Top of the Morning: CEO Macro Briefing Book - 1Q25 update
The desk views the current post-election optimism among businesses as a pivotal moment, albeit with lingering uncertainties regarding policy implementation and Federal Reserve actions. Per the full note source, this environment could foster positive economic outcomes, reflecting conditions reminiscent of the mid-1990s. With inflation and bond yields indicating a quicker recovery, market dynamics are set to react to these intertwined variables. The outlook, framed by the performance trends post-COVID, suggests that traders should remain vigilant moving forward.
What the desk is arguing
The desk interprets the latest macroeconomic insights as signaling renewed optimism despite existing uncertainties with policy shifts and Federal Reserve strategies. Per the full note source, the current economic landscape showcases a low unemployment rate around 4%, drastically improved from nearly 7% four years ago, highlighting a significant turnaround. This optimism is tempered as businesses await the concrete applications of Trump 2.0 policies amidst a cautious Fed.
Evidence supports this stance as GDP growth currently runs above trend lines, which is a notable improvement from recent recessions. The ongoing transformation in economic output, likely influenced by technological advancements such as AI, suggests further potential productivity growth ahead. Businesses reflecting increased sentiment may provide the necessary tailwind as the Fed navigates its policy decisions.
Where it sits in our coverage
Our consensus target on the outlook for USD liquidity remains at 1.075, with a range between 1.04 and 1.12 for the upcoming quarters. Key firms have shown variance, with the following targets: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk’s assessment aligns closely with jpmorgan, whose forecast supports a more optimistic view, while contrasting with bofa’s more cautious stance, thus suggestively sitting at the upper end of the target range.
How other firms see it
Industry trends show that firms like jpmorgan and citi are aligned in their positive take towards the post-election recovery, advocating for an outlook buoyed by economic indicators. Conversely, bofa maintains a pessimistic view, reflecting deeper concerns over inflationary pressures and pending policy changes prompting hesitance.
In terms of pertinent currency movements, the USD/JPY trajectory is one to monitor closely, especially given its sensitivity to Fed interest rate signals and broader economic indicators.
01Post-election environment shows business optimism despite policy uncertainties.
02The economy exhibits healthier conditions than in prior recovery phases.
03Inflation and bond yield dynamics indicate a faster growth potential.
04Traders should be cautious of the implications of Fed policy on market conditions.
Market implications
Traders should watch for strengthening signals around USD liquidity, particularly if economic indicators align favorably with Fed adjustments. Key technical levels to monitor are the current range of 1.04 to 1.12, providing a clear guide for positioning as more data becomes available.
Risks to this view
A reversal in this outlook could occur if the Fed adopts a significantly more aggressive stance due to rising inflation, or if Trump 2.0 policies face substantial implementation challenges, leading to diminished business confidence.
ubs
Hi, everyone, Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel. Businesses have greeted the post-election environment with optimism after years of gloom.
This yet uncertainty remains as questions surround the timing and implementation of Trump 2.0 policies and its interplay with a seemingly more cautious Fed and slowing economy. So joining us today to discuss the outlook and implications in a new report. This is the Q1 of 2025 iteration of the CEO Macro Briefing Book.
Glad to welcome back to the podcast, asset allocation strategist for the Americas with UBS CIO Paul Hsiao joining us today here in studio. Paul, nice to have you back. Thank you for dropping by.
Nice to be back. So, Paul, to begin, what kind of economy has President Trump inherited and have conditions in a material way changed from Q4 of 2024? Right.
So in a recent report called The Roaring 20, we wrote about how conditions over the last couple of years have exceeded expectations and we're doing much better as an economy compared to the recovery seen after the great financial crisis, which was largely seen as disappointing. The economy that we have today looks very similar to what we saw in the mid-90s where optimism was higher. We had those productivity gains from the Internet and computers and we're not even seeing the broader implications of what AI can do so far.
We did a chart in the CEO Macro Briefing Book just comparing the starting conditions that President Biden did had in 2020 compared to what President Trump will have in his second term. And it's far different. For example, the economy is much healthier currently.
The unemployment rate was near 7% four years ago and now it's closer to 4% amongst historic lows. GDP is running above trend compared to the historic crash that we got in 2020. Now, to be fair, not all of that was President Trump's fault.
But we also have inflation and bond yields reflective of a quicker environment compared to what we had 2020 or even in 2019 when you had a couple of years of the Trump 1.0 era tax cuts that were taken into place. We have a much healthier economy at least based on the numbers so far. But not only that, I think what is interesting is a surge in business sentiment very similar to what we saw in 2016.
One of the indicators that we like to look at is the NFIB Small Business Index which takes a gauge of US businesses. Sentiment has been quite depressed over the last couple of years, inflation, labor shortages, high interest rates were some of the main causes of that. But now, since the election, it's surged very similar to what we saw in 2016.
So I'd say that President Trump in his second term is inheriting a pretty good environment. Now that's not all to say that everything is rosy. I mentioned that inflation is running slightly above target and should that still be the case in above trend growth, that might limit how much the Fed can do in terms of rate cuts and higher borrowing costs for long growth would certainly be a drag on growth.
But perhaps more important that is the current state of deficit spending. It's a little higher than 6%, actually closer to 7% today, much higher than the levels that we saw when Trump inherited the White House the first time, almost double the amount. That really constrains what the White House and Congress can do when it comes to passing additional spending plans in the future.
Okay. So now that we have that context as to the current health of the US economy, let's switch over, spend a few moments talking about the markets and, Paul, in particular, equities seem to be cautiously optimistic as we're beginning 2025. Are there still reasons at this point, Paul, to be optimistic?
