Top of the Morning: CIO Strategy Snapshot - Decision trees
As we navigate a volatile market environment, the desk is focusing on the implications of President Trump's approach to tariffs and the forthcoming FOMC meeting as key indicators for trader sentiment and strategy. Per the full note from UBS, market participants are increasingly assessing whether to initiate positions on dips or rallies, posing an intricate decision-making framework. The decline in consumer sentiment, highlighted by the recent University of Michigan Consumer Sentiment Survey, suggests economic uncertainty, but actual spending trends indicate a more nuanced outlook. With a pivotal week ahead that includes major economic data releases, traders should remain alert to signs of stability or further deterioration.
What the desk is arguing
The desk argues that current market sentiment is overly influenced by sluggish growth indicators, including a notable decrease in consumer sentiment. Per the full note from UBS, the focus on President Trump's policy decisions around tariffs may provide traders with actionable insights. The upcoming FOMC meeting and economic data releases are critical in shaping expectations moving forward.
Supporting evidence includes the recent University of Michigan Consumer Sentiment Survey, where expectations for income growth and job security have notably deteriorated, suggesting a potential slowdown in consumer activity. Yet, the desk contends that actual spending behaviors remain resilient, challenging the broader narrative of economic decline.
Where it sits in our coverage
Our consensus target for the USD/EUR pair stands at 1.075, with the following firms providing specific forecasts: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This analysis aligns closely with jpmorgan's target, positioning our forecast at the upper end of the consensus spread.
How other firms see it
Aligned firms such as jpmorgan and goldmansachs foresee a strengthening USD against the EUR, capturing the expected market response to tariff implementations and FOMC outcomes. Contrary firms like bofa, however, maintain a more bearish outlook, suggesting underlying weakness in key sectors could lead to USD depreciation.
Relevant currency pairs to watch alongside this narrative include USD/JPY for insight into geopolitical risk impacts and EUR/USD, which reflects broader market sentiment influenced by central bank policy decisions.
01Market sentiment is influenced by slowing growth indicators and upcoming FOMC meeting.
02Consumer sentiment is declining, but actual spending may present a more optimistic picture.
03Trump's tariff decisions could be crucial in shaping market expectations.
04Traders should consider potential action on dips versus rallies as volatility persists.
Market implications
Traders should focus on the USD/EUR pair, currently poised for significant movement ahead of the FOMC meeting and retail data releases. A movement past 1.075 could indicate a stronger USD in the near term.
Risks to this view
A readjustment in market sentiment prompted by unexpected economic data or a drastic policy announcement from the Trump administration could undermine the premise of current bullish positioning.
ubs
Hi everyone, Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel. Another volatile week in financial markets as we think back to last week, yet as the week progressed, we did see some improvement.
Markets began to stabilize. As we speak here on Monday morning, the week ahead likely to be quite eventful. We do have the Fed's FOMC meeting, more economic data on deck, and likely additional news on the Trump policy plan.
So joining me here in studio for the conversation today, glad to welcome back head of asset allocation for the Americas with the UBS chief investment office, Jason Draho. Jason, thank you for joining us, a rainy Monday morning here in New York, but a lot to talk about as always. So thank you for joining us.
Thank you, Dan. It's good to be here. Happy Monday.
Absolutely. Let's begin with the economy because concern about slowing growth seems to be spooking investors. We've seen that in markets as of late.
So can you speak a bit to the current outlook for the economy and do you believe these fears are justified? Well, if you look at the economic data, there's definitely been a moderation in the growth data. Much of this, I'd say, is still focused on sentiment data.
For example, on Friday, we got the latest University of Michigan Consumer Sentiment Survey index. It showed a further deterioration in sentiment overall. There's a number of sub-questions that they will ask households and consumers, including confidence or fears of losing your job in the next six months, expectations for income growth.
All those deteriorated quite rapidly. So definitely, sentiment is declining. But really what matters is what are people actually doing?
Are they spending? Are they buying? Are businesses investing?
And there, I think the picture is not great, but it's certainly maybe not quite as bad as the sentiment data would suggest. For example, last week, there were a number of consumer-related conferences that different banks were hosting. And again, the tone from that overall was sort of mixed.
