UBS On-Air: Paul Donovan Daily Audio 'The British are coming'

Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Thursday 30th April. In an address to the US Congress this week, King Charles assured the rebels that the visit did not represent a rearguard action left over from the 18th century, with the aim of reasserting British control. A quick glance at yesterday's FOMC meeting of the Federal Reserve may raise doubts about that assurance, for the British way of doing things seems to have captured the US Federal Reserve. This was perhaps inevitable. Economics is exponentially more convincing when delivered in a British accent. There were a total of four dissents from the FOMC statement, three over the language, favouring a more hawkish tilt, and one, obviously from US President Trump's hand-picked governor, in favour of easing right now. This level of internal disagreement is nothing less than an imitation of the Bank of England. At the press conference, Fed Chair Powell signalled their intention to stay on as a governor, while threats to the Fed's independence continue. This whole situation potentially complicates the position of Fed Chair nominee Walsh. Walsh's nomination was approved by the Senate Banking and Finance Committee in a strictly partisan vote, something that has never happened with a Fed Chair before, and reflecting if not concerns about political bias then at least the extremely political partisan process of confirming Walsh in particular Walsh needs to build a coalition of support not just in favour of rate cuts but also for the rather unorthodox desire to reduce the Fed's balance sheet without any sudden decline in liquidity demand in the economy. Powell was able, apparently with difficulty, to build a coalition of support for the unchanged policy stance of the Fed yesterday. Powell commands a certain amount of respect within the Fed, helping in that process. The level of respect for Walsh within the Fed is clearly different, making coalition building more difficult, especially as markets may place more weight on Governor Powell's comments. This would not stop rate cuts if there was an unambiguous case to ease. Those members of the FOMC who are not sock puppets will vote based on economic facts. But if there is ambiguity or uncertainty about the course of action, the views of Fed Chair nominee Walsh may be less influential in tilting the balance than has been the case with any of the preceding Fed Chairs. Today we get the ECB meeting and here there is the potential for more policy uncertainty than existed with the Fed, even though dissent is not publicly recorded in anything so obvious as a vote. ECB decisions are like electing a Pope emerging in a puff of smoke without direct accountability. The ECB entered the Gulf War with a more or less neutral policy stance and there are permahawks on its decision council However there is no possible justification for an increase in rates today. The only economically valid reason to raise rates in response to an oil price shock is if second-round inflation effects, a wage price spiral or profit-led inflation, are in evidence. It's far too soon for either of those effects to show up clearly. What hints there are, from the fact that inflation numbers have surprised to the downside in some of the larger euro area economies, would rather argue against second round effects emerging at this stage. In terms of data, there's quite a lot on consumer spending. Japan's retail sales were stronger than expected. These numbers do not adjust for inflation, however. German retail sales, which do adjust for inflation, were also stronger than expected. There was the inevitable positive revision to the previous month's data too. Consumers clearly are adapting to higher energy prices without cutting consumption on non-energy products, through adapting savings rates primarily. US consumers have already had to go through this process with the inflation impact of tariffs last year. But with some tax rebates, they still have room to adapt to the oil shock this year. Today's March income spending and personal consumer expenditure deflator from the states will not fully capture the effects of soaring energy prices. And the affordability crisis is about more than inflation reality. But this data will be looked to closely for signs that US consumers are able to match the apparent European consumers resilience That all for today Have a good day This material has been prepared and published by the Global Wealth Management Business of UBS Switzerland AG, regulated by FINMA in Switzerland. Its subsidiaries or affiliates, collectively referred to as UBS. 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