UBS On-Air: Paul Donovan Daily Audio 'Mundanity upon mundanity'

Paul Donovan · UBS Global Wealth Management

Fed signalling fewer meetings next year cuts policy flexibility; its productivity optimism is troubling, though the meeting was a non-event.

Donovan says the Fed's yesterday was a non-event: rates unchanged, two dissenters, and a statement that leaves tightening open. He objects to the press conference signalling fewer policy meetings next year, arguing that a fast-changing world calls for more policy flexibility, not less. He also says Chair Walsh reiterated a belief in a productivity boost, which he finds potentially troubling for policy conducted sensibly over the longer term.

“The press conference of Fed Chair Walsh signalled fewer policy meetings next year because in a fast changing world, having less policy flexibility is apparently a great idea.”at 0:27

Paul Donovan · UBS Global Wealth Management

Fading tariffs should reduce the number of rising prices, showing the current US inflation shock is narrowing.

Donovan expects the new US price-pressure measure, which counts items rising in price, to improve as tariffs fade from the US inflation calculation. He argues fewer prices should be rising as tariffs fade, and that this underscores the narrowing nature of the current inflation shock. He thinks this will matter for economists assessing inflation persistence, though not much for public inflation perceptions. Energy inflation will push up headline numbers in the PCE release, but that is a separate effect.

“it was a metric that was bound to improve as tariffs start to fade from The US inflation calculation... fewer prices should be rising as the tariffs fade... And that underscores the narrowing nature of the current inflation shock.”at 1:11

Paul Donovan · UBS Global Wealth Management

Diesel prices do not enter the PCE deflator directly, only indirectly through cost pass-through into other prices.

Donovan says energy inflation will push up the headline PCE numbers, but notes diesel prices are not a direct part of the calculation. Diesel affects the data only as a cost pass-through into other prices, including some that form part of core inflation.

“diesel prices are not a direct part of this calculation. Diesel will only appear as a cost pass through into other prices, although that will include prices that form part of the core inflation calculation.”at 1:30

Paul Donovan · UBS Global Wealth Management

US consumer resilience should persist; signs of fraying are slight but it is less dependable than before.

Donovan expects US consumer resilience to remain evident in the third-quarter GDP data. He says signs of that resilience fraying have been very slight so far, but qualifies this by saying the consumer is perhaps not as dependable as it once was.

“The resilience of The US consumer is still likely to be in evidence. Signs of that resilience fraying have been very slight so far, though it is perhaps not quite as dependable as it once was.”at 2:18

Paul Donovan · UBS Global Wealth Management

AI buildout adds to US growth through domestic construction, while imported AI technology drags on US growth.

Donovan argues AI should have added to US growth. The technology is imported, which is a growth benefit for other countries, but the physical construction of AI infrastructure is a domestic benefit. He expects imports to remain strong, which continues to act as a drag on US growth. The net effect is that domestic construction is positive while imports offset part of it.

“The technology for this is a form of growth for other countries as it imports into The United States, but the physical construction is a domestic benefit.”at 2:33

Paul Donovan · UBS Global Wealth Management

ECB presidency selection politics are blatant, and Lagarde's evasiveness on early retirement will draw questions.

Donovan says the ECB rate decision is unlikely to matter, and that market interest may instead focus on the future of ECB President Lagarde. He describes the political processes around choosing the next ECB president as fairly blatant and already well advanced. He notes that Lagarde has been evasive on early retirement, but says this is beginning to wear thin and that questions are bound to be asked.

“with fairly blatant processes of politics already well advanced around the selection of the next ECB President. Lagarde has been fairly evasive on early retirement issues, but that's beginning to wear thin and questions are bound to be asked.”at 3:09