Top of the Morning: CIO Strategy Snapshot - Fit check
The desk is optimistic about the U.S. economy's resilience as President Trump's second term unfolds, suggesting it is well-positioned to navigate current challenges. Per the full note from UBS, the description of the economy as 'dressed to impress' reflects robust indicators supporting growth and inflation. Recent data from December indicates a strong economic footing, with positive readings across key metrics. With no immediate high-impact economic events scheduled, traders should remain alert to longer-term market dynamics influenced by political and economic strategies under the new administration.
What the desk is arguing
The desk posits that the U.S. economy is poised for growth amid the political shift with President Trump's second term beginning, indicating strong market potential. Per the full note from UBS, Jason Draho emphasizes this positive outlook through the lens of a 'fit check,' underscoring the economy's solid performance metrics.
Supporting this view, December economic data painted a favorable picture, suggesting strong consumer spending and manageable inflation levels, which are essential for sustained growth. This outlook is underpinned by a notable increase in indicators such as GDP and employment figures, corroborated by recent reports signaling a strong end to the year.
Where it sits in our coverage
Our current consensus for the USD shows targets clustering around 1.075, with a range between 1.04 and 1.12, based on insights from several banks. Notably, jpmorgan is aligned with our view, setting a target at 1.10 for March 2026, while bofa presents a contrary stance with a more conservative target of 1.04 for the same tenor.
The desk's upbeat tone aligns closely with jpmorgan, resting towards the upper end of the consensus range, while diverging from bofa, which reflects a more cautious outlook on the dollar's strength in the near term.
How other firms see it
Firms such as jpmorgan and citigroup align with the desk's positive assessment, emphasizing growth prospects bolstered by strong economic indicators. However, bofa and goldman sachs represent a more skeptical view, anticipating potential headwinds that could dampen appreciation in the USD value.
Traders should particularly watch the EUR/USD trajectory, which is likely to reflect shifts in sentiment regarding U.S. economic health versus European conditions, given the close correlation between these major currencies.
01The U.S. economy is perceived as strong as President Trump starts his second term.
02December economic data shows positive signs for growth and inflation.
03Consensus targets for USD indicate a range from 1.04 to 1.12.
04The sentiment reflects a divide between optimistic and cautious market views.
Market implications
Watch for developments in market sentiment tied to new executive orders or economic policies from the Trump administration. The key level to monitor remains 1.075 in the USD, as traders interpret fresh economic data that could influence this benchmark.
Risks to this view
Key risks to this bullish outlook include unexpected disparities in economic indicators or major political upheavals that could undermine market confidence. An adverse report on consumer spending or employment rates could swiftly alter the market's current trajectory.
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Hi everyone, Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel. President Trump has officially taken office and already signed a flurry of executive orders.
In addition to that, there was important economic data last week on the U.S. economy, suggesting that it is in a good place as Trump 2.0 begins. So joining us today for the CIO Strategy Snapshot to discuss this all, 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 on this Tuesday morning.
As we talked about last week, a lot has happened over the past few days, so plenty to catch up on. Thank you for joining us today. Good morning, Dan.
Yes, it's a monumental moment in terms of American politics and economics, so a lot to discuss this morning. So where to begin, Jason, perhaps we can start by addressing the state of the economy. This is President Trump takes office.
Now in your latest blog, title is Fit Check, you described the economy as dressed to impress. So what exactly do you mean by that? Well, first, maybe I should clarify what I mean by Fit Check.
For those of you who see TikToks or maybe on other social media platforms, a Fit Check is a form of a video where someone, usually a woman, kind of shows off what she's wearing and could ask you for a Fit Check, like feedback from people. So given there is a TikTok ban that's been called off for a little bit a while, I kind of thought, well, it's appropriate to do like a Fit Check for the U.S. economy as Trump takes office. And the dress to impress is one of the captions that often people will use, these kind of content creators describe their outlook.
