Top of the Morning: CEO Macro Briefing Book - Q2 update
The desk interprets the shifting macroeconomic landscape as a pivotal context for FX trading strategies going into the latter half of the year. According to insights from the UBS Chief Investment Office, there is a notable evolution in dealmaking and economic trends as we approach the U.S. midterm elections. Additionally, the implications of artificial intelligence on economic activity are becoming increasingly significant, as business owners must navigate a landscape marked by both opportunity and uncertainty. These elements collectively suggest a potentially volatile market environment, urging traders to recalibrate their strategies in anticipation of greater market movement ahead of these key events.
What the desk is arguing
The desk posits that the evolving macroeconomic conditions will drive more pronounced movements in the FX market as we approach critical economic and political junctures. Per the full note source, the current economic landscape reflects shifts that may alter market dynamics significantly, particularly with the impending U.S. elections looming on the horizon.
Investor sentiment surrounding dealmaking has become increasingly cautious, suggesting a potential tightening of liquidity in certain markets. This could lead to an environment where traditional correlations in FX pairs are challenged, thereby requiring heightened awareness of sector-specific developments that could influence currency valuations.
Where it sits in our coverage
Our current consensus target for EUR/USD stands at 1.075, with a range setting of 1.04 to 1.12. Notable firms include: - jpmorgan: Target of 1.10 by March 2026 - bofa: Target of 1.04 by March 2026
The desk's view aligns closely with jpmorgan, positioning itself at the midpoint of the consensus range, signaling a balanced perspective toward a slowly strengthening Euro against the Dollar, while distinct from the more bearish outlook from bofa.
How other firms see it
Firms like jpmorgan and goldman are aligned with the desk's cautious optimism around a viable path for the Euro, suggesting stability amidst upcoming economic shifts. Conversely, bofa continues to adopt a more conservative stance, reflecting concerns over potential slowdown in growth and earnings.
Key intersections worth monitoring include the EUR/USD trajectory and Federal Reserve communications, as these could substantially influence liquidity conditions and trader sentiment ahead of the anticipated shifts in policy and economic conditions.
01Increased caution around dealmaking suggests potential liquidity shifts.
02AI's impact on economic activity is becoming pivotal for traders.
03Midterm elections could influence market volatility and trader sentiment.
04A recalibration of strategies is recommended as macroeconomic conditions evolve.
Market implications
Traders should watch the 1.075 level in EUR/USD as a critical marker for market sentiment. Upcoming economic indicators, particularly related to the Fed's positioning, may catalyze further volatility in FX pairs in this market environment.
Risks to this view
A reversal of the current outlook could be prompted by unexpected economic data that suggests a robust recovery, undermining the cautious stance within the market. Additionally, any significant developments arising from the U.S. midterms that shift the political landscape abruptly could also challenge this view.
ubs
Hi everyone, Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel. Joining me here on the line for today's episode, glad to welcome back Senior Asset Allocation Strategist for the Americas from the UBS Chief Investment Office, Paul Hsiao.
Paul is joining us to talk about the latest iteration of the ongoing series, CEO Macro Briefing Book. For today, we will cover the Q2 update, which is now available for you. Our listener is up on UBS.com slash CIO.
So with that, Paul, good morning. Welcome back and thank you for dropping by Top of the Morning today. Dan, thanks for having me.
Absolutely. So Paul, since we last spoke a couple of months ago at this point, can you bring our listeners, our clients up to speed in terms of how the business environment has changed, evolved from Q1? What have you picked up on?
Yeah. So when we published the Q1 report back in February, I think the top of February right now, at the time we had certainly some geopolitical tremors, still the effects of the tariffs going on as well as some friction in Europe regarding Greenland. And then ever since then, obviously, we've had the Iran war, which is a much more direct connection to the economy and asset prices through oil prices.
So we thought at the start of the year, barring more geopolitical conflict, the U.S. economy looked like in pretty good shape. We thought there'd be a slight deceleration from the speed that the U.S. economy was growing back in 2024 and 2025. By 2026, we expected something closer to trend as the Fed's leadership hands off from Jay Powell to Kevin Walsh.
And that would set up the conditions for a couple more rate cuts at the end of the year since the effects from tariffs, the inflationary effects from tariffs, would roll off during the first half of this year. And then as the economy continues to modestly decline, we thought that set the conditions for two more rate cuts. Since then, we've definitely had some developments that were unexpected.
