Top of the Morning: CIO Strategy Snapshot - Digesting the data and policy
Per the full note source, UBS CIO's Jason Draho views the January CPI and retail sales data as minor hiccups rather than a trend shift, with inflation still on a gradual downtrend but policy uncertainties—including tariffs, DOGE, and budget negotiations—risking fiscal drag. The desk's benign growth/inflation baseline keeps them positioned for a soft landing, but they acknowledge that any escalation in trade or fiscal policy could reignite inflation fears. Consensus among sell-side firms is broadly aligned with a dovish lean, though a few houses warn of upside inflation risks. The calendar offers no high-impact events in the next 30 days, leaving markets to focus on headline risk from Washington.
What the desk is arguing
Jason Draho of the UBS CIO Office characterizes the January data as 'minor hiccups' rather than a regime change. The CPI print came in above expectations, driven by categories like motor vehicle insurance (+2% MoM), but was not broad-based.
The desk retains a baseline view of gradually easing inflation and steady growth, which supports a soft-landing narrative. Policy developments—DOGE, tariff announcements, and budget negotiations—are monitored as upside risks to both inflation and fiscal drag, but not yet sufficient to alter the core outlook.
Where it sits in our coverage
No internal coverage data available for this commentary.
How other firms see it
No per-firm forecasts available for this commentary.
What the calendar says
No high-impact events are scheduled in the next 30 days for the relevant jurisdictions.
Key takeaways
01UBS CIO sees Jan CPI and retail sales as minor hiccups, not a trend shift.
02Inflation is still on a gradual downtrend per the desk's baseline.
03Policy risks from tariffs and fiscal negotiations are key upside risks.
04No imminent calendar catalysts; markets driven by headline flow.
Market implications
Watch for any escalation in tariff rhetoric or fiscal cliff headlines from Washington, which could stoke inflation expectations and lift front-end yields. A break above 4.5% in US 2Y yields would challenge the soft-landing narrative and pressure risk assets.
Risks to this view
A second consecutive hot CPI print or a broad-based tariff imposition would force the desk to mark up their inflation forecasts, delaying Fed cuts and lifting the USD. Concurrently, a failure in budget negotiations leading to a government shutdown would add fiscal uncertainty.
ubs
Hi, everyone. Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel.
We are back after the President's Day long weekend, which gave investors a short reprieve from the Trump 2.0 news flow that has been nonstop over the past four weeks. That policy news may pick up this week, but the economic news is relatively light over the next few days. However, that doesn't mean the markets will be calm.
So joining me today here in studio in 1285, glad to welcome back head of asset allocation for the Americas with the UBS Chief Investment Office, Jason Draho. Jason, glad to be back with you here on set. Welcome back.
A lot to catch up on. Welcome back to you, Dan. I hope you had a great vacation.
Good to be here. Yeah, it's great to be back, Jason. So as I mentioned, a lot has been happening in the markets with headlines.
Let's perhaps begin with economic data. I know last week we did receive some notable data points, which investors were very much focused on accounting for the January inflation data as well as retail sales. So I'm curious to hear, Jason, your assessment, what the latest data says about the state of the U.S. economy.
Well, going into last week, I would describe the data over the prior two months. We're seeing that to be relatively benign on the growth and inflation front. A good story overall.
The data last week would be, let's call it, some minor hiccups in what it signals about the state of the economy. So it wasn't quite as clean. So starting with the inflation data, the big piece was the CPI data for January.
It came in above expectations. It certainly caused the markets to react pretty strongly after the news came out last Wednesday morning. But as you kind of got into the details, what it indicated is that there was a number of categories that increased significantly.
So it wasn't just one thing, but it wasn't across the board. So something like motor vehicle insurance increased up to 2%. We saw some travel and airfares increase significantly.
But the thing that I think requires a little bit of a caveat to the data is that we've seen now for a few years in a row, a strong seasonal aspect to the data. So it jumps in January. Things like auto insurance tend to be reset to January 1.
So you see this set of annual kind of adjustment. The models that try and smooth this out, like the seasonal adjustment models, I think are having a little bit of difficulty trying to capture it. So there's a seasonal aspect that suggests it's hot now.
But if we look at last year, then it kind of moderate as the year went on. So there is some aspect there that don't take this as a sign of a new trend. Take this as perhaps as a bit of a one-off.
Also important is that the shelter part of inflation, and particularly the owner's equivalent rent that had been very sticky for a long period of time, on a month-over-month basis, that was up 30 basis points. The depart month was around 31 basis points. The depart month, that was around 20.
