UBS On-Air: Paul Donovan Daily Audio 'Growth and tightness'

Paul Donovan · UBS Global Wealth Management

UK growth trend is positive through this year, with Q3 GDP picking up and services leading.

UK third-quarter GDP growth picked up from the second quarter, and services led the growth. Imports of cars and chemicals were a drag on trade, while computer and electronic production was stronger. Donovan caveats that the numbers are only an approximation, but argues the trend has been positive all year and that even Bloomberg would struggle to put a negative spin on the data.

“with third quarter GDP growth picking up from the second quarter. Of course, these numbers are, to put it charitably, an approximation, but the trend has been positive for The UK throughout this year.”at 0:15

Paul Donovan · UBS Global Wealth Management

UK consumers can keep spending because savings are robust and could fall, despite weak real wages.

UK consumers are not seeing much real wage growth, with only a very modest positive expected. Consumer spending is nonetheless supported by a cushion of savings. UK savings rates are robust and could fall further if needed, which would let consumption continue.

“Consumers are not experiencing too much in the way of real wage growth at the moment. A very modest positive is the best that can be expected. But consumer spending has a cushion of savings that can be called upon. Savings rates are robust in The UK and could fall if needed.”at 0:46

Paul Donovan · UBS Global Wealth Management

A tight labor market amid affordability strain could cause second-round inflation, but that has not happened.

A tight labor market during an affordability crisis would risk second-round inflation effects, which US policymakers would have to weigh. Donovan notes these effects have been persistently absent even though US consumers have been hit by waves of temporary inflation shocks and a sense that inflation is worse than it really is.

“a tight labor market at a time of an affordability crisis would risk second round inflation effects... What is interesting is that the persistent absence of those second round inflation effects has occurred even as The US consumer has been battered by waves of temporary inflation shocks”at 1:35

Paul Donovan · UBS Global Wealth Management

US housing freeze hurts labor mobility and pushes young buyers out, weighing on their spending.

The partial freezing up of the US housing market limits labor mobility, because people won't move house if it means refinancing their mortgage at a substantially higher rate. Limited home supply and a sclerotic market also put homeownership out of reach for younger Americans. Donovan argues this could in turn affect their savings and spending behaviour.

“The partial freezing up of The US housing market does challenge labor mobility. People don't want to move house if it requires them to refinance their mortgages at a substantially higher rate. ... the sclerotic nature of the market combined with limited home supply puts homeownership beyond the reach of younger US citizens.”at 2:12

Paul Donovan · UBS Global Wealth Management

Risk that some Fed members want to engineer a non-oil economy recession is rising.

Recent Fed speakers have been mixed in tone, from gradual tightening to borderline disturbing, which Donovan says gives something for everyone. Against this, he argues the risk that some on the Fed might want to create a non-oil economy recession does seem to be creeping higher. The argument rests on the mixed tone of the comments rather than on hard data.

“Recent comments have been mixed in their tone, anything from gradual tightening to borderline disturbing, giving something for everyone. But the risk that some on the Fed might want to create a non oil economy recession does certainly seem to be creeping a little higher.”at 2:52

Paul Donovan · UBS Global Wealth Management

Markets are too optimistic on a US-Iran deal; Iran's strait control is unlikely to disrupt sentiment.

Iran reported explosions on a couple of tankers overnight, yet markets are clinging to an optimism bias and expecting a US-Iran deal, or at least enough expectation of one to minimise risk premia. Iran and Oman say they will keep control of the Strait of Hormuz. Investors are assumed to expect a nuclear-style settlement with tolls on shipping, based on Oman, so Donovan argues this will not unduly disrupt market sentiment.

“markets are generally clinging to their optimism bias and looking for a deal to be done between The US and Iran, or at the very least, enough expectation of a deal that risk premia can be minimized.”at 3:30