And I think that's an appropriate way to think about the U.S. economy right now. If we look at the data we have and the data we have is most of the relevant stuff for December and whether we look at growth or inflation, it's all pretty positive story. So just on growth, the data that has come out, you know, whether it's for the labor market, these ISF manufacturing and services indices, industrial production, retail sales, and particularly kind of core retail sales that's not subject to, you know, kind of price fluctuations and gas prices and food prices, all those data have exceeded expectations for December.
The Atlanta Fed has a GDP tracking estimate for the fourth quarter. It is now up to 3 percent. It had dipped down to 2.5 percent at the end of December.
For context, the economy grew at 3 percent in the third quarter. If it grows at 3 percent in the fourth quarter, we're looking at a full year economy growing at about almost 2.8 percent. And not only signs of slowdown, it's signs if it was strong QI, then it gradually declined.
It's kind of holding steady. So the economy is in good shape. The momentum is strong.
That should continue. There's not a lot of reasons to think that's going to suddenly change, you know, bar it against some sort of shock. We'll get into that.
The bigger economic news last week was the inflation data, you know, the CPI data and also the PPI data. It came in a little bit better than expected, at least on a month over month basis. The year over numbers are being impacted by kind of some base effects.
But month over month, it was a good number below expectations. A key part of the inflation data is the shelter part. It's over a third of CPI data, a little less than that for the PC data the Fed focuses on.
And what we saw is another month where the step down that we saw in December for owners or November for owners of corporate rent, that was also relatively contained. So to give you some perspective on a month on basis for a year ago, two years ago, that piece of inflation was running at 0.6, 0.7. It's been trending lower.
But in November, it was down to about 0.23 for December's 0.31. This is important because if you have a third of inflation indexes clearly still disinflating and if you actually took out the shelter piece from CPI inflation, it'd be around 2 percent. We'd already be at the target.
This is trending lower and it should be. Then that's the sound that the inflation should gradually get back towards 2 percent. So the inflation reacceleration or sticky concerns, they're still a risk.
But the data this last week doesn't suggest that that is a significant risk or a baseline view. So what you have is an economy that's growing strong, that still seems on a track towards gradual disinflation. And that's a pretty good kind of state for President Trump to be, of the economy to be inheriting on for his new administration.
So, again, that's why I kind of classified as dressed to impress, because by any measure, the economy is pretty impressive. Now, Jason, before we get into the new administration, just based on this economic outlook you've just shared with us, what are the implications for the Fed cutting rates this year? Well, the inflation data was important because that's where the markets have become concerned that while the growth is holding up, inflation is or disinflation is basically falling out.
Is there a risk that it gets sticky at the high 2.8 percent range, around 3 percent, could even reaccelerate? So the CPI data that was, again, below expectations and showed that disinflation still seems to be on track. That's important.
And what we saw is the market pricing for the Fed rate cut that had fallen down to about almost only one cut this year and that wouldn't be done until December. The market is back to pricing now around 1.6 cuts this year with one cut basically priced in for the end of June. Our view from last December after last FOMC meeting was that the Fed would cut twice this year in June and September.
So now kind of aligned with what the Fed is projecting based on the stop loss, pretty consistent with what market pricing. The caveat is that we would need to see, like the Fed would likely need to see, the labor market continue to kind of cool just a little bit and certainly not reaccelerate and inflation progress to continue in order to feel comfortable to get cut rates later this year. That's likely to happen.
But now the Fed is at least in a good position, a sort of defendable position to say, you know, we've cut rates a decent amount, the economy is holding up, inflation is still coming down. Let's pause for an extended period for multiple months to assess the data, make sure inflation actually is falling, but also have time to assess the policy announcements and actual policy of the Trump administration to see what impact it could have on growth, inflation, and does that alter what the Fed needs to be doing? So relative to where we were in December when the Fed cut 25 basis points, it was a hawkish cut.
Our view hasn't fundamentally changed. The data has evolved in a way that it's consistent with getting the two cuts and the market price is now somewhat aligned to it. So, again, adding it to the growth data, the inflation data now, you know, what the Fed has said it's going to do, what the market expects it's going to do, it's all kind of aligning in a pretty good story at this point in time.
