UBS On-Air: Paul Donovan Daily Audio 'US rates paths'
Per the full note source, UBS Chief Economist Paul Donovan argues that the FOMC meeting minutes and Fed Governor Waller's speech are the key events today, with the market focused less on the current economy and more on political uncertainty in 2025. Donovan expects inflation to moderate in H1 2025, allowing the Fed room to ease, but sees political risks to inflation as a later concern. The desk's base case is that the Fed will cut rates in the first half of the year, though internal Fed divisions add nuance. This view aligns with a modestly bullish USD stance near term, but the broader path hinges on political developments.
What the desk is arguing
Per the full note source, UBS Chief Economist Paul Donovan frames the FOMC minutes and Governor Waller's speech as the primary market catalysts today. The desk argues that uncertainty about the 2025 economic outlook has shifted from the current state of the economy to political risks, which has made investors less certain about the pace of Fed easing. Donovan emphasizes that US inflation should decline in early 2025, driven by factors like fantasy house prices, providing room for rate cuts in the first half of the year.
Supporting this, Donovan cites that the US consumer credit burden does not appear onerous, with S&P credit card data showing default and delinquency rates in line with pre-pandemic norms. Additionally, many US households have locked in low mortgage rates, cushioning the impact of higher rates. The desk is implicitly rejecting the view that inflation is sticky or that the Fed will hold rates steady through H1 2025, instead betting that political threats to inflation are a later-stage risk.
How other firms see it
UBS aligns with the dovish Fed view, while Goldman Sachs and JPMorgan similarly expect further easing in H1 2025, though with more caution on political uncertainty. Morgan Stanley is more hawkish, arguing that fiscal expansion could force the Fed to delay cuts. Bank of America and Barclays sit closer to the middle, projecting one to two cuts in H1 2025 depending on data.
Related pairs to watch include USD/JPY, where the Fed path directly impacts carry dynamics, and EUR/USD, which will react to Fed-ECB rate differentials. US consumer credit and Fed speeches are the near-term cross-asset catalysts.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01FOMC minutes and Waller speech are the key events today; focus on Fed divisions and political uncertainty.
- 02UBS sees inflation moderating in H1 2025, allowing the Fed room to ease rates before political risks emerge.
- 03Consumer credit data due today is volatile but does not indicate onerous household debt burdens.
- 04The desk's bullish USD view near term relies on the Fed delivering a cut in H1 2025; political shocks are a downside risk.
Market implications
Watch the FOMC minutes and Waller speech for signals on the pace of easing. A dovish lean could weaken USD/JPY toward 155, while a hawkish surprise would push EUR/USD below 1.0450. The US consumer credit print, though volatile, may reinforce the narrative of resilient household spending.
Risks to this view
The call is invalidated if political developments, such as tariff announcements or fiscal expansion, accelerate inflation sooner than expected, forcing the Fed to pause. Alternatively, if the FOMC minutes reveal deeper internal divisions than anticipated, the market may price a longer hold, strengthening the USD and steepening the yield curve.
Good morning. This is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's six o'clock in the morning London time on Wednesday the 8th of January.
The US Federal Reserve is in focus today with the release of the minutes of the last FOMC meeting. Investors have become a little less certain about the path of Fed easing in 2025, although that has perhaps less to do with the immediate economic outlook and more to do with the potential for political changes to the economic outlook. There have also clearly been some divisions within the Federal Reserve over the pace of policy easing of late.
As a result, the nuance of the minutes perhaps assumes more significance than is normal at this stage of an easing cycle. Inflation should still decline in the States during the early part of this year as fantasy house prices and other factors allow some moderation. The political threats to inflation are likely to happen later, if at all.
That does allow the Fed some room to ease rates in the first half of the year. Fed Governor Waller is also scheduled to speak on the economic outlook today. Of related interest is the data on US consumer credit that's due to be released.
There are a sorted series on things like credit card data and they don't necessarily give a consistent picture. This data series is volatile and the range of forecasts in the consensus is very wide. Overall, the consumer credit burden does not seem to be especially onerous.
S&P credit card data is generally showing default and delinquency rates in line with pre-pandemic norms. Many US households also locked in mortgage interest rates at absurdly low levels. Germany is giving November retail sales and factory orders data.
The retail sales numbers will almost certainly underestimate the strength of the German consumer's spending. Ten of the last twelve retail sales data releases have seen the year-on-year rate of growth revised up. German consumers are not in that bad of a place.
Real income growth and no real need to increase savings rates allow some more consumer spending to take place over the course of this year. US President-elect gave a press conference yesterday and made an eclectic series of statements. The challenge for economists and for investors is working out whether any of the statements should be taken seriously or to what degree they can be taken seriously.
Some, like renaming the Gulf of Mexico, which the US cannot do unilaterally, can just be ignored. Some, like the territorial ambition, are also likely to be dismissed, although bilateral relations may be challenged by some of these assertions. The issue that markets care about, the threat to aggressively tax US consumers via tariffs, is something that investors are focused on.
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