UBS On-Air: Paul Donovan Daily Audio 'Why work matters'
The desk notes a significant shift in the narrative surrounding the US labor market, as highlighted in UBS's recent report. Per the full note, expectations for today's US employment report suggest an unchanged unemployment rate, with non-farm payroll growth anticipated below 100,000. The desk emphasizes the importance of this data in relation to consumer spending, particularly under prevailing high oil prices and the erosion of the savings rate during previous tariff periods. This situation indicates a delicate balance that could affect the broader economic outlook and potentially market sentiment.
What the desk is arguing
The current landscape of US labor data indicates a troubling level of uncertainty, which could impact market dynamics. UBS suggests that the unreliable nature of the upcoming employment report may further muddy the waters, despite expectations for stability in employment metrics. With non-farm payroll projections scattered and a consensus forecasting minimal job growth, this leaves room for volatility in market reactions based on interpretation of wage dynamics and job security.
The desk is closely monitoring average hourly earnings amidst this data backdrop. Though average earnings may rise due to shifts in job composition even without wage increases, this could mislead market expectations about consumer behavior. If consumers begin to dip into savings to address rising costs, any confidence they have in job stability will be crucial in sustaining consumption and, consequently, broader economic health.
Where it sits in our coverage
Our current consensus target for the USD is 1.075, within a range of 1.04 to 1.12. Specifically, jpmorgan is aligned with a target of 1.10 for March 2026, while bofa offers a contrary perspective, setting their target at 1.04 for the same tenor.
This outlook aligns with a cautious sentiment across some firms while reflecting the inherent uncertainty captured in UBS's report. As highlighted, the volatility in payroll data and its impact on wage growth could resonate through these targets, particularly if consumers lack confidence due to their eroded savings rates.
How other firms see it
Most firms seem to align with this cautious viewpoint, echoing concerns over job security and consumer behavior. In contrast, a handful of firms have adopted a more optimistic stance, suggesting a rebound in labor dynamics.
Keep an eye on USD/JPY as its movements may reflect broader sentiment influenced by the US employment outcomes and Fed policy.Ongoing observations about the labor market are likely to affect these cross-currency dynamics significantly.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US labor market data releases face reliability concerns with an expected sub-100k payroll increase.
- 02Consumer sentiment heavily influenced by job security could shape spending habits amid rising oil prices.
- 03Shifts in job composition may distort average wage growth metrics, misleading market expectations.
- 04US eroded savings rates during tariffs present additional vulnerabilities for future consumer spending.
Market implications
Traders should monitor the reception of the upcoming employment report closely, particularly any deviations from the consensus expectation of stability. A strong or weak reaction may influence positioning moves in pairs like USD/JPY stemming from broader market sentiment about the US economy.
Risks to this view
Risks to this analysis include a better-than-expected job growth figure that might uplift consumer confidence or unexpected changes in monetary policy from the Federal Reserve, which could alter perceptions of economic stability and the USD's value.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Friday the 5th of June. Today we get more labour market data from the United States in the form of what has become the increasingly unreliable US employment report.
The expectation for today is of a fairly static report, no change in unemployment and a payrolls gain below £100,000, but in line with more or less stability in the overall conditions of the labour market. However, the range of forecasts for payrolls today is fairly scattered and almost no one is forecasting the actual consensus number. In this sort of situation the relationship between average earnings and wage growth weakens.
If there are fewer jobs being created overall, the risk is that changes in the composition of the workforce will have a disproportionate impact on the averaging process required to get to average hourly earnings. It only takes a spike in the number of high income jobs being created to raise average earnings, even if no one is actually getting a pay rise. The US labour market has assumed more importance than normal in the last 16 months.
In the current situation, US consumer spending on non-oil products depends on a willingness to lower savings rates to pay for the current higher oil prices. Exactly the same pattern was followed last year with US tariffs. But this stabilisation effect depends on two things.
First the price increases should not be so large as to overwhelm the savings rate. And second, consumers need to have enough confidence in the future to be willing to lower their savings rates. Inevitably, confidence in the future is likely to depend on job security, which is why maintaining the no-fire part of the no-hire, no-fire labour market in the States is so important.
The US is perhaps more vulnerable than other economies, having eroded its savings rate during the tariff era, and with additional layers of policy uncertainty raising more questions about the stability of the labour market. However, for now, today's data should reassure markets that consumers will continue to spend. The rest of the calendar is fairly subdued.
Bank of England Governor Bailey is speaking after markets close, and this is marking the anniversary of the publication of Smith's Wealth of Nations. Fascinating, no doubt, but unlikely to excite the financial markets. Revised first quarter euro area GDP is even less calculated to arouse the passions of the investing community.
Revised data never does. Euro area data almost never does. And the first quarter is a whole war away from the way the world is operating at the moment.
On the war news, the latest information at attempts to a ceasefire between Israel and Lebanon having failed has not proved to be a surprise. The stalled nature of talks between an Iran and the United States has not proved to be a surprise. Markets want to be optimistic, but investors are not going to give up being cynical unless discussions about progress on talks include some communication from Iran, and that has generally not been forthcoming.
That's all for today. Have a good day. Finma in Switzerland.
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