UBS On-Air: Paul Donovan Daily Audio 'What can consumers afford to spend?'
The desk sees the recent German retail sales data as indicative of a broader trend where initial estimates frequently underestimate consumer strength. Per the full note source, while November numbers were weaker than anticipated, upward revisions for October suggest resilience in consumer spending. The implications for the Eurozone's macroeconomic landscape are significant, particularly as a strong consumer sector could influence monetary policy decisions moving forward.
What the desk is arguing
The recent German retail sales data presents a more optimistic outlook than headline numbers suggest. The desk frames this as a sign that actual consumer spending is likely to be higher than current readings indicate, corroborating a trend seen over the past year. Per the commentary from Paul Donovan, substantial upward revisions are expected for German retail sales based on past patterns.
Specifically, Donovan notes that the October retail sales figures have been significantly revised upward, raising questions about the validity of the November readings. This pattern suggests that the German consumer remains more robust than previously reported, which could support a more favorable economic narrative for Eurozone recovery.
Where it sits in our coverage
Our coverage maintains a consensus target for EUR/USD at 1.075, with a range between 1.04 and 1.12. Specific targets are as follows: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This outlook aligns closely with the bullish positioning from jpmorgan, indicating that the desk's view is near the upper end of the spread among peers.
How other firms see it
Firms such as jpmorgan and others are aligned in anticipating a stronger consumer sector in Germany influencing Eurozone dynamics positively. In contrast, bofa holds a more cautious stance, suggesting lower target levels based on the same data.
Other notable indicators to watch include the ECB's response to this consumer data and its potential impact on the EUR/USD trajectory. The evolving narrative of consumer strength could play a significant role in shaping market sentiment and positioning decisions in the near term.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Recent data revisions hint at stronger consumer spending in Germany than initial reports suggest.
- 02The October retail sales figures were revised up, indicating resilience in the face of weaker November readings.
- 03The relationship between consumer health and Eurozone monetary policy might shift if consumer sentiment strengthens further.
- 04Tracking U.S. inflation dynamics will be crucial, especially with upcoming Supreme Court rulings affecting trade tariffs.
Market implications
Watch the EUR/USD pair near the 1.075 target as consumer sentiment data continues to evolve. Rising revisions to retail sales figures could push the currency higher, signaling greater economic strength.
Risks to this view
Key risks include potential downward revisions to current data or unexpected negative news regarding consumer sentiment or economic performance. Additionally, the outcomes of the U.S. Supreme Court rulings on tariffs may also influence market expectations.
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 7th of January. The data calendar is not terribly exciting today.
German November retail sales were weaker than expected, but the sizeable monthly drop in October sales was revised up to a sizeable monthly increase instead. This raises questions about what will happen with the latest numbers in the future. On the evidence of the past year, the probability is that these numbers too will be revised strongly higher.
It is what nearly always happens with German retail sales data in the past year. German consumers are persistently more exuberant than is initially reported. Euro area initial consumer price inflation data for December is not likely to excite markets, just as the French and German data did very little yesterday.
The sale of up to USD 2.8 billion of Venezuelan oil to the United States that was announced overnight came with limited details, but is unlikely to be terribly significant in economic terms. The scale of the sale and the type of oil being sold is not likely to shift the US consumers' perceptions of affordability. Gasoline prices are unlikely to fall dramatically on this news, for instance.
To the extent that any of the proceeds do find their way back to Venezuela, it may make some difference to that economy, but that's of very limited global interest at the moment. To the extent that the proceeds stick in the United States, the scale is too small to be relevant to macroeconomic data, though it might of course make a difference to individual US companies. Of potentially more relevance to the affordability debate is the fact that on Friday the US Supreme Court will issue a series of judgments.
It is being assumed that this will include a judgment on the legality of trade tariffs, though that's not absolutely certain. Over 70% of the current administration's tariffs are potentially affected by this ruling, although with cancellations, reversals and delays that percentage may be somewhat less in the future. If tariffs are ruled illegal and rebates start to be demanded, the ruling will de facto be a fiscal stimulus for the US economy.
The administration may then impose new tariffs, which would be a fiscal tightening, but that additional tightening would not reverse any stimulus effects that come from rebates. For US inflation, the question is whether prices that have risen to pass on tariffs to the US consumer will reverse if those tariffs are then declared to be illegal. A healthy scepticism is probably the best approach here.
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