Yes. I mentioned how well the economy has done and I'd say that financial markets have done even better. Compared to the end of 2019, equities have essentially doubled, the S&P 500, admittedly led by a handful of companies, but those companies have quite healthy balance sheets.
They are investing in the economy. So there are reasons to be optimistic. I also mentioned the return of business sentiment, lower borrowing costs, perhaps lower uncertainty when it comes from the policy side in the future.
But I think a lot of businesses now are greeting Trump 2.0 in a much more business-friendly regulatory environment, but largely a much more business-friendly environment in general. And I think that has set a more optimistic tone for equities. We still believe that earnings growth will be positive.
Earnings reports so far have been quite optimistic, I'd say. I think CIO has a target of the end of year S&P target for about 6,600. So still a good deal of appreciation this year after a couple of years of really, really good equity returns.
So we're still quite bullish on the equity market. Now, on the other side of that, when you think about risk considerations, what's out there, Paul, that business owners should be aware of heading into Q1? So I'd say for us, the way we like to frame this is that the sources of uncertainty are different now.
Over the last couple of years, I think markets and businesses have looked at the Fed as the greatest source of uncertainty. How much are they going to raise rates? What considerations are they really looking out for?
And how much do they sign to reduce? And with that sort of past us with the Fed embarking on its rate cutting cycle, I think a lot of firms perhaps would like rates to go lower, but at least know directionally where they're going, have confidence in that. So we'd say that the source of uncertainty now comes with the White House.
We remember back in 2016 that there were a lot of policies by tweet, and that method seems to be largely in place as Trump begins his second term. But also, how much tariffs will actually come to fruition? We know that there are a couple of announced on China as well as U.S. allies like Europe, Canada, and Mexico to go in place pretty soon.
But I don't think every business or market participant think that it would actually come into fruition in the way that they say they would so quickly. So there's obviously a source of uncertainty risk from there. Additionally, I mentioned that faster growth inflation might keep interest rates higher than expected, and that would be a drag on growth, especially if the optimism on AI and the adoption of AI isn't as wide as we expected this year or in the coming years.
But on the positive side to that story, we are seeing more signs of AI adoption broadening that hasn't been reflected in the productivity numbers so far. But productivity has been improving quite well. The unemployment rate is still low.
So when businesses tend to find more of a shortage of workers, that when productivity tends to kick in. So we think that that could be a catalyst of broader AI adoption, especially if we'll have immigration constraining policies from the Trump administration put into place since that also reduces the labor supply. So let's stick with Washington as a factor for a few more moments.
President Trump has been very vocal in terms of potential policy mandates in the early days here. We've already seen a lot from an executive standpoint come out of the White House. From a high level standpoint, Paul, what should we expect in the way of policy implications out of Washington?
You know, from a very, very high level, the way we like to think about this is that while Trump's first term was focused on the demand side of the economy by cutting taxes, we think that the second term will be largely focused on improving the supply side of things. That's not to say that the administration doesn't want to stimulate the demand side. I saw from Chiron's coin today that Trump's promising the biggest tax cut in American history once again, which is surely a demand side stimulus.
But I mentioned before that we're already in a period of time where the White House is, in Congress, is spending a record amount of money when it comes to deficit spending. There's more attention being paid on fiscal sustainability given how high interest rates are right now. So while the administration would like to extend the Tax Cuts and Jobs Act, which is expiring quite soon, enact policies like no tax on tips, perhaps other spending plans, we just think that it's going to be very, very difficult to pass such legislation given those concerns and given quite, I would say, tight margins in both the House and the Senate.
So it's not clear that everyone on one side of the aisle would be for that. We think that there is greater emphasis on improving the supply side. Over the last couple of days, we've seen the administration announce a $500 billion investment plan with the private sector about AI.
So more capital investment, more business-friendly regulations put into place. We think that that would probably be where the administration is going to get most of its wins this time around. So when you think about the policy landscape, potential policy landscape, coupled with the economic environment, what the health of the economy looks like today, we talked about the potential path forward for monetary policy.
You put all of that together, Paul. What does this all mean for the dealmaking environment? Right.
And, you know, I think we sound like a broken record expecting the dealmaking to improve over the last couple of years, but we even have greater confidence that the dealmaking environment will pick up this year, just because there's more and more signs of activity picking up. Exits have been improving over the last three quarters, for three quarters in a row after years of being clogged up. And we think that this is actually key to getting the dealmaking flywheel really put into place.
But not only that, a survey done by consultancies like Ernst & Young shows that a lot of general partners expect exits to pick up even more in 2025. There's still a record amount of dry powder up there. I think Prequin estimates it to top around $1.6 trillion at the end of 2024.
So there's a lot of pressure for capital to be deployed. And this, combined with a more business-friendly environment, combined with rising business sentiment and animal spirits, and all of this points towards a pickup in dealmaking, whether it's M&A, PE, VC, we're most likely going to see that come to fruition this year. Well, when it comes to D.C. policy, monetary policy, and the evolution of the economy, we will know a lot more a few weeks from now.
So do look forward to continuing this conversation, Paul, with you next quarter. But thank you again for dropping by and sharing these updates with our listeners today. Absolutely.
Thank you. And again, today we've been joined by Paul Hsiao, asset allocation strategist for the Americas with the UBS Chief Investment Office. I would, of course, encourage our listeners, especially our clients of UBS, to get a hold of a copy of the latest CEO Macro Briefing book.
This again, for Q1 of 2025, can now be located up on UBS.com forward slash CIO for clients of UBS. Simply reach out to your UBS financial advisor to receive a copy directly from UBS studios on Dan Cassidy. Thank you for joining us.
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