Top of the Morning: CIO Strategy Snapshot - Is the correction over?
The desk posits that recent stabilization in equity markets may signal a pause rather than a complete shift in the correction trend. Per the full note from UBS, the S&P 500's rise last week after five consecutive declines coincided with critical events such as the FOMC meeting and growing concerns over inflation. As the central bank adjusts its projections, reflecting a potential stagflation scenario, markets are left to reassess their positioning amidst evolving economic indicators. Despite the lack of imminent economic catalysts, traders should closely monitor tariffs that may impact market sentiment further.
What the desk is arguing
The desk believes that while the S&P 500's recent recovery may appear encouraging, it is not necessarily indicative of a sustained turnaround. Per the full note from UBS, the latest FOMC meeting revealed a downgrade in the growth forecast for 2025 by 40 basis points alongside a 30 basis point increase in the inflation outlook for the same year. This mirrors a cautious sentiment as markets adjust to a potentially stagflationary environment, characterized by stagnant growth coupled with rising prices.
Further emphasizing this shift, the FOMC's decision not to cut rates suggests a more hawkish stance moving forward, despite mixed economic signals. The focus now shifts to upcoming tariff news, which could add another layer of complexity to the market dynamics, especially if they heighten inflationary pressures.
Where it sits in our coverage
Our consensus target for EUR/USD is set at 1.075, with a range between 1.04 and 1.12, reflecting varying market outlooks based on inflation and economic growth forecasts. Firms with respective December 2026 targets include: - JPMorgan: 1.10 - BofA: 1.04
The current outlook aligns closely with JPMorgan's target, suggesting our view is at the higher end of the consensus range regarding potential currency movements.
How other firms see it
Firms like JPMorgan and Goldman Sachs are aligned with the desk's view on potential stabilization of equity markets impacting the FX landscape. Conversely, BofA stands in opposition, forecasting a more pronounced downturn in the currency pair due to inflationary pressures.
In this context, traders should also keep an eye on the USD/JPY currency pair as various central bank policies and inflation rates across economies interact in complex ways that reflect broader economic conditions.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Market stabilization may not indicate a complete correction end.
- 02FOMC forecasts show lower growth expectations, pivoting to stagflation concerns.
- 03Anticipation of tariff announcements could create further volatility.
- 04Current consensus aligns with a higher range outlook for EUR/USD.
Market implications
Traders should monitor the EUR/USD level, especially around the consensus target of 1.075, as economic data influences market sentiment post-FOMC. Key attention should also be directed towards anticipated tariff news, which could act as a catalyst for volatility in the coming weeks.
Risks to this view
A reversal of the current outlook could occur if inflationary pressures escalate unexpectedly or if the FOMC signals a more aggressive rate hike path than the market anticipates. Additionally, significant shifts in tariff policies could have immediate impacts on market sentiment, particularly within sensitive currency pairs.
Hi everyone, Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel. The S&P 500 was up last week.
This was the first time that occurred in five weeks, and this happened during a week of an FOMC meeting, an important NVIDIA developer conference, more economic data, and of course more speculation about tariffs. So a lot happening in the markets at the moment. Joining us here on this Monday morning, glad to welcome back Jason Draho, Head of Asset Allocation for the Americas with the UBS Chief Investment Office.
Jason, I know you're traveling today, so you're joining us here on the phone, though nice to be on with you. Thank you for checking in with our audience and do look forward to our conversation today. Yes.
Good morning, Dan. Happy Monday. I know we broke our in-office or in-room streak, but that will resume again next week and we'll go for a longer run next time.
Definitely. Looking forward to resuming our conversations here in New York in the studio. So all right, a lot to cover today, Jason.
So let's begin with that FOMC meeting, which occurred last Tuesday into Wednesday. We did hear from Chairman Powell with his press conference on Wednesday afternoon. I'm curious, what did you take away from the meeting outcome and the press conference?
Well, there were no rate cuts as was expected, but there were some changes in forecasts and some of the language they used under QT, the quantitative tightening. So I'll go through that and then sort of give the interpretation of what it all means. In terms of the economic projections, they updated that by downgrading their growth forecast for 2025 by 40 basis points.
They increased their inflation forecast for the year, so inflation will end the year higher than the initial anticipated by about 30 basis points. So directionally, lower growth or inflation, that is sort of stagflationary, and the downgrade for growth was a little more notable than the upgrade for inflation. The dot plots, so the projection of where the Fed funds rate will end at the year, that didn't change.
