UBS On-Air: Paul Donovan Daily Audio 'Solid foundations, political threats'
The desk emphasizes the potential disruption stemming from a threatened U.S. government shutdown as outlined in UBS's commentary. With budget negotiations failing under the influence of prominent figures like Elon Musk and Donald Trump, the likelihood of a shutdown impacting economic data release could strain U.S. labor markets and ignite volatility in forex markets. Per the full note from UBS, the implications of even a short shutdown could accumulate, casting a shadow over Federal Reserve Chair Powell's data-driven policymaking. While the immediate economic impact may be limited, the uncertainty inherent in prolonged shutdowns poses risks that traders should closely monitor.
What the desk is arguing
The desk argues that the looming U.S. government shutdown represents a material risk to economic stability and currency values. According to UBS, the failure to pass a budget could result in a shutdown starting tonight, with potential consequences for economic data that the Federal Reserve relies upon.
The commentary highlights that a short-lived shutdown would primarily affect government workers, yet any extended shutdown could severely disrupt economic data publication and insights into unemployment and growth metrics. Such developments may impede the Federal Reserve's ability to make informed decisions, especially as they pivot towards managing interest rates with an eye for economic indicators.
Where it sits in our coverage
Our consensus target for USD/EUR is 1.075, with a range of 1.04 to 1.12 as drawn from current firm sentiment. Notable targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This desk's perspective leans towards a bearish view on the dollar, particularly if the shutdown lingers, aligning with jpmorgan's more cautious stance. This sits at the upper end of the target range while juxtaposed against bofa's lower forecast.
How other firms see it
Firms aligned with the desk's view, like jpmorgan, are anticipating potential weakness in USD/EUR dependent on fiscal developments, whereas bofa expresses a contrary stance that anticipates a stronger U.S. dollar should the shutdown culminate in a swift resolution.
In this context, closely watch the USD/EUR pair as market dynamics evolve, particularly noting how anticipated labor data reacts to fiscal uncertainties during the shutdown adhesion.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01A threatened U.S. government shutdown could disrupt economic indicators.
- 02Failure of budget negotiations implicates Federal Reserve policy-making processes.
- 03Short-lived shutdowns have limited initial impacts but extend economic consequences.
- 04Monitoring USD/EUR pair is vital as shutdown developments unfold.
Market implications
Watch for movement in the USD/EUR pair, particularly around 1.075, as traders react to any shutdown announcements or government negotiations. Positioning may shift rapidly in anticipation of labor market data being delayed due to shutdown implications.
Risks to this view
Should the government reach a budget agreement before the shutdown occurs, or if the impact on economic data proves limited, the potential bearish outlook on USD may reverse. Additionally, a reaffirmation of labor market resilience could undermine selling pressures on the dollar.
Good morning. This is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Friday the 20th of December.
With the wearisome repetitiveness of a tacky Christmas song, US government shutdown threats are with us once again. Last night, Congress failed to pass a package that had been endorsed by President-elect Advisor Musk and President-elect Trump. If nothing is passed today, then the government starts to shut down this evening.
A short-term shutdown is difficult for people who are employed by the government. It may lead to changes in their behaviour. For example, given insecurities associated with working for the government, it might be the case that government employees seek to hold more liquid savings than does the average US citizen.
However, it does have a limited economic impact if the shutdown is just short-lived. The longer the shutdown, the more dramatic the economic impact until eventually GDP turns negative. It does also add to uncertainty because, of course, official economic data is published by the government.
It may not be the best quality data, but it's generally better quality than private sector surveys and any loss of data means a limitation on the understanding about what is happening in the economy. That may be particularly relevant when the Federal Reserve of Chair Powell is pursuing the policy error of data dependency. From the United Kingdom, November public sector borrowing was lower than the consensus expected, albeit the consensus was based on a relatively limited number of forecasts.
That offers some signals on economic activity. It's harder to avoid the tax authorities than it is to avoid the Office for National Statistics, and so tax revenue data may hint at the bits of economic activity that are being missed in the official calculations. Yesterday's Bank of England rate decision, however, hinted at some concerns about growth.
The three dissenting voices in the unchanged rate decision ended up providing a dovish signal. U.S. consumer data comes in the form of the November income and spending figures. Incomes are expected to continue to outstrip inflation.
It is the rising real incomes that provide such a solid foundation for growth in the U.S. economy in 2025. It's also worth reflecting that the inflation number, represented by the personal consumer expenditure deflator, will still include the fantasy owner's equivalent rent price, a price that nobody pays, albeit that has less of a weighting than it does in the consumer price inflation where owner's equivalent rent is a full quarter of the calculation. Real personal spending should continue to increase, as rising incomes mean that consumers can spend without having to rely on credit cards or savings.
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