Top of the Morning: CEO Macro Briefing Book - Q2 update
The commentary highlights a growing uncertainty among investors regarding the sustainability of U.S. economic exceptionalism, particularly in the wake of potential changes in trade policy and regulatory environments under President Trump's second term. Per the full note source, this uncertainty is influencing the C-suite perspective as business leaders begin questioning whether the Trump administration will maintain a business-friendly environment that fosters growth, particularly through investments like the recent $500 billion AI initiative announced by SoftBank. The desk believes that this sentiment may lead to further volatility in U.S. financial markets, particularly affecting the USD against major currencies, as expectations around U.S. economic performance become more cautious.
What the desk is arguing
The desk posits that the current investor sentiment reflects a significant shift towards caution surrounding U.S. economic policies as uncertainty looms over critical areas such as trade and investment. This perspective is rooted in concerns about U.S. exceptionalism being tested, with corporate leaders expressing doubt about the continuity of favorable economic conditions stemming from the upcoming election and trade decisions.
Given the context provided by UBS's Paul Hsiao, who indicated that previous indicators of strong economic conditions are now overshadowed by these uncertainties, markets may react by repricing expectations for the U.S. dollar. Investors had initially embraced prospects for a reflationary environment, but the recent pivot towards more protectionist policies, such as tariffs, signals a potential cooling of these expectations.
Where it sits in our coverage
Our current consensus target for USD remains at 1.075, with a range of 1.04 to 1.12. As referenced in our internal analyses, a few firms have set their sights in this spectrum: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This call aligns closely with jpmorgan's stance, which is positioned towards the upper bound of our expected range, suggesting that our desk's outlook may anticipate higher dollar strength than some contrary views suggest.
How other firms see it
Market sentiment appears divided, with firms like jpmorgan supportive of a stronger USD, likely leveraging the backdrop of continued economic impact from recent policy changes. Conversely, bofa presents a more cautious outlook, aligning with the bearish sentiment towards USD given the uncertainties outlined above.
Traders should keep an eye on correlated currency pairs such as EUR/USD, as shifts in USD sentiment could directly impact their trajectories in the coming weeks. The dynamics of the Fed's policy adjustments will also play a crucial role alongside the fundamental factors shaping trade relationships and investment outlooks.
01Investor sentiment is shifting towards caution around U.S. economic policies, notably in trade and tariffs.
02There is increased skepticism regarding the sustainability of U.S. exceptionalism among C-suite executives.
03The market could face volatility as expectations shift about future economic performance under Trump's administration.
04Recent policy developments, including protectionist measures, could dampen previously optimistic forecasts.
Market implications
Market participants should monitor levels around 1.075 for the USD, as sentiment may shift based on ongoing developments in fiscal and trade policies. Positioning signals from corporate earnings reports could also provide further clarity and direction.
Risks to this view
If the U.S. economy showcases stronger-than-expected resilience, or if trade tensions ease, this could invalidate the current bearish sentiment surrounding USD, leading to a potential reversal in market positioning.
ubs
Welcome back to Top of the Morning on the UBS Market Moves podcast channel. Just last quarter, the Q1 macro briefing book pointed to robust operating conditions in a strong economic environment. Fast forward to today, uncertainty is top of mind for the C-suite with some investors openly questioning the sustainability of U.S. exceptionalism.
Joining us here at our 1285 podcast studio today in New York to talk about the recent market and economic developments. Glad to welcome back from the UBS Chief Investment Office, Asset Allocation Strategist for the Americas, Paul Hsiao. Paul, thank you for once again spending some time with our listeners, our clients here on the Top of the Morning podcast.
Welcome back. Happy to be here. Thanks, Dan.
You pointed to uncertainty seems to be top of mind for most investors. So to begin, to set the stage, can you just briefly walk our listeners through why the C-suite population and Wall Street are so uncertain about what's under the surface in President Trump's second term? That's right.
Usually in second term of presidents, I think markets should be more reassured of what's going to happen since they already had the experience of the first term. Now, the Trump first term, by most measures, was different than, let's say, his predecessors. And it was interesting to see how investors and markets would react this time around.