The median forecaster or medium FOMC participant still anticipates two cuts this year, but the skew is clearly towards either zero or one cut. There's a total of eight committee members who are basically saying like one or zero. So that's relatively hawkish.
On the other side, relatively dovish versus expectations was that they did adjust their cap on how many treasury bonds can roll off their balance sheet. Right now it's 25 billion. They're going to change that to only 5 billion, which is close to basically saying they're going to stop running off treasuries and therefore shrinking their balance sheet.
This happened, I'd say, about a minute earlier than expected. So that was some of the details. I think a couple of interesting things to note is in the forecast for inflation, while it's higher this year, the inflation forecast for the end of 2026 and 2027, so December of both years, that basically didn't change.
So what that implies is that even though they are baking in higher inflation due to tariffs, they assume essentially it's going to wash out very quickly. And during the press conference, Jay Powell did basically say that the inflation forecast incorporates a tariff effect and that he did use the word transitory to describe the tariff inflation. We know how the word transitory kind of turned out almost four years ago, so it's a little bit interesting that he chose that word, but it's consistent with how the Fed has been thinking about these things.
And ultimately, if inflation rises, but ultimately this whole tariff story is more of a growth shock. And later on down the line, that'll be more of an impact for growth. In the FOMC statement, they did change the language to go from two set of risks to inflation and growth.
So now they're just uncertain about the economic outlook has increased. And all this reflects the fact that at the moment, everything is sort of somewhat beholden on a policy front for what comes out of the Trump administration on fiscal policy and more particularly on tariffs. So the Fed is very much kind of in wait and see mode.
It also means from a markets perspective, to some extent, the Fed put or the Powell put is really only activated after we see what happened with fiscal policy and therefore with the Trump put. So if it turns out that tariffs aren't so bad and the economy isn't so slow, the Fed may not feel compelled to cut rates very quickly given inflation going up. But if growth slows, then I think they'll move relatively quickly to want to cut rates to support the labor market, even if inflation is still considerably above the target, which is why ultimately our view is unchanged.
We still expect the Fed to cut twice this year in June and September, but the uncertainty around that is quite high. This could change very quickly depending on what sort of policy announcements we get from the Trump administration. So that's the takeaway was kind of more the same view, but sort of the Fed acknowledging that there's a lot of uncertainty, they kind of codified what the market was sort of anticipating.
And now we're all sort of in wait and see mode for what comes out of on tariffs and other policies from the Trump administration. So, Jason, with that degree of uncertainty in mind, I know as we've been speaking about it over the past few weeks, growth concerns continue to be front and center for investors. What's the latest read on the economy based on the economic data we've received over the past week?
Well, the sentiment indicators continue to show weakness, and that's really where the biggest concern and the flashing sort of bright lights or growth concerns are in the soft sentiment data. Hard data that's more activity based, like it's actual consumption, labor market data continues to suggest that economic conditions overall remain relatively solid. I think it's interesting if you look at different economic surprises and how the data is coming relative to expectations, it was getting sort of worse and worse.
It was kind of disappointing expectations in the past couple of weeks. It's actually been surprising to the upside a little bit, and in particular, the hard data has been doing even more so to the point where it's actually kind of clearly not kind of surprising positive to the upside. Another measure to look at is the Atlanta Fed has a GDP one or GDP now tracking estimate for Q1.
This got a lot of attention because it dropped significantly into negative territory after some data for January came out. All a lot of it related to imports of gold. So it's somewhat distorted.
But what's happened is that forecast for Q1 or the tracking estimate for Q1 has been trending a little bit higher in the past couple of weeks. You know, it's still negative, but if you think of what you take of that level effect that's being distorted by imports and gold, then it's actually suggesting that the growth picture, instead of getting worse, it's kind of stabilizing and getting a little bit better. And we saw that with retail sales, the control group retail sales that kind of strips up the more volatile pieces was above expectations.
Industrial production was above expectations. So all told, growth we expect will sort of moderate this year from last year. There's certainly still some considerable downside risks, but the fear of recession and kind of a rapid slowdown, it's really not imminent or readily apparent in the data right now.
And we won't get a lot of clarity on that this week because the major economic data to come out on Friday would include the PCE inflation that the Fed focuses on. And given that the CPI, PPI data that already came out, it shouldn't be too surprising. So I think the more important piece of that data set will be the personal consumption expenditures, which is a broader reading of consumer spending than just the retail sales, because it will include services, will include kind of a broader measure.
