What's takeaway 1 on UBS On?

Consumer sentiment data should be viewed through a political lens, especially regarding inflation perceptions.

What's takeaway 2 on UBS On?

Gasoline prices remain a key psychological threshold for voters, impacting sentiment and approval ratings.

What are the market implications for UBS On?

Traders should monitor the USD/EUR movements, particularly as sentiment data is released, since changes in gasoline pricing could signal broader shifts. The current levels around 1.075 could face pressure if consumer sentiment continues to falter, particularly with major economic indicators looming on the horizon.

What are the risks to this view on UBS On?

If gasoline prices abruptly stabilize below the $2.50 fair price level or if significant geopolitical developments emerge that reshape market views on inflation pressures, the current sentiment-driven read on consumer sentiment could reverse quickly. Additionally, an unexpected Fed shift in policy could simultaneously alter inflation expectations and market positioning.

UBS On-Air: Paul Donovan Daily Audio 'The politics of price expectations'

What the desk is arguing

The Michigan consumer sentiment data, while not necessarily predictive of economic performance, carries significant weight due to its political ramifications. Donovan notes that this sentiment hinges on consumer perceptions of price, particularly on essential goods, which have a 'fair price' that remains fixed in the public's mind regardless of actual inflation data.

This fixation is compounded by rising gasoline prices, which loom large over consumer sentiment, particularly as they hover above the psychologically impactful $2.50 mark. With recent declines in overall gasoline prices, the sentiment measures could become more volatile, but unresolved pricing levels are likely to maintain pressure on public perception and thus political performance.

Where it sits in our coverage

Currently, our consensus target for the USD is 1.075, with estimates from various firms suggesting a range as follows: - jpmorgan: 1.10 by Mar26 - bofa: 1.04 by Mar26

The desk's focus aligns with jpmorgan's target, reflecting a somewhat optimistic outlook compared to bofa, which sits at the lower end of the spectrum.

How other firms see it

Firms such as jpmorgan and bofa express contrasting views on the EUR/USD trajectory, with jpmorgan anticipating stronger performance due to perceived economic resilience, while bofa is more cautious. As the consumer sentiment data unfold, keeping an eye on the correlation between gasoline prices and broader market sentiment metrics will be crucial.

Key indicators that might reflect this thesis include volatility in rates around the Federal Reserve's next monetary policy meeting and changes in commodity prices, particularly those related to food and energy.

Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's three o'clock in the morning London time on Friday the 17th of July. Today we get the University of Michigan's consumer sentiment data from the United States.

This is survey evidence and surveys have become progressively less reliable in recent years. The Michigan survey has a pretty low sample size, albeit higher than it was in the past. However, whatever its economic value, sentiment data does have a political impact and that is going to be relevant.

US President Trump suffers the same challenges as former US President Biden when it comes to inflation. People focus on the price of high-frequency purchases and they have a fair price level in mind, which tends to stick around for many, many months. It doesn't matter what happens to their inflation statistics.

If food and fuel prices are above the remembered fair price, voters will continue to feel upset about inflation. The decline in gasoline prices recently should have helped to reduce some of the expectations of inflation in the Michigan survey today. But the fact that gasoline prices are rising and are well above the roughly $2.50 fair price that consumers remember from the pre-war era is still likely to weigh on sentiment.

Why does this matter? Because investors are trying to gauge whether there is enough political pressure for the United States to make the necessary concessions that would reopen the Strait of Hormuz. Trump's personal approval rating has shown a better correlation with the persistence of the gasoline price above $2.50 than it has with the somewhat wilder gyrations of the crude oil price.

And this is the transmission mechanism that several investors are likely to be watching. Equity markets have been moving down, led by technology stocks. This is not a clear signal on the economic outlook.

Whatever has motivated tech stocks to go lower, it's not the macroeconomic outlook or indeed the policy outlook. The bigger question is therefore whether these declines now have a feedback impact onto the real economy. The interesting point is that for the overwhelming majority of consumers in developed economies, the gyrations of the technology sector have very little economic relevance.

These people are largely unaffected by the tech sector's enthusiasm for investment. And the wealth effect is minimal, as most people hold the majority of their wealth in real estate rather than in financial equity. However, there is a potential investment impact if this weakness persists for a while.

And there's a potential impact on the spending of higher wealth households that are more exposed to the equity market. The former is probably more serious than the latter, but even here there are mitigating factors. Technology sector investment has driven growth, but it has also potentially cannibalised or crowded out other forms of investment.

Less tech investment might at least partially free up resources for other areas of the economy that have been starved of investment by the AI enthusiasm. As for the wealth effect, the evidence is that consumers have been more consistent in their spending rather than surging their spending as tech stocks have increased in value. There are liquid savings to support consumption where necessary.

The eurozone is offering final June consumer price inflation, but this is a number that so rarely changes. Markets barely even acknowledge its existence. It is a reminder of the general narrative of a pretty benign inflation experience in the eurozone, away from the oil shock.

But markets understand this, even if it's a lesson that does not appear to have been learned by all members of the European Central Bank. That's all for today. Have a good day.

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