Top of the Morning: CIO Strategy Snapshot - Labor data, Trade update, DC roundup
In light of recent labor market data and ongoing trade talks between the US and China, the desk sees potential volatility in the FX markets. Per the full note from UBS, Jason Draho emphasizes the interplay between labor statistics and geopolitical developments as pivotal for market direction. Recent labor figures, which showed a steady unemployment rate at 4.1%, suggest underlying robustness, but initial jobless claims also ticked up to 300,000, indicating pockets of softness. This mixed picture could lead to fluctuations in the USD as traders reassess their positions ahead of potential trade agreement outcomes.
What the desk is arguing
The desk frames this as a critical juncture for USD positioning, with labor statistics providing a foundation for upcoming negotiations with China. The recent rise in jobless claims may heighten investor caution, as any sign of weakness could prompt shifts in sentiment toward the dollar. Per the full note from UBS, this dynamic could prompt traders to evaluate their exposure to risk assets and safe havens alike.
Draho highlights that the outcome of US-China trade talks should also weigh on trading decisions this week. If negotiations yield positive news, we could see a strong rally in risk currencies against the USD, while adverse developments could compound the dollar's strength.
Where it sits in our coverage
Currently, our consensus target for the USD stands at 1.075, with a range from 1.04 to 1.12. Specific firm targets include: - jpmorgan: 1.10 - bofa: 1.04 This consensus is indicative of a bullish sentiment around the USD in contrast to other firms that might adopt a more cautious stance depending on trade developments and labor metrics.
How other firms see it
Firms like jpmorgan and bofa are positioned with similar views, anticipating further directional movement stemming from labor and trade narratives. Conversely, some firms remain skeptical of the bullish case for USD, highlighting potential pitfalls in the labor market and trade discussions.
As a watchpoint, the EUR/USD trajectory, influenced by the ECB’s monetary policy stance, will continue to offer insight into broader currency trends leading up to the imminent trade discussions. Additionally, the outcome of US-China talks will significantly influence related pairs such as USD/JPY, especially if any shifts in sentiment towards risk assets occur.
01Labor market data presents a mixed picture; unemployment steady at 4.1% but rising initial claims.
02Upcoming US-China trade discussions may have significant implications for currency positioning.
03Firm consensus suggests a USD outlook range of 1.04 to 1.12, with nuanced views among major banks.
04Monitoring developments in labor and geopolitical landscapes will be crucial for traders.
Market implications
Traders should remain vigilant for movements in the USD, particularly around the 1.075 level, as sentiment swings with labor and trade news unfolds. Positioning signals could shift particularly in light of the trade talks as we approach critical thresholds in USD currency pairs.
Risks to this view
A negative surprise from US-China trade talks or a sharper-than-expected deterioration in labor market conditions would likely prompt a reversal in the current bullish sentiment surrounding the USD, exposing potential weaknesses in forecasts.
ubs
Hi, everyone. Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel.
Risk assets continued their grind higher last week. This as investors digested a new round of economic data. President Trump and President Xi of China also spoke setting up negotiations between the two countries this week.
Perhaps the biggest story last week was the break between President Trump and Elon Musk. So a lot going on, Jason, as usual, joining us once again here in studio. Glad to welcome back Jason Draho, head of asset allocation for the Americas with the UBS Chief Investment Office.
Jason, resuming our in-studio conversations the first time in a few weeks. So great to be back at the table with you. It's good to be back.
Absolutely. So let's get right into it, Jason, perhaps beginning with the economic data. In particular, last week, we did receive a lot of labor market data, including the May jobs report on Friday.
So what was your takeaway from the data we received last week on the labor front? Well, it's early June, which means we start getting all the May data beginning last week from ISM, manufacturing services. But I think the real focus was on the labor market data overall, which included the payrolls report on Friday for me, but also jolts data, which goes back to April, the weekly jobless claims.
I think the overall story to take away from the labor market is that it's still relatively decent. It's moderating very gradually. But certainly, I think the fears that investors have now, given the issue of tariffs potentially being a drag on the economy, is a bit of a step-down change or falling off a cliff in the worst case scenario for the labor market.