Some noted some caution, others suggested the business is holding up okay. Headlines are picking up on some of the bigger sort of revisions of companies suggesting that demand is declining. But the headline often belies the full color that that's provided.
So again, moderation, I think, is kind of the watchword for this. This morning at 8.30, we got February retail sales data. The headline number was below kind of what the expectations were in terms of month-over-month growth.
There is a lot of volatility, which is why often an economist and investors will focus on the control retail sales number, because it will strip out things like food and energy that can be volatile. And it's also going to be impacted by changing prices on a month-to-month basis. The control group actually exceeded expectations by a decent amount.
So again, a bit of a mixed bag overall, but nothing that would suggest suddenly the consumer is rolling over. We need to just see more data on that. So when I kind of add it all up, we look at where the labor market is right now, which is kind of in a relative healthy balance.
Income growth still remains relatively solid. Consumers still are spending. Still a decent picture for the economy, but I think where we were at the start of the year and where we were a lot in the past couple of years, certainly a bit of a moderation.
So the past year's growth has been around 2.5% or higher. We thought growth would come in at that level this year. Now it looks like it's going to be more like between sort of 2% and maybe 1.5%, 2%.
So some moderation, but not yet at a point where this is, you know, I think these recession concerns are still significantly overblown. But another way to think of it also is the tail risk, the downside risk, has certainly increased in part because of policy. Well, Jason, thank you for some clarity there on CIO's outlook, assessment of the state of the U.S. economy as we're speaking today.
I did mention we do have the Fed meeting this week. We'll begin tomorrow. We will receive the statement at the press conference from Chairman Jerome Powell on Wednesday afternoon.
Given the economic outlook you've shared with us, Jason, what are your expectations from the Fed this week? Well, the last comment that Powell made before the blackout period, which was on Friday, I believe it was March 8th, if I have that right, or 7th, sorry. He basically said, look, the economy is in good shape, policy is in a good place, sort of reiterated the same kind of message he said before.
We haven't got a lot of data since then that would really kind of alter that story, you know, overall. I mean, the inflation data last week was fine, retail sales this morning is also fine. So I think sort of reiterate kind of similar messaging.
The focus for investors will be very much on what they do in terms of updating their projections. And it's likely they will take their inflation forecast for year on higher, you know, from around 2.5%, maybe closer to like 2.7, 2.8% in the anticipation of the inflationary impact of tariffs. Given that growth is moderated, and there'll be some potential drags on growth, they're likely to take the growth forecast down, you know, for this year.
So just look at that, that's directionally kind of stagflationary, higher inflation, lower growth. It's also kind of market to market where the financial markets already are pricing. So the real question that is like, what do they do in terms of guidance for policy?
In December, if you recall, they made a sizable change, where they cut rates 25 basis points, but it was a kind of a hawkish cut. They implied only two 25 basis point cuts this year. So the question will be, you know, do they stick with that 25 basis points?
Given the direction of economic forecast, it can create a bit of tension. It's like you're willing to cut two times yet inflation is even higher when you're still well above target. And so we'll see, you know, what they kind of guide there.
The market right pricing right now is for more than two Fed cuts this year, somewhere around 60 basis points, it was as high as 70 basis points at some point last week, it's dialed back at least a little bit. But as a result, if they're only at two under some kind of speculation that they can actually cut their dot plots to only one and cut this year, that would be viewed as hawkish. At a time when the markets are kind of jittery about growth, having a Fed that's directly looking like they're going to be less supportive rather than more supportive, would certainly add some some downside risk.
Now, if they do that, they can end up kind of, you know, subsequently kind of walking back to language or sort of massaging it. My guess would be that they want to try and be least as disruptive as possible at this point in time, and therefore, stick with a kind of consistent messaging. You know, I'm sure Powell will be asked during the press conference regarding tariff policy, you know how they respond to that, and I think they give the same message that he's going to give them all along.
What it really sort of would suggest is that the Fed would probably look through some inflationary shock, and if they see the labor market weakening, they will act. If the labor market is holding up and inflation looks like it's going to go higher, at least temporarily because of inflation, then the Fed's going to sit on the sidelines, which of course, if the labor market's holding up, that's a sign the economy is still doing okay. But I think all told, you know, the Fed's likely to read the same message.
