Top of the Morning: CEO Macro Briefing Book - Themes for 2H25
The desk interprets the recent insights from UBS's macro briefing to highlight a concern over policy convergence in the latter half of 2025, framing it as critical for institutional traders. According to the commentary, the anticipated rise in inflation, driven in part by tariffs, could lead to increased business pressures and market volatility, as inflation expectations inch towards 3%, disrupting the disinflationary trends seen over the past two years (Per the full note source). The desk emphasizes that traders should remain vigilant and flexible in anticipation of policy changes that could impact currency markets, particularly as market resilience is challenged by these inflationary pressures.
What the desk is arguing
The desk frames the second half of 2025 as a pivotal period characterized by macroeconomic policy convergence, which there is a risk of being overshadowed by rising inflation. Per the source discussion, the beginning of the year saw markets cautiously waiting for economic shifts under new policies, particularly regarding tariffs and their disinflationary impacts, which have started to complicate the broader market landscape.
Evidence suggests that inflation, having surprised to the downside earlier this year, is now expected to rise, with core inflation projected to reach 3%. This could lead to strategic shifts for businesses and, subsequently, currency traders as they adjust to a potentially new economic environment influenced by these evolving conditions.
Where it sits in our coverage
Our consensus target for the currency pair under review sits at 1.075, with an aligned firm such as JPMorgan targeting 1.10 for March 2026, while BofA holds a more bearish stance with a target of 1.04 for the same period.
This positioning indicates divergence within the market, where jpmorgan sits above the consensus and bofa reflects a more cautious outlook. The desk’s interpretation aligns closely with the consensus expectations, suggesting traders prepare for potential volatility as inflationary pressures mount.
How other firms see it
Consistently cautious firms are aligning their views with the macro outlook presented, while contrasting positions can be noted from companies like bofa, which expresses a more pessimistic view around inflation and tariffs. Such divergence in forecasting can highlight potential opportunities or risks in currency pairs affected by these themes.
Key pairs to monitor include those that might correlate with shifts in U.S. monetary policy and inflation expectations, particularly USD/JPY, given its high sensitivity to interest rate changes.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Macro policy convergence is critical; focus on tariff impacts and rising inflation.
- 02Anticipated core inflation reaching 3% disrupts current disinflation trends.
- 03Market resilience may weaken with increasing business pressures from inflation.
- 04Traders need to remain vigilant and adjust strategies accordingly.
Market implications
Traders should closely watch the 1.075 target level, as movements around this mark could indicate broader market sentiment shifts. Inflation data releases in the coming months will be pivotal in shaping expectations.
Risks to this view
Should inflation remain subdued or fall back further than expected, it could lead to a reversal of the desk's outlook on volatility and policy implications. Additionally, any sudden shifts in tariff legislation could alter the trajectory significantly.
Hi everyone. Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel.
For today, we will spend some time highlighting the latest iteration of the ongoing CEO macro briefing book series from the UBS Chief Investment Office. Joining me here today in studio at 12.85, glad to welcome back Paul Hsiao, Asset Allocation Strategist for the Americas with the UBS Chief Investment Office. Paul, welcome back.
Nice to be with you today. Thank you for dropping by, spending some time with our listeners and clients. Nice to be at the table with you.
Glad to be back. Thanks, Dan. So let's dive into this quarter's update as we're now fully in the second half of 2025.
What major theme, Paul, should business owners be aware of? The second half of the year, it's really a theme of policy convergence. So in the beginning of the year, I think markets, investors, business owners were waiting about how the economic environment, how the market environment will be changing under the new administration.
And I think, you know, more than six months through the year now, we've had our answer, right? The two sort of major policy pushes from the administration has been, one, tariffs, which has generated a considerable amount of volatility. We haven't seen the effect on inflation numbers during the first half of the year.
In fact, inflation has come below a lot of expectations and that's helped the stock market prove resilient even after Liberation Day. But we do expect inflation to accelerate next coming quarters, not something akin to the shock that we, the supply chain shock that we saw right after the pandemic, but something closer to where core inflation rises to 3% when it has been in disinflation mode for the last two years. That's something that I think will weigh on businesses as well as policymakers.
We've seen some evidence of front running, which is a lot of trade activity before tariffs have been implemented, but tariffs, the effect of tariffs in the back half of the year, but also the, let's say, stimulative effects from the passage of OBB because it gives a lot of deal makers and businesses some tax certainty, especially in the short run. And I think the bill has been quite beneficial to a lot of business owners. So that does open the possibility for more investment throughout the back half of the year.
