UBS On-Air: Paul Donovan Daily Audio 'Who believes the numbers?'
The commentary from UBS highlights concerns over UK inflation data integrity, particularly given the government's energy price cap and broader economic uncertainties. As noted by Paul Donovan, the February consumer price inflation came in slightly below market expectations, indicating potential underlying issues that could affect monetary policy. Per the full note, the lack of reliable labor market data and discrepancies in historical wage growth further complicate the economic landscape, suggesting that official figures may understate the actual economic activity. The current fiscal landscape, particularly regarding increased defense spending, adds another layer of uncertainty for trading strategies in GBP pairs.
What the desk is arguing
The desk views the current volatility in UK inflation data as a critical factor impacting GBP forecasts. Per the full note, the government's cap on energy prices leads to artificially influenced inflation metrics that misrepresent the true economic situation.
Significantly, the absence of producer price data due to quality issues raises questions about the reliability of current economic indicators. Looking ahead, this creates a backdrop in which markets might misprice risk related to the UK's fiscal and monetary responses to inflation and economic activity.
Where it sits in our coverage
Currently, our consensus target for GBP/USD is set at 1.075, with a range of 1.04 to 1.12. Specific firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This view appears to align with the more cautious perspectives of jpmorgan while standing at the higher end compared to bofa, indicating potential for further appreciation if inflation data stabilizes.
How other firms see it
Several firms, including jpmorgan, adopt a cautiously optimistic outlook on GBP given the anticipated correction in data quality influencing market movement. In contrast, bofa presents a more bearish stance regarding GBP/USD, citing concerns over economic data reliability.
Market participants should pay attention to how the upcoming UK fiscal statement influences perceptions of GBP strength, particularly as the trajectory of GBP/USD could correlate with evolving insights into the UK economy's underlying health.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01UK inflation data is under scrutiny for reliability, impacting GBP outlook.
- 02The government's energy price cap distorts true inflation metrics.
- 03Absence of labor market data raises concerns about economic undervaluation.
- 04The fiscal landscape is shifting with increased defense spending, influencing market sentiment.
Market implications
Watch for GBP/USD to react sharply to any indications from the UK fiscal statement, particularly with current pricing near 1.075. The reliability of inflation metrics could lead to significant adjustments in market positioning and expectations for the upcoming BoE rate decisions.
Risks to this view
A key risk to the current call involves any revelations from the UK fiscal statement that further highlight the depth of economic challenges, coupled with adverse market reactions to revised inflation expectations. Additionally, erratic economic signals could lead to a loss of confidence in GBP, potentially shifting market dynamics significantly.
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 26th of March. UK consumer price inflation data for February was slightly lower than had been anticipated.
The data does not yet include the higher energy prices that will be a reflection not of market forces but of the weirdness of the UK government's energy price cap arrangements. Consumer price data, which normally accompanies the release of consumer price data, was not published. This is due to data quality issues.
In other words, even His Majesty's Office for National Statistics do not trust the numbers. We already do not have labour market data being published because of data quality issues and recent wage growth requires a set of revisions stretching back into history because of data quality issues. The UK Chancellor will be giving a fiscal statement today.
Does this matter outside of the UK? Not directly. However, this is an example of the government dealing with a new set of fiscal realities required by increased defence spending.
Simplistically, alliances are efficient ways of funding defence. If existing alliances are no longer dependable, then expensive duplication will take place on all sides. Today's statement will be accompanied by lots of angst about debt and deficit ratios relative to GDP.
The remarkable thing about this is that anyone thinks that the data is reliable. Research from Cambridge University, which is a minor academic institution in the east of the UK, suggests that there may be data quality issues with local employment numbers, official numbers understating the reality by quite a margin. That fits with the idea that economic activity is being underestimated in the UK, meaning that the debt ratios that cause so much anxiety are not going to be as bad as are currently reported.
US President Trump has continued to make some rather erratic pronouncements on taxing US consumers. Having hinted at more targeted taxation, they have clarified that they are not intending to exempt many US purchases from the tax burden of so-called reciprocal tariffs. Taxes on US consumers of copper are also planned.
These are not actual policies at the moment, just verbal comments of a president who has been known to change their mind. However, there were more companies from China added to the list of restricted exports from the United States, and that does definitely offer disruption to the supply chains. US durable goods orders data for February are due.
There may be some panicked ordering by international companies in anticipation of future trade wars, although February may be a bit late for that, as goods are generally subject to tariff on arrival in the purchasing country, and production and shipping times are therefore relevant. There may also be some price increases by US companies who anticipate trade taxes and think they can get away with raising their own price. The numbers are value-based.
Trade President Goolsbee was making some moderately hawkish comments overnight, suggesting that if the bond market starts to price in higher inflation, that would prevent rate cuts by the Federal Reserve. Consumer inflation expectations have already risen in the States, but sentiment surveys are just not reliable, and consumers are not very good at predicting inflation. Not very good is a polite British understatement.
Research by economists suggests that only economists can be relied upon to predict inflation. Consumer inflation expectations only really matter if they change consumers' economic behaviour, which they rarely do. Market inflation expectations matter more directly, as they have the potential to change the cost of credit and the perceptions of risk in the wider economy.
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.
It's subsidiaries, or affiliates, collectively referred to as UBS. In the USA, UBS Financial Services Inc. is a subsidiary of UBS AG and a member of FINRA-SIPC. The investment views have been prepared in accordance with legal requirements designed to promote the independence of investment research.
This material is for your information only, and it is not intended as an offer, or a solicitation of an offer, to buy or sell any investment or other specific product. The analysis contained herein does not constitute a personal investment recommendation or take into account the particular investment objectives, investment strategies, financial situation and needs of any specific recipient. This material may not be reproduced or copies circulated without prior authority of UBS.
Please visit www.ubs.com forward slash CIO hyphen disclaimer to read the full legal disclaimer applicable to this material.
Sources & References
How we cover this story