Top of the Morning: CIO Strategy Snapshot - Policy put or policy error
The UBS CIO strategy desk frames the 2025 macro debate as a contest between a 'Trump policy put' — where policy stimulus cushions downside — and outright policy error, per the full note source. Friday's 1.7% S&P 500 selloff, driven by growth fears from weak retail sales and cautious Walmart guidance, reinforces the policy-error tail risk. The desk sees the market now demanding a growth-supportive policy signal; without one, equity downside could challenge our year-end targets across risk currencies.
What the desk is arguing
Jason Draho of UBS CIO frames the core 2025 macro question as whether Trump administration policies will ultimately act as a 'put' under growth or trigger a policy error that compounds slowdown fears. This binary is the backdrop for every tactical move in FX and rates. The immediate catalyst was Friday's 1.7% S&P 500 slide, the worst single day of the year, led by cyclicals and accompanied by lower yields — a classic growth-scare pattern.
Per the full note source, the selloff reflects two data points: January retail sales contracting 0.8% month-over-month, well below consensus, and Walmart's cautious forward guidance out of its Q4 earnings. These have rekindled consumer-spending anxiety that had been dormant. The desk argues the alternative read — that this is just noise — is increasingly untenable given the concentration of weak signals.
What the calendar says
While no high-impact FX-specific events are scheduled in the next 30 days per our calendar, the growth narrative will be tested by upcoming US CPI and PCE prints, as well as any Trump administration policy announcements on tariffs or tax cuts. The next hard data point is the February payrolls report, which will either confirm or refute the consumer weakness thesis.
Key takeaways
01UBS CIO sees the 2025 macro debate as a contest between a 'Trump policy put' and outright policy error.
02Friday's 1.7% S&P 500 drop reflected growth fears from weak retail sales and cautious Walmart guidance.
03The desk believes the market is now demanding a growth-supportive policy signal; failure to deliver raises downside risks.
04Near-term FX direction hinges on whether upcoming data confirms consumer slowdown or stabilizes.
Market implications
Watch USD/JPY and EUR/USD for the growth-scare spillover: a break below 1.04 in EUR/USD would confirm the policy-error scenario, while a rally above 1.08 would signal the policy put is credible. The next catalyst is US CPI on March 12.
Risks to this view
The call is invalidated if upcoming data surprises to the upside (e.g., strong payrolls or a rebound in retail sales), or if the Trump administration announces a significant fiscal stimulus package that restores the 'policy put' narrative. A sharp reversal in risk appetite could also lift the dollar broadly.
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Hi everyone, Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel. The S&P 500 had its worst day of the year this past Friday, down 1.7% on this session, with the selloff fueled by growth concerns, some of which stem from Trump administration policies.
Aside from that, national elections in Germany took place this past Sunday, so that is well another widely anticipated market event. So joining us today for the CIO Strategy Snapshot here in studio to discuss all of these items. Glad to welcome back Jason Draho, Head of Asset Allocation for the Americas with the UBS Chief Investment Office.
Jason, great to be with you to begin another trading week. Thank you for dropping by. Good morning, Dan.
Good morning, everyone. Good to be here again for another week in person. Absolutely.
And continuing with our promise. Yes, we are keeping that New Year's resolution intact so far. Of course.
So Jason, I mentioned a few moments ago these growth concerns. Perhaps that's a good place to start, just given the market response we witnessed on Friday. From where you sit, is growth slowing and are these concerns legitimate?
Well, I think they were maybe building a little bit on Friday when the S&P sold off 1.7%. It was led by the cyclical stocks down more. We saw yields go lower, all consistent with a little bit of growth anxiety.
So where does this come from? If we look back in the past couple of weeks in terms of the data we've received, January retail sales were below expectations relative to what was expected on a month-over-month basis. They shrank 0.8%.
So I'm going to raise a little bit of concern about the health of the consumer. Then last Thursday, Walmart, when they were commenting on their fourth quarter earnings, their forward-looking guidance was on the conservative side. So again, indicative of perhaps the consumers being a little bit stretched or cautious overall.
So you have concerns about the state of the consumer. Then on Friday, there was an S&P PMI services index that came out that was below expectations, below 50. Further cracks in the growth narrative to some extent.
So you can add a lot. That's where some of these concerns are coming from. Are they legitimate or not?
I'd say it's always possible to get a bit of a gross soft patch. The data for a couple of months had been, I'd say, relatively good, benign from a growth perspective. So every now and then, you're going to get some hiccups where a couple of data points may not behave the way you expect.