So you're seeing a real sort of step down in that piece of the inflation story. If you go back 18 months, that was running at 0.6, 0.7. This is critical because if you stripped out the shelter part of inflation, CPI has been running around 2% for a while.
And so the fact that this shelter OER piece is going lower suggests that going forward, that will continue to be sort of disinflationary for inflation for the rest of the year. So again, putting the January data in overall context. Then on Thursday, we got the PPI data, which was more in line with expectations.
And what economists can do is look at the different components of CPI and PPI data, weight them accordingly for how the PCE data is constructed. And that's what the Fed focuses on, the core PCE. And that suggests that on a month-over-month basis, it will be more moderate in terms of how much it increases year-over-year.
It's likely to go from around 2.8% to 2.6%. So when we get that inflation data, assuming this forecast is more accurate, then it will still show that generally inflation is headed lower. So headline initial reaction was negative inflation.
And it does kind of raise a little bit of eyebrows. This has been a concern that inflation could run hot. But it's not a change of overall narrative that suddenly inflation is accelerating.
That's kind of the key takeaway. On Friday, then we got to retail sales for January. It definitely fell short of expectations.
The forecast says it would grow 0.3% month-over-month. It came in at minus 0.8%. And this is the core kind of retail sales.
You strip out kind of gas and energy, which can fluctuate a lot month-to-month. So definitely a disappointment. This could reflect some payback from a lot of spending in November, December.
Again, it could be a January seasonal effect. The seasonal adjustments have a hard time capturing it. But perhaps it also reflects a little bit of uncertainty among the consumers about some of the policy directions, particularly on inflation and tariffs.
There's concern among some consumers that it's going to cause prices to go higher. That could be altering their spending patterns. We did see the week prior to that, the University of Michigan Consumer Survey, the one-year head inflation expectations jumped from 3.3% to 4.3%.
Again, it's probably reflecting some of those inflation concerns. You see in a different walk of business data, the NFIB Small Business Survey, optimum surged post the election, pulled back a little bit in January. But if you look at things like hiring plans and CapEx plans, those have actually been not really increasing as much.
So it's as if you ask small business owners, what's your outlook for the economy? Oh, it's really improved. Do you plan to hire more?
No. So it's a little bit of... I think that's to reflect some...
You have to really read into the data. Yeah. So I think it reflects a little bit of, especially with tariffs and some of the other policy uncertainty, it is perhaps weighing a little bit on the private sector, the consumers and businesses.
We need more data, though, to kind of get a sense of whether this is one-off. So I'd say still relatively benign, but a few things kind of worth monitoring going forward. And it would suggest that after things being relatively calm and benign, we could get a narrative shift, as I kind of call it, in the next couple of months.
We saw that last year, multiple pivots from Goldilocks to suddenly stagflation concerns to suddenly recession concerns last summer, then back to reflation concerns or focus by the election. It's been sort of the same story for a few months. We could get a bit of a pivot to something that's less favorable in the near term, just because the growth data, the inflation data isn't maybe as well-behaved as it's been recently.
And when thinking about inflation, retail sales, of course, one set of data points is not indicative of a trend. So we will see what the data reveals in the weeks and months ahead. Well, certainly one data point is not a trend.
But if you get two data points, sometimes investors can extrapolate and draw inferences that are still not reflective of the underlying trend, which is why I think so far it hasn't really disrupted the overall macro narrative. But if we get into March and the data starts saying something similar where the consumer spending is weak or inflation can use to run a little bit hot, I'm sure that then the market will start to trade off with concerns like, is this reflecting a pivot point in the data in some way? Yep, a lot to watch out for in the months ahead.
And I recall last week, Jason, outside of the abundance of economic data, investors had a lot to digest with respect to developments from the new administration. This accounts for tariffs, further activity by DOGE, even negotiations over budget deals in Congress, that's ramping up as well. So where, Jason, does all of this policy stand and what does it mean for the economy?
Well, let's go with tariffs. We already know from a couple of weeks ago that the 25% tariff on Canada and Mexico, that was delayed at least until March 4th. It may be implemented, it may get a further extension.
And then President Trump had talked about reciprocal tariffs. Initially, that was a little unclear what that entailed. Still, the details remain to be seen because there was going to be reports last week of a big announcement on reciprocal tariffs.
And what the announcement actually entailed was, after the Commerce Department, the U.S. Trade Representative, other government agencies that are related to commerce or trade are going to report back by starting April 1st, looking at different trade practices, tariff levels by different countries. And depending on that, that could lead to reciprocal action.
So it really means no action in the near term. It may take well into the summer before some action is done. What that entails is still a little bit unclear.
