Macro Monthly Podcast with UBS Asset Management
The desk interprets the recent commentary from UBS Asset Management as a reflection of increasing economic caution, particularly highlighted by dismal soft data versus the still-resilient hard data. Per the full note source, portfolio manager Evan Brown emphasized the dichotomy between these data types, noting that while consumer and business confidence is waning, actual economic activity remains robust, though it may be poised for slowdown. This sets the stage for traders to brace for potential shifts in market sentiment as the data landscape evolves. Current consensus on relevant currency targets reflects a span that captures this caution, creating a notable context for upcoming trading decisions.
What the desk is arguing
The desk frames the commentary from UBS Asset Management as indicative of a cautious outlook for both the U.S. economy and financial markets. Evan Brown points out that soft data, particularly consumer and business confidence metrics, has deteriorated, suggesting potential economic slowing, despite hard data remaining relatively stable.
The recent U.S. macro data presents a mixed picture: while employment and spending are holding firm, consumer confidence measures have dropped significantly, as noted by Brown. For instance, a significant plunge in the University of Michigan Consumer Sentiment Index has historically preceded shifts in economic activity.
Where it sits in our coverage
Regarding USD/EUR targets, our consensus stands at 1.075, with a range between 1.04 and 1.12. Specific targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This view aligns closely with the target set by jpmorgan, which leans towards the upper end of the projected range, suggesting a more bullish sentiment compared to bofa, which presents a more conservative outlook.
How other firms see it
Overall, firms like jpmorgan align with a bullish interpretation of market conditions, emphasizing the resilience of hard data, while firms such as bofa express caution, mirroring the bearish sentiment present in the soft data.
Watch the USD/EUR pair closely as its trajectory could reflect the underlying tensions between soft and hard economic data, especially as the markets reassess their expectations going forward.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Soft data shows considerable deterioration in consumer and business confidence.
- 02Hard data remains resilient, though caution signals potential economic slowdown.
- 03Market sentiment may shift as traders respond to mixed economic indicators.
- 04Consensus targets indicate varying views on currency trajectory reflecting this cautious outlook.
Market implications
Traders should focus on the USD/EUR pair, especially if recent soft data trends signal a broader market recalibration. Given the current consensus, crossing above 1.10 could indicate more bullish bets forming, while a drop below 1.04 might validate bearish views.
Risks to this view
Any unexpected resilience in soft indicators or robust employment figures could undermine this cautious outlook. Additionally, if hard data begins to reflect a downturn, it would invalidate the current bullish stance, prompting a quick repositioning in markets.
We are back now with the next installment of our ongoing monthly macro podcast series with colleagues from UBS Asset Management. On a monthly basis, we do look forward to hearing from the top investment professionals from the UBS Asset Management multi-asset team. With that, fortunate to have with us on the line today, welcoming back Evan Brown, portfolio manager and head of multi-asset strategy.
We're also joined today by investment strategist, Fatou Kante. With that, Evan, Fatou, thank you for spending some time with our listeners today. Fatou, let me pass it over to you to lead the conversation with Evan.
Welcome back. Thanks, Dan. It's great to be back here again with Evan.
Welcome everyone. Today, we'll dive into what's happening in the global economy. We'll touch on the latest on U.S. policy, and then lastly, we'll speak about how investors should be thinking about equities, fixed income, and global diversification right now.
Evan, with that being said, what do the latest U.S. macro data releases indicate about the strength and trajectory of this economic cycle that we're currently in? Yeah, thanks, Fatou. There are two types of data out there.
There's soft data and hard data. The soft data is essentially surveys of consumers, of businesses, and the hard data is what's happening right now in the economy. That's employment, spending, et cetera.
The soft data looks quite poor. If you look at consumer confidence, if you look at measures of business confidence and capex intentions and the like, those have really deteriorated. We do take some signal in that.
I think when you have the private sector sounding more cautious than typically, you'll see activity slow. The soft data can be a leading indicator for the hard data, but you also don't want to overstate it. In the end, you really want to focus on what people do as opposed to too much on what they say.
In fact, in 2022, beginning of 2023, the soft data was terrible, and the hard data ended up being just fine in the end. It's a mixed picture, but fair to say that the ongoing uncertainty with tariffs is weighing on sentiment, and it's likely to weigh on the hard data soon. First of all, we are going to see inflation prints start to, over the course of the summer, rise as a result of the tariffs, just higher cost of good imports, and then that is likely to lead to some pullback in consumer spending.
The big question is, do we start to see the labor market really loosen? What's good is that, like I said, the hard data holding up, the employment report we got last week was very, very healthy. It showed even in the middle of April, which was after Liberation Day, companies were still hiring at a very healthy rate.