That was not evident at all with the payrolls coming in a little bit above expectations. So kind of solid number in that regards. But the overall sort of story from the labor report was certainly more mixed.
The prior two months were revised down, combined about 90,000, sort of offsetting some of the beat on the upside. The household survey that determines the unemployment rate was a little bit softer. And while the unemployment rate on a rounded basis was still at 4.2%, if you started going down to the second decimal place, third decimal place, it went from roughly 4.16 to about 4.24.
So again, still rounded 4.2, but almost a point higher, or a tenth of a point higher. Initial jobless claims have been taking a little bit higher, but still at a very low level overall. So again, softening labor market, consistent sort of with a slowing economy, but not clearly kind of an inflection point where we're seeing real kind of slowdown.
The ISM data was a little bit weaker, like the ISM services went back below 50, which is viewed as kind of contraction territory the first time in a while. Yet if you look at the overall tracking estimates for Q2, it's still near 4%, like a 3.8%. Certainly more data to come that will change that.
It also speaks to the fact that the GDP data in particular is going to be very distorted in Q1 and Q2 because of tariff front running before liberation day on April 2nd and the payback. And so there's a lot of kind of distortion. I think if you just try to look through all that and say what's the underlying trend, it is towards some kind of moderation of growth, at least at this point in time.
We're not yet seeing a really obvious impact from the tariffs and the data. That could start to change at least this week because the key economic data points this week are the inflation data that will come out over CPI and PPI. That could be the first signs of tariff being passed along to the consumer.
It still may take another month or two before it's evident, but that could be the first sign. And that's also in the context of the inflation data has been relatively well-behaved for the past few months, so kind of giving me assurance that the underlying disinflation trend is in track, absent to the impact of tariffs. And then the question all this leads into is what does this mean perhaps for the Fed?
The Fed has been basically saying we're in a relatively good position to be able to kind of wait and see in the labor market data, suggesting overall, yes, some moderation, but not really significant cracking. It allows the Fed to kind of reinforce that view, which is why the market pricing for a June cut, which is in nine days from when we're talking now and recording, is almost 0%. And even for July, it's only 1.6.
So it's not until you get into the fall that is really kind of the market fully pricing in one full cut, and it's down to 1.8 cuts for the year. So in terms of how investors have been responding as of late, I did mention that it was another positive week last week for risk assets, aside from the S&P 500 going up again. What else, Jason, was notable about market performance last week?
We did have a strong ending on Friday. So the S&P was up about 1.5% for the week. But beneath the surface, what was really kind of notable was the leaders were small caps.
You know, the Russell 2000 was up 3.2%. Cyclically oriented sectors kind of led the way. Defensive sectors, by and large, were flat to down.
So if you can take that difference, kind of cyclicals outperformed defenses by nearly five percentage points. So all that with the cyclicals, the small caps, it was a pro-risk on sort of pro-cyclical, higher beta story, which has not been the case as far as the markets recovered from their low back in early April. You know, higher quality, by and large, last week's the first signs of really kind of broadening out where you're seeing some kind of performance catch up.
Perhaps as investors also look and think, well, how much higher can the S&P go in the near term? What areas of the market can kind of catch up? And so at least the price action last week is consistent with that.
Then you look at the VIX vault index, it's down to about 16.7 or 16.8. It's the lowest level it's been since early March. So before the tariff situation really started to escalate.
At the same time, if you look at interest rates, the rates kind of went up across the curve from anywhere from 12 up to 14 basis points for the two year to about 10, 11 basis points for the third year, which has been in focus because it's been rising more quickly. It was only up four basis points. That really reflects the fact that the data overall and the labor market data overall suggests, again, the Fed doesn't need to cut.
That's why you saw the curve sort of move in its direction overall. So a relatively kind of positive story for the markets in general, consistent with just a generally better view of how long growth could sort of hold up and further suggesting the left downside tail risks for the economy are relatively contained at this point in time. So Jason, I do want to get your thoughts.
And this heated up a bit as the week went on last week. We did see the feud between President Trump and Elon Musk. Based from that, do you see any implications for Trump 2.0 economic policies, whether that be Doge, the one big beautiful bill, or perhaps something else?