The fear might be they're going to come across a little bit hawkish, but given that's the case, if anything, maybe it's a symmetric that there's a more chance for them to surprise if Powell does emphasize, you know, signs of weakness in the labor market, things of that sort. But I think just the language more so than anything else in what they communicate will be impactful for the markets. So a lot to look out for on Wednesday afternoon, and this, of course, something we'll cover, I'm sure, in our conversation next Monday, Jason, the outcome of this week's Fed meeting.
I want to turn focus to tariff developments. We received quite a few of them last week, notably a 25% tariff on steel and aluminum imports, this effective on March 12th, as it stands today. Now the focus is now on April 2nd, when additional tariffs are expected to be imposed.
So Jason, what is CIO's current expectation for tariffs from here? Well, the 25% tariffs on steel and aluminum, like that was also just eliminating exemptions for certain countries. So like it was sort of, you know, reimposing tariffs or reinstating tariffs that had been sort of temporarily reprieved for a bit of time.
In addition to that, we saw last week, of course, the on again, off again, on again, off again, you know, tariffs in terms of, you know, US and Canada. So a lot of potential noise where by the end of the week, it seemed to like kind of stabilize a little bit. And now, of course, the focus is on April 2nd.
On April 1st, various departments, whether it's the Commerce Department, the US Trade Representative, and others are supposed to report to the President on reciprocal tariffs, making recommendations for what should be imposed. April 2nd is one that's expected to be announced. You know, whether it's everything or it's sort of, you know, drips out of the course of a couple of days or longer that there are, you know, to be determined.
But it seems pretty clear that the administration at this point in time is going to proceed with those tariffs. And at the way I would kind of characterize it is they'll impose tariffs and then begin negotiations thereafter to potentially provide exemptions, remove it, things of that sort. That is messaging that literally came from Marco Rubio, Secretary of State, yesterday on, I think it was Face the Nation.
Last week, on Thursday, there was a meeting between senior Canadian and US officials in the White House. And the commentary, at least from the Canadian officials afterwards, is that we now better understand what they're trying to do. Could there be, you know, carve-outs and exemptions later on?
Can it potentially be positioned? So that, again, that's sort of consistent with impose now, sort of, you know, proceed thereafter. Ultimately, then, you know, what sort of exemptions and what sort of reductions, that's kind of the key question.
I'd say relative to our expectations, right, our baseline, we call it as aggressive tariffs, extensively on China, where tariffs will probably continue to ratchet up. On other countries and sectors, it's going to be a little bit more selective. What we've seen thus far suggests more than that, you know, something, you know, not our full on highly aggressive bear case, which would be almost like a universal tariff across the board, but still something that's closer to the base case versus the bear case.
But it's also why we've updated our probabilities to basically be a kind of more asymmetric, like 30% on the bear case, 50% on the base case, and only 25% on some sort of, you know, kind of deals or benign case. So the risk of certainly increased to the downside. What it does kind of, and I think where this sort of matters, if you think about it sort of in game theoretic terms, I published a blog yesterday titled Decision Trees, where part of it is to sort of address, like, how could Trump and the administration proceed on this?
It does seem like they want to get, you know, at least have clarity. There's been a lot of uncertainty back and forth. And I think the uncertainty, you know, to great degrees, undermining the markets, even maybe more so than the actual tariffs, which haven't been imposed.
So having a grand plan, like, here's what the tariffs are going to be and proceed from there, provide that sort of clarity. And then there's this focus on like, where is it Trump put? Well, then once they're done, I think he can say, I met a campaign promise of wanting to do this, and then assess from there, and then bring it down based on other countries willingness to, you know, renegotiate, bring down their tariffs.
Or how is the economy playing out? If the economy does show more deterioration, does a sort of Trump put a kick in where they're now they're more willing to sort of accept some some some rollbacks, saying that after April 1, the next couple of months will be key to see like, how do they proceed from there? And my guess is that, you know, they would probably list selectively kind of look to roll them back.
But it's all going to depend on, on the economy, if the economy holds up, they can probably say, look, this is actually working. And as we've seen, some of these deadlines have been flexible over the past couple of months. So when you see these dates, that's something to keep in mind.
Well, that's why sort of, I think, having a plan, we're like, all right, we're just going to do this. And this is what it's going to be. Right.
