UBS On-Air: Paul Donovan Daily Audio 'Shell shocked'
The desk contends that while December’s US consumer price inflation may reflect modest headline increases, specific headline contributions, particularly from eggs due to significant supply shocks, may mislead perceptions of overall inflation trends. Per the full note from UBS, egg prices skyrocketed by 127.9% year-over-year, indicating a relative price shock rather than a systemic inflation issue that the Federal Reserve can effectively address. As market prices offer a relatively stable outlook, the potential impact of current inflation data on monetary policy seems limited and suggestive of a cautious Fed approach moving forward.
What the desk is arguing
The current inflation narrative, driven in part by substantial increases in specific goods like eggs, highlights a key distinction in economic terminology. Paul Donovan from UBS points out that these price surges represent relative price changes rather than general inflation, suggesting that the broader inflation picture remains stable. This nuance is critical in understanding the interactions between inflation risks and central bank policies.
Additionally, the notable increase in egg prices—which nearly rival illicit substances in terms of price escalation—demonstrates the impact of supply shock rather than macroeconomic demand pressures. This could indicate that, barring further structural disruptions, Federal Reserve interventions may maintain their focus on more generalized inflation indicators without needing drastic policy shifts.
Where it sits in our coverage
Our consensus target for the USD pair currently sits at 1.075, within a range of 1.04 to 1.12. Notably, jpmorgan has aligned their target at 1.10, while bofa projects a contrary stance with a target of 1.04 for March 26.
The desk's perspective aligns closely with the prevailing forecast from jpmorgan, suggesting that macroeconomic stability will likely temper significant policy shifts from the Fed. The desk firmly places this outlook near the upper bound of the consensus range, reflecting expected resilience amidst this inflationary data context.
How other firms see it
Foremost, jpmorgan aligns with the desk's assessment regarding stable inflation and cautious Fed responses. Conversely, bofa presents a contrary stance, indicating a more cautious outlook on overall inflation trends, which could lead to varied investment strategies amongst traders.
Traders should also monitor potential influences on the EUR/USD pair as the Fed's policies interact with European Central Bank dynamics, as well as staying vigilant regarding inflation metrics that may trigger market volatility.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01December's CPI could show modest gains influenced by specific commodity price shocks, notably eggs.
- 02The distinction between relative price increases and systemic inflation is crucial for understanding Fed monetary policy responses.
- 03The broader implications for monetary policy point toward stability rather than immediate shifts, given current market indicators.
- 04Future developments in inflation metrics will require close monitoring as significant price changes in individual goods could skew perceptions.
Market implications
Watch for movements around the 1.075 mark as the December CPI data is released. This could inform positions ahead of any potential shifts in Federal Reserve policy, especially if unexpected inflation pressures emerge.
Risks to this view
A reversal from this outlook could occur if broader inflation metrics start to signal systematic economic pressures rather than isolated cases, pushing the Fed toward aggressive rate adjustments. Unforeseen supply chain disruptions could also recalibrate inflation expectations.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Wednesday the 15th of January. US December consumer price inflation is due.
The consensus is looking for a modest increase in the headline rate and general stability in the core rate. Some of this headline move will doubtless be down to the price of eggs. In yesterday's producer price data, wholesale egg prices rose 127.9% year-over-year and now appear to be rivaling illicit drugs in their price status.
The price level is not far off the all-time high of 2022. This is a reminder that price increases are not quite the same thing as inflation. Inflation is a general increase in prices caused by an imbalance in the economy.
Egg price increases are a relative price increase caused by an industry-specific supply shock. There is little US Federal Reserve Chair Powell can do about egg prices, short of becoming a poultry farmer. There may be some economists who feel Powell might make a better poultry farmer than a Fed Chair, but that's a different issue.
Otherwise, market prices are generally presenting a benign picture on inflation. Owners' equivalent rent, the fantasy housing price that no one actually pays, is still likely to add to both the headline and the core inflation rates. US President-elect Trump declared that an external revenue service would be created.
This has a number of market implications. First, Trump's social media post was a clear admission that US citizens will pay all of the trade taxes that are proposed. This is due to the Oxford comma.
Trump declared that the service would collect tariffs, duties, and all revenue that comes from foreign sources. Second, this again emphasises that tariffs seem to have a different status in Trump's second term compared to their first term. Tariffs seem to be more than a mere bargaining tactic.
Third, this shows the challenge of single-issue politics. Trump has a number of single issues – trade taxes, deregulation, reducing the government debt. Here, they come into conflict as an external revenue service would duplicate the work of the rather long-established customs service by charging US consumers trade taxes, adding to bureaucracy and adding to government costs.
UK headline and core consumer price inflation data for December rose by less than the market had expected, and the number is increased by the artificial housing measure of owner-occupier's cost, although this is less of a break from reality than is the US owner's equivalent rent measure. Housing is now the biggest driver of UK inflation. Price discounting in the goods sector, which stimulated consumer demand to the end of the year, formed part of the disinflationary force.
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