So now turning to President Trump, as we're recording today, Tuesday morning, he hasn't been in office for even 24 hours yet. There's already notable policy implications. How would you sum up, Jason, the policies thus far and what could it all mean or signal about future policy out of the White House?
Well, clear that, you know, from an economic perspective, there's four main channels of policy. One is fiscal, you know, or tax cuts. Second is deregulation.
Third is tariffs. Fourth is immigration deportations. There was very little, you know, on the first day in terms of fiscal policy.
You know, there's things that the administration and Congress has to do, including, you know, having another deal to, you know, to fund the government for the rest of the year that that expires on March 14th, to deal with the debt scene at some point in time. Good chance that what they end up doing is having, you know, probably two different bills, even though there may be some incentives to have one reconciliation bill, but a bill short term to fund some immigration and defense funding. And then a bigger bill later this year, probably by the summer, that's going to deal with the tax cuts that are set to expire at the beginning of next year.
But nothing really new that kind of came out from the first day in office. On deregulation, Trump did sign an executive order saying that, you know, no new regulations until the government is fully in place and the administration is fully in place. He's also done some things such as, you know, take away federal government workers, you know, employment protections mandatorily would be in office five days a week.
Some thought that that helped to kind of shrink the workforce overall, also making it easier to fire some civil servants. So that under the deregulation count that that sort of, you know, some action taken there, a number of executive orders on immigration, things that were kind of expected, you know, such as declaring a national emergency at the southern border. The real question is the deportation of immigrants is going to start with kind of criminals.
You know, how many people, how soon they can round them up to that? That's kind of an open question. Presumably some of these people who they're going to target first are not in the labor force or at least not conventionally.
So the economic impact for 2025 on immigration and deportation should be relatively minimal. The real sort of story from yesterday in terms of the policy, though, was what was announced or what maybe wasn't announced on tariffs. There was a fear in the marketplace that on day one, there could be announcements of new tariffs to take effect immediately.
Instead, what we got even before the inauguration were media reports that there'll be a memorandum of understanding that dictates that different economic agencies and departments investigate trade practices, other companies, countries, how they might be harming the US and sort of report back. And that would guide subsequent trade policies, tariff policies going forward. It doesn't mean tariffs won't be used, but it wasn't sort of the worst case scenario that kind of out of the gate they would be implemented.
I would caveat that that was in the morning. By the evening, Trump, in an informal press conference or answering reporter questions in the Oval Office, did say that enough about tariffs on China or Canada and Mexico that he's prepared to impose a 25 percent tariff as soon as February 1, which is, of course, only 10 days away. What materializes to be seen, he has said these things before back in his administration.
He talked about 25 percent tariff on Mexico because of lack of action on the border. He did not fall through. So it's still less unlikely that they'd fall through this quickly.
But it's clear that he's using these deadlines to force action by both countries. But on net, I think the read through is that at least one day, the worst case fears of tariffs did not materialize. Some of the rhetoric on China has been a little bit less than expected.
Maybe going back a few months ago, you know, I mentioned that TikTok, you know, the Fitchek kind of videos, President Trump sort of announced that there'll be a 75 days to give more time for ByteDance to sell TikTok to U.S. Fire. So by some time, we'll see whether they don't, whether he actually enforced the ban or not.
But it clearly there's some leeway that he seems to be providing, and you can sort of draw conclusions from that, which might be a little bit dangerous. But, you know, the read through from yesterday is that our view that ultimately it'd be more selective tariffs, universal tariffs, but perhaps only on the most sensitive goods. That might be a reasonable base case.
The broad base tariffs that were being sort of feared as a downside case, nothing that happened yesterday would sort of suggest that's more likely. If anything, that suggests perhaps a little bit less likely, you know, all is equal. But these things will be very fluid.
It could certainly change within, you know, days, weeks ahead. Well, Jason, that was a very helpful recap. And I'm sure, as you pointed out, we will learn a lot more in the days and weeks ahead.
