UBS On-Air: Paul Donovan Daily Audio 'Spin and substance'
The desk interprets Paul Donovan's insights from UBS regarding U.S. producer prices as suggesting a period of interest rate stability from the Federal Reserve. With July's producer price index releasing no shocks, particularly highlighted by a significant drop in lettuce prices, the Fed is likely to remain on hold for the near future. This aligns with prevailing views as traders await consumer sentiment data which could influence market dynamics, although the impact may be moderated by current political factors. Per the full note source, the forecast for consumer behavior remains largely positive despite inflation pressures, with real wage growth challenges remaining paramount.
What the desk is arguing
The central argument from UBS's recent audio commentary suggests that the Federal Reserve is positioned to maintain interest rates in light of stable producer price dynamics. A noteworthy factor is the unusual 72% monthly decline in lettuce prices, which underscores a particular disruption in the supply chain rather than a broader trend of disinflation, as noted by Donovan. Per the full note source, this situation is not one the administration will leverage to showcase disinflationary success.
Supporting this view, Donovan highlights upcoming retail sales and consumer sentiment metrics as crucial indicators. While the U.S. consumer's spending pattern remains resilient despite negative real wage growth, the retail sales figures will reflect inflationary impacts, particularly from volatile gasoline prices. The market's interpretation of these indicators will, therefore, be essential.
The alternative reading might suggest that unexpected inflation signals from core PPI readings could spark more aggressive Fed tightening, but current data does not support that notion.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Producer prices indicate the Fed will likely remain on hold.
- 02Lettuce price collapse is a notable anomaly, not indicative of general disinflation.
- 03Consumer sentiment and retail spending data are critical to future Fed policy shifts.
- 04Negative real wage growth persists but consumer spending remains robust.
Market implications
Watch for any significant shifts in U.S. consumer sentiment readings, particularly with the upcoming retail sales report, to gauge potential trade positioning before further Fed communication. Key levels to watch include the 1.075 level in EUR/USD, which may test trader sentiment.
Risks to this view
A significant catalyst that could invalidate this outlook would be an unexpected spike in core inflation metrics that prompts the Fed to signal a tightening of monetary policy sooner than anticipated. Such a shift could destabilize current expectations of prolonged interest rate stability.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Friday the 14th of August. US producer prices have continued to signal that the US Federal Reserve is likely to keep interest rates on hold for the time being.
If the Fed has been content to be on hold to date, there was nothing in the recent report to change that view. One feature was a 72% month-on-month decline in the producer price of lettuce. This follows major health concerns about the supply chain and represents a peculiar collapse in demand and is therefore not something that the US administration is likely to tout when seeking to convince US consumers of disinflation forces at work.
The US consumer is next in scope and today we get a combination of spin and substance. On the spin side, there is the US-Michigan consumer sentiment poll, which is thrown all over the place by the extremely polarised political climate existing in the United States. That does not mean that markets should ignore it entirely.
As a piece of economic data, it's not especially useful, but it's something that politicians are concerned by. It might have a bearing on policies, including of course the administration's policy in the Gulf. The inflation expectations number is likewise economically nonsensical, but the figures are a reflection of consumers' feelings about the affordability crisis.
Consumers' feelings are skewed towards angry of late. On the substance side, there are retail sales figures. The US, very unhelpfully, produces retail sales data without correcting for the effects of inflation, so price moves will have a bearing here.
Gasoline and particularly diesel prices are of course a major issue. The US consumer has been, on average, willing to continue to spend, even as real wage growth has turned negative. That seems likely to continue into the end of this year, the household balance sheet giving consumers the ability to spend regardless.
In global trade, the United States has accused more than 40 countries of helping US consumers avoid US tariffs on goods from China by transshipment. Transshipment is where goods from China pass through another country to be rebranded before being sold into the United States. It is certainly true that China's exports to the US are dramatically higher than US imports from China, and these numbers are supposed to be measuring the same thing.
China's market share of US imports has fallen, but not by very much when using China's data. That suggests that US consumers are getting very good at finding ways of avoiding their government's tariffs, and it means that the inflation impact on consumers has been less than might be supposed. The lower effective tariff rate arising from this avoidance will also help keep the US enterprise inflation number lower than would otherwise be the case.
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