Some of that just could be one-off due to the monthly patterns, seasonal adjustment patterns. If we look at more of the totality of the economic data in the US, starting at the labor market, all the data we got for January suggests the labor market is still quite solid. And since then, no real notable tick-up in the weekly initial jobless claims.
A strong labor market is key to underpinning consumer spending. The ISM manufacturing and services indices tend to be more widely followed and probably better long-term gauge, and those are still in positive territory. The Atlanta Fed has a GDP tracking estimate.
For Q1, it's still at 2.3%. It was at over 3 at some point, so it has moderated, but let's put this in perspective of what a growth scare would entail. In some way, most of the weakness we're seeing is showing up more in sentiment surveys.
So for example, the University of Michigan does a consumer sentiment survey. The second reading for February was out on Friday morning. It showed a decline in consumer sentiment and optimism overall.
About 10 days prior to that, the NFIB Small Business Optimism Index came out for January. It actually ticked down a little bit, again, so suggesting after a pop post-election, it's moderating. So you add this all up, maybe some yellow flags or things that would be kind of bear-watching.
But overall, there's not a reason to think the overall fundamental story for the US economy has changed, but it's certainly possible to get a bit of a growth scare in the near term. Okay, so these surveys, the recent data, seem to be telling a story which the market is clearly paying attention to. If we factor in as well policy coming out of the Trump administration, I do want to mention, Jason, your recent blog, Policy Put or Policy Error Within, you do suggest that the main macro debate this year may boil down to whether Trump 2.0 policies will be market supportive or market negative.
So why could this be the key debate, Jason? And what is CIO's view on what the policies are likely to be? Just think about the past couple of years, if we go to 2023, I'm simplifying, but the debate often came down to, do you expect a soft or hard landing?
Last year, it was different ways to frame it, but you could say, will this US exceptionalism of strong disinflationary growth continue or not? This year, I'm kind of suggesting that early on, maybe it kind of boils down to, will the Trump policies be favorable for the macro environment, or could they be ultimately kind of detrimental? And I kind of classify that as detrimental, meaning a policy error that adversely affects growth, lower inflation, higher in some capacity, or is a policy put, and then think about, will ultimately the policies, they will sort of stop them from being negative, and they'll be supportive for the economy, for the markets overall.
It's a simplifying device, and in part because there are so many aspects to the Trump 2.0 policy agenda. We just think about on the tariff front, there's multiple avenues, tariffs on China, potential export restrictions, tariffs on Canada and Mexico, specific tariffs on different goods that are deemed of national security, pharmaceuticals, semiconductors. So just tariffs alone are a big issue.
Then we think about the fiscal front. There has to be a deal to extend the tax cuts, which isn't worked, but near term, there also has to be a deal to fund the government. There's DOGE, every day we're hearing some sort of news about either cuts to government spending, cuts to government employees, what is real, what is exaggerated, how all play out there.
There's a lot going on there, immigration, deportations, regulation, geopolitics, a lot of things, and when there's so much kind of going on, sometimes it's helpful just to kind of simplify and say, what does this really mean for the economy, for growth, inflation, because financial markets often trade on that. So that's why I'd say simplify and frame it in this way, especially in a time when people are getting a little bit concerned with growth, could there be some downside risks. I'd say in some way, this policy put or policy error, question mark, debate kind of really boils down to will growth in 2025 again be solidly above 2% or is it a risk of falling short of that threshold because of policy actions, and that's kind of what we're debating to some extent.
I'd say we're not seeing much evidence so far in actual hard activity data of the Trump administration policies impacting it one way or another, it's just it's too soon. Some of the sentiment measures I alluded to in terms of the Michigan Consumer Sentiment Survey, Small Business Survey, inflation expectations have drummed, perhaps because of tariffs. You could maybe trace those back to the Trump, you know, at least the potential policy agenda.
But it's still I think that's kind of more of a kind of a question mark. It's also interesting that while there's a lot of focus on tariffs being inflationary, I'd say the markets perhaps are more focused on or worried about the drag on growth. And again, if we look at what happened last week, equity markets down led by cyclicals rates going lower.
On days back in early in February, when there was a prospects of the 25% tariffs on Canada, the money morning, what we saw is equities are lower, rates were lower, indicative of the market thinking, ultimately, that it's really a growth shock more so than it is an inflation shock. And that kind of feeds into this kind of focusing on kind of growth as the key story. So if there is some potential risk of what's called policy errors, then where does a policy put come into play?