Well, there was certainly a new thing in developments, particularly on Thursday when they tweets were going back and forth. Great water cooler conversation to speculate what happened and why. I can imagine in DC, it's kind of running rampant.
But as investors, you know, it might be fun to kind of have a debate and discuss, but ultimately kind of ask, what does this mean for economic policy? Does this really have any impact on what the Trump administration plans to do? And I'd say the short answer is, you know, you know, probably not much, or maybe even very, very little.
By the time that happened, it was already clear that Elon was stepping back from the administration, you know, for perhaps a variety of reasons, but his political influence has certainly been, you know, kind of waning. There was an announcement a week prior, I think, in the Oval Office that he's stepping away. The week prior, but if you want to go back earlier in the spring, there were these special elections in Florida, but also Wisconsin.
Elon had put a lot of money into Wisconsin. You know, the Republican candidate didn't do well. So you can think of it as Elon's sort of political juice perhaps was wearing off, not that strong.
And so if that's the case, you think about where he could have some influence, you know, Doge just certainly got some high, you know, kind of, that was his high profile. It was already evident, you know, a few weeks ago, a couple, you know, a month ago, maybe, you know, more than that, that a lot of big headlines of cuts, but the actual reality of what was happening was, in terms of dollars being cut, was much less. It had already also appeared that Congress was, through the budgeting process, trying to kind of take back some of that authority to, you know, how much, you know, these different departments and government agencies would actually spend.
Elon did criticize the one big, beautiful bill as being, you know, increasing the deficit. It's not good enough to cut, but it just goes back to the point of like the political influence. If you're a Republican, you know, deciding what to do, it's much more significant if President Trump tweets at you versus Elon Musk tweets at you.
So I think that, again, he can complain about the size of it, but I think it's going to be relatively insignificant to the direction of travel beyond what already Republicans I think we're kind of concerned with in terms of some of the futures. On tariffs and trade, I think that was never something that Elon was overly influential on. I think what sort of matters more there is the fact that there is some self-imposed deadlines of these 90-day reprieves that are now only about a month away, negotiations, as we speak, in London between the U.S. and Chinese officials.
So, again, Elon wouldn't be, you know, overly significant there. I think what is a little bit more perhaps interesting or relevant to think about is almost take a step back from the specific policies to think more along the ideology or framework of Trump 2.0 or Trumponomics, you know, as I call it. At the start of the year, I wrote a piece I titled, like, you know, MAGA v.
DOGE. Yeah, which we spoke about. And the idea is like, well, what is the sort of the economic philosophy of the Trump administration?
And so I was really kind of asking also, like, what exactly is Trumponomics? Because it is certainly not traditional Republican policies. It is a heterodox mix of different sort of policies.
And if we think of MAGA as, you know, a pro-America or America first, you know, trying to support workers who have been left behind over the past 20 or 30 years, you know, obviously anti-free trades, even some sense anti, you know, kind of, you know, the tech sector. I would, in simple terms, if you want to kind of distill it down, it's like this is meant to be more labor-supportive overall, perhaps as an ideology, whereas DOGE literally was going into kind of government spending, cut government waste, trying to make the delivery of services to the public more efficient, putting it into the hands of the private sector where appropriate. Therefore, I would kind of classify it as, like, smaller government, private sector, more pro-capital to do it.
So in simple terms, MAGA is pro-labor, you know, DOGE is kind of more pro-capital. At the time, I would have conjectured that ultimately the policies will lean more capital-friendly. Now if we fast forward to, you know, just about a week ago, the S&P 500 at that point in time was still not even in positive territory for the year.
So you could say whatever the set of policies have been done are not necessarily friendly to capital at that point in time. But they were definitely unfriendly to capital back in early April after Liberation Day. And since then, we've had this kind of significant bounce back.
And so I think it's if you can assess the shift in the policies overall, from where they were, it looks like it's going back towards, you know, the pendulum swinging more towards at least being not anti-capital, but more friendly, you know, on capital. We know President Trump, historically, has followed the stock market, uses the S&P 500 as a gauge for success. As back in March and April, he'd be asked, like, are you following the stock market or not?
