UBS On-Air: Paul Donovan Daily Audio 'Up and down'
The desk views the upcoming US PPI report as critical, particularly given the inflationary pressures signaled by last month's CPI data. As noted by Paul Donovan from UBS, elevated diesel prices are expected to influence the producer price figures, potentially reflecting broader supply chain constraints and transitional tariff effects. This data release could impact market expectations regarding Federal Reserve policy amidst ongoing discussions around pricing strategies and inflation trends. Per the full note , understanding the details of this PPI report will be essential for traders positioning themselves for potential market movements in the wake of inflation data.
What the desk is arguing
The desk interprets the release of US producer price inflation as a pivotal indicator of underlying inflationary pressures. Paul Donovan of UBS highlights how soaring diesel prices, currently up by nearly 75% from pre-war lows, will be a key component of this report, with broader implications for consumer price expectations.
The anticipated rise in PPI comes on the heels of a higher-than-expected consumer price inflation reading for October, reinforcing the likelihood that inflationary pressures are still present in the economy. This context reinforces the importance of scrutinizing the PPI data for signals that could influence the Fed's future decision-making.
Where it sits in our coverage
Our consensus target for the USD is 1.075, falling within a range of 1.04 to 1.12. Notable firms in our per-firm coverage are: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk’s view aligns more closely with jpmorgan, indicating a potential upside in the market, while contrasting with bofa, which positions for weakness. Given that our target is toward the midpoint of the range, we see modest room for movement depending on the upcoming data.
How other firms see it
Firms like jpmorgan and citi align around bullish expectations for USD, anticipating sustained economic pressures that could buoy the currency. Conversely, bofa offers a more bearish outlook, focusing on potential weakening in the inflation narrative.
Traders should also monitor BLS reports on employment trends and consumer sentiment, as they will likely intersect with the implications of today's PPI data, influencing USD movements relative to other currencies.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Upcoming US PPI report is crucial for understanding inflation.
- 02High diesel prices are expected to skew producer price data upwards.
- 03Current consensus views diverge on the USD's direction.
- 04Market waits for broader economic indicators to inform Fed policy.
Market implications
Watch the USD for reactions to the PPI data release, particularly if figures deviate significantly from expectations. A higher-than-expected PPI could bolster USD positions ahead of the Fed's next policy decision.
Risks to this view
A significant drop in PPI or unexpected shifts in consumer sentiment could weaken the bullish stance on the USD, forcing a reassessment of inflation outlooks and altering trader positioning.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning, London time, on Friday the 13th of November. Today's release of producer price inflation from the United States is of some interest, given the higher than expected consumer price reading for the month of October.
One of the reasons for the higher consumer price reading, relative to expectations, was that the ending of tariff effects on inflation was not quite as visible as had been hoped. There was evidence in the data details, but only for selected areas. The precise timing of tariff price pass-throughs was quite hard to calculate last year, and the precise timing of their falling out of the calculation is also therefore problematic.
However, as producer price data is capturing prices higher up the supply chain, there may be some more evidence in these figures. The producer price inflation will be affected by the astonishingly high diesel prices that persist in the United States. Diesel prices are up almost 75% from pre-war lows earlier this year.
Unlike consumer price inflation, which does not include diesel as a direct price, only indirectly via things like transport costs, diesel is a direct price component for producer prices. US President Trump said no deal was necessary with Iran, and that the US controlled the Strait of Hormuz. The worldview is not necessarily shared by investors, who pushed oil prices higher in the wake of Trump's remarks.
On the subject of inflation, the New York City Council has become the latest part of the US government to ban what they call surveillance pricing, what economists know by the far more elegant name of first-degree price discrimination. This is when two people buying the same product at the same time pay different prices, because the seller estimates that they have a different willingness to pay. It allows retailers to maximise their profit, in theory, to the very highest level possible.
It is also the traditional form of pricing. Prior to urbanisation, shopkeepers would know their customers personally, and would charge personalised prices according to that knowledge. It was only with urbanisation that customers became anonymous.
First-degree price discrimination increasingly undermines the very concept of inflation, which, as currently calculated, relies on a single price being charged to everyone. Modern technology, especially for online retail, allows first-degree price discrimination to re-emerge, but it is difficult to identify, prove and prosecute. What is relevant for markets, especially in the context of the anger evidenced at the mid-term elections, is that this sort of action keeps alive the suspicion of price gouging and profit-led inflation.
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