And I think going into the election, a lot of folks, especially in the C-suite thought, if Trump wins, will probably have a more reflationary environment. So business-friendly policies will be passed, probably less scrutiny on Biden-era M&A deals and things that would announce maybe future-looking investments such as AI. And I think there were signs of all that happening in the first couple of weeks of the second Trump term, especially with the $500 billion announcement deal that was AI-related.
SoftBank. Exactly. That was announced earlier this year.
Since then, the announcements of tariffs, the way they were calculated, the seeming whipsaw effect of different countries first towards our neighbors, Mexico and Canada, then being broadened out to the entire world, and now mostly focused on China, and then now rolled back. That sort of environment is not the best for business because for many folks, it's really unclear how businesses can even project what happens in the future. Is it necessarily a higher tariff rate?
Is this a better deal to go on for the future? Right now, it's not really quite known, and in fact, this weekend, I was at a store trying to buy something and had to order it from overseas, but they said, we don't know when it's going to arrive or how much it's actually going to cost just due to the current situation. There's just an anecdotal evidence of how this uncertainty of policy is not only affecting businesses right now, but also consumers, which represents the backbone of the US economy.
So I think that's why uncertainty seems to be top of mind for most folks in the US right now. So it's interesting just looking at how the markets have responded, perhaps looking for some consistent messaging on this from the administration over the past few weeks. We've seen a lot of back and forth in the markets, markets selling off, recovering, selling off, recovering, as we're recording here on Monday, April 28th, I believe US equities coming off of one of their better weeks in 2025.
So what is the market, Paul, saying to the Trump administration? I think there are three things that were interesting to me. The first thing is going into the second Trump term, a lot of folks thought that there might be a Trump put at some point, similar to the first term, where if equity markets declined so much, there'll be some sort of announcement that would help bolster equity markets.
And we thought that that line could be around 6,000. That's the line, that was the level the S&P was approximately when Trump was at the New York Stock Exchange ringing the bell, probably a notable time in anyone's lifetime, probably the president as he was about to become the president once again. So 6,000 was the number.
And I think a lot of forecasters were thinking, well, we'll end the year probably higher than 6,000, 2025 higher than 6,000. Now those expectations have revised down. So the equity put I don't think has been as successful as trying to figure out about where Trump policy could be.
Interestingly enough, and this is the second thing, is that there was a put, it was just in the different market, and it was actually the bond markets. When bond markets started selling off and yields started rising during the confusion of tariffs, I think following that, that's when we saw more alarm bells being heard, I think, in the Trump administration where more capitulations and concessions were made. And now we have a relative period of truce, I think, in the tariff fight, 90-day pause.
It seems that there is some, at least less aggression on Chinese tariffs from the Trump side following what happened in the bond market. And I remind you that it is quite important, just recently the rise in bond yields as British investors repudiated then Prime Minister Truss' plan was ultimately what brought down her government. And it's somewhat recent memory in the 90s when bond yields also rose that much under the Clinton budget plans where you saw much more capitulation within the Clinton administration.
So while the Trump administration seems to try to be as aggressive and does what it wants, it does look like there are some guardrails definitely present in the bond market. And the third sort of interesting thing that the markets are saying to us is that the U.S. is less of a safe haven than before and leading to some talk about the erosion of U.S. exceptionalism. So what do I mean by that?
So generally in periods of market stress, when equities sell off, treasuries or the U.S. dollars start to rise, right? It's when you have riskier economies, usually emerging market economies, when the equity sells off. And then you also see bond markets and the currency sells off when investors start taking money out of that country, putting it in elsewhere, usually in U.S. assets because that's regarded as the safest assets in the world.
This time around with the sharpest equity sell-off since 2020, what happened? It was the dollar selling off and treasury selling off. So it implies to me at least that the U.S. is a little more risky than what it has been perceived before just given all this uncertainty and volatility around announcements.
So those are three things that the markets are telling us right now. So in terms of how all of this trade back and forth negotiations are impacting economic conditions, and again, I'll say we're recording ahead of GDP, the jobs report set to be released later in this week. What do current economic conditions in the U.S. look like at the moment, Paul, and should investors be preparing for a recession on the horizon?