So as we begin to close out today, Jason, what does this all mean for CIO's investment outlook and what should investors be doing right now? Well, we think kind of big picture, medium term for the full year, the economic conditions I described of good growth, inflation coming down, the Fed to be able to cut rates, that's a favorable backdrop for risk assets, for equities to continue to perform well. That's why we maintain our 6,600 price targets for the S&P 500 by year end.
Now, the path to get there can certainly be choppy. And if all you have to do is look at the performance of the S&P for the past month, it looks like a little bit of like a sawtooth up and down as economic data comes in, as policy announcements are made or at least actions are potentially announced. I think that will be the case until we get real clarity of what the Trump administration will do, most specifically on tariffs.
I think the other policies generally are neutral to positive for growth. It really is the tariffs that have proposed a significant downside risk. And so until there's clarity on that, markets are likely to be choppy.
Same thing, the most recent data is good, but we can easily have data that comes out in February or January that is above expectations. We're growing again, the strong labor market and job growth is strong. Inflation survives to the upside.
And suddenly we go from good supportive data to data that perhaps suggests the economy is running too hot, the Fed may not be able to cut, rates go higher and we're kind of getting back to where we were. So that is sort of the path we're on for the time being until there's sort of clarity on the inflation trajectory and the tariff policy trajectory. But longer term, ultimately, those things should play out in a way that is ultimately supportive for risk assets.
Within equities, our favorite area right now is the US, just given the overall view is that the US economy is clearly doing well and some of the policies such as tariffs would be worse for other countries than it would be for the US. We like tech sector, the tech sector is the most attractive sector. It's actually underperformed a little bit year to date on some restrictions that were imposed by the Biden administration on semiconductors, also perhaps a little bit of profit taking.
We've seen a rotation for the first couple of weeks more towards value and cyclical thoughts. But ultimately, the fundamental story for AI, the investment, at least all the commentary coming out suggests that team is well in place and we expect that will perform quite well this year. Financials is another sector that we like.
And if you look at the earnings for Q4 for the biggest banks last week, they were all quite strong, better than expected. And the financials led the markets higher last week. And we think this environment where good economy, more pickup in corporate activity, like M&A activity, deal making activity that's good for banks and ultimately for the disc, bias towards cutting rates, all that should be positive.
Same thing with a regulatory environment that should be more favorable for financials. Within fixed income, we favor kind of high quality fixed income at these low level of yield. Don't need to take a lot of spread or credit risk to get income.
Yields have been very volatile. They moved up a lot. They're already down 10, 20 basis points if you look at the 10 year just in the past couple of weeks based on that inflation data.
But there's a lot of volatility. Rates could again easily back up depending on what policy announcements are made. So rather than extending duration too much, we like kind of the five to seven year point of the curve to add a little bit of exposure to interest rate risk, but not being too exposed to rates going higher if things kind of end up heating up, which is still very much risk or fiscal policies in a way that would be inflationary or larger deficits.
But again, the markets will react to what they're going to. And the final thing is just to remind people that whatever message is kind of go for gold. I think gold has a good upside and there is a risk off hedge and sort of inflation hedge.
But there is also a secular story that makes gold attractive. The central banks continue to buy gold to diversify the reserve holdings and the recent data of just the past week suggests the central banks are buying significant amounts of gold. So it's a bit of a hedge to it against an environment that by and large is relatively favorable for risk assets.
Gold is a way that looks relatively attractive to add to the portfolio right now. Well, Jason, very productive conversation. Thank you for joining us to keep us current on CIO's Investment Outlook guidance when it comes to positioning and recapping for us what has been a very busy last 24 hours in Washington, D.C.
Thank you again, Jason. Do look forward to picking back up with our conversation in the week ahead. You're welcome.
Have a great week. Again, today we have been joined by Jason Draho, head of asset allocation for the Americas with the UBS chief investment office. I will point out that Jason's latest blog, which he has been making reference to today, title is Fit Check, is now available for you on UBS.com forward slash CIO from UBS studios on Dan Cassidy.
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