When would they pivot? First, I'd say, you know, I think the administration and understandably so would say, our policies are not going to lead to be an error, you know, we believe these policies will lead to lower inflation, lower inflation, lower rates, stronger growth. I mean, that this is kind of, you know, you know, everything you can debate, but in terms of until we see what the actual policies entail, and there's a lot of uncertainty and ambiguity, you can have to raise the question, well, is that actually, you know, right?
Because rates have gone lower recently, not because of inflation going lower, but they've gone lower because of concerns about growth. So could there be something that would trigger a policy pivot, a put, put into place? We often talk in the markets generally believe that there's a Trump put for the S&P 500.
He closely follows the markets that uses as a real time gauge of the success of, you know, his policies. The S&P 500 is still higher than it was on the inauguration day. So we're not, you know, clearly much below that.
Ten year treasury yields are, you know, almost 20 basis points lower against sort of, you're not indicative of like, well, he has to take action on that front. So it suggests that you need to see more stress in financial markets, equities lower, the rates higher to kind of cause the administration to want to pivot in some way in policy. But you'd also maybe need to see economic data in a way that's that's showing a real clear slowdown.
The economic data may not indicate that any until, you know, at some point in Q2, it's just going to take a couple of months for the data to come in. If we start to get more signs of growth slowing, the markets will price that in and that could be the signal to the administration that the markets at least are giving it a perhaps cautious thumbs down. But I think this is the environment we're going to be in sort of for at least for the near term.
It's, you know, if they proceed down a path that some people view it as sort of negative potential for growth, and if the growth data comes in that way, it's going to fuel that versus others who think ultimately, this is an administration that wants to get growth higher. You know, so how will this play out? So it's a little bit of a kind of, you know, boiling down this debate of like, how the policies will impact the economy, which is kind of heightened now given there are so many questions about the strength of U.S. growth.
So a lot coming out of Washington that could either be supportive or disruptive to investor confidence and therefore the trajectory of the markets. That is absolutely correct. Yes.
So if we step outside of the U.S. for a moment, Chase, and I know heading into this weekend, there was a lot of attention on Europe, specifically Germany. They held their election. Can you summarize for us the outcome and the implications that this outcome carries with it?
Well, the outcome ended up being relatively close to expectations in polling results. What happened is that sort of the center-right, CDU, CSU, and the center, which, you know, got the majority of or at least the largest percentage of the votes, and the center-left SPD combined, they did well enough to be able to form a grand coalition, certainly in the lower house. Now, it will take a couple of months to negotiate the terms of this coalition, you know, who has what sort of power, what positions in the government.
And this is not unusual in Germany. There's been coalitions at least in the most recent government. There has been sort of hope that at least once this election gets done, there'll be increased fiscal spending.
You know, as you know, like when you're going to go into election, then you don't really get government action at a time when, you know, if German economy hasn't been doing as well, there's certainly questions about defense spending going on in Europe regarding, particularly pertaining to what's, you know, the developments of a ceasefire in Ukraine, the shape that could take. So by having the election results done, that could unleash increased fiscal spending. That is still a possibility, but there wasn't enough of a, or there probably won't be enough of a grand coalition among parties that could really unleash significant fiscal spending.
There are constitutional constraints on how large the debt can be that requires a two-thirds majority to change that, you know, to get significant spending. So it's, you know, a positive result to get a little bit more clarity instead of coming in along with expectations. You always worry that there is a, you know, a scenario from the market's perspective that is not what is anticipated.
But by and large, it was sort of the markets, you could say, were perhaps pricing this in. That was one of the reasons why European and German equities have done well this year. And so the, you know, this isn't the result I would say is not a real kind of game changer for the overall outlook.
I will say, though, that, you know, given that we've moved past this one risk event for our equity team, you know, they do like Germany as sort of their favorite part in Europe. And European equities have done well this year. You know, Germany now should get the increased defense spending.
There's, you know, a manufacturing rebound taking place. It benefits from lower gas prices, like, you know, natural gas prices. So all things that, you know, could allow the German economy that's been stumbling along to actually kind of pick up.
And that would, again, you know, benefit German equities. So that is just something that, you know, reinforces perhaps a trend and the team would sort of buy on dips in German equities given this, you know, this fundamental outlook. Jason, thank you for some color around the process.
I know that was a big point of interest as we were heading into the weekend. So as we begin to wrap up, if we take into account all of the domestic macro policy considerations, external factors as well, what's CIO's market outlook from here? And what are you recommending that investors do at the moment in the way of allocation?