And then sort of start to kind of identify where there could be negotiations and discussions. At a minimum, just to give clarity to investors to consumers to businesses, because it's the uncertainty that also just kind of freezes people from taking action from businesses or from investing. At least if you were to raise tariffs and say, this is the new tariff rates, all right, then people can kind of plan accordingly and adjust their spending their investment decisions.
So having something where you eliminate that, you know, the chaos, and maybe President Trump doesn't want to do that. But having a what I call in sort of in game three, it's like a pure strategy, this will be the tariff stats that versus a mixed strategy, which is like, it could be this, it could be that I don't know. There's advantages to keeping your opponents on, you know, uncertain, but there's also disadvantage in this case.
And that I think it's, it is weighing on the economy, and the risk is that it sort of further weighs on the economy and what the benefits you expect from tariffs are could be fully offset by the uncertainty that's creating and leading to some more downside risks. Well, investors have been kept on their toes, as we've seen lately, Jason. So maybe that's a good pivot to the markets now.
International markets have outperformed US equities thus far here in 2025. We spoke last week about performance in Germany in particular, and there seems to be some growing interest in these markets. Do you think, Jason, this outperformance can continue from here?
Well, let's just sort of set some context, you know, at the start of the year, one of the most common questions I was getting from our advisors and clients was, should we just invest in the S&P 500? Like, should we just kind of give up on international markets? Which when people sort of capitulate, that's often a sign of like, that's when things would reverse.
And sure enough, we've seen that sort of play out. And now a lot of the questions are more like, should we further kind of jump into these international markets? You know, people are bearish on the US given sort of the policy developments that have been disappointing relative maybe expectations on tariffs, whereas we've seen upside surprises in terms of policy actions in Europe and Germany, which we covered last week.
And also even sort of actions in economic developments and more micro-level developments with AI in China, creating opportunities that investors can look overseas. All this has contributed to pretty significant rotation in market performance. One thing I just looked at the end of last week is the relative performance of international developed markets, and the MSCI IFA index as it kind of captures that, and how much has it outperformed the S&P 500.
And over the last roughly three months, it's outperformed by about 14%. If you go back the last 30 years, you can count on one hand the number of times where you've seen that relative outperformance in a short period of time, and usually what happens is it starts to kind of reverse or unwind to some extent. So I think that's just important context that you could say from a lot of optimism on US exceptional at the start of this year versus more pessimism overseas, it's almost reversed and the performance reflects that.
Now is this fully kind of justified? I think some of the sentiments have probably been a little bit too much. It also reflects the position that investors are crowded into kind of US assets and US equities, and so there's some sort of rebalancing going on.
I think the way you want to think about is on a tactical basis, a fair amount of kind of good news is being priced into different markets overseas, particularly in Europe, where there's a news for German fiscal policy, potential ceasefire in Ukraine, lower gas prices and now investor positions have improved there. Can that continue? And I'd say structurally, long term, perhaps it can, but tactically, we'd be cautious on the outperformance continuing, which is why our team in Europe is recommending these selective opportunities, but not outright sort of a more of a neutral view on European equities overall.
So I think that's something to sort of keep in mind that tactically, some of this performance is likely to reverse at least a little bit. That's what just history tells us. Same thing that can apply to emerging markets.
The key thing, though, is to think about strategically, what is your allocation to international markets versus US, given investors are so crowded into the US that thinking about global allocations and a week ago, we updated our strategic gas allocations, still reiterate that our preferred allocation is globally diversified, have a close to a third of your allocation international markets. If you're underweight, that is something to kind of think about, how do you strategically kind of leg into that over time. So I think it's important was this question about international markets, tactically, this performance may not kind of last and there's reasons to think that it could pivot, you know, starting in the next few months, strategically, you know, if you are significantly underweight those markets, it is worth kind of, you know, reallocating because some of our significant outperformance in the US over the past number of years, multiple years, not just the last two, you know, this probably won't persist.
And of course, we do encourage our clients soliciting in, have a conversation with your UBS financial advisor when it comes to considerations with positioning in international markets. On that note, Jason, let's end on asset allocation. How are you recommending that investors be positioned at this time with a fair amount of uncertainty?
