Macro thoughts with Jonathan Pingle, UBS Investment Bank
The desk anticipates ongoing uncertainty in the U.S. trade policy landscape will continue to weigh on economic sentiment and the dollar. Per the full note source, Jonathan Pingle from UBS highlights that recent tariff announcements exceeded market expectations, suggesting significant volatility ahead. This thought aligns with potential shifts in monetary policy direction as the Fed navigates these headwinds. Commentary on the evolving trade environment underscores the impact of tariffs on the economic outlook, especially as companies aim to adjust to the shifting landscape.
What the desk is arguing
The desk believes that the evolving uncertainty around U.S. trade policy will substantially influence market dynamics and add layers of complexity to economic forecasting. Per Jonathan Pingle's insights, there are indications that headline news will fluctuate, maintaining a status of unpredictability that traders must navigate cautiously.
Furthermore, Pingle notes that the administration's recent tariffs significantly surpass prior discussions, implying that the market may not be adequately priced for sustained geopolitical tensions. This has the potential to dampen consumer and business sentiment, which could reflect as changes in economic indicators in the coming months.
Where it sits in our coverage
Our current consensus target for USD/CAD is 1.075, with a range reflecting expectations across firms as follows:
This view is at the upper end of the consensus spread, suggesting a bullish outlook compared to bofa but more aligned with jpmorgan’s forecasts.
How other firms see it
Several firms, including jpmorgan and others, align on a more bearish sentiment for the dollar, anticipating additional strain from trade policies. Conversely, bofa takes a more conservative stance, projecting a lower target, reflecting a belief in potential stabilization following policy adjustments.
As developments unfold, traders should watch USD/CAD closely for implications linked to broader economic indicators and central bank announcements under this fluid trade policy environment.
01Ongoing trade policy uncertainty expected to impact U.S. economic sentiment.
02Exceeding tariff announcements signal potential for increased market volatility.
03Consensus target for USD/CAD aligns at 1.075, nearing upper bound projections.
Market implications
Traders should keep an eye on the next tariff announcements and their potential impact on market sentiment, particularly around the 1.075 level in USD/CAD. Additionally, any Fed commentary relating to monetary policy adjustments could serve as a catalyst for movement.
Risks to this view
A reversal of this thesis could occur if clearer signals from the administration indicate a shift towards trade resolution, or if economic indicators from the U.S. point towards stronger than expected growth, prompting shifts in monetary policy sooner than anticipated.
ubs
Hi everyone, Dan Cassidy here. Welcome back to the UBS Market Moves podcast channel. Against a backdrop of uncertainty when it comes to the direction of U.S. trade policy, our focus today will be on the road ahead for the U.S. economy.
With that, we are very fortunate to be joined today by Jonathan Pingel, Chief U.S. Economist with UBS Investment Bank. Jonathan, nice to have you here on Market Moves.
I believe this is your first time joining us on this podcast, so thank you for spending some time today with our listeners, our clients, and very much looking forward to hearing your insights today. Thanks very much for having me. So a lot to cover, Jonathan, of course, U.S. trade policy tariffs, top of mind for many at the moment, and that seems to be driving so much of the economic and investment outlook.
I'm curious, how do you anticipate that the trade environment will evolve from here maybe over the near term and over the next year as seemingly we're receiving new insights or headlines on a daily basis? Yeah, I mean, I think those headlines are going to continue for a while, and I think they're going to come and go and still leave a fair amount of uncertainty about where all this is headed. You know, one of the interesting things is that the administration came out on April 2nd with, I think, an announcement of tariffs to be put in place that was, you know, well in excess, I think, of what people expected, certainly an order of magnitude more than what was discussed on the campaign trail.
Now, since then, they have postponed, you know, one component of the so-called reciprocal tariffs, and they've also done some clarification work in trying to point out where there was overlap so that there's no double-counting as well, and there have been a few carve-outs. Now, that said, the other thing we have to keep in mind is that many of the components of goods and items that have been carved out of the tariffs are also things that are under consideration for additional tariffs under other procedures, authorities, and rationales. And even if we think about all that's been, you know, double-counting eliminated, what's been postponed, what is in place today is still essentially on a notional value an increase in the tax on U.S. imports ten times.