Mentioned the Iran war up top, which has a stagflationary effect to the U.S. economy. Right now, we're not seeing that in quite the data right now. We'd like to open up the macro briefing look report with a scatterplot of where inflation is and where the latest quarter of GDP forecast is.
And right now, we're squarely in reflation territory, where we have been for the last two years. We thought that the Iran war with its increase in oil related prices could push us into stagflation, you know, slowing down growth by keeping inflation high. But data from the Fed has suggested that the U.S. has been much more insulated to oil related shocks since over the last 20 years that it's become an oil exporter.
So it certainly is a challenge in the U.S., as it is across the world with higher energy prices and no seeming end in sight. At the same time, the U.S. is a much better prepared economy than others to weather this. So underlying all that, we've had the consumer confidence still decline to recessionary levels, and we start to see its effect on a slowdown in overall spending, particularly in discretionary areas that are highly exposed to oil prices like foreign travel and airfare that has been lagging this year so far compared to years prior.
And the labor market, which has been showing more signs of slowdown during the back half of 2025, that actually has been relatively surprising, which is a negative for the Fed. Headline jobs growth over the last three months has been the fastest in a couple of years. The unemployment rate remains stable, so there's less fear of AI related layoffs.
And with inflation remaining a little higher than target, it sets up the conditions right now for the Fed to pause their rate cutting exercise. And we think they'll resume in the back half of the year, especially if we get more clarity on the Iran front. So accounting for higher energy prices, current economic conditions, a fluid geopolitical environment, there is a lot out there to keep business owners up at night.
So, Paul, as we look ahead a bit, I know coming up in November, we do have the highly anticipated U.S. midterm elections. I know you cover the Fed a bit as we're recording here on Tuesday, May 12th, just days away from current chairman Jerome Powell concluding his tenure as chairman. We have Kevin Walsh expected to come in shortly thereafter.
So when you think about the upcoming midterm elections and more near term, a Kevin Walsh led Fed, how should business owners be thinking about these considerations? Maybe we'll start in the Fed first, because to me, that's a little more clear cut. So Walsh has been confirmed by the Senate.
We've had, I think, Jay Powell's last press conference last time where he was asked whether he'd stay on. And he said he would, which shows that there's the continuity of leadership at the Fed, even though the chair of the Fed might be rotating seats. But the overall composition remains still similar.
And there has been less pressure from the White House to pursue criminal investigations over Jay Powell. So those are all good things for the Fed's interdependence and general autonomy. During Kevin Walsh's testimony, he brought up the fact that he likes trim mean PCE as his preferred inflation gauge.
And that has been declining since it tends to strip out the more volatile components like oil, which is having an effect on higher prices. So what that means to us and to business owners is that the structural dovish bias of the Fed, I think it's still intact. And that's why we're more confident on two more rate cuts by the end of the year.
And that is more dovish than consensus, at least right now. When it comes to the midterms, I think if you look at different prediction markets, they would say that Democrats have about a short, virtually short thing when it gets the House and about 50-50 when it comes to the Senate, which means a very divided government for the White House. We think the likelihood of the of the Democrats taking both the House and Senate to be less than 50-50, we looked at the electoral map and what happened is that Dems need to win all their seats, which are in solid Democratic right now, the three seats which are in lean, which are lean Democratic, the three toss up seats where there's about a 50-50 chance and then take one leaning Republican seat.
So that's a really tall order for Democrats to have to get the majority of the Senate. So what that means for us is that even with a divided House, it would make compromise a much more pertinent issue for the White House, which has been enjoying control of the White House, House and Senate right now. It might make a government shutdown a little more frequent if the House can't come to agreements to pass certain pieces of legislature.
But when it comes to the Senate, I think the more important thing there is that it's personnel. So the Senate has the ability to confirm cabinet level appointments as well as more higher, higher ranking appointments. Right now, Republicans have it and they also have the tie breaking vote of the vice president, J.D.
Vance. But if Democrats are able to get a majority, that can certainly make more confirmations of the more difficult for the White House. So that's the major difference between what we consider to be the base case of just the Democrats taking the House and then the, let's say, upside Democrat case where they take both the House and Senate.
The major difference for us there is the confirmation of personnel over Trump's next two years. And that might be a little more difficult when it comes to passing legislation. Just given the increasing attention that the bond market has on the U.S., the U.S. debt trajectory, even worse, his own comments about the unsustainability of the fiscal trajectory and even more, I'd say, more sort of layman perspective of how much the U.S. debt has increased over the years.
