Top of the Morning: CEO Macro Briefing - 12 questions ahead of 2025
Lead — Paul Hsiao's insights in the CEO Macro Briefing suggest that the economic landscape for 2025 is evolving with declining inflation despite consumer pessimism. Per the full note source, Hsiao emphasizes that while consumers feel disheartened, indicators like inflation are showing signs of moderation, which could influence market dynamics positively. Traders should note how this sets a backdrop for potential shifts in FX trends as business confidence plays a critical role in currency movements. The backdrop of the recent U.S. elections adds further complexity to how markets perceive the economic outlook going into 2025.
What the desk is arguing
The desk interprets that the incoming administration will contend with a mixed economic reality as they inherit an environment where inflation is easing, albeit consumer sentiment paints a more negative picture. According to Hsiao, this disconnect presents opportunities for strategic asset allocation and potential FX positioning. As inflation influences monetary policy and market expectations, the optimistic trajectory may counterbalance the bearish consumer sentiment.
Moreover, the desk believes that upcoming fiscal policies and central bank responses could shift market variables substantially in the coming months. As inflation rates decrease, anticipated measures by the Federal Reserve to address economic recovery will be crucial, especially post-election where economic policies will be scrutinized.
Where it sits in our coverage
Current consensus forecasts suggest the FX landscape reflects a range for USD pairs with a target of 1.075. Notable forecasts include: - jpmorgan: 1.10 - bofa: 1.04
Our desk's assessment aligns closely with jpmorgan, signaling a bullish outlook, sitting firmly within the higher range of market expectations. The anticipation of consumer sentiment recovery aligns with potential movements in the USD space.
How other firms see it
Various firms share a similar bullish outlook on the USD, including jpmorgan. Conversely, bofa maintains a more cautious stance, reflecting concerns over persistent consumer pessimism.
Traders should focus on USD-related pairs particularly where economic indicators like inflation and employment figures come into play, as they could have cascading effects on investor sentiment and currency positioning.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Declining inflation could influence FX markets positively despite current consumer pessimism.
- 02New fiscal policies post-election will be critical in shaping investor sentiment and market dynamics for 2025.
- 03There is a split in expectations among firms, with some bullish on the USD while others remain cautious.
- 04Strategic positioning in FX may benefit from the anticipated shift in economic conditions as the new administration takes charge.
Market implications
Watch for any significant fluctuations in inflation data or consumer sentiment indices, as these could be pivotal for USD movements. Anticipation around fiscal policy from the new administration could also serve as a catalyst for volatility in FX markets.
Risks to this view
The call could be invalidated if inflation rates unexpectedly spike, prompting aggressive Federal Reserve actions that could disrupt market expectations. Additionally, if consumer sentiment worsens beyond current projections, it may lead markets to reconsolidate bearish positions.
Hi everyone, Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel. For today, we are continuing with our series of year ahead conversations as we will dive into the latest CEO macro briefing book from the UBS Chief Investment Office, which examines 12 questions ahead of 2025.
Joining me today here in studio for the conversation, I'm glad to welcome back one of the contributors to that piece, Paul Hsiao, asset allocation strategist for the Americas with the UBS Chief Investment Office. Paul, it's nice to have you back here in studio. Thank you for dropping by.
Looking forward to our conversation. Good to be here. Thanks, Dan.
So Paul, within this special edition of the CEO macro briefing book, which we have covered this ongoing series from the UBS Chief Investment Office here on the podcast over the course of this year, within this special edition, CIO answers 12 of the most asked questions about markets and the economy from our business owner clients. This is we're coming off the latest U.S. election and heading into a new year. So while we won't have enough time today to cover all of these questions, let's discuss a few top of mind for our business owner clients, beginning with the economy.
Paul, what kind of economy will the incoming Trump administration be inheriting? And looking at economic conditions, what they are today, are conditions really as bad as consumers feel they are? Thanks for the question, Dan.
So we thought that we'd put out a little update of our CEO macro briefing book between Q4, the Q4 report this year that was released in October and then Q1 in January. It's a little awkward timing, but we thought that just given the election, we thought we'd put out a little update for our business owner clients. And when it comes to the economy, the narrative hasn't really changed since the election.
Although consumers might still be feeling gloomy, inflation is coming down, but the absolute level of price increases are still quite high for many consumers. The economy is doing quite well. And the way we're framing it in the year ahead conversation is that we're really five years into what we're considering to be a roaring 20s decade.
And part of that, part of the way that we assess that is we're running real growth a little bit above trend, around 2.5%. Inflation is a little bit above the Fed's target at 2.5%. So 2.5 plus 2.5 is really a 5% nominal economy, nominal growth economy.
