UBS On-Air: Paul Donovan Daily Audio 'Through the keyhole'
The desk emphasizes that the failure of the US Congress to avert a government shutdown results in a lack of official economic data, significantly impairing the accuracy of economic modeling. Per the full note from UBS, this situation constrains economists to rely on private sector data, which, while clear, offers only a narrow view of the economy, likened to 'viewing the economy through a keyhole'. This deficit in reliable data creates uncertainty in market forecasting, which may impact trading strategies across FX pairs, with particular attention to USD movements.
What the desk is arguing
The desk argues that the impasse in Congress heralds a troubling period for economic forecasting. Without updated official data, economic projections will primarily rely on private data sources, which may not capture the broader economic dynamics effectively, creating potential volatility in FX markets.
UBS's commentary clearly highlights the issue: economists' reliance on model-based projections becomes less accurate under current conditions. The absence of official data not only obscures the comprehensive economic picture but can lead traders to make decisions based on incomplete information.
Where it sits in our coverage
Our consensus target for USD pairs currently sits at 1.075, with a range between 1.04 and 1.12. Aligning with our outlook, jpmorgan sets its target at 1.10 for Mar26, while bofa presents a more conservative view with a target of 1.04 for the same tenor.
The desk's position echoes this consensus, indicating a cautious outlook on USD stability in light of an uncertain data landscape, making our viewpoint consistent with the cross-firm sentiment.
How other firms see it
Firms like jpmorgan and bofa present contrasting perspectives, with jpmorgan aligned with the desk's cautious optimism, while bofa represents a more bearish outlook on USD strength, reflecting different stances on the prevailing economic uncertainty.
The anticipated impacts of this uncertainty can be observed in pairs like EUR/USD and AUD/USD, where shifts in sentiment around US economic health could generate significant volatility. Traders should watch these pairs closely for signals of changing momentum, especially with potential shifts following data releases in other jurisdictions.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Lack of official US data creates forecasting challenges.
- 02Private sector data is less reliable, leading to increased uncertainty.
- 03Market positions may fluctuate significantly without accurate information.
- 04Attention to USD movements is critical amid upcoming economic dynamics.
Market implications
Traders should monitor the EUR/USD and AUD/USD pairs closely for potential impacts stemming from US economic data uncertainty. A significant break above 1.10 could shift sentiment positively if traders view the private data as favorable, whereas failure to maintain stability could drive a reassessment of positions.
Risks to this view
Any significant legislative breakthrough that results in the Congress reaching an agreement could restore confidence in official data integrity, thereby reversing the current market stance. Additionally, stronger-than-expected private sector data may also lead to a recalibration of forecasts that impacts the USD positively.
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 1st of October. The next act in the political theatre of the United States is underway, with the US Congress failing to either change the rules or pass the necessary legislation under current rules to keep the government open.
Of course, not all of the government is shut down, but quite a lot of it is. A lot of the effects are reversible, assuming the play-acting doesn't go on too long and the people who are temporarily laid off get back pay. But for economists and markets, it does mean an absence of economic data.
So can the golden age of information step up and private sector data fill the void? It cannot. Private sector data is like looking at a room by peering through a keyhole.
You can see clearly, but you can only see part of the bigger picture. Government data is like opening the door to the room. Private sector data relies on government data to model what is happening outside of its field of vision.
Add in the uselessness of politically partisan survey evidence and the rapid structural change to the global economy, and any illusion of precision that is offered by private data starts to fade away. Some releases are better than others. Things like credit card data offers more insight than a sentiment poll, for instance.
But the whole picture is now missing. US President Trump's nominee to be the next Bureau of Labor Statistics commissioner appears not to have enough votes in the Republican-controlled Senate to be confirmed, and their nomination has been withdrawn. This matters to markets, partly because some investors have expressed concerns about the independence of economic data, but also because it reminds investors that presidential nominees may, under certain circumstances, fail to be confirmed.
With the role of US Federal Reserve Chair up for confirmation next year, that is a market-relevant consideration. Pro-area consumer price inflation is due today. The various provincial numbers were slightly erred to the upside relative to consensus, but not in a way that is likely to change expectations about policy stability from the European Central Bank.
As a result, markets are not likely to exhibit a great deal of interest in today's data. Japan's Tankan sentiment survey of companies was so completely in line with market expectations as to generate only limited interest. Capital spending plans were about the only surprise to the upside, and one might detect a whiff of artificial intelligence enthusiasm about those particular numbers.
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