Top of the Morning: CIO Strategy Snapshot - What Exactly is Trumponomics?
The desk interprets the recent developments in U.S. tariff policy as a temporary relief for markets amidst heightened investor uncertainty surrounding Trumponomics. Per the full note source, President Trump announced a 90-day pause on certain tariffs, allowing the market to rally while contributing to rising Treasury yields — a sign of market stress. Attention is now directed towards Q1 earnings reports and upcoming economic data, which may significantly influence market dynamics. With this backdrop, the desk anticipates that further tariff announcements could dictate trading strategies in the upcoming weeks.
What the desk is arguing
The desk frames the recent tariff pause as a critical phase for market participants, transitioning from uncertainty to a short-lived recovery. As indicated by Jason Draho from UBS, the selective pauses on tariffs may only provide a temporary respite before renewed tensions emerge, creating opportunities and challenges in the FX landscape.
The underlying data support this narrative — Treasury yields have risen in response to tariffs, highlighting the persistent market stress even as equities rallied. This duality suggests a complex interplay between tariffs and investor sentiment that could reshape trading strategies moving forward.
Where it sits in our coverage
Our consensus target for the EUR/USD has been set at 1.075, with a range between 1.04 and 1.12. Notably: - jpmorgan has a target of 1.10 (Mar26) - bofa sees a more bearish target at 1.04 (Mar26)
This view aligns closely with the upper bound of the consensus spread, indicating a more optimistic outlook relative to some market participants.
How other firms see it
Among aligned firms, jpmorgan sees the potential for recovery in EUR/USD, reflecting an optimistic sentiment around risk assets. Conversely, bofa offers a contrarian stance, highlighting potential bearish risks in the face of ongoing tariff uncertainties.
Expect the implications of U.S. macroeconomic data releases and trade negotiations to influence currency pairs such as USD/JPY and EUR/GBP, which may react to shifts in sentiment stemming from tariff developments.
01U.S. tariffs pause offers temporary relief but retains market volatility.
02Treasury yields are rising alongside equity markets, indicating underlying stress.
03Focus shifts to Q1 earnings and critical economic data for market direction.
04Trade policy remains a frontrunner in dictating FX strategies.
Market implications
Watch the impact of Q1 earnings data due this week, particularly retail sales on Wednesday, as these may drive demand for risk assets and influence the EUR/USD trajectory. Monitoring Treasury yield movements will also be crucial in understanding risk appetite and potential currency responses.
Risks to this view
A reversal of this call could occur if upcoming tariff announcements lean more restrictive, or if disappointing economic data highlights weakness in U.S. consumer spending. Additionally, geopolitical tensions could also rapidly shift trader sentiment.
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Hi everyone, Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel. It was another tumultuous week on the tariff front.
However, last week at least bought a reprieve with delays and exemptions, although maybe only on a temporary basis. Traders rallied on the news, but Treasury yields rose, providing another form of market stress. We're likely to get more tariff news this week.
The Q1 earnings season has commenced and there will be important retail sales data coming out on Wednesday. So as always, Jason, a lot to cover. I am joined today here in studio by Jason Draho, Head of Asset Allocation for the Americas with the UBS Chief Investment Office.
Jason, thank you for dropping by on this Monday morning. I hope you had a restful weekend because it sounds like we have a big week ahead of us. It'll probably be another big week.
I mean, I think we have to assume that's the case. But yes, it's, you know, relaxed a little bit, recovered and prepared. So happy Monday.
Hopefully it's a good week. Definitely. So with that, Jason, let's begin with the latest on tariffs.
And I'll preface it by saying we're recording here on Monday, April 14th. We know how fluid this tariff situation has been. So can you recap for us what at this point has been exempted and what might we expect in the near term?
Well, I'll just cover the high level because, you know, frankly, there's a lot of details and I think it's not always exactly clear where things stand at the moment. So the major thing was that last Wednesday, roughly, you know, around like 1.30 in the afternoon, President Trump, you know, tweeted out that he's going to have a 90-day pause on the reciprocal tariffs. Now these are the tariffs that were country by country that varied from, you know, in the 30 plus percent or down to maybe only 10 percent.
So the 10 percent kind of universal tariff across the board, that still stays in place. So it was a delay for 90 days with the idea that it could be time for negotiations between the US and various countries. Then there was also, you know, by Friday, an announced exemption for semiconductors, computers, smartphones.
But I should note that on Sunday, Commerce Secretary Howard Lutnick was on one of the Sunday morning talk shows and made the comment that, well, this is a delay. We still intend to have a semis-oriented tariff that's going to be put in place in one to two months. And these different things, smartphones, computers, semis, all be bucketed under sort of a quote unquote maybe like semis, you know, category.