Well, it's sort of remarkable that despite all the things that are kind of coming, you know, in terms of just in the administration, with daily announcements on executive orders and other measures, the kind of the flood the zone approach to policy announcements, that since the inauguration, the S&P 500 and the 10-year treasury yield have both traded in relatively narrow ranges, you know, for the S&P, a range of two and a half percent. And even the move on Friday was still within that range as the market sold off because earlier in the week, the S&P had hit an all-time high. It's also, you know, obvious that the volatility has been contained.
The VIX is still below 20. But if you actually look at realized volatility, like these daily moves, it is not that much different than where it was for much of 2024. It's actually declined since the election.
So the markets have been relatively contained. Perhaps that's a sign that investors are just overwhelmed with information. And sometimes when you have so much information, you can't digest, you can't process, you can't make decisions, you just don't take any actions.
So I think perhaps more likely, it's going back to this policy put, policy error, you know, framework, that the markets were very comfortable in a policy put, that the policies would be supportive and the, you know, worst-case scenarios of on tariffs or cuts to spending, things of that sort, would not actually, you know, materialize. In the next couple of months, when we think about the outlook, that thesis is going to be challenged. Already just, you know, these growth concerns are kind of front and center.
We had a temporary reprieve on sort of tariff news. But by March 4th, the delay on the 25% tariff on imports of goods from Canada and Mexico, that expires. There has to be something done by then, which is, you know, coming up, you know, just next week.
The reciprocal tariffs that were announced, you know, as soon as April 1st, there could be news on what tariffs are being imposed. And certainly in between that time period in March, there could be news. So the tariff story has not gone away.
And there's still definitely some downside risks there. On the fiscal front, again, sort of questions about how much spending is being cut. And, you know, a lot of headline news from Doge, maybe the reality is probably much less than that.
So it's important to kind of keep that in perspective. But through real congressional action, where there's real spending, you know, rules that could change. In the near term, on March 14th, government funding runs out.
There was a temporary continuing resolution to fund the government until then. Normally you'd expect, especially when there's a unified Republican or Democrat control, that they would be able to pass a government funding bill. But the current administration seems to feel relatively comfortable with the announcements of cuts to spending, you know, employees.
So their risk tolerance for a government shutdown is probably higher than normal. It's hard to say whether it's a base case that you should get a shutdown, but it certainly should not be surprising at all. Under the first Trump administration, there was a government shutdown, the longest thing on record of about 33 days.
So if something like that were to happen this time, you know, that would be in the near term a modest drag on growth. Typically, it's like you get the payback later on when workers start to go back to work. But at a time when there are growth concerns, that can certainly add to sort of a soggy or soft patch in the economic data.
So I say all this in the context of ultimately we think, you know, policy put rather than policy error is a likely scenario that ultimately the tariffs will be aggressive on China, selective elsewhere. So, you know, not a major hit to growth or inflation. That cuts to spending, you know, actually would be quite modest and ultimately later on, you know, the tax policy should be beneficial.
You might at least have more in the 26th story. So ultimately, I'd say, you know, positive on the supply side, positive for the macro, but the path to get there, you know, will be bumpy. So it's a, you know, and it's kind of consistent with an escalate to de-escalate approach on tariffs and perhaps also on the fiscal front as well.
And so as a result, I'd say the market outlook is perhaps more constructive over the medium term, you know, through year end than it is more in the near term in the next couple of months, given where the markets are, given some of these, you know, various policy headwinds. If there are significant pullbacks, we think there's probably opportunities to buy, you know, dips in certainly risk assets over that time period. But just to give some perspective of how things will play out.
So all that said, still see more upside in equities overall, you know, kind of more to go in equities in the US and, you know, to some extent abroad. We haven't talked about tech and AI, but just that is still a view that the team has and NVIDIA reporting earnings will this week will, you know, provide certainly a big spotlight to that theme overall. Within fixed income, you know, still skewed more towards high quality and also rates of pullback.
You know, there is a risk that rates could back up again back to like the 4-7-4 range. And so we'd be cautious on extending duration too much at this point in time, more targeted about the 5% or the five-year kind of duration part of the curve. Well, we know the markets don't like uncertainty.
So accounting for all of these deadlines coming up, accounting for tariffs, government funding it will be an interesting few weeks ahead. So all the more very helpful to hear CIO's outlook, Jason, and of course, the positioning when it comes to guidance. So thank you very much.
You're welcome. It's really lots to discuss in the coming, you know, weeks and months. Well, thank you again, Jason.
Appreciate your time today. I do want to point out again, Jason's latest blog Policy Put or Policy Error is available now up on UBS.com forward slash CIO. For clients of UBS, simply reach out to your UBS financial advisor if you would like to receive a copy of Jason's latest blog directly from UBS studios on Dan Cassidy.
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