UBS On-Air: Paul Donovan Daily Audio 'Talking calmly'
The desk interprets the recent commentary from UBS as signaling a cautious stance on US monetary policy, reflecting Fed Governor Waller's preference for maintaining interest rates amidst ongoing disinflation. Waller's remarks bring heightened attention to upcoming US inflation data, as he indicated that shifts in disinflation trends could prompt a reevaluation of policy action. Per the full note , the US employment report today and next week's inflation data are pivotal; however, uncertainty around data accuracy amidst changing economic dynamics cannot be overstated. The desk anticipates potential volatility in USD pairs, particularly as positioning appears influenced by these indicators.
What the desk is arguing
The desk frames this as a critical moment for US monetary policy, stemming from Waller's indication of a hold position amid easing disinflation pressures. His comments align closely with those of fellow Fed Governor Williams, underscoring the prevailing cautious sentiment at the Fed, which could impact traders looking for guidance.
With attention on the upcoming employment report and CPI data, nuances in these prints could wield significant influence over market sentiment. The expectation is for an employment report showing moderate job growth, providing a balancing point against the backdrop of falling immigration trends reducing the available labor pool.
Where it sits in our coverage
Our consensus target for USD pairs reflects cautious positioning, with predictions from several firms falling within the range of 1.04 to 1.10. In particular, notable targets include: - jpmorgan: 1.10 for Mar26 - bofa: 1.04 for Mar26
This view is generally aligned with jpmorgan while bofa presents a more pessimistic outlook, suggesting a divergence in sentiment across the spectrum.
How other firms see it
Aligned firms such as jpmorgan share a constructive view of the USD, while bofa represents a more bearish stance, reflecting uncertainties around further disinflation and market volatility.
Key currency pairs to monitor in relation to this hypothesis include USD/JPY and EUR/USD, as they tend to react sharply to shifts in US monetary policy outlooks, particularly around inflation data and employment reports.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US monetary policy remains uncertain amid disinflation signs.
- 02Upcoming US employment and inflation data are critical for market direction.
- 03Waller's comments reflect cautiousness, influencing traders' positions.
- 04Divergence exists among firms regarding USD outlook.
Market implications
Attention should be given to the employment report due today; any deviation from expected moderate job growth could prompt shifts in USD positioning. Furthermore, the upcoming CPI data next week will serve as a barometer for monetary policy expectations.
Risks to this view
Potential catalysts that would invalidate the current call include unexpected economic data indicating stronger inflation pressures, which could compel the Fed to adopt a more aggressive stance on interest rates. Additionally, geopolitical developments or a significant shift in labor market dynamics could alter the outlook.
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 4th of September. In the unnecessarily uncertain world of US monetary policy, we heard from US Fed Governor Waller yesterday.
Waller was signalling a hold position on interest rates, driven by disinflation forces in the US economy. Of course, the Gulf War is not a disinflation force, nor are tariffs on US importers of Canadian product. But what Waller was referencing were the underlying pressures, which have been lessening.
The tone of Waller's remarks have given extra weight to next week's inflation data from the United States, because Waller was also clear that a change in the disinflation trend would mean a change in policy. This tone is similar to that offered by New York Fed President Williams, one of the leading economic voices at the Federal Reserve. These two FOMC voters receive a level of respect from investors that Fed Chair Walsh has yet to attain, and their words have moved financial markets.
One risk with this Fed speak is that it does place perhaps too much focus on two sets of numbers. Today's US employment report, which perhaps assumes a little less importance, and next week's consumer price inflation data set. In a world dominated by dodgy data, any individual statistic can be distorted, subsequently revised, and so on.
But with markets getting too excited about the certainty of policy, and with investors having been operating in a vacuum of guidance because of Walsh, there's nothing to be done about this obsession. Today's employment data comes after the US labour market share of the economy fell to a record low in the second quarter. The expectation is for an employment report that shows some jobs growth, but not too much.
Changing immigration trends make it difficult to know accurately what the neutral level of jobs growth is these days. Lower immigration trends mean lower trend employment growth, and lower trend GDP growth than would otherwise be the case. With the hyping of disinflation as a policy driver, the average hourly earnings data is likely to get the maximum attention.
Average hourly earnings are not the same thing as wages, and with falling labour force participation rates, they may be driven by the changing composition of the workforce, but they matter because markets are rarely interested in the subtleties of data composition. They should signal the absence of a wage price spiral, or anything remotely resembling a wage price spiral in the United States. German factory orders data for July has been published, stronger than had been expected, and with the almost inevitable positive revisions to previous month's data.
Describing the data as stronger than expected is a bit of an illusion, as only five economists actually forecast the figures, but the data was a lot better than any one of those five expected, and the trend is one that has distinctly been moving upwards. Indeed, the yearly growth rate was the best for five years. There are a couple of other central bank speakers due out today, Bank of England Governor Bailey and European Central Bank Chief Economist Lane.
The market is convinced that the ECB will increase rates again, compounding the earlier policy error, but hopefully they won't make matters any worse beyond the September rate hike, and investors can then start to turn their attention to when the policy mistakes will be reversed, with rate cuts, maybe sometime next year. The Bank of England, as ever, is entertainingly divided on policy, but Bailey shouldn't be signalling any desire to raise rates. That's all for today, have a good day.
This material has been prepared and published by the Global Wealth Management Business of UBS Switzerland AG, regulated by FINMA in Switzerland. It's subsidiaries, or affiliates, collectively referred to as UBS. In the USA, UBS Financial Services Inc. is a subsidiary of UBS AG and a member of FINRA SIPC.
The investment views have been prepared in accordance with legal requirements designed to promote the independence of investment research. This material is for your information only, and it is not intended as an offer, or a solicitation of an offer, to buy or sell any investment or other specific product. The analysis contained herein does not constitute a personal investment recommendation, or take into account the particular investment objectives, investment strategies, financial situation and needs of any specific recipient.
This material may not be reproduced or copies circulated without prior authority of UBS. Please visit www.ubs.com forward slash CIO hyphen disclaimer to read the full legal disclaimer applicable to this material.
Sources & References
How we cover this story