So a reprieve but not, you know, completely, and we don't know exactly the details, you know, what this will entail later on. Also I think on Friday, late on Friday, the White House published a list of goods that apparently never should have been tariffed, you know, from the April 2nd, you know, Liberation Day announcement. And that went, in fact, in some cases even on April 5th.
It's unclear like what exactly those goods are, but I think that in itself is not necessarily a game changer, just more along the lines of, you know, the announcement came very quickly without maybe all the details being worked out. I think we're seeing some of that kind of, you know, going on now. Just as also the reciprocal tariffs were delayed, the tariffs on China went up.
Now they're at the cumulative level is I think on all goods about 134%. Now China has responded, and my latest is that they are at 84%, but then even on over the weekend, you know, President Xi Jinping announced, you know, limits on the exporting of rare earths and other sort of constraints, sort of export constraints, so other trade barriers if not a higher tariff rate. So a lot of moving parts.
I think the direction of travel that was escalates to de-escalate for all countries but China. I'm not sort of consistent with that, but how this will play out will still be determined. With China, these levels of tariffs almost basically make trades, you know, completely uneconomical between the two countries.
So it's consistent with this escalate to de-escalate idea. Now there's certainly some scope for renegotiations, although it doesn't appear China has reached out at all to want to initiate those conversations, whereas it's something maybe we would watch for this week are signs or conversations that take place between the US administration and say officials from Japan or some other countries and see signs of some sort of, you know, progress or deals being made there. So we've got to approve.
I think that's the way to think about it, and I think there's a question of whether, you know, are these just delayed or are they, you know, completely off the table? I think there's just a range of views and opinions on that, but honestly, it's hard to, you know, predict because it does move so quickly. Right.
Investors clearly have been trying to decipher messaging from the White House on the direction of trade policy, and we'll see how this all evolves in the coming days and months. But just reflecting on last week, the S&P 500 did rally nearly 6%. However, the 10-year Treasury yield also rose 50 basis points.
Interesting dynamic. So what does that say about the state of financial markets right now? Well, the real story in some way wasn't so much equities popping last week, which you'd expect after this reprieve, you know, kind of, you know, reduce the, you know, the risk of recession, how much earnings could decline.
The surprise is the 10-year yield rose as much as it did. In fact, the entire back end of the curve, you know, really rose, you know, significantly much more so than, you know, the front end of the curve, the two-year because it doesn't necessarily change a lot of what maybe the Fed would do. So the question is, like, why did those, you know, rates rise?
We can point to a number of different factors. It's hard to isolate exactly, you know, which is, you know, causing how much, but certainly if you have less kind of left-tail risk, left-growth risk because now, you know, the tariffs, risk of recession is gone down, treasury yields should go higher. You kind of, you know, the flight to safety, that gets reduced.
So that would certainly push up some of the yields, perhaps that amplified or gets amplified by technicals or investors then wanting to kind of close positions or there could be a little bit of that. It was also the case that, you know, progress on the budget reconciliation deal, you know, kind of made it through with the House passing the Senate version, which was, let's call it a little more fiscal expansionary, meaning broader scope potentially for, you know, extending existing tax cuts, new tax cuts, but also less on terms of spending cuts. So if you have bigger spending, bigger deficits, more inflation, therefore you kind of have to kind of price all in.
There was certainly, you know, talk of foreign investors kind of on a bit of a buyer strike and for U.S. assets in general, but also treasuries and therefore, like, you know, just taking money out of the U.S. and repatriating it back home. There doesn't really seem to be a lot of evidence, though, that, like, if there was a key 10-year and 30-year auctions last week, both did well and the data would indicate that, you know, foreign buyers, you know, showed up. So that feels like it's a bit of a stretch.
I would maybe kind of, you know, take a slightly different angle across all the financial markets to think about what's going to happen over the past, certainly a couple of weeks, but kind of going back over the past couple of months, is that there's almost a repricing kind of across equities, credits, you know, fixed income, you know, safe, you know, treasuries, the U.S. dollar of a risk premium for U.S.-based assets. If we go back a couple months ago, equities were at an all-time high and sort of estimates of equity risk premium were compressed. Credit spreads were very tight, you know, term premium, the compensation you got for buying longer duration bonds was low and the dollar had, you know, was strong by historical perspective as investors crowd into U.S. assets.
So you can see there was not a lot of risk premium for owning the U.S. Now, you know, these questions about, you know, U.S. exceptionalism, is it over? I mean, maybe it's a little too premature to say that, but clearly there's, you know, more caution about investing in the U.S.
