UBS On-Air: Paul Donovan Daily Audio 'Trends not changing '
The desk interprets recent employment data from the US as indicative of underlying weaknesses in the labor market that necessitate a cautious stance from the Federal Reserve. Per the full note from UBS, while job numbers have increased year-to-date, the pace of growth has slowed compared to the previous four years. This lag in employment growth, alongside the decline in manufacturing jobs, raises concerns about future economic resilience—especially as averages in hourly earnings may soon be outpaced by inflation. The expectation of a potential rate cut is underscored by the current trends in job creation, indicating a vital pivot that may alter market dynamics.
What the desk is arguing
The desk frames this as a crucial sign for the US economy, emphasizing that while jobs are being created, the overall pace—despite an upward trend—may not be sustainable. As pointed out by UBS, the slow job growth raises flags about the quality of reported employment data, particularly with the slowdown in manufacturing jobs continuing unmitigated.
Moreover, the desk notes that although consumer confidence remains robust, evidenced by strong employment in sectors like restaurants, the deterioration in manufacturing and potential inflationary pressures on wages suggest the Fed might act to preemptively ease rates. This reflects a broader sentiment regarding the need for caution amidst apparent weakening trends.
Where it sits in our coverage
The current consensus forecast from our coverage suggests a target of 1.075 for the USD against select currencies. This sentiment aligns closely with projections from several firms, including:
Given the mixed signals, our desk's view is moderately aligned with jpmorgan, which anticipates stronger fundamentals warranting a tighter range, while we differ from bofa, who remains more pessimistic on growth.
How other firms see it
The consensus appears to be centered around a cautious outlook on the dollar's strength, with firms like jpmorgan and others supporting a bullish view based on potential Fed pivots. Contrarily, firms such as bofa project a bearish outlook, reflecting unease concerning economic stability and consumer spending.
Key indicators such as US CPI and employment sectors, particularly the manufacturing index, will be pivotal in shaping sentiment and influencing the broader USD trend moving forward.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US job growth is slowing compared to previous trends, signaling potential economic fragility.
- 02Manufacturing employment continues to decline, raising questions about sector health.
- 03Fed considerations for further rate cuts may be influenced by ongoing labor market developments.
- 04Inflation risks might soon outpace wage growth, impacting consumer purchasing power.
Market implications
Traders should monitor the USD's behavior around the 1.075 level as a key pivot amid these economic signals. The potential for Fed policy changes, particularly rate cut discussions, will be crucial, as will upcoming data releases showing inflation trends or further insights into labor market health.
Risks to this view
Should employment data reverse sharply or inflation metrics deteriorate more than expected, this may invalidate our cautious stance, pushing traders to recalibrate expectations regarding Fed policy interventions and the USD's strength.
Good morning. This is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Wednesday the 17th of December.
Yesterday's US employment report is dotted with red flags as to the data quality. And the data quality was never that good in the first place. It is perhaps better to be looking at the trends that have emerged this year rather than fixating on a single data point.
Year-to-date the total number of jobs in the United States has risen but the pace of increase is slower than for the same period over the preceding four years. Manufacturing jobs have continued to decline with very little evidence of a shift in the trend. The decline was already underway during the factory building boom of the last few years and with the ending of that boom this year it can hardly be considered a surprise that the jobs numbers have continued to trend down.
Average hourly earnings are not the same thing as income or wage growth and should be treated with considerable caution when the composition of the US workforce is shifting. But the growth here has slowed to levels where it may be overtaken by rising inflation rates in the not-too-distant future. The labour market pattern is not likely to cause serious concerns about the resilience of the middle-income US consumer at this stage.
Restaurant sector employment continues to be strong and no doubt reflects the established pivot in consumer behaviour towards spending on having fun. Hotel employment has been weaker but that is harder to separate from the weaker tourism going into the United States this year which doesn't really say anything about domestic consumers. Nonetheless, the labour market trends probably raise enough concerns to reinforce the idea of a further rate cut by the US Federal Reserve to act as an insurance against any increase in the fear of unemployment.
US President Trump announced a complete blockade of Venezuela except for the land borders. If the blockade is effective, it will therefore primarily affect oil supplies which tend to be shipped by sea to China but any other exports can presumably take a land route out. Trump has demanded the return of oil, land and assets.
It's not clear what Trump is referring to which suggests that the timing of the blockade will be open-ended. The impact on the Venezuelan economy could be significant as oil exports were an important source of foreign exchange. However, Venezuela's oil exports are not that significant in global economic terms running at notably below 1% of global demand last month.
UK November price data showed a slower pace of consumer price inflation than had been expected with some sectors of the economy experiencing deflation. The weird way electricity prices are levered in the UK is continuing to add to the inflation rate but things like furniture and appliances are falling in price. The data certainly helps the case for a rate cut at tomorrow's Bank of England meeting and argues perhaps for some further easing of policy in the new year.
That's all for today. Have a good day. and a member of FINRA SIPC. The investment views have been prepared in accordance with legal requirements designed to promote the independence of investment research.
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