UBS On-Air: Paul Donovan Daily Audio 'The power of saving more, or less'
The desk believes UK economic resilience, bolstered by rising real disposable incomes, will influence market dynamics favorably towards a stronger GBP. This sentiment is underscored by recent revisions to the UK GDP for Q2, leading to a more optimistic outlook for household savings and spending patterns. Per the full note , the uptick in savings rates indicates a cautious but potentially stabilizing economic environment. If global oil prices decline as geopolitical tensions ease, further improvement in inflation metrics could catalyze even greater consumer activity.
What the desk is arguing
The desk posits that the UK's economic activity is likely being underestimated, highlighted by stronger-than-anticipated second-quarter GDP growth. New methodologies suggest prior data miscalculations that may be bullish for currency traders, as higher real disposable incomes and increased savings rates indicate a shift towards stability and potential growth.
Moreover, the growing household savings rate, as mentioned, suggests consumers may be prioritizing fiscal health amid rising incomes. If energy prices fall due to geopolitical stability, this could bolster real income further, potentially driving consumer spending and supporting GBP strength.
Where it sits in our coverage
Our consensus target for GBP/USD sits at 1.075, with a range of 1.04 to 1.12. Notable targets include: - jpmorgan: 1.10 - bofa: 1.04
This view aligns with jpmorgan, whose forecast sits at the higher end of the spread, indicating confidence in pound strength compared to bofa's more cautious stance, which lies at the lower bound.
How other firms see it
Firms like jpmorgan and bofa present differing perspectives on GBP's trajectory, with jpmorgan advocating for a more bullish outlook while bofa remains skeptical.
In terms of interlinked indicators, the trajectory of GBP/USD appears closely tied to developments in UK inflation rates, and may be affected by upcoming publications regarding energy prices and core inflation metrics, which will impact overall economic sentiment and monetary policy considerations.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01UK Q2 GDP was revised upward, indicating stronger economic activity.
- 02Rising real disposable incomes have led to an increased household savings rate.
- 03The outcome of geopolitical tensions may substantially affect consumer spending.
- 04Positive trends in inflation metrics could enhance GBP's upward momentum.
Market implications
Traders should monitor the GBP/USD pair closely for potential moves towards the 1.075 target, especially in relation to energy price developments and UK inflation data releases. Any significant shifts in these areas could act as catalysts for positioning adjustments.
Risks to this view
The key risk to this outlook would be a prolonged conflict in the Gulf region, which might keep oil prices elevated, thus stifling any positive impacts on real disposable income. Additionally, unexpected inflationary pressures in the UK could also derail the anticipated positive economic dynamics.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Wednesday the 30th of September. The United Kingdom's economy grew more strongly than expected during the second quarter with revisions pushing growth higher.
New data techniques have revealed that economic data has been missing activity in the United Kingdom and that's a story we're likely to hear more of in the future. One aspect of the UK's data that has particular relevance is that real disposable income is growing in the UK. This has not been the case, for instance, in the United States.
However, that pickup in real disposable income has led to an increase in the savings rate. Overspending is increasing, but as incomes rise there is a desire to restore past savings levels. The importance of this is that if the Gulf War does not turn into a forever war and resolution drives down global oil prices, the impact of lower inflation on real disposable incomes will of course be positive.
However, that positive income effect may just generate a more muted economic effect if the gains in income are then used to rebuild savings. German retail sales rose in the month of August with some more positive revisions to the historical data. These numbers are not normally a huge focus for markets, however.
Of concern today will be the European preliminary September inflation data. Spanish numbers were released yesterday, a fraction higher than had been expected. For today, France, Germany and Italy will all give their numbers, with the impact of energy the obvious effect.
It is worth reiterating, as we get details in the coming weeks, that energy prices will also push up core inflation almost as noticeably as the headline inflation rates. Because although core inflation does brand itself as excluding food and energy, it does not exclude the effects of food and energy. Airfares are 40% energy costs, for instance, airfares are part of core inflation.
With companies quick to pass on energy costs down the supply chain to the end consumer, such prices are expected to rise. In the United States, we have personal income and personal consumption data, along with revisions to the second quarter's GDP figures. The revised income and consumption data, and the personal consumer expenditure deflator, are all going to be the key focus.
There's not much real income growth, but the US consumer has a grim determination to keep on spending, and they still have the savings resources to be able to make up the gap. Importantly, on the inflation front, the personal consumer expenditure deflator is going to be published with new revisions to the methodology. These methodological revisions are likely to subdue inflation in the coming months, at least inflation as reported.
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