If that's going to show some bounce back after a little bit of weakness in January, then again, we'll sort of reaffirm the overall growth story. The U.S. economy is still on relatively solid footing, even if it has moderated a little bit from last year. So that's kind of the latest.
But it is a fluid situation and certainly can reflect shifts in policy that are forthcoming. Now, Jason, if we look ahead to next week on April 2nd, there is a lot of anticipation over this. President Trump is scheduled to release details of the reciprocal tariffs.
What do we know as of today about these tariffs and what is CIO's base case? Well, it's interesting that, you know, like I think on Friday, President Trump tweeted out that, you know, April 2nd will be Liberation Day. You know, we'll finally sort of adjust these tariffs to kind of get a line in with what our countries are doing.
What's also interesting in the past 24 hours has been a Bloomberg story, then another one, a Wall Street Journal story. You've seen the same thing that, you know, officials in the administration are indicating that the fears in the market of like really high tariffs kind of across the board, that's kind of overdone. It's likely to be targeted more towards the 15 percent of countries that have the bulk of the trade deficit with the U.S.
So it's not, you know, it's been kind of targeted with those countries that are that the administration sort of uses being high deficits, high trade deficits with the U.S. or surpluses, but also tariffs that are higher. So targeting those countries, it seems likely that they'll have tariffs that would be like a uniform tariff rate across all imports from that country. And the tariff rate will vary country by country.
There won't be, or at least at this point in time, limited sector tariffs. So instead of having a tariff on Japan, that's 5 percent or Canada's 10 percent and Germany is 15 percent, you know, it might be like that as opposed to all imports of cars will have a 10 percent tariff. So it seems like you're going in a direction more of country specific.
It also does seem like it's once this gets into place, then that can open up scope for negotiations between the U.S. and the various countries and depending on what they're willing to do in terms of bringing tariffs down or reducing or eliminating other non-tariff trade barriers. So you can see the futures markets and equity markets this morning are responding positively to that. Again, viewing that it's moving further away from the more risk case scenarios.
We did update recently our probabilities of different tariff scenarios. Our base key still remains what we classify as aggressive tariffs, mainly targeted on China and Europe. And we said it's about a 50 percent chance.
But there's also a 35 percent chance of highly aggressive tariffs where the U.S. imposes about a 60 percent tariff on China and 20 to 30 percent on the Eurozone. And the effective tariff rate increases by about 15 percentage points. And they stay in these tariffs, stay in place, you know, kind of all throughout the year.
That's, you know, as of the reports over the weekend, that's something less likely. What I would caution is that we've heard sort of reports along these lines for the past two months and then President Trump or someone else in the administration comes out and refutes these reports. So until we actually see the details come out on April 2nd, I think we should be a little bit cautious in saying, you know, that the worst case scenarios are avoided because things could certainly change, you know, very quickly.
If other countries hear this, they might also then be less willing to negotiate. So again, until we see that, I think it's everything sort of on the table. But it does seem like the administration is going down the path that is, you know, not as bad as investors perhaps were fearing in terms of worst case scenarios for tariffs at this point in time.
So with that, Jason, as far as how markets, investors may be interpreting that, as I alluded to a bit earlier, thinking back to last week, financial markets appear to stabilize a bit. What do you read into that? May that be a sign that the correction is over?
Well, I think about what sort of drove the correction is clearly recalibrating by investors their views on the likelihood of tariffs and the likelihood of growth slowing significantly. And that was exacerbated by comments from Trump and senior policy officials saying that there could be a period of adjustment, transition, detox, a little bit of pain. So the market's going to pull back.
I think some position adjustments further help that. And keep in mind, there was also narratives and stories and developments around the world that were also drawing capital away from the U.S., whether it was significant fiscal reform in Germany or the developments of AI technologies among Chinese companies. As we see now, and you mentioned at the outset, that the S&P 500 and the NASDAQ index were both up slightly last week, but it was the first time in five weeks the prior four weeks they had negative returns.
So we're off a little bit of the lows. At this point in time, it feels like the equity markets, at least in the U.S., are more properly kind of calibrated, balanced, not this correction between some revisions to growth and to the outlook overall. So pricing and maybe growth, that won't be quite as strong as initially assumed at the start of the year, but it's really not recessionary.
So if tariffs end up being aggressive or highly aggressive, if there's a bigger slowdown on growth, the markets, equity markets, are not priced for that. Yes, it turns out that the tariff is kind of comes out along the lines of what we just discussed, maybe not as bad as feared. It also provides a potential near-term catalyst for equities to go higher.