We don't know at this point. We do know that the labor market will cool off and hiring will slow, but we don't know just how fast it will be and how severe it will be. I will say, the silver lining here, something we've talked about a lot on these calls is that if you're going to have a sharp slowdown or even a recession, you want to have it with the current backdrop we have right now, which is that private sector balance sheet in aggregate whether it's the consumer or businesses or banks, they're just in very, very good shape.
There's not this big need to be lever. People aren't over their skis. If we get that slowdown, and even if it's a severe one, it's still likely to be, let's call it a mild recession, as opposed to some of the deep recessions that we experienced in 2020 and 2008.
Interesting. Given this economic outlook that's quite murky, why do you think equities rebounded so strongly from their lows on April 7th? As we speak now, the SPS is up 11.2% since then.
Any insight on that? I would use three words, and it was the title of our macro monthly, which is Trump has constraints. Those are the three words.
I think the market recognizing that has been the reason why we've had such a sharp rebound. We of course had Liberation Day's announcement, and then we had the shortest implementation period possible with the President pivoting and actually saying that it was the bond market and the sell-off in the bond market that was a major reason why he decided to pull back. That's important information.
As much as President Trump has ideological views on trade and the like, when he was seeing real disruption in the bond market, which underpins all of our borrowing rates and really underpins the global financial system, US Treasury yield, that was enough to get him to back off. Then again, we saw it when he was threatening to fire Fed Chair Powell and him backing off of that as well when the long bonds started to sell off. Another constraint on him is political, which is that to give an example, a lot of these tariffs are disproportionately going to hit a lot of the people who put him in power, whether that is lower income consumers who are going to be facing higher prices on goods or whether it is small businesses, which based on surveys have leaned in the direction of being Republican, and small businesses have a lot less flexibility than larger businesses in terms of their ability to withstand these tariffs.
They can't just switch their supply chains overnight or reshore overnight. As these policies get more painful for some of Trump's key constituents, that is leading to policies that are more de-escalatory in nature. We are seeing the Trump administration will start negotiations with China in bringing these tariffs down starting this weekend.
We don't expect anything imminent, but just knowing that that process has started, the administration acknowledging that the tariffs are unsustainable for the U.S. economy, I think is an important thing. That plus the market getting very oversold has been what has catalyzed this rebound. Yeah, I imagine we will be speaking about tariffs for quite some time, and this next question is no different.
As you touched on in your response here, since Liberation Day, tariff policy has changed for a number of reasons. How do you see tariff policy as it is today and the uncertainty around it impacting economies outside of the U.S.? It hurts, certainly, as you'd expect.
More trade-focused, more kind of open economies that export and depend on exports to the U.S. are getting hurt, and obviously China, where you have the 145% tariff rate, the severe hit to growth. At the same time, they also have shown an ability to kind of withstand pain for long periods if we think about COVID and them having a zero COVID policy and lockdowns for the course of three years. It's just the result of their political system.
They're politically more able to withstand that economic pain. But it is hurting them, for sure. There's an interesting dynamic because as much as these tariffs do hurt countries around the world, we're actually seeing something that we like to call the Trump paradox, which is the more dangerous Trump's policies are to a particular country or region, the more they suddenly get their act together and engage in domestic policies that are more supportive of their economies.
And the perfect example of this is Germany, who are engaged in fiscal austerity for forever. And Trump essentially saying, hey, Germany, you're on your own, or Europe, you're on your own when it comes to the Russia-Ukraine war, that catalyzed a dramatic increase in not just defense spending, but also infrastructure spending in Germany, and that's going to support the economy. And that is a good thing for Europe and for the world.
Canada is another example, right, where you've had all these individual provinces who actually, believe it or not, had their own mini tariffs within Canada against each other. And they're bringing those down. With Prime Minister Carney getting elected, there's momentum towards tax cuts and deregulation and the like.
And so these kind of policies that maybe would not have been possible without Trump threatening, with all the tariffs are calling for Canada to be a 51st state and the like. So there is this cushion that is being provided where politicians are kind of stepping up and supporting their economies. And also, these tariffs, right, it's a supply shock here in the U.S. where you have not just growth going down, but inflation going up.
And so that makes the Fed's life more difficult. The Fed can't ease. They'll probably ease later this year when growth slows, but it's difficult for them to preemptively ease.
But whether you're Europe or you're Canada, if you're getting hit with tariffs, it's really just a demand shock. And so that's hurting your growth and it's bringing down inflation. That actually means that your central bank can be much more preemptive in lowering rates.
So there are these underlying supports, and that's been a factor, I think, in why most international markets have not performed in the U.S. so far this year. Thanks, Evan. Thank you for tuning in.
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