So there seems to be a certain amount of comfort that there's negotiations underway, and some of the language and messaging may have become a little bit more friendly, but, you know, we're still left with a current stance of policy that represents a substantial increase in the tax on imports without a whole lot of guidance as to what happens next. Now, I do think there are – well, there seem to be negotiations underway. What comes out of them, we don't know.
The Treasury Secretary testified today in front of Congress that there really was no substantive discussions going on with the Chinese about their very high tariffs. So it's difficult to understand where these, you know, where the deals stand. I think most people expect some deals to be made, but, you know, what happens is incredibly uncertain.
So I think the one thing we do foresee is that, you know, a certain amount of these large increases in tariffs probably are likely to remain in place for some time here. So Jonathan, I'm curious in terms of the impacts being felt to the U.S. economy, and I suppose time will tell, though, as we're recording here on Tuesday, May 6, we're coming off of the April jobs report. Last Friday, last week, we also had the Q1 print for GDP.
What are your thoughts on the current state health of the U.S. economy and expectations for the economy's trajectory from here? Yeah, I mean, you know, our expectation was the economy was sort of slowly cooling. I mean, we'd see the economy was, you know, still in solid shape, but it generally sort of cooled from the very strong 23, you know, a little less strong 2024.
And we generally thought that that process was going to continue in 2025. A lot of that was just, you know, the Biden administration, their expansive stimulus efforts, sort of running their course, kind of getting back to getting back to trend. You know, and I think, you know, coming through the first quarter GDP data, there was a lot of noise due to the trade discussions, you know, imports surging, doing to try to front line tariffs.
But if you looked at the core parts of domestic demand, certainly seemed to be holding up OK. And I think you saw that in the April employment report released on Friday. Our guess is that the May employment report probably looks fine, too, the one released in early June.
But in next week's CPI, we are expecting that the April CPI starts on the margin to show some of the price increases. We're going to expect some of that in the May release, the May data released in June. And then in June, July and August, you know, after, you know, some of the lags in the inflation measurements run their course, you know, some of these things are only sampled every other month.
You know, there's a delay in applying tariffs to some, you know, goods that are in transit. Some things will have been in inventory by the time we're in June, July and August. And we expect to see relatively large increases in prices.
And we expect that will dent real income for households. The price level shift is going to make people feel poor. And we think that's going to be a material drag on growth in the second half of the year.
So I think the economy looks pretty good, actually. Looking at the inflation data, it looked like the FOMC could have been headed for a soft landing. But when I think about what's going to happen with the tariffs being put in place, you know, the potential price increases in the coming six months, it does look like that will probably weigh on on growth and the labor market eventually.
Some encouraging takeaways there. I know a question top of mind for many, the prospects for a recession. What are your thoughts on a potential U.S. recession on the horizon?
Any signs pointing to that? No, there are really no signs pointing to that. It really all depends on the trade policy.
You know, if you think about the magnitude of what is being proposed, you know, we're not really passing through all of these things sort of one for one and the prices. Some will get absorbed by the exporters. Some will get absorbed by the currency.
But we are expecting that we're probably going to have inflation go up by roughly two percentage points. And if you think about what that could do to spending in the economy and the weight on even businesses, purchases and investment, you know, it's not hard to get like a one percentage point drag out of these trade actions. That may or may not be a recession, but it's also somewhat uncertain.
You know, my guess is that there are a lot of downside risks. And I do think we're going to go through a pretty soggy patch. And I think if somebody said a recession was a base case, a mild one, I don't think it would be.
I don't think I would really argue with that. I mean, I have not been claiming my my my outlook is necessarily a recession, but the growth is certainly weak enough. I think ex post, you know, we could probably use the R word.
Now, the timing of our conversation, Jonathan, we will be hearing from the Fed tomorrow, Wednesday, May 7th. What do you expect to hear from the central bank? Looking out through the balance of 2025, what's your expectation for the course of monetary policy and potential rate cuts?