I think it makes it a little more difficult for any more pro-spending legislation to be passed in the second half of President Trump's term. Now, I want to revisit before we close out, Paul, you did bring up AI, artificial intelligence, a bit earlier in context to potential impacts, influence to the U.S. labor market. More broadly speaking, are you seeing any evidence or growing evidence of AI influence on U.S. economic activity?
Yeah, certainly. And that's something that has changed from the first quarter to the second quarter. AI still plays a pretty major part in not only the U.S. economy, but the global economy.
And it's spread out in a couple of ways. First, you obviously have the GDP impact from the positive impact of more data center or AI-related spending. And that's showing up in private investment and that's helping support growth not only at the back half of 2025, but so far in 2026.
And with hyperscalers like your Google's, Meta's, Amazon's pledging hundreds of billion dollars for CapEx this year, we think that that's still a positive story for the overall U.S. economy. On the flip side of that equation, we have some GDP detraction just based on the amounts of imports that are coming in that these companies need, computer imports, raw materials. And that is increasingly difficult if you have more tariffs or trade restrictions put into place, making further AI-related data spending a little more difficult.
When it comes to financial markets, what we're seeing is while the Mag7 certainly has done well, equity started to broaden out. And so we, the CIO, had this thesis where the first leg of the AI trade will have the enablers really benefiting. So those folks building those CapEx centers, building the picks and shovels.
And we think that the next leg of the AI trade will help broaden the overall performance of U.S. equities in particular, based on those companies who are adopting AI to increase the productivity and margins. And we see finance, health care, utilities to some extent being the lowest hanging fruits for this sector. Over the CEO macro briefing book, we also have a couple of AI-related slides when it comes to the labor market where we try to take a deeper dive into, is AI having a detrimental effect on the labor market?
And right now we're seeing if there is any effect, just a very, very modest for younger cohorts of highly exposed AI sectors. For other sectors that are less high touchpoint with AI, we're not seeing that as much. And we also have AI-related numbers when it comes to productivity, as well as GDP spending in the macroeconomic section.
But before I close that, I just wanted to touch on AI in dealmaking. So I mentioned how AI is certainly a big player when it comes to not only the U.S. economy, but public markets. In private markets, in M&As, we're seeing not only more M&A deals related to AI come to fruition, but more M&A practitioners saying that they're using AI to source deals.
And then finally, in venture, we've been seeing for a while now how AI is taking more than half of all venture fundraising dollars. And I think that that trend will continue to remain the case. Although I think the focus more now is on what's the differentiator of certain firms going to do and what can these firms really do with AI enhancing capabilities that they weren't able to do before.
So a little more scrutiny on that front from my perspective. Paul, very insightful conversation as always. Thank you for dropping by Top of the Morning to keep our listeners, our clients informed on the dealmaking environment, what you're picking up on with respect to economic activity, among some other timely topics.
And again, I do want to point you, our listeners, to the latest CEO macro briefing book presentation, the Q2 update, which is available for you now up on UBS.com slash CIO. Though again, today we have been joined by Senior Asset Allocation Strategist for the Americas from the UBS Chief Investment Office, Paul Hsiao. Paul, thank you again for dropping by and I look forward to picking back up with our conversation again soon.
Thank you. Thank you for tuning in. Be sure to visit UBS.com slash studios to view the entire UBS Studios suite of podcast channels, along with our video offerings such as UBS Trending.
You can also follow us on Instagram for content highlights at UBS Trending. UBS Studios is part of the UBS Chief Investment Office within UBS Global Wealth Management. Visit UBS.com slash CIO to view the latest research.
UBS Chief Investment Office's investment views are prepared and published by the Global Wealth Management business of UBS AG or its affiliate UBS. This material has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient and is published for informational purposes only. As a firm providing wealth management services to clients globally, UBS AG and its subsidiaries offer both investment advisory services and brokerage services.
Investment advisory services and brokerage services are separate and distinct, differ in material ways and are governed by different laws and separate arrangements. In the USA, UBS Financial Services Inc. is a subsidiary of UBS AG and a member of FINRA SIPC. For information, please visit our website at UBS.com forward slash working with us.
For a full legal disclaimer applicable to the independent investment views produced by UBS, please visit our website at UBS.com forward slash CIO dash disclaimer.