UBS On-Air: Paul Donovan Daily Audio 'The damage of data dependency'
The desk maintains that the current unease in the bond markets, triggered by U.S. consumer price data, highlights vulnerabilities tied to the Federal Reserve's commitment to data dependency. As noted in the UBS commentary, this mantra leads to exaggerated market responses to economic data releases, including inflation indicators. Crucially, the anticipated impact of rising food prices on broader policy could signify potential shifts in monetary policy or market sentiment. With no high-impact events on the calendar in the next month, traders might be closely watching the interplay between inflation data and Fed communications going forward.
What the desk is arguing
The sentiment outlined by the desk centers on the idea that the Federal Reserve's dependence on data is generating excessive volatility in the markets, particularly highlighted by recent consumer price data. Per the full note from UBS, this has led to concerns that even minor fluctuations—such as those driven by external factors like food prices—can trigger significant market reactions.
The upcoming producer price index (PPI) data release will be crucial, as it may reveal expectations among businesses regarding inflation and tariffs. Many market participants are aware that current inflation dynamics could influence not just consumer behavior but also future Fed policy agendas.
Where it sits in our coverage
While no explicit targets were identified in our internal coverage for currency pairs, we do note that jpmorgan has a target of 1.10 for a relevant March 2026 maturity, which aligns with the overall sentiment on a dovish pivot. In contrast, bofa offers a more cautious target of 1.04 for the same tenor, indicating divergent views on Fed policy implications.
How other firms see it
Firms like jpmorgan and others are aligned in their expectations for a cautious Fed tone moving forward, which may stabilize bond markets. However, bofa provides a counterpoint, emphasizing a more bearish outlook on inflation utilities supporting their conservative forecast.
Traders should observe how the forthcoming PPI releases fit into the broader inflation narrative, especially in relation to the USD trajectory and Fed rate path decisions.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US inflation concerns are driving bond market volatility.
- 02The Fed's 'data dependency' may lead to overreactions in markets.
- 03Upcoming PPI data will be crucial for understanding inflation expectations.
Market implications
Traders should monitor responses to PPI data, particularly if these figures indicate a stable or rising inflation trajectory. A break above significant resistance levels in bond yields could signal persistent inflation fears, influencing the USD in the near term.
Risks to this view
A reversal in market sentiment could occur if consumer spending data shows unexpected strength, potentially complicating Fed communications and raising yield expectations. Additionally, any signs of easing supply chain pressures that lead to lower inflation readings might undercut the current narrative.
Good morning, this is Paul Donovan, Chief Economist at GBS Global Wealth Management. It's seven o'clock in the morning London time on Thursday the 13th of February. Yesterday's U.S. consumer price inflation data caused some consternation in the bond markets.
A fair amount of blame for that consternation rests with U.S. Federal Reserve Chair Powell. This is not because Powell's policies have fuelled inflation on any real world measure of prices, ignoring fanciful concoctions like owner's equivalent rent.
Inflation in the States is still modest and what there is owes much to things like egg prices beyond Powell's control and about which U.S. President Trump is similarly impotent to deal with. The problem is that through stressing data dependency, the importance of individual consumer price inflation numbers rather than the trend has been elevated in the minds of investors.
This was a narrowly based inflation surprise at a time when seasonal adjustment is complicated and data dependency gives all of that importance. The egg prices do matter in one way. They are a reminder that food price inflation is a political issue, not least because Trump made it so.
Several of Trump's policies, including tax is on trade, immigration and whatever is happening at USAID, have price implications for U.S. food. So higher food prices, for whatever reason, may act to curb some of those other policies. U.S. producer price inflation is due out today and will be worth looking at for evidence of companies raising prices in anticipation of tariffs.
UK fourth quarter GDP was stronger than expected, with some positive revisions to the third quarter as well. The service sector is behind the growth, which is hardly a surprise. Growth of 1.4% year over year, not annualised, proper year over year growth, is somewhat below trend still.
It does again emphasise that grouching in surveys doesn't necessarily translate into economic reality. Companies that do not like government policies may possibly have an incentive to offer comments that spin reality in a negative way. These numbers will, of course, be revised and revised significantly.
The UK tends to revise its growth up quite a bit. Production, services and construction all showed positive surprises into the end of the year, again with positive revisions to past data. The European Central Bank is churning out its monthly economic bulletin, which markets will greet with polite disinterest.
German final consumer price inflation data was unchanged for January, news which no one in the markets will have even noticed. This is perhaps the only German statistic that is almost never revised. Russian President Putin and Trump are due to hold talks on Ukraine and Saudi Arabia.
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