UBS On-Air: Paul Donovan Daily Audio 'The triumph of the optimists'

Paul Donovan · UBS Global Wealth Management

Fuel prices drive inflation perceptions, and perceptions rather than actual inflation fuel the affordability crisis.

US gasoline and diesel prices are near record highs, and the US is feeling the costs of the war with Iran. Donovan argues fuel prices are a powerful driver of inflation perceptions. He concludes that inflation perceptions, not inflation reality, drive the affordability crisis, which links the energy price shock to political pressure ahead of the midterms.

“Fuel prices are a powerful driver of inflation perceptions and inflation perceptions, not inflation reality, drives the affordability crisis.”at 1:04

Paul Donovan · UBS Global Wealth Management

Iran peace talk signals may cut the energy risk premium, but supply and demand fundamentals are unchanged.

Oil fell on reports that Iran's government had been given powers to pursue peace negotiations with the US. The parameters of those talks are unknown, but the timing is seen as positive. Donovan argues a more cooperative Iran and US administration officials focused on more than legacy may be enough to reduce the risk premium in financial markets. He stresses that this shifts perceptions of risk around current fundamentals, not the laws of supply and demand in energy markets.

“Even if US President Trump is not willing, a more cooperative Iran and administration officials looking to more than legacy alone may be enough to reduce the risk premium in financial markets. However, the fundamentals do not change on [words] alone, so this should be seen as shifts in the perceptions of risk around the current fundamentals rather than a shift in the laws of supply and demand in the energy market.”at 1:27

Paul Donovan · UBS Global Wealth Management

The RBA's split, more dovish hike reduced market expectations for further Australian tightening.

The Reserve Bank of Australia raised rates a quarter point, an expected move. Australian policy began the year accommodative and has moved toward a neutral rate. The decision was split and the overall tone was somewhat more dovish. Donovan argues this has reduced market expectations for future tightening.

“This was a split decision with a somewhat more dovish tone overall, which has reduced market expectations for future tightening.”at 2:41

Paul Donovan · UBS Global Wealth Management

US job openings data is of little use because survey response rates are extremely low.

Donovan says the job openings data would be a helpful insight if anyone bothered to respond to the survey. Response rates are so low that economists question how US statisticians can publish the results without embarrassment. He argues the release is therefore of limited value as a read on the labor market.

“The job openings data would be a helpful insight if anybody bothered to fill in the survey. Response rates to this are so low as to make economists wonder how U. S. Statisticians can keep a straight face when publishing the results.”at 2:58

Paul Donovan · UBS Global Wealth Management

AI investment generates only limited demand for US-produced capital goods and equipment.

Factory orders, durable goods and capital goods orders data are a reminder that AI-related investment, described as the shiny new toy of artificial investment, only produces limited demand for US-produced capital goods and equipment. The argument is that the AI capex boom does not translate into broad domestic equipment orders.

“These serve as a reminder that the shiny new toy of artificial investment only produces a limited demand for U. S. Produced capital goods and equipment.”at 3:19