Tomorrow's meeting, I think, you know, I think Chair Powell's in a tough spot. I think the FOMC is, you know, we had a speech on April 16th, which I think laid out the basic message. You know, the trade actions have been much larger than the FOMC was expected, Chair Powell said, and that likely is going to be true.
The economic impacts, you know, he noted that probably means higher inflation and slower growth. And he explained that that would put the Fed's, you know, the two parts of their mandate, inflation and employment, into tension if, you know, if employment's weakening and inflation is is rising. So very difficult spot for the FOMC, Chair Powell, you know, will probably lean on the more traditional language where, you know, when the goals are in tension, you know, you look at which one is further from the goal and how long is it going to take to return to the goal.
And as one former central banker once said, you deal with the sicker patient. So I think at first the Fed's going to be very reluctant, you know, to respond to labor market weakness should it arise because of these upside inflation risks. But I do think at the end of the day, if the labor market does weaken, the Fed would respond to rate cuts.
And I am expecting our base case 100 basis points of rate cuts starting with the September meeting just for the FOMC to at least not not make a weakening economy any weaker. And since we're on the topic of the Fed, I've been hearing that Fed independence being a concern. How are you thinking about that, given what we've been hearing about in the headlines as of late?
Well, I think certainly there's a certain amount of public pressure being applied, given some tension between the administration and the FOMC over over the economic outlook and the stance of policy. But, you know, I think, you know, for the FOMC, I think thus far, you know, they are acting independent. I think they cherish their independence.
And I think Chair Powell is is navigating that, you know, in my view, pretty, pretty well. You know, I think the bigger questions are going to come eventually, you know, the administration will have their own choice of Fed chair and how close that Fed chair aligns with the White House or the White House's preferences over monetary policy remains to be seen. Now, the chair is not all powerful.
You know, I mean, Chair Martin, who was the longest serving Fed chair, you know, I mean, he he you know, he won a lot of votes with only one vote. The famous Paul Volcker, legendary Fed chair, actually lost a policy vote. But you don't always get their way.
But I think, you know, over time, this administration will have a chance to put more of their personnel on the FOMC. And I think that will become a more interesting question, you know, just how independent monetary policy really is. Thank you, Jonathan.
Very helpful context and clarity there on the Fed. Maybe one other consideration I've been hearing as well, that concern in the markets as to whether U.S. exceptionalism is over. How are you thinking about this issue?
Yeah. I mean, you know, there's a lot, first of all, I mean, the American economy had a lot going for it. I mean, free markets, deep liquid capital markets, high productivity growth.
But I do think that, you know, if I walk forward, the implications of very high tariffs, it does have the potential to undermine some of those some of those benefits. You know, protectionism generally is not associated with rising efficiency and productivity. You know, undoing supply chains and important trade networks is probably not pro-growth to the same extent.
So you know, we'll see how the trade policy actions play out and what the actual implications are in the data over time. But I do think that that is could represent a key turning point, you know, sort of in that narrative of exceptionalism that it sort of permeated financial markets over the last few years. Jonathan, really do appreciate your time and covering the ground that you did for our listeners, our clients.
A lot of timely topics here on the minds of many. Before we close out, any final thoughts or takeaways you would like to leave with our audience? Well, I think, I mean, if I had to think about it, you know, the administration is working with a number of policy levers, deregulation, fiscal policy, you know, some are pro-growth.
I think the trade policy remains to be seen. I personally would argue that it's not pro-growth and of a magnitude that sort of more than offset the positives they're talking about and the other policy priorities. However, a lot of this really remains to be seen because a lot of the policies are up to the administration itself.
So I think we'll have to see what the go forward is, what the economic implications are for how this how this unfolds. So there's also a lot of uncertainty out there in the outlook. Jonathan, thank you again for dropping by Market Moves to spend some time with our listeners.
Our clients would be great to have you back at some point as these topics certainly are not going anywhere. So hope we can continue the conversation, though. I thank you again, Jonathan, for your time today.
Thanks for having me. Again, today we have been joined by Jonathan Pingel, Chief U.S. Economist with UBS Investment Bank from UBS Studios on Van Cassidy.
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