UBS On-Air: Paul Donovan Daily Audio 'The Wile E Coyote effect continues'
The desk interprets the recent commentary from UBS, highlighting the persistence of consumer behavior in developed economies, notably under the 'Wile E Coyote effect.' This phenomenon suggests that consumers continue to spend despite looming economic challenges, as evidenced by the latest UK retail sales data showing increased volumes in both oil and non-oil categories. Per the full note source, while the current spending trends are robust, they are unsustainable in the long run given the eventual 'gravity' of economic reality. The consensus forecasts indicate a cautious outlook, with key targets reflecting mixed sentiments among market participants.
What the desk is arguing
The desk frames this as an illustration of consumers' current buoyancy in developed economies, particularly in the UK. With March retail sales revealing a notable rise in spending, there's a clear indication that households are opting to spend savings to maintain their living standards, a trend unsustainable without eventual economic adjustments.
Specifically, UK retail figures show an uplift in oil sales, correlating with a perception of strong demand. However, the underlying concern is that this growth in consumer activity cannot last indefinitely, signaling potential risks ahead for the economy.
Where it sits in our coverage
Currently, we have a consensus target of 1.075 for the GBP/USD exchange rate, with a range of 1.04 to 1.12 projected by various firms. Key targets from notable institutions include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk’s view aligns with jpmorgan but diverges from the more cautious outlook presented by bofa, which sees potential downside risks for the pound.
How other firms see it
Firms like jpmorgan remain aligned with the bullish sentiment on GBP/USD, suggesting a favorable outlook amid current retail performance data. Conversely, bofa takes a more conservative stance, reflecting concerns about sustainability in consumer spending.
The interplay between developing UK retail trends and upcoming economic indicators will affect the GBP/USD trajectory, particularly as central banks react to evolving economic conditions.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01UK retail sales data shows increased consumer spending despite economic challenges.
- 02The phenomenon of consumer behavior reflects short-term buoyancy but poses long-term risks.
- 03There is a divergence in sentiment among leading financial institutions regarding GBP/USD targets.
- 04Sustainability of spending trends is a key focal point for market observers.
Market implications
Watch for the GBP/USD near the consensus target of 1.075 as consumer spending trends evolve. Upcoming economic data and any shifts in central bank policies could act as catalysts for volatility in the currency pair.
Risks to this view
A significant slowdown in consumer spending or negative economic data from the UK could invalidate the current bullish stance on GBP/USD, potentially driving the currency lower toward the 1.04 target set by **bofa**.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Friday the 24th of April. UK March retail sales data shows the Wiley-Coyote effect is performing as expected.
In the Roadrunner cartoons, Wiley-Coyote would run off the edge of the cliff, continue running across thin air, and only later realise the absence of solid ground before plunging into the abyss below. Developed economies' consumers are still happily running across thin air. The Gulf War induced a rise in oil prices that weakens consumer spending power.
One response to that would be for consumers to cut back on non-oil spending and divert their money to buying oil. What is happening at the moment is that consumers are maintaining non-oil spending, in fact increasing it, increasing oil spending, demonstrating perhaps a lack of confidence in a quick end to the war, but cutting savings rates to finance the whole situation. But in the UK, petrol retail sales and non-oil retail sales volumes adjusted for the price increases both rose during March.
Non-oil sales indeed rose more than expected, and this was predominantly in non-food categories. The increase in oil sales does, in effect, mean that part of the UK's petroleum reserve is now held at a very localised level, stored in the tanks of the general population's cars. So far, the UK consumer data, as with earlier US retail sales data, supports the idea of people adapting to the higher oil prices.
It cannot last forever, but it can last for some little while yet. Japanese March consumer price inflation showed a slightly larger increase than had been expected, which was concentrated into energy prices. The government in Japan has been restricting some of the energy price increases back in March, and this support has been partially withdrawn in April, so there will be some further inflation effects in the future.
Ahead, the data calendar is focused on sentiment data, which offers very, very limited value. The Germany for Business sentiment poll for April is expected to slide, but as with most sentiment surveys, it can depend on the day in which the survey was completed. The wild swings in expectations surrounding the war over the last month are bound to be reflected in such analysis, although it's worth remembering that financial markets are more fixated on the aggression and retreats of US President Trump's social media commentary than are people in the real world.
The final Michigan consumer sentiment data from the States for April is similarly affected, and here the headlines can just be ignored. The political polarisation that is evident in the breakdown of the data along party lines may be of more interest. This is a small sample of the population, and considerable care is needed in interpretation, but the political polarisation around overall sentiment and around inflation expectations is of some use.
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