UBS On-Air: Paul Donovan Daily Audio 'Still not hiring'
Lead — Paul Donovan from UBS highlights the deteriorating quality of US employment data, specifically the recent September report, which indicates an increase in unemployment alongside higher participation from job seekers. The desk interprets this as indicative of a cautious labor market where the narrative of 'no hiring, no firing' holds, supporting stable consumer spending. Per the full note, the data's reliability is compromised due to lower response rates and seasonal adjustments, which may distort actual trends. Traders should keep an eye on how these employment figures play into broader consumption trends in the U.S.
What the desk is arguing
The desk posits that the increase in the unemployment rate to its highest level since 2021 signals a cautious approach in the U.S. labor market, despite an uptick in consumer participation. Per the commentary from UBS, while total payrolls exceeded expectations, the nuances in demographic unemployment rates, especially among younger job seekers, paint a complex picture of labor dynamics.
Supporting this view is the indication that while unemployment rose, the middle-aged demographic saw a decline in joblessness, suggesting sustained consumer confidence in spending. The commentary points out that as long as middle-class consumers remain employed, overall consumption is likely to hold steady, even in the face of rising unemployment among younger cohorts.
Where it sits in our coverage
Our consensus target for USD weakened slightly, with a range of 1.04 to 1.12 against major currencies, influenced significantly by labor market dynamics. Specific targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This view aligns with jpmorgan, which anticipates a stronger dollar outlook based on stable consumer spending, while it diverges from bofa, which expects downward pressure on the dollar given current economic indicators.
How other firms see it
In general, firms like jpmorgan believe that the stable employment of middle-aged workers supports current spending levels, maintaining a bullish view on USD strength. In contrast, bofa suggests that the unemployment uptick among younger workers may dampen overall economic momentum.
In addition to these employment metrics, watch for indicators like U.S. Retail Sales and consumer sentiment surveys that could provide further insights into spending behaviors and trends impacting FX markets.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US employment data quality is declining, affecting market confidence
- 02Rising unemployment among younger cohorts hints at cautious hiring
- 03Stable middle-aged employment suggests sustained consumer spending
- 04Labor market dynamics will influence FX market trends
Market implications
Traders should monitor how the employment data affects USD performance, particularly around the 1.10 level as a crucial pivot point. Upcoming retail sales figures could also provide context for consumption trends and, subsequently, impact FX positioning.
Risks to this view
Should upcoming data indicate a stronger-than-expected rebound in youth employment or shifts in spending trends, this could invalidate the current bullish sentiment on consumer spending and lead to a reconsideration of dollar strength.
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 21st of November. Finally, there was some significant US data with the release of the September employment report.
Sadly, this data is a little bit dodgy, to use the technical economic term. It's not just that the response rate for payrolls data has come crashing down in recent months, nor that the accuracy of the household survey has been questioned. Those are both problems that have been building for years, and the Bureau of Labour Statistics has repeatedly told Congress that their underfunding makes this data less reliable.
It is also the fact that September data specifically often has some weirdness in the seasonal adjustment process. Thus, though payrolls were higher than expected, it's also often expected that the September payrolls will be higher than expected. What caught the attention of markets was the increase in the unemployment rate, which is now at its highest level since 2021.
The increase in unemployment was driven partly by increased participation in the labour market. More people are looking for jobs who were not previously looking for jobs. However, it wasn't a universal increase in unemployment.
Middle-aged unemployment, 35 to 55 years old, actually fell. There was an increase in unemployment amongst those in their early 20s, people who would have been leaving college and looking for work. This increase in unemployment reflected an increase in the number of people looking for work in this age group, which strongly hints at the no hiring, no firing narrative.
To the extent that these figures can be trusted, that still signals that consumption should remain firm in the United States. It is the middle-aged middle class that matter to consumer spending, and that particular group has little reason to fear unemployment at the moment. UK October retail sales figures were somewhat weaker than expected, although the consensus forecast is constructed from a worryingly narrow range of estimates, so being weaker than consensus doesn't actually say very much.
There was a downturn, but this was focused on clothing and, to some extent, food sales. There is some suggestion that this may be due to the increased enthusiasm for the Black Friday sales focus, which online retail has embraced in recent years. That may increasingly delay purchases from October into November.
Online retail sales fell in support of this argument. The UK's government borrowing reduced in October. A decline there was expected.
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