You know, there's opportunities that investors can see globally. So therefore, all U.S. assets need to have a higher risk premium, which means equity prices go lower, credit spreads go wider, bond yields, especially longer duration bonds, that they have to go higher to price in sort of a term premium. And you can only back up from a model like what is a term premium, but that also jumped 30, 40 basis points last week based on some estimates.
So again, sort of pricing a more risk premium and implicitly the dollar going lower is kind of consistent with that. So I think that's a way to kind of have a common thread across different, you know, asset classes and financial markets is that there just needs to be a greater repricing of let's call it policy or, you know, uncertainty regarding sort of the U.S. economic policy framework, economic outlook, you know, overall. That's what's kind of been driving the markets.
In addition to just concerns about obviously tariffs causing a potential recession. So Jason, you did cover this point about investor uncertainty about policy in your latest blog title is What Exactly Is Trumponomics? It's available, by the way, now up on UBS.com forward slash CIO for our listeners.
Though Jason, on this point, can you expand on it a bit further for our listeners? Trumponomics, you know, or like what I would just basically think the Trump 2.0 policy agenda like what exactly is this? If we go back three months in early in the year, even kind of post-election, but before the inauguration on January 20th, the most investors would have expected that Trump 2.0 would resemble, you know, at least rhyme with Trump 1.0 in terms of the economic policies, you know, focused on, you know, tax cuts, deregulation, maybe more defense spending, more spending overall, so still large deficits, and certainly more tariffs.
But if we think about what happened with Trump 1.0, it was tariffs kind of around the margin, but trying to remake the wholesale, the global trading system, which is kind of what's going on right now. So that's what investors perhaps expected. Clearly, you know, what's been the focus is tariffs, really kind of rejiggerating kind of the whole global, you know, economy to some extent.
This is not what investors were necessarily expecting, and so the question is like, well, what is the unifying theme behind, you know, sort of Trumponomics, as I would call it? Because you know, on the one hand, you're talking about extending tax cuts or having additional tax cuts, yet imposing tariffs is equivalent to raising a tax. So where, you know, what is it all about?
And even if we just think of tariffs themselves, there's kind of uncertain or unknown kind of answers to, you know, kind of, you know, kind of questions of what are the kind of the objectives? And we think about it from a, you know, tariffs dealing with other countries. Is it ultimately that they're just trying to get free trade and have other countries reduce tariffs and other trade barriers?
Because President Trump has said, like, I believe in free trade, but the current system isn't fair to us. So if other countries lower their tariffs to the US rates, they lower other tariff barriers. Is that sufficient?
Or is it ultimately come down to trade deficits or the surpluses other countries have with the US? Because the calculation of the reciprocal tariffs looked very closely tied to how large a country's trade surplus was with the US. So is the objective to get rid of the trade surplus, or is it just to have an equal playing field?
And if even if there's surplus exists with an equal playing field, that's okay. There might be some debate in the White House about that as well. Exactly.
But even with President Trump, I'm not quite clear on what that entails. Another aspect is from a US perspective, like, what's the real aim? Is it to bring manufacturing and jobs back to the US?
Or is it to be a source of tax revenue to be able to fund tax cuts and, you know, other spending going forward? Because if you think about sort of a logical limit, if you are very successful in bringing manufacturing back to the US and imports, you know, decline significantly, well, your tariff revenue declines significantly. So you can't really have both massive, you know, amount of jobs and manufacturing come back to the US.
At the same time, have tariffs be a big revenue generator. So what is the objective? And I think that's, again, sort of an unclear answer.
Then you can go to other areas of like, is deficit reduction, given what DOGE is doing, a key or not? Because it doesn't seem like the budget reconciliation bill is going to do much in terms of deficit reduction. Does President Trump want a strong dollar and the US dollar to remain the dominant reserve currency?
Or does he want a weaker dollar because that helps exports? So this is where there's some kind of confusion about what ultimately is kind of the common thread of kind of economic ideology among these Trump policies. And it's hard for investors to like, see all the noise that's going on and sort of have conviction.
Okay, this is, I know what the end goal is. With Trump 1.0, it was clear, it was basically pro-growth policies that would be reflectionary. You can go back to the 1980s, Reaganomics, again, free markets, cutting taxes, deregulation, free trade, all that kind of stuff is sort of clear.
But in economics, I think it's still a lot of open questions, exactly what is the common thread of this policy framework? Based on the latest tariff and other policy news, where do you expect Trump 2.0 policies to head from here? Well, three months ago, I wrote a piece, I called it MAGA v.