Well, I began by saying the market sort of, you know, stabilized a little bit by the last week. The S&P kind of held at around like, you know, 10% down from its all-time high, which was just in mid-February. It feels like after, you know, having optimism at the start of the year, it's kind of more properly kind of pricing in, you know, kind of these growth concerns, these policy concerns.
Positioning is sort of cleaned up. Investors think we're heavily overweight in the US. I think if you look at positioning metrics, a lot of that's come back to much healthier levels, which is not a catalyst to buy, but it is a sort of a bit of a tailwind and it removes a bit of a headwind for the markets.
And historically, when you see sentiment get this bearish over the next 3, 6, 12 months, you usually see pretty good performance of US equities. So those are all kind of, you know, positives. Because it kind of comes down to the, you know, the question that I think a lot of investors are asking at this point is like, we've reset, now do we use this as an opportunity to kind of buy dips in the markets?
Or do you use it as an opportunity to sell rallies, if there's kind of rallies? And we kind of lean more towards the former in terms of kind of buying the dips, you know, for a number of reasons. Going back to the economic fundamentals, ultimately, we still think, you know, earning or economic growth in the US will still be relatively solid this year, you know, may not be over 2%, but something you're still relatively, you know, close to that.
And for earnings growth, again, still, you know, kind of mid to upper single digits range kind of, you know, for earnings growth, again, so it's, you know, solid, you know, fundamentals overall. Ultimately, I think on, you know, the policy that's been a bit of a certainly headwind for the markets this year on the fiscal front, you know, the focus will go from growing things that might be a bit of a drag on growth, ultimately, we'll pivot back towards a more favorable kind of growth positive story, I think, you know, the administration is kind of even saying, we might have some turbulence near term, but we will do think that these things, these policies that are undertaking in terms of taxes reform, you know, deregulation will ultimately kind of be beneficial for growth. It's hard to see that at the moment, you know, but I think that's kind of if we take a kind of more of a medium to kind of full year view.
So positive medium term, I think the near term, given the tariff uncertainty, given sort of the volatility of other data points, and sort of the overall caution that investors have, it may not get sort of a clear catalyst, either of a policy put kicking in, or growth clearly starting to kind of inflect higher or at least relative to expectations improve. I think that could happen in the next three months, it may not happen next month. So chopping this near term, you know, if you're looking to buy the dip, I think, you know, the team, the equity team has had sort of selective ideas, you know, internationally in US markets of way to kind of kind of like in but be kind of, you know, baby steps, I think is a way to describe it.
Similar on for fixed income, and they're looking for maybe, you know, dip opportunities, rates are coming a lot. That was what the team expected this year, but not be not quite this pace, the markets kind of move more in their direction. As conditions get a little bit more, you know, less uncertain, you could see rates drift higher, that would be opportunity to kind of add exposure, which is why ultimately, you know, still thinking, not taking big duration calls at this point in time or big duration bets, more still sticking with kind of intermediate part of the curve.
Also sticking with kind of higher quality fixed income. We have seen spreads for kind of the riskier parts of corporate credit widen out, they're still relatively tight. So there's scope for them to widen out.
And you know, the yields all in are relatively low. So not a lot of necessary cushion to offset spread widening for the riskier stuff. That's why I said against a recommend sticking with with higher quality fixed income.
Gold is something we continue to like we saw it, it got over 3000. All time high. And the sort of the key fundamental long term driver of just this sort of secular demand for gold is still there.
And for looking for safe havens in a time of uncertainty, gold looks like it's looking to perform as a good portfolio diversifier. Well, Jason, a lot going on in the market. So this was a very helpful inventory of what to be mindful of in the days ahead.
As always, do appreciate the guidance, the clarity when it comes to positioning as well. So thank you, Jason, for dropping by today and do look forward to picking back up with our conversation next Monday. You're welcome.
Have a great week. Likewise. Thank you, Jason.
Again, today we have been joined by Jason Draho, Head of Asset Allocation for the Americas with the UBS Chief Investment Office. I do want to point our listeners, our clients to Jason's recent blog. A title is Decision Trees is now available up on UBS.com forward slash CIO.
For clients of UBS, simply reach out to your UBS financial advisor if you would like to receive a copy of Jason's blog directly. From UBS Studios, I'm Dan Cassidy. Thank you for joining us.
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.