If you take it literally, if another country has a 5% tariff on goods from the U.S. on, say, clothing, and the U.S. has a 0% tariff, the reciprocal would be, the U.S. applies a 5% tariff to those goods coming to the U.S., so they match. But they could take a broader view of what reciprocal means because there could be anti-dumping measures or dumping measures in certain countries. There could be, like in Europe, a VAT tax that effectively can function a little bit like perhaps a tariff.
Other means that are sort of not direct tariffs but could be viewed as anti-free trade measures that could cause the administration to want to apply something. But the key thing out of all this is that if you follow that up, what was actually announced with also the delay in the Canada-Mexico tariffs, that the way I think investors are still treating this, rightly or wrongly, is that a lot of sound and fury, a lot of threats, a lot of loud kind of bark, but the actual bite so far has been relatively modest. And that's how it's going to play out, that this is all still designed to get negotiations, get countries to do concessions, that ultimately most of these tariffs won't be applied.
We'll see, but that's kind of how the markets are interpreted. So starting from an extreme and walking it back, depending on how the negotiations progress. Well, the term we use is like escalate to de-escalate.
Sure. And so I think that's how the markets are sort of perceiving that. So that's one policy front on Doge.
Obviously, a lot of headline numbers. And as we speak, I can see in the crown of the bottom of the news, there was something about Musk saying, we've identified trillions of dollars of spending we can't... Hard to keep up with all of these headlines.
It's also like the federal government only spends a certain amount of money, and I think it can't all be unaccounted for. Right. A lot of activity in terms of potential layoffs.
Look, it's still unclear what this will entail. There's still questions about what Doge can do in terms of cutting, because it is Congress that determines spending. It's up to the executive branch to execute that and spend the money.
There's some discretion on what they can do, but not entirely. So a lot of headlines now when it's all said and done, three months, six months down the line, will spending cuts be that significant or not, I think remains to be seen. It's also important to put in perspective that the discretionary spending for the federal government is about 15% of the total budget.
Social Security, Medicare, Medicaid, that's fixed defense spending. It's not going to be really impacted. And significantly interest on the debt payments, that's not going to be impacted.
That is 85% of spending. And so even if you have federal government workers resigning or quit, in any given year, around 200,000 federal employees leave the government. Attrition for whatever it is.
So if you hear about 65,000 people taking payouts like that, they might have just put anyway at some point during the year. So again, the magnitude of what actually will end up happening still remains to be seen. It's probably a little bit less than what all the headline news is suggesting, but still to be determined.
And then on the budget negotiations, there is some sort of deal that has to be done by March 14th. Otherwise, government funding runs out, the government will shut down. Perhaps the Republicans or some wouldn't mind that.
We'll see. They have to raise the debt center at some point in time. They have to have a deal to extend the tax cuts, which I think that's uniform agreement.
They want to do that. Is it one bill or two bills? The House is looking down the path of one bill.
The Senate wants to do two. Last week, what passed was a budget resolution, essentially allowing up to $4.2 trillion of spending increases over 10 years. So they have to kind of figure out how do they kind of offset that.
So a lot of negotiations will take place. This will be more difficult. It's also not something that can be done by executive order.
So unlike some of what's been done thus far, this will definitely going to be more of a slow grind. And ultimately, like a lot of these policy measures, it might be a lot of sound and fury, but the actual economic implications are relatively modest in the big picture. What is an issue, though, is that the direction near term is uncertainty can weigh on the economy, the potential for spending cuts, and this really might not be given to different government agencies.
You know, it could be impacted. Some workers being laid off near term, you could see some impact. So I think it skews more towards a downside in terms of economic consequences, in terms of growth, and which kind of goes into the prior question of like, economy's OK, but there is a risk that near term things could get a little bit worse before they perhaps kind of get better later in the year or next year.
Well, I suspect investors will be closely monitoring those headlines surrounding congressional budget negotiations in the weeks ahead, as that deadline at this point is less than a month away. So, Jason, given everything that's ahead of us, coupled with what we've seen over the past week, accounting for the economic data, news out of the Trump administration, how have markets been digesting all of this? Quite well.
In some ways, we've been meeting with the S&P is just a little bit below its all time high, and today, based on futures, I could set a new all time high. Treasury yields have been relatively kind of contained and benign. I would point out that it's been four weeks since the inauguration, since Trump 2.0 officially began.
And during that time period, the S&P 500 is traded in a pretty narrow range of a high of 61.18 and a low of 59.94. It's about a 2% range if you kind of measure that gap. The 10-year Treasury yield has gone from like 4.42% to a high of 4.64%, so about 22 basis point range.