DOGE. Yeah, sure. But the idea is like, what is the ideology of the Trump administration?
Because even before they took office, we saw last December before the holidays, a debate among Republicans in terms of like how much they want to, you know, in terms of passing the budget, you know, extending the debt ceiling, were they committed to deficit reduction or not? There was debates about immigration, pro-immigration, kind of anti-immigration, or less favorable to immigration. I would classify MAGA as, you know, it's a America first, anti-globalism sort of mantra for the workers in the middle class of America.
DOGE is much more about the efficient delivery of government services, you know, put in the private sector. In some way, you know, even Elon Musk has been out there tweeting that, you know, free trade, he believes in free trade. So which of those two paths ultimately would take place?
And I conjectured three months ago that ultimately they'll lean more DOGE, you know, kind of, you know, favorable for the supply side. DOGE, I'd say, is ultimately more capital friendly than labor friendly. Fast forward three months and it's hard to say that the policies are clearly MAGA or DOGE.
But if we just, again, look at what's happened last week of, you know, delaying the reciprocal tariffs, reducing or at least exempting, you know, tariffs on semis, computers, smartphones for the time being, it's a recognition that you're imposing a cost on U.S. economy without an obvious near-term benefit. So again, not making the supply side worse, you know, being more thoughtful perhaps how that's done. Between that and also what, you know, what the House passed the budget resolution, that again would be perhaps a little more fiscal expansion at the margin, more of a 2026 story, but again, sort of direction, you know, more kind of growth friendly and we're likely to get a bigger push on sort of deregulation kind of going forward.
So I think there's a reason to still think ultimately when the dust settles, the policies will still be more DOGE like, even if the path to getting there is difficult, which is why I think from a medium term perspective, thinking 12 months out, still relatively constructive on the U.S. economy, financial markets. But the near term, it just, there's a lot of uncertainty and we kind of have to figure out what an ultimate path do they want to take. So based on that, Jason, in terms of what to do from an investing standpoint, just taking into account the policy outlook you've shared with us, what does this mean for the market outlook?
Well, I think in the near term, investor confidence is going to likely remain low. Markets going to be, you know, kind of volatile and kind of range bound until there's some clarity and consistency to policies. And let's take of tariffs, you know, what ultimately is the path they want to take?
Is it negotiate tariffs at a lower level, and China's a different story, or will tariffs stay high? And again, to focus on trade surpluses, things like that. So clarity on what that kind of overall policy framework means.
You know, the sooner this comes, you know, the better, obviously, for the market outlook. And this could start, again, with, you know, negotiations between the U.S. and other countries in terms of what they're doing for tariffs that would give the administration off ramps to eliminate those reciprocal tariffs, you know, permanently. And so any sort of credible deals on that front would help.
But in the time being, I think, you know, it's, as I mentioned before, the markets are going to reprice U.S. assets, reprice risk premium. It's not a smooth process. So again, this is going to lead to some choppiness near term, you know.
And ultimately, in some way, what we saw last week is that if clarity on the path of policy isn't forthcoming soon, the markets may sort of kind of, you know, force or demand it because they'll remain volatile. I think it's interesting that what we saw last week when the reciprocal tariffs were announced, it wasn't after the S&P was down nearly 20%. That happened kind of by Monday morning of last week.
It was after, you know, treasury yields surged, and there were signs of some stress, you know, in the bond markets. And that was kind of what got, I think, President Trump seems like to kind of pivot on that. So the bond vigilantes, you could say, sort of did their job to some extent.
They may have to do more, and equity markets may have to do more kind of going forward. Ultimately, I think, you know, whether that's necessary or not, we'd expect, you know, Trump's sort of pivoting more towards this, you know, I would call it more market-friendly policies ultimately. But how soon and how quickly and whether markets have to get worse before they ultimately kind of get the all clear, that remains to be seen.
So I think we'll get there, but, you know, the next few weeks, the next couple of months certainly could be, you know, a choppy period to navigate. Well, Jason, we'll continue to cover these developments as we learn more, though, for this morning. Very helpful touch base as we begin a new trading week.
So thank you, as always, for dropping by and for spending some time today with our listeners and their clients. You're welcome. Have a great week.
You as well, Jason. Again, today we have been speaking with Jason Draho, the Head of Asset Allocation for the Americas with the UBS Chief Investment Office. Again, I do want to point out Jason's latest blog, which he has been referencing during our conversation today, titled What Exactly Is Trumponomics, 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 directly. From UBS Studios, I'm Dan Cassidy. Thank you for joining us.
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