UBS On-Air: Paul Donovan Daily Audio 'The exciting tale of the Federal Reserve'
The Federal Reserve's latest communications suggest a potential pause in interest rate cuts in the near term, which could lend support to the USD. Per the full note from UBS, many Fed officials expressed opposition to a December rate cut, amid limited new economic data due to the government shutdown. The current environment indicates that the Fed is unlikely to pivot in the coming weeks, keeping the outlook for the USD relatively stable despite ongoing political noise around rate policy. With little scheduled economic data releases in the United States before the Fed's next meeting, traders may focus on market sentiment and previous data prints to gauge potential shifts.
What the desk is arguing
The desk posits that the Federal Reserve's resistance to a December rate cut indicates a more hawkish stance than previously anticipated. This is underscored by the fact that many officials are against easing monetary policy further, limiting the Fed’s ability to act ahead of their next meeting in light of a lack of significant economic data. Per the full note from UBS, the Fed's position could keep the USD buoyed against major currencies in the short term.
Supporting this view is the context of the ongoing government shutdown, which has complicated the collection and release of crucial economic metrics like employment data. As Paul Donovan from UBS noted, the absence of fresh data may stall any drastic shifts in monetary policy, potentially reinforcing the USD's strength given the current negatives surrounding global trade and tariffs.
The alternative read would be that if economic indicators come in below expectations or if external pressures from ongoing geopolitical tensions mount, there could be a case for the Fed to revisit its stance sooner than expected.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The Federal Reserve shows opposition to a December rate cut, maintaining a potentially hawkish tone.
- 02Limited economic data due to government shutdown may prevent any immediate shifts in policy consensus.
- 03Current resistance to interest rate cuts suggests potential support for the USD in the near term.
- 04Political pressures surrounding interest rates could still create volatility in market sentiment.
Market implications
Focus on the USD's performance ahead of the next Fed meeting, particularly as market sentiment fluctuates and in light of upcoming data releases such as initial jobless claims. Holding levels near recent highs could signal a resistance point for the USD; watch for any indicators that might affect Fed policy expectations.
Risks to this view
The outlook could be invalidated if unexpected economic data indicates a downturn in employment or consumption trends, prompting the Fed to reconsider its rate stance. Additionally, any significant moves by political figures or changes in trade policy could directly impact market expectations and the USD's trajectory.
Good morning, this is Paul Donovan, Chief Economist at GBS Global Wealth Management. It's 7 o'clock in the morning London time on Thursday 20th November. The US Federal Reserve minutes offered some excitement and it's not often that an economist gets to say those words.
Many officials were reported to be against a cut at the upcoming December meeting. The Fed will have very little new economic information before the December meeting because of the US government shutdown and critically some of the employment data will not be available. That offers perhaps less scope for the Fed consensus to shift in the coming days.
Data is starting to be released but figures like the September employment report were always quite distorted. The October employment report is forever lost to civilisation because there was no one there to ask the required questions and the November and December data will come after the Fed meets. US President Trump has continued to be critical of the failure of the Federal Reserve to cut rates and suggested firing US Treasury Secretary Besant if rates were not cut.
That has been taken to be a joke. The US September employment report data is due out today and of course it's quite old news. This data was properly collected before the government shutdown but the seasonal adjustment process around September employment data has been a bit questionable in recent years.
There is a fairly wide range of estimates around the payrolls number although almost all surveyed economists are arguing for an increase in payrolls back in September. Average earnings are seen as holding a fairly steady pace of growth. Since tariffs were introduced in April, consumers have had to cut back on savings in order to pay for higher prices but earnings growth has allowed some growth in consumption too.
Given everything, today's data release is perhaps overshadowed by the latest initial jobless claims data which could attract more attention from the markets as being a more timely indicator of the health of the labour market. German producer price inflation for October is not something that necessarily grips the financial markets attention but the numbers came in a fraction weaker than expected after revisions. German producer prices are in deflation territory largely because of energy price declines but non-durable goods do seem to have had some price weakening too.
There are some business sentiment surveys offering a background drone of irrelevance in the financial markets, the UK's CBI trends data and the Kansas City Fed manufacturing poll. There is also the normal noise from central bank speakers, the Fed speakers perhaps getting a little bit more attention with the heightened speculation about the path of policy. That's all for today, have a good day. of UBS AG and a member of FINRA SIPC.
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