UBS On-Air: Paul Donovan Daily Audio 'What difference does it make?'
The desk's analysis supports the expectation of a rate cut from the Fed, bolstered by a weakening labor market and the unlikely impact of recently appointed Fed officials. According to the insights provided by Paul Donovan from UBS, consumer data expected today could bolster sentiment, potentially indicating that recession fears are unwarranted—especially given that middle-class consumers appear resilient despite rising prices. Overall, the desk anticipates steady consumer spending patterns amid prevailing economic uncertainties, with retail data serving as a key indicator to monitor. Per the full note source, the market reflects a consensus view geared towards rate adjustments amid these consumer dynamics.
What the desk is arguing
The desk emphasizes that the confirmations of Fed Governor Cook and CEA Chair Miran's participation in the upcoming FOMC will likely not alter the anticipated policy decisions. Markets are already pricing in a rate cut, reflecting a sentiment that the Fed is poised to respond to economic indications rather than the appointment of new members.
Given the expected release of consumer spending data, which Donovan notes may reflect stronger than feared retail figures, the desk sees potential for investor confidence if results meet or exceed expectations. Current conditions indicate that while certain consumer segments face pressures, overall spending remains buoyant due to available savings and credit lines.
Where it sits in our coverage
Currently, our consensus target is set at 1.075 with a range between 1.04 and 1.12. Notable targets from select firms include: - jpmorgan: 1.10 by Mar26 - bofa: 1.04 by Mar26
This outlook aligns with the prevailing market sentiment indicated by several firms, reflecting cautious optimism about consumer resilience amid economic policies, though it represents a lower bound of the forecast range.
How other firms see it
Many firms align with a similar view, anticipating a rate cut and consumer resilience, though divergence exists with firms like bofa, which express skepticism regarding consumer strength and project lower targets.
The trajectory of the EUR/USD may closely mirror the anticipated policy adjustments from the Fed, particularly as US economic indicators emerge, influencing broader market dynamics.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Anticipation for a Fed rate cut continues, supported by weakening labor market signals.
- 02Consumer data emerging today is critical for assessing economic resilience.
- 03Middle-class consumers appear able to maintain spending habits despite cost pressures.
- 04Market consensus currently favors a continuous rate adjustment strategy.
Market implications
Investors should closely watch today's retail sales figures and the overall consumer sentiment data for indications of spending trends. Should data align with the expected upbeat narrative, it could further solidify a bullish view on consumer-oriented currencies.
Risks to this view
A sudden shift in consumer confidence or an unexpected downturn in today's retail sales data could challenge the bullish outlook and prompt a reassessment of market positioning towards the Fed's rate cut predictions.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Tuesday the 16th of September. The US court system has confirmed that Federal Reserve Governor Cook will be a voting member at tomorrow's FOMC policy decision.
The US Senate has confirmed that Chair of the Council of Economic Advisers Miran will be a voting member at tomorrow's FOMC decision. Do either of these confirmations matter to the outcome? Probably not.
The markets are expecting a rate cut and the weakening state of the labour market does not prevent a cut. Whether lower rates will accomplish much when it appears that uncertainty around government policy and not the cost of credit is the bigger restraint on economic activity remains to be seen. However, we do have US consumer evidence today and this should hopefully restore confidence in the idea that a US recession might be avoided.
Consumers tend to be less immediately affected by policy uncertainty. If one attempts to move aside the partisan noise, fear of unemployment amongst the middle-aged, middle-class cohort of consumers does seem to be low and this is the group that matters. Today's retail sales numbers are nominal and so the effect of higher prices on goods will be a potential boost to the value of sales.
However, the middle-class consumer has the ability to pay the higher price, even with lower real income growth, because there are savings and lines of credit available. US consumers will not willingly surrender their national pastime of spending money. The expectation is therefore for a fairly steady pace of spending.
We'll also be getting import and export price data from the states. Import price data is of course important in judging where the costs of trade policy are likely to fall. In this sense, it is important to ignore the effects of universal global commodity price changes, falling petroleum prices for instance, instead to focus on whether there are offsetting import price declines for specific imported products.
So far, that has generally not been the case. The United Kingdom provides some wild guesses at the state of the UK labour market. UK labour market data comes packed with so many health warnings these days, as to perhaps undermine confidence in the picture the figures are presenting.
For what it's worth, the data is presenting a rather steady state picture of the labour market, with modest increases in real incomes. We had the Germans' EDEW business sentiment poll as well today. It's really hard to get excited about sentiment measures.
Even the mainstream media is starting to pick up on the problems of data quality when based on surveys, about 15 years after the economics profession was voicing these concerns, but better very late than never. Euro area and US industrial production figures are released today. Despite the Euro area being slightly more important as a manufacturer, its industrial production numbers attract fewer than half the economic forecasts than does the US number.
Admittedly, the Euro data is for July, which was some time ago, and the US numbers are for August. With some US companies suggesting that production is being disrupted by international supply chain problems in the wake of trade policy uncertainty, the US data may have an additional layer of interest in the details. That's all for today.
Have a good day. This material has been prepared and published by the Global Wealth Management Business of UBS Switzerland AG, regulated by FINMA in Switzerland. Its subsidiaries or affiliates, collectively referred to as UBS.
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