UBS On-Air: Paul Donovan Daily Audio 'Shuffling demand around'
The desk interprets the recent disappointing retail sales data from China as indicative of a consumer shift towards government-supported spending, while the implications for fiscal stimulus remain prominent. Per the full note source, the findings echo Japan's historical reliance on consumption vouchers from the 1990s, where consumer behavior pivoted based on fiscal support. This suggests a need for timely intervention ahead of potential trade tensions arising from U.S. tariffs. Future assessments of China's economic trajectory must consider this shifting demand narrative and its impact on broader global markets.
What the desk is arguing
The desk posits that China's November retail sales figures, which fell short of expectations, reveal a critical pivot in consumer behavior tied to government support. As cited by Paul Donovan, Chief Economist at UBS, this demand shift is reminiscent of Japan's past consumption patterns, highlighting the necessity for fiscal stimulus to prop up consumer confidence and spending in areas without government backing.
The detailed retail sales data indicated that government assistance correlated with stronger spending, painting a picture of consumer caution in unsupported sectors. This aligns with the broader narrative that suggests a proactive fiscal response is necessary to mitigate future economic risks, especially in light of anticipated trade tax impacts.
Where it sits in our coverage
Our consensus target stands at 1.075, with a forecast range from 1.04 to 1.12. Key firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This view from the desk tends towards the upper bound of the consensus spread, indicating a relatively optimistic outlook compared to bofa's more cautious stance at the lower range.
How other firms see it
Firms aligned with the desk's perspective, such as jpmorgan, emphasize the potential for rebound based on fiscal stimulus measures. Conversely, bofa holds a contrary view, expecting greater caution in consumer spending, particularly in non-supported sectors.
Key indicators to watch alongside this commentary include the AUD/USD dynamics influenced by Chinese demand shifts, as well as broader implications for the USD/JPY rate in the context of potential trade negotiations.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01China's retail sales trend reflects a consumer shift towards government-supported areas.
- 02Historical parallels with Japan's consumption voucher impact provide context.
- 03Fiscal stimulus remains critical in bolstering confidence and spending.
- 04Proactive measures are essential given looming trade tensions.
Market implications
Traders should monitor the 1.075 level closely, as a sustained move above this threshold could indicate increased confidence in Chinese fiscal measures. Additionally, developments or announcements regarding trade taxes or fiscal stimulus will be pivotal in shaping market sentiment in the near term.
Risks to this view
A sudden deterioration in consumer confidence or a failure to implement fiscal stimulus effectively could reverse the current optimistic narrative. Specific catalysts to watch include unexpected announcements related to U.S.-China trade policies or economic performance indicators suggesting deeper declines in consumer spending.
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 16th of December. At the start of my career in the early 1990s, I was an economist covering Japan.
This was a very interesting phase of my career, but one of the problems with covering Japan in the early 1990s is that the experience is apt to scar you for life. And one can spend far too long looking for parallels to that period. However, China's latest retail sales data has awakened a hint of deja vu.
Retail sales were weaker than expected in November, but within the detail, areas where the government has offered assistance and subsidies were stronger. What happened is consumers spent on areas where there was government assistance but cut back more aggressively on areas where there was no government assistance. This is all vaguely reminiscent of Japan's experiment with consumption vouchers in the 90s, where people used the vouchers to consume but at the same time capped back on spending with cash.
We should not get too excited about a single data point from China, and the timing of the single shopping festival is being blamed for some of the weakness. But the overall picture does fit with the broader narrative of needing to support the Chinese economy through fiscal stimulus that aims to reduce fear of the future. There's no economic advantage to delaying the stimulus until US President-elect Trump's trade taxes are applied.
The damage from trade taxes will basically be the same whether they're stimulus now or stimulus later. There may be political spin advantages around delaying, however. The impeachment of South Korean President Yun now moves on to the courts, with a Supreme Court trial scheduled to start on 27 December.
For financial markets, the period of political uncertainty is an issue, but the impeachment has almost certainly reduced the risk of disruptive strike action in Korea, which had been threatened by some union groups if Yun continued in office. There are several business sentiment surveys around today. In the UK, there have been headlines around business sentiment slumps in the wake of the recent budget.
It's worth remembering the way in which social media has changed survey evidence. The Rice-Davis test often needs to be applied. They would say that, wouldn't they, is an appropriate filter through which survey evidence should be viewed.
Republicans win the presidency in the US, so surveys with lots of Republicans replying report better economic conditions. A general sense of dissatisfaction with the budget translate into specific negativity, even if a firm's individual position is actually OK. With the current political situation in Europe, it seems hardly likely that a neutral and objective view of the economy can be captured through sending out questionnaires.
We are in the blackout period for the US Federal Reserve, but ECB speakers are charging in to fill the void, valiantly led by ECB President Lagarde. The scramble to explain policy direction is not likely to interest markets at this stage, which have priced in an ongoing easing cycle from the ECB and, for the time being, from the Fed. That's all for today.
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