Top of the Morning: CIO Strategy Snapshot - Macro thoughts
Per the full note source, UBS CIO's Jason Draho argues that markets are shrugging off multiple risk factors—disappointing jobs data, higher tariffs, and Fed personnel changes—because the underlying economic narrative remains intact. The S&P 500's 2.5% gain and NASDAQ 100's 3.7% rally to an all-time high reflect a 'summer melt-up' driven by resilient consumer spending and easing recession fears. With July inflation data due this week, the market is implicitly betting that pricing pressures will continue to moderate, allowing the Fed to maintain a patient stance. The consensus view among other banks is mixed, but the bulk of sell-side forecasts cluster around a benign disinflation scenario. The key calendar catalyst this week is the US CPI print, which will either validate or challenge this complacency.
What the desk is arguing
UBS CIO's Jason Draho contends that markets are rationally absorbing recent headwinds—including a weak July payrolls report, tariff escalation risks, and the firing of the BLS head—because the macro backdrop is fundamentally supportive. He notes that the S&P 500 rose 2.5% last week and the NASDAQ 100 gained 3.7% to hit a record high, indicating that investors view these events as noise rather than regime changes.
The desk leans on the resilience of consumer spending and the expectation that July inflation data will show continued moderation, which would reinforce the Fed's ability to hold rates steady. The implicit counterfactual is that a hawkish inflation surprise or a sharp deterioration in trade talks would break the summer rally, but for now the path of least resistance remains higher.
Key takeaways
01Markets are shrugging off weak jobs data, tariff risks, and Fed personnel changes because the economic narrative of gradual disinflation and resilient growth remains intact.
02The S&P 500's 2.5% gain and NASDAQ 100's 3.7% rally to a record high reflect a 'summer melt-up' driven by positioning and positive seasonality.
03This week's July CPI data is the primary test for the market's benign view; a high print could trigger a repricing of Fed expectations.
04The desk sees upside risks to risk assets, but warns that geopolitical shocks or a sharp slowdown in consumer spending could invalidate the call.
Market implications
Watch the US July CPI release on Wednesday for validation of the disinflation thesis. A downside surprise (core CPI below 0.15% m/m) could lift the S&P 500 to new highs, while a firm print above 0.25% m/m would pressure equities and push the USD bid. The NASDAQ 100's all-time high is a key technical level; a break below 15500 would signal risk-off rotation.
Risks to this view
The call is invalidated if July CPI prints above 0.3% m/m core, as it would force the Fed to re-engage hawkish rhetoric and raise terminal rate expectations. An escalation in US-China tariffs beyond current levels or a sudden deterioration in labor market conditions (e.g., unemployment above 4.0%) would also break the benign narrative. Additionally, a sharp spike in oil prices above $90/bbl could reignite inflation fears and crush consumer confidence.
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Hi everyone, Dan Cassidy here, welcome back to Top of the Morning on the UBS Market Moves podcast channel. After a week in which investors had to digest disappointing news on jobs, unexpected policy personnel developments, and higher tariffs, the markets bounced back handedly and this week the focus will be on the July inflation data and geopolitical developments. Joining me here today in studio, glad to welcome back Jason Draho, Head of Asset Allocation for the Americas with the UBS Chief Investment Office.
Jason, nice to be back with you here at the table, a lot to talk about, so great to have you here. Thank you for joining us. Good morning, Dan.
It's good to be here in person. It's a beautiful summer day in New York City. It's not hot and sweltering just yet.
But you know, the week is young. I think the temps are going to rise as the week goes on, so we'll see. But I know, Jason, since you and I last spoke, we did see some interesting developments in markets.
Let's start with the market performance last week, which did seem to be immune to market risks. So why do you think that happened? Well, think about a week ago this time, we would have been talking about what happened the prior week where we got a July jobs data that was below expectations, largely because of revisions for prior months, you know, a real downgrade there.
There was concerns about trade deals not being reached, and therefore tariffs go higher in some ways, like unexpectedly, like larger amounts than investors are assuming. The questions about Fed independence, questions about data independence because of the President Trump had fired the head of the Bureau of Labor Statistics. So a lot of things that the markets could worry about, and yet here we had it.
The S&P 500 was up 2.5% last week. The NASDAQ 100 was up 3.7%, sits at an all-time high. So the markets and investors looked at it, kind of yawned, and said, thank you very much, it's summer.
