UBS On-Air: Paul Donovan Daily Audio 'When economics takes over'
Lead — The desk interprets recent US equity market declines as a response to increasing economic uncertainty, with solid fundamentals in early 2025 being overshadowed by government policies. Per the full note source, UBS Chief Economist Paul Donovan highlights that consumer and corporate uncertainty from policy shifts may pose risks to market stability. Observations from the National Federation of Independent Businesses and consumer sentiment surveys illustrate a divergence in market sentiment compared to economic fundamentals. As traders consider positioning ahead of potential policy shifts, the impact on FX flows warrants close attention, given the ongoing challenges in multiple currency environments.
What the desk is arguing
The desk posits that US equity market movements are increasingly influenced by economic uncertainty exacerbated by current government policies. Recent commentary from UBS indicates that despite strong economic fundamentals—such as consumer confidence and savings—rising uncertainty could lead to volatility in assets and markets. Donovan specifically notes that unusual cracks in small business sentiment could signal deeper issues than mere partisan biases would suggest.
Furthermore, the delineation between economic reality and market perception is becoming increasingly blurred. The expectation that asset price movements could temper unorthodox government policies seems to be unraveling, with Donovan suggesting that market reactions may not sufficiently curb policy initiatives. This dichotomy poses risks to market performance going forward.
Where it sits in our coverage
The current consensus target for the USD/EUR pair stands at 1.075, with a range of 1.04 to 1.12. Notable firms include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk's perspective aligns closely with jpmorgan, capturing the more optimistic end of the spectrum, whereas bofa presents a contrasting view with a bearish stance that underplays recent economic strengths.
How other firms see it
The consensus among many firms highlights a mixed sentiment towards equity markets, with firms like jpmorgan leaning bullish while bofa and others maintain a cautious approach. The divergence in views may play into broader discussions around USD/EUR and broader economic indicators, particularly given the Fed's potential for policy tightening given inflation concerns. Look to the EUR/USD trajectory for guidance on how US market sentiment may react to further Fed announcements as uncertainty continues to drive activity.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US equity market declines reflect rising economic uncertainty driven by recent government policies.
- 02Despite solid economic foundations, consumer and corporate sentiment is weakening, as indicated by survey results.
- 03Market responses to asset price changes could influence the trajectory of government economic policies.
- 04The divergence between equity market performance and economic fundamentals poses risks for traders.
Market implications
Traders should monitor small business sentiment as an indicator of market expectations, especially given its pronounced Republican bias. A shift in this area could lead to a recalibration of risk assets, particularly in relation to USD strength against the EUR, especially if economic forecasts continue to signal volatility.
Risks to this view
A sudden improvement in consumer sentiment or a shift in government policy could abruptly reverse the perceived risks outlined by Donovan. Additionally, if consumer confidence surges and mitigates worries about governmental issues, the expected correlation between equity performance and FX might break down, impacting general market volatility.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 6.30 in the morning London time on Tuesday the 11th of March. Equity markets do not always react to risks around economic fundamentals.
Equity analysts don't always listen to economists, more is the pity. Yesterday's decline in US equity markets does owe quite a bit to risks around economic fundamentals however. At the start of this year the US economy had a solid foundation, as did most of the rest of the developed economies.
The things which would normally cause an economic downturn were not present. Consumers had a low fear of unemployment, reasonable savings levels and OK balance sheets. The imbalances that trigger recessions were not in evidence.
That fundamental economic strength is generally holding true today, but recent US government policy has increased consumer and corporate uncertainty about the future. This raises risks for markets as uncertainty itself has economic consequences. Today's National Federation of Independent Businesses survey of small business sentiment has traditionally had a very strong Republican bias in its answers.
That makes today's data release actually worth watching, quite unusually, as any weakening of sentiment here would be presumably in defiance of the partisan bias and media influence. As such, that would be a more significant warning of the risks from the current policy position of the US government than, say, a decline in the University of Michigan's consumer sentiment poll. Markets had also assumed that movements in asset prices would act as a brake on some of the more unorthodox policies of US President Trump.
Recent comments have suggested that that is not the case and that does therefore increase risk. However, Trump's somewhat erratic style does mean that there is some chance of policies still being reined in by market moves. Japanese GDP was revised lower in the fourth quarter.
The process is exaggerated by annualisation and the composition had more government spending and less private sector spending, which is a slightly negative signal. The revisions are a reminder that economic data is not very precise in real time. Revisions are more common and are generally larger than has been the case historically across economies.
The United Kingdom's February British Retail Consortium like-for-like shop sales data was weaker. In theory, it was weaker than consensus, but as only three economists forecast this number, consensus is something of an exaggeration. It was non-food sales that were dragging down the number.
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