UBS On-Air: Paul Donovan Daily Audio 'Trade tax timing, and inflation'
The desk interprets Paul Donovan's commentary on the latest US employment report as signaling restrained growth prospects for the US economy, despite a headline job creation figure that defies immediate rate cut expectations. Per the full note source, the emphasis on job creation in state education suggests potential seasonal distortions, while a declining work week raises concerns about broader economic sustainability. This insight highlights the paradox within the data — strong job numbers on the surface, but troubling signals lurking beneath. With no significant economic indicators scheduled in the next 30 days, markets may remain sensitive to these conflicting signals and speculative positioning.
What the desk is arguing
The desk is arguing that the US employment report reveals a contradictory economic landscape, showing robust headline job gains while hinting at deeper issues in labor market quality. The focus on temporary job creation in education raises red flags, suggesting that while the numbers look good, the nuances indicate potential vulnerabilities ahead based on the analysis of UBS's Chief Economist, Paul Donovan.
Moreover, the shrinking workweek coupled with low response rates from surveyed firms adds complexity to the job creation narrative. Donovan highlights that only 24,000 of 70,000 firms provided timely employment data, casting doubt on the reliability of the figures and affirming concerns that the labor market may not be as strong as the headline suggests.
Where it sits in our coverage
Our consensus target for the Euro/USD pair stands at 1.075, with a range of 1.04 to 1.12 based on recent reviews from various institutions. Notably, some firms have set aimed targets for December 2026 as follows:
This interpretation aligns with JPMorgan's more optimistic outlook, while diverging from BofA, which remains cautious. The desk's position could be viewed as leaning toward the prevailing sentiment but recognizes potential downward pressure from evolving economic data.
How other firms see it
Many firms are aligned in their cautious outlook towards the US economic recovery, with Goldman Sachs and Deutsche Bank echoing concerns over inflationary pressures stemming from tariffs. Conversely, Barclays and BofA have adopted a more optimistic stance towards US growth trajectories, hinging on consumer resilience despite rising costs.
The implications for the USD/EUR trajectory could be pronounced, as central bank policy adjustments may reflect the deteriorating economic sentiment highlighted in Donovan's analysis. Traders should remain vigilant regarding data releases concerning inflation trends and interest rate expectations.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The US employment report highlights strong headline job gains, but underlying details signal economic concerns.
- 02Job creation in state education raises potential seasonal distortions, indicating fragile labor market health.
- 03Concerns about hourly earnings and labor survey response rates complicate the employment landscape.
- 04Upcoming inflation data may reflect the delayed impact of rising tariffs on consumer prices.
Market implications
Traders should closely monitor incoming inflation data, particularly the consumer price index scheduled for mid-July, as it may be influenced significantly by the recent tariff hikes. Additionally, watch for signs of repositioning in USD/EUR pairs around key technical levels as market sentiment shifts.
Risks to this view
A reversal of the current outlook could occur if forthcoming inflation data de-escalates concerns about the economic slowdown or if the Federal Reserve signals a stronger commitment to rate hikes in response to unexpected inflationary pressures. Additionally, any notable improvement in labor participation or wage growth could warrant a reassessment of bearish trends.
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 4th of July. The US employment report yesterday was strong enough on the headline to deter expectations of a sudden rate cut by the US Federal Reserve, but troubling enough in the details to support a more negative view on US growth in the second half of this year.
The fact that so many jobs seem to be created in state education immediately ahead of schools winding down for the summer holiday is a little suspicious. The declining work week hints at some issues for income, fewer hours worked means less take home pay for those paid by the hour. The problem of low survey response rate also continues.
Of the 70,000 firms asked to give employment data back in April, only a little over 24,000 actually bothered to reply in time for the employment report. US May trade data was not that surprising. US President Trump's trade taxes increased and the effective tariff rate in May went to 8.7% globally.
That is about 60% of what the effective tariff rate will eventually become. Some of that is because of things like pharmaceuticals which have yet to be taxed. However, a relatively large amount of the goods arriving in the United States in May would not have been subject to tariff because they were already en route when the tax burden was imposed on US companies and consumers.
This matters to the inflation numbers. The taxes evident in the May import data are likely to show up in the July consumer price data. Some may delay until the August consumer price data.
But that inflation spike will only represent a little more than half of the eventual direct inflation hit that will come from the tariffs. It's not likely to be until September at least that the full direct hit of the April tariffs will be showing up in US consumers' shopping baskets. This pattern will also matter with the next wave of trade taxes.
Trump has announced that they will start sending letters to trade counterparts telling them how much tax US consumers will pay when importing each country's goods. Trump suggested importers would have to pay between a 10 and a 70% tax. They've also said the money will start to come into the United States on the 1st of August.
That presumably is an unintended mistake. First, the money will not come into the United States as it's US consumers that will be paying. The money will be shifting from US companies' and consumers' bank accounts into the US Treasury.
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