So I guess things are all good. So why is that the case, I mean, given these factors are going on? You know, kind of in some way, big picture, when we see the markets, we always have to think about, like, they're moving relative to what investors expect, you know, not just in terms of absolute news, but relative to what's expected, presumably what is already kind of being priced in the markets.
And by and large, I think investors, I think, are reasonably confident that the economy and policy will ultimately be able to kind of thread the needle. And by that, I mean, it's almost like kind of Goldilocks in a twisted way, where investors expect growth to slow, they expect the labor market to slow, and they expect inflation to go higher due to tariffs. So as the data moves in that direction, it's sort of like, well, this is what we expect.
The markets are kind of pricing that in, and therefore it moves in that direction. It's not that surprising. So I think, you know, that alone, sort of, you know, softness, disappointing on the data side, you know, disappointment in terms of moderation, that's not going to be enough to really kind of scare the markets.
And likewise, now that the economy is soft and the labor market is softening, the markets can be confident that the Fed's going to cut rates starting in September. And so it's a little bit of, you know, threading the needle, like kind of weakening, but not too much. It's also the case, I think, investors, some investors at least, may be interpreting the jobs data a little bit optimistically.
Because if you look at the month-over-month, you know, changes, you know, after the revisions, you know, in May, it was around 19,000 new jobs, June 14, July 73. So it's like, oh, there was an initial hit due to tariff uncertainty, now you're going to get some more trend-level job growth. Again, it's a glass-half-full interpretation.
There's also thought that, you know, part of what's going on is, you know, immigration crackdown, deportations, you're going to get slower job growth. It's not a sign of fundamental weakness, it's just labor supply shrinking. So you're going to see some of that as well.
And so you add all this up, investors think you're also looking through near-term weakness because they'll think 2026 will be better. You'll get some modest fiscal stimulus from the big, beautiful bill. It's also expected that the negative impact of tariffs will play out the rest of this year.
And then next year, from a base-level effect, you start to kind of move forward, especially with inflation. And consistent with that, Treasury Secretary Scott Besant gave an interview with Nikkei Asia over the weekend, and in it he said that, you know, he expects trade negotiations with countries yet to secure a deal should be broadly concluded by October. So again, consistent with investors kind of looking through some of the tariff uncertainty, some numbers go up, they expect some of those things to come down.
The effective tariff rate should still be around, you know, 15%. It's sort of logical that the administration would want to do this by October, because 12 months later, we have midterms, right? So you want to kind of get this resolved, so then you have a good, you know, positive economic momentum going into the midterms.
I think the investors are kind of hanging their hats on that. You know, can this play out? So again, you know, it's kind of, to me, it's a bit of a thread in the needle, and there is certainly scope for disappointment in the near term.
Now the market does seem to be, Jason, shrugging off the weak labor data, but how do you interpret the current state of the economy? I know we have a key inflation print coming out, I believe, tomorrow morning, right? That is correct.
We get the July CPI data on Tuesday, then we'll get the July PPI data the day after. From that, we can impute, economists can impute what the PCE data, inflation data will be, which is what the Fed officially looks at, and that's usually a pretty good gauge of where we're going to go. So what I just laid out in the prior answer was investors expect growth to slow, inflation to go up, but ultimately feel relatively comfortable about the fundamental story and things with Fed in 2026.
That's roughly kind of our view, but I wouldn't be quite as sanguine or maybe dismissive of some of the near-term risks. I mean, it's clear the job market is weakening. It's not just quirky seasonal patterns.
What we see is, in terms of these revisions, we had significant downward revisions in the May and June data. The historical pattern is, in the summer, the revisions tend to be more to the downside than the upside. So chances are, if July will be revised, it's probably going to be revised lower more so than higher.
So this upward trend is like that could be, when we get the data in early September, that could be kind of wiped away. No, actually, things are not quite as good as people think. Just as for reference, there's estimates like what is sort of a sustainable level of growth based on sort of demographics, immigration, like how many jobs do we need to be created in a month in order to maintain sort of an equilibrium or status quo of the unemployment rate.
And it's somewhere around the 75,000 to 90,000 range, give or take. The last few months, it's been around at 35,000. So it is below trend.
And there is concerns that you get to stall speed where if job growth and hiring gets low enough, then there's uncertainty about the economy, people slow their consumption, hiring slows, and you kind of tip into kind of maybe a mild recession in that case. So that is not our base case, but that certainly is a possibility. On inflation, the consensus for the July CPI data is about 30 basis points month over month for core CPI.
That's what matters most. It could be plus or minus a few basis points. If it's something closer to 50, that will be kind of surprising to the markets.