And that may already happen based on the reporting of this being the case. But there is scope then for if the market gets ahead of itself, if the tariff situation is a little bit worse than is subsequently feared, there's scope for downside. So, you know, continue chopping it from these levels I think is reasonable.
One thing that also helps in terms of hitting a bit of a near-term bottom is that investor positioning has cleaned up a lot by a variety of metrics. You know, institutional investors in particular, hedge funds, very systematic strategies, they've de-risked quite a bit to the point where relative to kind of long-term averages, they're below or underweight risk versus before they were kind of relatively aggressive on risk, particularly in the U.S. at the start of this year. So that means there's less selling that needs to be done.
And there's also more, as you might think, to be deployed to buy the markets to move higher. So I'd say I wouldn't conclude that the correction is absolutely over. You know, we need to see clear policy pivots off from the Trump administration in terms of putting the tariffs in place and then focusing on growth, enhancing policy measures.
You know, having the Fed be willing to move forward with cutting rates and inflation not being as bad as feared and actually seeing the growth data not just sort of perhaps stop declining, but also kind of inflicting a little bit higher, which, you know, could happen in the next few months, but it's not, doesn't appear to be in the next couple of weeks. So now at least it's a little bit of choppiness, but at least it feels like that there's some stability for the markets, at least until April 2nd. OK, so despite the stability in markets, we may not be out of the woods yet with respect to the correction.
With that in mind, Jason, let's end on investor positioning. What should investors be doing right now? Well, ultimately, we'd say they'd perhaps be selectively buying the dips in certain areas of the market that looked attractive, especially if they've been sitting on the sidelines or even kind of selling at this point in time.
Within equities, overall, we maintain our view of upside for U.S. equities and tech in the U.S. remains our preferred sector. Tech has been one of the biggest underperformers this year. If you make seven, it's certainly underperformed.
But when we look at the underlying kind of fundamentals, the earnings potential, there's been no real sort of downgrade to the earnings outlook this year. It's just been sort of valuation compression or sort of derating. You compare that then with the kind of valuation, say, of Chinese Internet companies.
That valuation gap that was pretty extreme four months ago, that's compressed quite significantly given how well those companies perform versus how the banks have done. So we think on a global basis, a lot of the good news in these other markets, whether it's in Europe and Germany specifically, in China, those are priced in, whereas the U.S. markets are now sort of more maybe accurately pricing the underlying economic fundamentals, both the economy but also AI overall. So within the U.S., we still like U.S. equities.
We still like the tech sector. We think this has a good upside from current levels. We'd be cautious on jumping too far or too headlong into international markets, European markets or Chinese markets.
We do have selective ways in which we think that investors can play it, including six ways to play Europe, which are going to be stocks or ideas or less tariff focused. We think there's been a little, perhaps, complacency in European equity markets, given the string of good news to maybe discounting the risk of the tariff story and how much that could impact negatively on own growth. So be cautious on chasing that.
And similarly with the Chinese Internet stocks that have done quite well because other parts of the Chinese economy aren't going to do as well as tariffs go into place, the Chinese economy could actually slow. And that's something to keep in mind. That's a big part of the Chinese equity market is that part.
If you pivot to fixed income, as you see, if things turn out to be better on growth and fear, there's certainly a risk of rates backing up a little bit, which means we wouldn't recommend taking too much duration at this point in time. We continue to elect the intermediate part of the curve, like the five to seven year stay in high quality. Spreads have widened from fairly tight levels.
And there is a risk that if the growth uncertainty persists, they could widen even further. And only then will we think there'll be opportunities to buy in some of the riskier parts of credit, but just not yet. And then gold is something we continue to like.
It's done very well at this point. So we think it more of a diversification, given all sense in the global economy, geopolitics. It's done well at that diversification.
And we continue to think that it'll perform that role, at least in the near term, especially as the tariff details are rolled out and we understand exactly what are sort of the implications for the global economy once that happens. Well, Jason, as always, a very helpful touch base to begin the trading week. Thank you for dropping by this morning to share with our listeners, our clients, your thoughts on recent developments across the Fed, the economy and what's been moving markets.
And of course, always appreciate the guidance when it comes to positioning. So I thank you again, Jason, and do look forward to resuming with our conversation next week here in the studio. You're welcome.
Have a great week. Thank you for tuning in. Be sure to visit UBS dot 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 dot 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 dot 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 dot com forward slash CIO dash disclaimer.
Sources & References
How we cover this story