Yeah, I'd say that this aggressive tariff policy does to some extent announcements of a lot of fiscal stimulus, whether it's through the extension of the Tax Cuts and Jobs Act that was passed in 2017 under the first Trump administration. Generally, you see really aggressive, expensive announcements happen when the economy is in trouble and the economy needs some help. This time around, we wrote in the first edition of the Q1 2025 report that Trump's inheriting actually a very enviable economic position from the Biden administration when you look at how GDP is growing faster than trend, unemployment below a lot of estimates where you'd considered it to be full employment and inflation much lower than it was back in 2022.
What's ironic is that all these policies are taken when the U.S. economy, at least right now and somewhat backwards looking, is doing all right. Recent activity indicators like the Dallas Weekly Economic Index or even the ISM Services and Manufacturing Surveys show pretty robust activity in the U.S. so far right now. However, there are some alarm bells ringing for future expectations.
That isn't to say that the U.S. can't beat expectations. It has beaten expectations over the last three years. Remember, this time, 2022, many were expecting recession that the U.S. not only avoided but managed to grow well into it.
But what forecasters are thinking is a sharp downwards revision in growth from above 2% to slightly or below 2% and I think that's where around UBS expects 2025 GDP would be. But we're also assuming that tariffs won't be as aggressive as they were announced during Liberation Day or they won't last as long. Consumers are also expecting higher inflation expectations in the 1, 3, and 5-year mark and that's somewhat self-fulfilling.
If you have consumers expecting higher prices, from a firm perspective, you're incentivized to increase those prices, right, which has a fulfilling effect back to consumers. So it's really hard once you're in an inflation environment to walk back down from it. But that also puts the Fed in a difficult situation when you have slowing growth but inflation staying high.
I think if inflation was lower, the obvious move was just to lower rates. But if you have inflation expectations keep going higher and actually inflation coming up due to tariffs, it's actually a really difficult call for the Fed to cut rates even further because you want to exacerbate that problem. We do expect that the tariff situation should eventually stabilize, cost shouldn't increase that much to have a continued disinflation trend and for growth to moderate somewhat from the 2024 end but to slow.
That's why we're calling for several rate cuts for the end of 2025. But we also acknowledge that that path is much more uncertain than it was before given how a policy is quite uncertain right now too. With respect to the dealmaking environment, Paul, you had read it that great expectations have been priced in for 2025.
Are those expectations coming to fruition? I'd say by most metrics so far year-to-date dealmaking has been disappointing. PitchBook writes that there have been around 1,500 M&A deals year-to-date right now.
That's far slower than the 8,000 plus deals done in Q1 2024 and we thought we'd actually be even more deals happening this time around. We do have this uncertainty due to policy, due to tariffs but there are also some structural reasons why dealmaking is still hard. Exits are still very, very low.
The amount of dry powder is very, very high so the deals that do come to fruition, there's a lot of dollars competing to be part of those high quality deals. Investors put a lot more scrutiny into the deals that are done so far. But moreover, I think that the idea that the Trump administration would be just blanket a lot more pro-business, I think that's come more into question.
There has been some M&A, big M&A deals that have done to pass but also antitrust has become back into the headlines as we have more scrutiny put into Google, let's say. That has been, I think, a bit surprising for many investors. A lot of them are still being very cautious in the dealmaking space.
That's why they've been not as fast as expectations but a lot of people are still quite optimistic. Once the tariff uncertainty headwinds fade away, we have more clarity on rate cuts. I feel like I've broken record because I've been saying that rate cuts are the catalyst to dealmaking for the last couple of years.
But once you have this uncertainty, more certainty on the path of rates, I think that's crucial for dealmaking to actually have a spark to last. Paul, very helpful touch base today on the current market macro environment and what we're seeing currently in the dealmaking space. We'll, of course, continue to follow that story as we progress through the year.
Though, Paul, thank you for joining us for the update today on the CEO Macro Briefing Book Series from CIO. Thank you very much, Dan. Thank you for tuning in.
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