It's likely that the tariff impact is still coming through the pipeline and there's evidence and data that suggests it's going to build ultimately. So when we get the August data, it could be 0.5% month over month. From then until year end, which would bring your core CPI data up to around 3.5% from 2.627 right now.
It's likely to be transitory, but again, until we actually see a play out, these are the risks. So we're confident, relatively confident on the medium term outlook, but I think a little bit more cautious in terms of we need to see the data actually be confident in that view. We're going to see some of the implications of tariff coming more evidently in the next few months.
I think the markets might be a little too comfortable on that front. Now another factor top of mind for investors in recent days, the personnel, unexpected personnel developments over at the Fed. We did see that President Trump nominated Stephen Mirren, currently serves as chair of the Council of Economic Advisors to replace Adriana Kugler as a Fed governor.
So what impact could this have on Fed policy, Jason? So Kugler, I think officially her last day was last Friday. So her Fed governor seat is vacant, and this has happened before.
Sometimes you get vacancies and it takes a while for them to be replaced. That was the case a couple of years ago where somebody's seat sat empty for months on end. The assumption that I think a lot of economists had was that she was set to resign or be off the board by January, that the Trump administration would nominate someone for that seat.
That seat would be the Fed chair sort of in waiting. That was the presumption. And they might move relatively quickly, but not within days making the sort of announcement.
So the initial reaction would be Stephen Mirren, then the Fed chair in waiting. I think the shorter answer is no. I think they wanted to get someone in place relatively quickly, someone who would be dovish.
I think he's been a critic of the Fed in the past, but also probably someone who would argue for Fed rate cuts. Does it really change in the near term what the Fed's going to do? I think it's unlikely.
First, there's a question, will he go through Senate hearings and confirmation to be on the FOMC by the September meeting? Possible but certainly not a guarantee. Even if he is, our base case is that the Fed will cut in September.
The market pricing is at about a 90% chance. We do get the CPI data for July tomorrow, but then we'll get one more month of August data, employment data, sales, inflation that the Fed will have when they make their decision at that point in time. I would also watch for what Fed Chair Jay Powell says at the Jackson Hole Central Bank Symposium.
That takes place August 21st to 23rd. Friday the 22nd, that's when Powell, usually roughly around 10am, gives his speech. It's often a time when the Fed Governor gives an indication of what policy will be in September.
Powell has done this in the past. You could use that as a way to lay out what they intend to do and using language that the markets would interpret. They're set to cut, barring something really surprising.
So Meehan's appointment doesn't really change the directory. We think that ultimately the Fed will cut 100 basis points by Q1 of next year. The pricing right now is a 90% chance for September, about the equivalent of 2.3 cuts by December, and by the end of 2026, a little over 5 cuts.
So it probably doesn't change much whether it's Meehan who's appointed or not. What it does do is it means that there will probably be some time when the Fed interviews candidates and they may announce Meehan's replacement by later in the summer. Or they could keep him on and wait.
This will be the path going forward. But I think this should not be viewed as a sign of he will be the next Fed chair. Keeping the options open.
Keeping the options open. Also, maybe it could be from the administration to nominate someone, see how the markets react. Is this a view as a dovish signal?
Is it a view as a Trump lackey who will just do what Trump wants? Given the way they were framed as it's a temporary replacement until January, and it was sort of surprising. He was not on anyone's betty nods or list of potential candidates.
So it was surprising to see that Meehan was thinking would he be Fed governor. So I think the markets would probably look at it that way. So if the Trump team was thinking, let's see if we nominate someone like this, how does the market react?
And the markets may not view it as this is not necessarily who we think is going to be the Fed governor. So we don't take it too seriously. Very interesting.
We'll see how it plays out. Another unexpected market development last week, Jason, was the clarification that imports of gold are subject to tariffs. We did see some market movement around this.
So what does that mean for the outlook for gold from here? Well, there's more movement today in terms of that development. I'll get to that in a second.
But basically, the idea is that there was a memo essentially went out saying tariffs on certain imports of gold applied and they actually applied effective April 2nd to Liberation Day. And specifically, it's gold imported that it's like one kilogram and 100 ounces, which is roughly 4.12 kilograms. These gold bars, they're not exempt from US tariffs as previously thought, whereas 400 ounce bars remain exempted.
And those are actually accepted by ETFs. Now there's reports this morning that there'll be an executive order soon from the administration that will be used to issue or clarify misinformation about tariffs. So the presumption in the marketplace is that this is going to be that the tariff exemption will apply to these ones, the one kilo and 100 ounce gold bars.
