UBS On-Air: Paul Donovan Daily Audio 'Precisely'

Paul Donovan · UBS Global Wealth Management

Warsh's guidance carries little weight; sock-puppet doubts linger, though Williams has partly reassured markets.

Warsh refused to give forward guidance at the IMF meetings and then gave guidance of a sort, which has lost some credibility. On its own, the Fed chair's word is not worth much, and concern that he is a sock puppet of the administration still lingers in markets. Comments from New York Fed President Williams, who is no one's sock puppet, add to his earlier remarks, so markets have been somewhat reassured on this point.

“On its own, the word of [Warsh] is not necessarily worth that much. The concern that the Fed chair is a sock puppet still lingers in financial markets.”at 0:35

Paul Donovan · UBS Global Wealth Management

The Fed is trying to engineer a precise landing without the data precision to do so.

The Fed wants to move rates to the top of the neutral range to look tough and control an inflation it in reality has little control over, while avoiding a restrictive stance. Donovan argues this is an attempt to engineer a precise landing without much precision in economic data in real time. He says this was difficult fifteen years ago and is much more complex today. Real income growth is absent and living standards are perceived to be falling, so the Fed must be very careful.

“The problem is that this is an attempt to engineer a precise landing without much precision in economic data in real time.”at 1:36

Paul Donovan · UBS Global Wealth Management

US consumers keep spending by drawing down savings, but retail data shows growing demand response to price rises.

US consumers continue to spend by using savings to offset the effect of tariffs and oil prices. Retail sales data now hint that when companies pass on costs, there is a little more demand response than in the early days of the current Gulf War. There is nothing likely to derail the economy as such. However, with no real income growth and a perception that real living standards are falling, the spending resilience is fragile and the Fed needs to be careful.

“US consumers have, for instance, continued to show their willingness to spend by using savings to counter the effect of tariffs and oil prices. But there are now some hints in the retail sales data that when companies pass on costs, there's a little more demand response nowadays than was the case in the first days of the current Gulf War.”at 1:58

Paul Donovan · UBS Global Wealth Management

Fiscal fears are overplayed as a bond driver; AI equity selloff triggered safe-haven buying of bonds.

Yesterday's troubles in AI-related equities sparked a safe-haven bid for bonds. This suggests fears over fiscal policy should not be overplayed as a driver of recent bond moves. An asset must have at least the illusion of safety to be a safe haven, and fears of a fiscal implosion are not consistent with that illusion. Even French bonds had a good day, which further emphasizes the point.

“Yesterday's troubles in AI related equities sparked a safe haven bid for bonds. That would seem to suggest that fears over fiscal policy should not be overplayed as a driver of recent bond moves.”at 3:39