Or it's down today as a result of tariffs. He'd be sort of dismissive. But I think it's clear that the shift over time is reflecting of concerns about the overall state of financial markets and, you know, equity is certainly not exclusive to that.
So I say all this in a sense of, can we glean anything from what, you know, Elon's leaving means? I'd say, ultimately, if he represented more of a doge, capital-friendly environment, I think the administration already seems to be moved, shifting in that direction, focusing on trying to get the one big, beautiful bill passed, which would have tax cuts, tax incentives for investment. There'll be a bigger push towards kind of deregulation.
And on trade and tariffs, which we'd say it's the most, perhaps, potentially harmful for the economy in the near term, it seems like as much as they'll try to escalate things, they've kind of narrowed in on sort of a sweet spot, a level of tariffs overall that they feel like could raise revenue, you know, enough to help offset, you know, tax cuts elsewhere, to incentivize production back in the U.S., to help potentially kind of reduce trade deficits. So I think if the markets sort of feel like what they're doing right now, that's where it's going to be. I think that is a level that, again, from an investor perspective, that is sort of that risk reduces, and then you can start to look more towards pro-growth policies, pro-capital policies going forward.
So I think that's the way, to me, when I do a bit of a five-month-later status check of that kind of idea, it felt like, certainly two months ago, this was not necessarily capital-friendly. Today, it feels definitely more investor-friendly. It's very interesting, these considerations, especially when you think about the evolution of Doge and how that has influenced markets in recent weeks and months.
If we end with asset allocation, Jason, just given everything that's going on at the moment and a lot coming up ahead of us, you mentioned the key inflation data this week, the upcoming Fed meeting. What are your key recommendations at this time when it comes to positioning? Well, kind of picking on this idea of ultimately, you know, we think the policies will be kind of capital-friendly, that again sort of suggests that, to me, we are in a still kind of an equity bull market.
You know, it's come back very strongly. So if you look at year-to-date, it doesn't feel like it's a bull market. If you think about where we were in April, it feels like, well, now, could this be resuming a bull market?
I think it's more of the latter. And that the policies ultimately will be favorable. There'll be speed bumps along the way.
Trade negotiations may not be entirely smooth. Passing of the one big, beautiful bill may hit some speed bumps along the way. But the direction of travel, that still feels relatively safe.
I'd say that's on a, again, bigger picture, kind of 12-month view. In the near term, the markets, I think, are pricing relatively good news. If we were to get jobs, you know, print or inflation print even this week, where inflation is running hot, that will spook the markets.
And certainly, if you get that combined with some weak labor market data or consumer spending data later in the summer, that's going to reinforce the ideal, is a static inflation scenario still possible? So I think that's, you know, given how big the moves are, I think that the near term is, you know, going to be perhaps, you know, maybe grind a little bit higher, but also very vulnerable to some, you know, data point that's disappointing. Ultimately, the weakness we would get, and maybe the economy is going to be in the second of this year, at some point, the markets will start to focus on better 2026 in terms of more fiscal support directionally, deregulation, better earnings outlook.
So again, I think thinking in that sort of bull market context. So phasing into equities as pullbacks, you know, but realize that, you know, this is sort of the dynamic, you know, we're sitting in. Pivoting from equities to fixed income, you know, the rates have backed up again, like the 10 years back to around 4.5%.
You know, as it gets higher, that starts to become a level where it looks a little more interesting to add duration, but at the moment, still kind of comfortable, you're not taking a lot of interest rate risk, staying at the front of the curve, you're staying higher quality because similar to equities, you know, credit spreads have tightened up, things have gotten richer again. So you don't need to take a lot of credit risk. And through all this chopping, this gold continues to seem to kind of, you know, chop a little bit higher in fits and starts.
So again, sort of an effective diversify, you know, overall. So that's something else that we like at this point in time. Well, Jason, as always, a very helpful touch base to begin the trading week.
Thank you for joining us, as is often the case in these times, headlines are very fluid. So thank you for providing your thoughts on what we've been seeing, how it's been impacting the markets and providing some guidance when it comes to positioning. You're welcome.
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