S. employment report indicates significant data revisions impacting market rate expectations.
- 02Despite stagnant wage growth, consumer spending may remain resilient due to the ability to spend savings.
- 03The Fed’s guidance will be crucial in shaping future interest rate landscapes.
- 04The affordability crisis may continue to pressure consumer sentiment and economic stability.
Market implications
Traders should monitor USD/JPY, focusing on resilience around the 1.075 level as a crucial pivot point. Upcoming Fed comments may provide critical insights into future rate trajectories, influencing positioning and sentiment.
Risks to this view
A reversal in this outlook could occur if significant economic data suggests robust demand, prompting the Fed to signal more aggressive rate hikes, or if consumers markedly decrease spending due to worsening affordability.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Monday the 5th of October. What did financial markets learn from last Friday's US employment report?
Obviously, the answer should be not much. The numbers showed that data is frequently revised and not to be trusted in real time. But if markets listened properly to economists, that is something that would be well understood already.
Sadly, markets are not always rational entities and economists are often ignored with inevitably dire consequences for humanity. The general reaction to the latest random numbers from the US labour market was to significantly lower the chances of rate increases this year. If you take the labour numbers at face value, there's some logic to this.
The employment report emphasises that there is little chance of second round inflation effects emerging in spite of the clear affordability crisis in the United States. Wage growth, after adjusting for inflation, is likely close to zero and with inflation perceptions higher than actual inflation, the feeling will be that living standards are deteriorating. However, the US consumer has the ability to cut back on savings to finance consumption and indeed has more ability to cut back on savings in the wake of some other data revisions.
That suggests that while cost pressures will not abate in the United States, demand is not going to fall off the edge of a cliff quite yet. The wily EQOT moment comes only when US consumers are either unwilling or unable to reduce their savings further. There has been some guidance on US monetary policy from members of the Federal Reserve.
US Fed Chair Walsh's refusal to offer guidance means that other members of the central bank just assume greater prominence and Walsh fades into well-deserved obscurity in the background. Comments from the likes of New York Fed President Williams have further supported the idea of perhaps one more rate hike this year. This is still an unnecessary hike that will not affect inflation or growth particularly in the States, but this hike will demonstrate, in the view of the Fed, that the last hike was not a mistake, even if the last hike was, in fact, a mistake.
Nothing says we know what we're doing in monetary policy quite like doing it again. In politics, the Brazilian presidential election first round gave a two-point lead to the right-wing challenger Bolsonaro. Incumbent President Lula and Bolsonaro now head to a second round of voting.
Markets are likely to position for a Bolsonaro victory given the surprise lead in the first round and the fact that voters from other candidates seem more likely to shift their support to Bolsonaro. The global impact of this is relatively slight, although the anti-incumbent trend of global politics is somewhat reinforced. French politics seems to be getting perhaps disproportionate attention at the moment, with much hand-wringing about the French fiscal position.
France's debt-to-wealth ratio remains relatively favourable, especially when compared to countries like the United States, but it's not a time to let facts get in the way of a good story. The financial media wants a sensational story, and looming presidential elections add to that narrative. The narrative might be affecting the euro, which has weakened, although that story needs to be treated with some caution.
Because the euro area is a current account surplus area, the value of the euro is driven by the willingness of Europeans to sell their currency and invest overseas, and domestic investors tend to understand their politics better than do international investors. That's all for today, have a good day. In the USA, UBS Financial Services Inc. is a subsidiary of UBS AG and a member of FINRA-SIPC.
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