And it's running at a pace that we really haven't seen since the 1990s to early 2000s, when the growth was a bit stronger and productivity has picked up. So that's the kind of economy that the incoming Trump administration will be inheriting. Something that's a little tight, running at an above trend pace.
And perhaps reassuringly for the incoming administration, there was pretty significant levels of data revisions that were released earlier this year, that really the bottom line of that is showing that the consumer is in really good shape, much better shape than we initially thought it would be. So those scares about next year growth to be slowing down because the consumer's slowing down I think would be placated a bit. So with respect to policy areas on the radar of the Chief Investment Office that may have an outsized impact on growth and inflation, if you had to cite three, Paul, what would those be?
Right. I think the overarching message from what we're gathering from the campaign is that this administration is not shy on being expansionary once again, and really looking into three areas. It's tariffs, taxes, and immigration.
And we think that the overall contribution of the incoming administration's stance is a bit inflationary. So on tariffs, obviously it's a drag to growth while raising prices. To what extent that companies will pass on their price increases from any tariff to consumers is obviously an open question mark.
And even with the, I think, already aggressive policy by tweets when it comes to tariffs, markets have somewhat shrunk it off. So it is cognizant that perhaps the bark is worse than the actual bite. There are levels of negotiations, there are limits to what an incoming administration can do.
So that's yet to be seen. On taxes, I think an easy, or at least a simple, win for the incoming Trump administration is to just extend the 2017 Tax Cuts and Jobs Acts, which cut taxes for a broad segment of the American populace. So I think one goal would be to find some way, in a bipartisan fashion, or even from a just single party fashion, a way to extend those tax cuts.
And then the third way is really immigration. We've already seen net inflow slowed down, and the open question is how much more would they slow down or even reverse in an incoming Trump administration. And I think that given how tight the labor market is, and it has softened a bit, so labor demand has softened, this is not the worst time that we're going to see a slowdown from the jobs growth that's coming from immigration.
So those are the three areas we're looking for, taxes, immigration, and tariffs. So there's a lot there now with respect to interest rates, of course, top of mind for market participants throughout the course of 2024. What could this all mean for interest rates as we look ahead into 2025, Paul?
Yeah, I mentioned that the net effect, if all these policies do get through, is inflationary. And we already see a bit of a reaction from the futures markets. So a couple, I think, months ago, leading up to the election, our call for four interest rates cuts in 2024, followed by four more in 2025, was not that far off of consensus.
Now, we haven't changed our forecast just yet, but the futures market has. They expect one more rate cut in 2024, which would make for at least 100 basis points total, more cumulative rate cuts with that jumbo size in September. But only two more in 2025, reflecting a higher probability of inflation as we go into next year.
So that's something that we're definitely watching out for. I don't have any Fed speak or any hints that we'll get from the December FOMC meeting about what the Fed will think after the election is something that we're paying attention to. So another consideration, often back of mind for many, not often addressed, being the national debt load carried by the federal government.
How concerned should not only policymakers, though investors, be about that consideration? Yeah, I think that's an increasingly important question, especially to our business owner clients, about what is the effect of the debt level? And given these expansionary programs that the Trump administration seems to signal, what's the effect?
Are we going to have a scenario where it's going to look like Japan, where the debt level is quite high, but they seem to manage it quite well? Or is it going to be somewhat like the UK under Liz Truss, where the bond markets reacted quite violently towards their expansionary programs, sort of suggesting that this is a bit too much, too fast, right? That's an open question.
And I think it depends, obviously, how much the Trump administration can get done during the first year. But the way we like to think about it in CIO is the growing debt pile is a chronic but not acute problem. So something like, think about managing diabetes rather than being in a car accident, right?
It's something that is manageable with time. Obviously it's still a problem. And if we're growing, if we continue to grow at this 5% nominal pace, it is something that I think the U.S. economy can shoulder on.
Obviously, with these policies going into effect and the likelihood of interest rates staying elevated, that could really increase the debt burden of interest costs going forward, which would be a concern as we go into the next coming years. So that's something we're paying attention to as well. Paul, this was a very helpful touch base coming off of the election.
As we continue to digest the implications to the policy environment, the economy, as we look ahead into next year. Again, I want to point our listeners, clients, to the CEO Macro Briefing Book, 12 Questions Ahead of 2025, now available up on UBS.com forward slash CIO. For clients of UBS, please reach out to your UBS financial advisor if you would like to receive a copy directly.
Though, Paul Schau, thank you again for dropping by today and look forward to continuing the conversation in the year ahead. Thank you. Thank you for tuning in.
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Thank you.
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