UBS On-Air: Paul Donovan Daily Audio 'Managing expectations'

Paul Donovan · UBS Global Wealth Management

Suspending the federal gasoline tax would cut US pump prices far less than gasoline has risen since the war began.

Trump floated removing the federal gasoline tax. Even if Congress could pass it, the cut would be under $0.19 per US gallon. That is small against a rise of more than $1.25 per gallon since the war began. Gasoline feeds directly into US consumer prices, unlike diesel, and consumers anchor on about $3 a gallon as fair. Prices above that level carry a political cost, so the proposal reflects that pressure rather than a meaningful price fix.

“the move would amount to a reduction of less than $0.19 per U.S. gallon. That has to be considered against the more than $1.25 increase in gasoline prices in The States since the war began.”at 0:57

Paul Donovan · UBS Global Wealth Management

Political pressure over gasoline prices may signal Washington's openness to a settlement with Iran.

Consumers' high sensitivity to gasoline prices creates political costs in Washington. That pressure could revive investors' hopes for a settlement with Iran, since it shows the administration is feeling the cost of the conflict. The point is tentative, framed as a possibility that renews hopes rather than a firm forecast.

“this political sensitivity to the gasoline price might again raise some investors' hopes for a move towards some kind of settlement with Iran.”at 1:30

Paul Donovan · UBS Global Wealth Management

US inflation expectations matter little because consumers show neither the willingness nor the means to act on them.

Gasoline prices weigh heavily on inflation expectations, and the New York Fed's one-year survey is due. Expectations only matter economically if people change behavior. Spending has not slowed significantly, which shows little willingness to cut back. There is no evidence of inflationary pay claims, which shows little means to act. Because of both, rising expectations should not be read as a rising inflation threat.

“inflation expectations are utterly irrelevant economically, unless people have either the willingness or the means to change their behavior in response. The lack of any significant slowdown in spending suggests little willingness.”at 2:01

Paul Donovan · UBS Global Wealth Management

The Fed's rate hike will raise financial stress and weaken the US economy's ability to absorb future shocks.

The Fed's unanimous decision to raise rates implies that policymakers did not expect the hike to address inflation, which it will not, because it has no inflation impact. The more relevant consequence is financial stress that rises after the hike. That stress reduces the US economy's capacity to handle future shocks. The speaker wants to see whether the minutes discuss this risk.

“It would be interesting to see if there was any discussion about the financial stress that will be increasing as a result of the rate hike, reducing the capability of The U.S. Economy to deal with future shocks.”at 3:07

Paul Donovan · UBS Global Wealth Management

Japanese wages are outpacing inflation, but not enough to signal significant cost pressure building.

Japan's August labor cash earnings matched expectations, but earlier data was revised lower. Earnings are rising faster than inflation, which is a positive sign. The gap is not large enough to suggest significant cost pressure building in the Japanese economy at present.

“Earnings are rising more than inflation, but not in a way that suggests a significant cost pressure building in Japan at the moment.”at 3:29

Paul Donovan · UBS Global Wealth Management

The Bank of Japan is moving from accommodative to neutral policy, which explains Governor Ueda's willingness to hike.

BoJ Governor Ueda signalled willingness to raise rates in remarks the day before. This reflects a policy shift the BoJ has needed to make over the course of this year, moving from an accommodative stance to a neutral one. The hike signal is therefore a continuation of that normalization rather than a reaction to a sudden inflation surge.

“Ueda was signaling a willingness to raise interest rates in remarks yesterday, however. This in part reflects the fact that the Bank of Japan has needed to move from an accommodative to a neutral policy stance over the course of this year.”at 3:38

Paul Donovan · UBS Global Wealth Management

European manufacturing is holding up reasonably well despite soft summer readings.

German factory orders disappointed, but the prior data was revised stronger, which is common with German economic data. French manufacturing figures were in line with expectations, though summer break distortions complicate them. Taken together, the trend in European manufacturing is okay despite softness in the initially reported figures.

“Overall, the trend of European manufacturing reality has been okay, despite some summer softness in the initially reported figures.”at 4:19