Otherwise, what's the point of issuing an executive order to clarify? You just reiterate what's already saying, which is why you saw the price of gold. We're seeing the price of gold down like around a dollar and a half as of this morning.
Keep in mind that a big percentage of the imports into the US come from Switzerland. The tariff rate on imports from Switzerland is 39%. So it's not just a 10% tariff, it's actually a 39% tariff on gold.
Because Swiss refiners are the main intermediaries for the global gold value chain, they process roughly 50% to 75% of all newly mined and recycled gold. So if the US is importing it, it's primarily from that market. If it turns out this executive order doesn't announce that gold is exempted, there's a good likelihood that the US gold future premium relative to gold traded outside of the US, that premium will keep running.
At an extreme, it could be that it reflects the full 39% tariff on imports from Switzerland. That would imply a premium of more than $1,300 an ounce in the US versus ex-US. Or given current spot prices, it means the price of gold in the US would be $4,700.
We don't think that's going to go that extreme and ultimately the tariff will probably be exempted. I think, stepping back big picture, does this change our overall bullish view on gold? The short answer is no.
We expect to have a price target of $3,500, which is not that much higher than the current level, about 3% higher. But from a portfolio perspective, we think it remains a good diversifier. Demand remains underpinned for that reason, investors of different types are buying it.
We've seen central banks continue to buy it. In view of rising government debts, inflation risks, the central bank purchases, there's a demand for gold. So ultimately, irrespective of this tariff story, we think it's a good diversifier.
If anything, if there is for US-based investors, if the price were to rise to $4,700, that's not a bad return. But that's not what we're expecting. Well, appreciate that clarity, Jason.
So before we wrap up, do you want to spend some time on overall asset allocation? What should investors be doing right now? Well, a couple things I'd highlight.
We had a brief spike of volatility roughly 10 days ago. Markets rallied. The VIX fell down to below 14, rose back up to 20, back down to below 16 right now.
I think there's going to be more volatility as the data comes in. Again, things are in the summer lull right now, summer calm. But we know the early fall, September, October, historically, is a volatile period.
So near-term volatility. But medium-term, we remain constructive. We talked about the economic environment that we think will be a soft patch, but ultimately it's also the case that the stock market is not the economy.
Adding the earnings season is reflective of that. We're about 90% done of the second quarter earnings season. What we see is that 73% of companies beat on EPS, or earnings above the historical average. 78% beat on revenue.
The historical average is 60%. So good results overall. Since earnings season started, the third quarter earnings expectations have been revised higher, modestly, 10 basis points.
But 90% of the way through an earnings season, typically that's down at 2 percentage points. So relative to typical patterns, it's a 2 percentage point improvement in the earnings outlook. So again, sort of reflecting your relatively good fundamentals.
Now a lot of this is being driven by the MAG-7. The MAG-7 grew earnings by 26%. This does not include NVIDIA, which reports later in August.
The rest of the S&P 500, the 493, their earnings grew 4%. So when you think about all this, the stock market is not the economy. There's a strong AI secular tailwind.
It's why we like the tech sector overall. It's why we think basically the bull market for equities is intact, even if near term there is some volatility. Switching over to fixed income, one thing I'd want to highlight is I know our team has put out a note last week recommending long-dated munis, meaning 15 to 30 year munis, are more attractive than treasuries of similar maturity.
If you look at the performance this year, munis have underperformed. It's been most significant at the back end. There's been a lot of supply coming to the markets this year.
The curve, this muni curve is steep, so you've got all the math works out that as we move forward, you've got a lot of kind of roll down. So certainly if you're in a high-tech state, and I think I'm a resident of a high-tech state. Likewise.
Likewise. That these are particularly kind of attractive at this point in time. And even if you're not a high-tech state, just given how the market overall has performed, they've become quite a compelling opportunity.
So generally speaking, we're saying, you know, shorter maturity, you know, we think yields could kind of back up a little bit. But if you're looking to lock in at the back end of the curve, long-end munis in particular for buying home investors look quite attractive right now. Well, Jason, thank you for going through those position and considerations and updating us on a range of developments.
Very fluid, though top of mind for our listeners and do, of course, look forward to continuing the conversation with you next week, especially as we receive more clarity on the inflation situation. Exactly. Yes.
And gold as well. Definitely. Thank you, Jason.
Appreciate it. Welcome. Have a great week.
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