UBS On-Air: Paul Donovan Daily Audio 'Saving the US consumer'
The desk underscores the importance of US consumer savings amid ongoing inflation pressures, as highlighted by Paul Donovan of UBS. Key findings include the paradox of stable inflation readings contrasted with deeper savings utilization by households, a topic critical for assessing consumer resilience going forward. Per the full note , while the headline inflation estimates may fluctuate due to technical adjustments, the real-world implications of reduced savings have significant ramifications for consumption habits and economic stability. With our internally tracked targets suggesting a cautious approach, we aim to navigate the evolving landscape of US consumption dynamics.
What the desk is arguing
The desk maintains that the current state of US consumer savings holds paramount importance, overshadowing the recent inflation metrics. Paul Donovan's observations from UBS highlight that the reported inflation does not reflect the real struggles faced by consumers dealing with affordability issues daily.
According to the revised figures, the US household savings rate has indeed shown a higher starting and ending point than previously assessed, which may extend consumers' resilience in their spending habits. The implications of this are vital, as they indicate how much further consumers can draw down their savings before encountering significant financial strain.
Where it sits in our coverage
Our consensus target for USD/EUR sits at 1.075, which aligns with the cautious outlook from several firms, notably: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This position contrasts with the broader consensus, as jpmorgan targets the upper end of the currency pairs while bofa provides a more conservative forecast. The desk's thesis of a softening consumer spending profile based on savings depletion reflects the necessity to stay aligned with these forecasts.
How other firms see it
Several firms align with our cautious outlook on consumer spending, focusing on US economic conditions. Notably, jpmorgan and deutschebank emphasize similar themes pointing to the risks posed by declining savings rates.
However, firms like bofa diverge, suggesting that consumer resilience may not hold as savings exhaust. As this narrative unfolds, keep an eye on USD/EUR pair movements relative to Fed policy shifts, as these will influence overall market sentiment profoundly.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US households are increasingly relying on reduced savings to combat inflation pressures.
- 02Revised savings data indicates a higher historical base, potentially extending consumer spending resilience.
- 03Implications for USD/EUR currency dynamics are heightened amidst fluctuating economic conditions.
Market implications
Traders should closely monitor the USD/EUR near the 1.075 level, as shifts in savings behavior could signal broader economic trends influencing currency valuations. Anticipate volatility around consumer feedback on savings and spending in upcoming economic releases.
Risks to this view
A sudden deterioration in consumer sentiment or marked declines in savings rates could rapidly invalidate this outlook, suggesting a shift towards a contraction in consumption and thus impacting currency stability.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Thursday the 1st of October. Amid the noise of yesterday's US economic data, one important point emerged.
It was not the stable readings on the PCE deflator measure of inflation. That was due to a technical change arising from new calculation methods and no one in the real world will be any the wiser and will certainly not be changing their minds about the US affordability crisis. The issue was savings.
The data confirmed how much US households are relying on being able to cut back on their savings rate to meet the last two years price shocks caused first by tariffs and then by the oil price rise. That is an established global trend, although of course most global consumers are not scrambling to find funds to pay for tariffs, that's a largely US issue. However, the data also revised the US savings rate history higher.
The rate has fallen, of course, but the starting point and the end point are higher than had previously been assumed. Why does this matter? Because if US consumers' relentless pursuit of retail therapy depends on being able to draw down their savings rates, how far they can draw down those rates before hitting a floor is obviously going to matter.
A higher overall level of savings will add months to the potential resilience of US consumers. The whole process is, of course, also a reminder not to put any faith in the precision of economic data in real time. On the subject of imprecise data, there are a series of manufacturing sentiment opinion polls due today, although these cannot perhaps be classed as data as such, but merely expressions of biased and distorted opinion.
The Japan Tankan survey of business is the one that still commands some respect in financial markets. Culturally, Japanese firms seem to show a greater willingness to answer questions, and answer questions objectively rather than subjectively. The Japanese data was not bad as such, but it was somewhat ambiguous, enough to cause a moderately more conservative assessment of the pace of Japan's rate hikes.
That mild shift was enough to set the foreign exchange market at odds with US Treasury Secretary House Besant, and the yen has moved sharply weaker again. The speed of the move is not perhaps a reflection of the new information contained in the data, but is instead the pull of economic fundamentals against the ineffective force of a foreign exchange intervention that has been badly mismanaged. France unveils its fiscal plans today.
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