Pretty narrow. The VIX volatility index is at 16.5. So relatively contained when you consider all the policy uncertainty.
And there is an economic policy uncertainty index that has surged to levels that hasn't been really since during the height of the pandemic and kind of near peak levels over the past 20 years. Given that sort of uncertainty, you think markets would be more choppy and volatile, but all things considered, they've been relatively well behaved, which suggests that, again, going back to lots of bark, not much bite, or the idea that a lot of talk about fiscal changes, but ultimately just maintaining the status quo is what the end result will be. The economy is in relatively good shape.
Corporate earnings that we got from 4Q, better than expected, so solid earnings growth. Guidance going forward, good, but not great. So you can see why the markets are kind of holding steady.
But it also sort of reflects the fact that investors are kind of either, one, completely overwhelmed by the information flow, just don't know how to react and what to make sense of it. Or two, again, going like it's sort of like, all right, lots of noise, but the signal suggests really ultimately not much change. And therefore, until we get clarity on what it means for the economy, for growth or inflation, positive or negative, markets are going to stay in a holding pattern.
As we get more information, perhaps that will change. But for the time being, that's kind of how the markets have been trading. Certainly some activity underneath the surface.
If you look outside of the US, it's been good performance elsewhere. European equities are up close to 12% year to date. EM equities in China were starting to bounce a little bit last week.
So one thing that is notable this year is that the US exceptionalism story that was very dominant last year for the economy, for the markets, that hasn't been the case thus far in the first, roughly six weeks, seven weeks into the year. Whether that continues or not, that remains to be seen. But that's how the markets have been trading.
It's almost a little bit of like less than feared in terms of Trump policies that's beneficial to the rest of the world. But so far, by and large, kind of holding steady. So investors seem to be taking all of this in stride.
You mentioned how US equity indices nearing all-time highs, considering as well some of these uncertainties in the weeks ahead surrounding economic components, notably inflation, of course, everything happening in DC. How should investors think about positioning their portfolios at the moment, Jason? Well, we came into the year with certain views on how the markets would perform, how the economy would perform, some key messages.
And despite this massive news flow, I wouldn't say that requires a substantial kind of rethink in the markets. The fact that they're been very range bound is sort of consistent with that view. So even though near term, there could be some hiccups in the growth data and the inflation data.
Ultimately, we think the policies by the administration will be market friendly, or at least not market averse. Because I think one thing is we think that Trump does care about how the market performs as a gauge of his success in terms of economic leadership. The economy overall for the year, the conditions should be relatively benign, similar to last year, meaning there'll be hiccups in different trends of the data, but the underlying story is still relatively constructive.
That's the underlying economic story. That should be then supportive for equities to grind higher. By the end of the year, we still see upside, sort of more to go in equities.
Within the tech sector, it's been choppy this year. And the deep seek news certainly caused some turbulence. And it's actually one of the weaker sectors year to date, the tech sector.
But ultimately, the AI thesis we think is still in place. And nothing of the earning season suggests that that's not the case. And if there is uncertainty and concern about the economy, what would investors do?
Good chance to kind of flight to safety is that they go out and buy the secular stories that have performed well. So again, feel comfortable about the AI opportunity, sort of seize the AI opportunity. Regarding rates, as we drift a little bit higher, these are levels where, again, it gets to kind of the higher end of the range.
But depending on how inflation plays out with the policy news, it's certainly conceivable that the 10-year could get back up to 475 or even higher, which is why we still prefer more of the belly part of the curve, like the 5-year point. So you're not taking a lot of duration, not taking a lot of credit risk, you're staying up in quality overall. A lot of political risk.
And so one way to navigate that one and one way to sort of manage it is gold, which is something that we continue to like. We've upgraded our forecast. So we see the gold at 3,000 by March.
It's kind of staying around those levels for the rest of the year. Good inflation hedge, but there's also a sort of secular story where central banks are buying gold in significant numbers. It's sort of a strong bid that's supporting the markets.
And some of that can deal with geopolitical uncertainty. You want to diversify their holdings a little bit less dollars, perhaps more gold. So that's another thing that we like.
So those are things that we said at the start of the year that hasn't really changed, despite a lot of sort of news flow on the markets. And they're sort of behaving consistent with that. Well, Jason, very productive conversation to begin this holiday short in trading week.
Great to be back on the mics with you. We covered a lot of ground today and there is a lot we will cover next Monday. So looking forward to that, Jason.
Thanks again. All right. Thank you.
Have a great week. Thanks for joining us for this edition of the UBS Global Wealth Management. Visit UBS.com slash CIO to view the latest research.
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