UBS On-Air: Paul Donovan Daily Audio 'Up we go again'

Paul Donovan · UBS Global Wealth Management

UK consumer resilience, as the fastest-growing G7 economy, may let the Bank of England raise rates.

The UK is the fastest-growing G7 economy so far this year. Donovan reads this as a sign of consumer resilience. That resilience allows the Bank of England to consider raising interest rates. He treats the goods-price backdrop as contained, with the British Retail Consortium shop price index running at about 1.3% year over year, so growth strength rather than goods inflation drives the rate-hike possibility.

“The UK is, of course, the fastest growing G7 economy this year so far, which suggests consumer resilience and allows the Bank of England to consider raising interest rates.”at 2:29

Paul Donovan · UBS Global Wealth Management

UK electricity pricing delays and exaggerates the oil shock, so energy inflation arrives later.

The UK has a delayed and exaggerated oil price problem because of how UK electricity prices are calculated. Electricity prices do not feed directly into the British Retail Consortium shop price data. Donovan therefore expects some influence from energy and electricity pricing to show up in the UK data released that day, rather than immediately in goods prices.

“The UK does have a delayed and exaggerated oil price problem because of the weird way that UK electricity prices are calculated, not a price that contributes directly to the British Retail Consortium data, of course.”at 2:57

Paul Donovan · UBS Global Wealth Management

Oil-shock uncertainty lies in the policy response, not inflation; concessions to Iran could help markets.

Attacks on shipping in the Strait of Hormuz and concerns about depleted US oil reserves pushed Brent above $110 a barrel. High oil prices motivate a political response in the US: Trump lifted Russian sanctions to lower US diesel prices, a deal with no discernible effect because retail diesel remains just below all-time highs. The main uncertainty for investors is the policy response rather than the inflation consequences, which are fairly obvious. If the political pressure from oil prices pushes Trump to concede to Iran, the outcome may be more positive for markets. If oil prices push central banks into restrictive policy, recession risk rises.

“The uncertainty for investors is less the inflation consequences, which are fairly obvious, and more the policy response. If the political climate caused by higher oil prices pushes Trump to make concessions to Iran, the outcome may be more positive for financial markets.”at 0:41

Paul Donovan · UBS Global Wealth Management

Repeated one-off oil and supply shocks leave central banks unable to act; underlying inflation looks benign.

The current oil shock is the fourth successive one-off price shock after the post-pandemic supply disruption, the Russian invasion of Ukraine and tariffs, and the Gulf War. All of them are beyond central bank control. None reflect macro-driven supply-demand imbalances that central banks can influence. Apart from profit-led inflation after the supply chain disruption, there is little or no evidence of second-round effects. Despite four inflation shocks, second-round effects have not emerged, which suggests underlying inflation pressures tied to the economy's structure are benign. The repeated shocks, however, prevent observation of those underlying pressures.

“it is the fourth such one off price shock, and they're all beyond central bank control. ... Despite four successive inflation shocks, second round effects have still not really emerged.”at 1:17

Paul Donovan · UBS Global Wealth Management

Japan's September exports were unusually weak, below every forecast, despite the weaker yen.

Japan's September trade data showed higher oil prices lifting imports and chip sales supporting exports. Export data nonetheless came in weaker than every surveyed economist expected, which is extremely unusual given the wide range of trade estimates. The weaker yen should have automatically boosted export values because Japan often invoices exports in dollars, so the miss is an anomaly against that mechanism.

“However, the export data was weaker than every surveyed economist expected. ... it is extremely unusual for the data to come in below every estimate. This was in spite of the weaker yen because Japan often invoices for its exports in dollars”at 3:31