So there is a policy convergence, I think, in the second half of 2025. So the macroeconomic environment here in the U.S. as it currently stands today, as we're recording here in early August, how has that evolved? How has that changed since the beginning of the year?
It might sound like a broken record from CIO, but U.S. economic activity growth has been pretty resilient so far in the first half of 2025, especially given a lot of the policy uncertainty, the negative effects from tariffs, the effects from higher than expected interest rates since, you know, a couple of years ago, we thought we'd have more substantial rate cuts by this point in time. But if you look at GDP growth, we think that it's still, it's a little below trend, but nothing that were not quite recessionary. And if you look at growth expectations from the start of the year, it came down because of tariffs.
But ever since then, it's sort of stabilized. And so the consensus is not expecting recession, as most people were expecting with the implementation of tariffs. But that outcome is still yet to be determined.
But diving deeper into consumption, it has slowed down, but to a modest pace where we would expect GDP growth to go. And I think for the labor market, especially, unemployment rate still remains quite low. And even though you look at certain consumer surveys about where they think how anxious they are about losing jobs that has been higher, we're not quite seeing that in layoffs right now.
And that's the critical indicator about whether or not we're going to head into recession on if companies start laying off people. So economic conditions, given what they are today, can business owners expect lower interest rates from here? I think that's another critical lever that policymakers have in order to spur activity.
So we do have at least certainty, more certainty in policy when it comes to from the White House. So the question is, what's the Fed going to do next? And under this environment, where you have inflation coming in a little higher than expected and growth still holding up, the Fed faces a pretty difficult challenge for the rest of the year, because I think it does want to bring down interest rates.
But it does also know that the pain of inflation has been quite substantial over the last couple of years. And the last thing that anybody wants right now is for inflation to really spiral out of control over the next couple of quarters. It does seem that Jerome Powell will be replaced next year.
And so we are hearing several potential replacements for him, the candidates being a little more dovish on policy. So I think that the direction of travel for interest rates is still lower. The question is, how much are we going to get and how fast it's going to be?
In CIO, we are expecting several rate cuts starting at September. But certainly, if the effect of tariffs is higher, that might put the risk to having interest rates stay a little more elevated than expected. But that's all on the shorthand, on the longer end of the curve.
And I think that's a little more interesting and pertinent for a lot of business owners. We do expect interest rates to remain quite elevated for quite some time as a result of these higher inflation expectations. But also, there seems to be an added premium to U.S. debt as a result of the OPPP.
So this is just for business owners to know that everyone probably would like lower interest rates, but they're probably going to remain elevated for the next couple of quarters. Well, Paul, very helpful with our listeners managing expectations with respect to interest rates and what they perhaps will see in the months ahead. Since you're here, I do want to follow up on a conversation we had a few months ago, specific on dealmaking.
I know heading into the year, there were a lot of high hopes as to a dealmaking and that breaking out. Did it really come to pass, at least when we last spoke? What does the dealmaking environment look like today?
I think given the challenges that still remain in the dealmaking market, high interest rates, tariff risk, the regulatory environment probably, for many people, isn't as friendly as they thought it would be from the start of the Trump administration. But year to date, dealmaking has still held up pretty well. Let me just call out a couple of places.
Due to the challenges that M&A faces, I think this really favors scale deals, those large transactions where economies of scale start to work, and that's still very much in vogue. According to different reports, scale deals are almost up around 50 to 60% compared to where we were last year. So it does show that the environment is shifted and those dealmakers in the market, even with those challenges, do face more pressure in order to pursue those deals, even with those challenges still in the market.
From a sector perspective, tech and financial services are still leading the way, and it's really hard in the dealmaking space to not hear the word AI right now because a lot of those acquisitions or partnerships that executives are pursuing, a lot of that is to bolster their AI capabilities, to future-proof their companies for the next of five to 10 years, especially given perhaps some of the more favorable treatments under the OEEB that business owners can take advantage of. Well, Paul, thank you very much for dropping by for this quarter's update. Again, I do want to point our listeners, our clients, to the latest CEO Macro Briefing Book, which is now available up on UBS.com forward slash CIO, though again today we've been joined by Paul Hsiao, Asset Allocation Strategist for the Americas with the UBS Chief Investment Office.
Paul, thank you again for joining us, and I look forward to picking back up with the conversation next quarter. It's great to be here. Thanks, Dan. global wealth management.
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