Top of the Morning: POTUS 47 - Another brick in the tariff wall
The desk argues that ongoing developments in U.S. trade policy, particularly in the form of tariffs, remain a critical factor influencing market dynamics, as highlighted in the recent UBS commentary. Per the full note, the effective tariff rate has not escalated as much as possible due to various exemptions, but aggressive measures are still in place, solidifying trade barriers. Trade tensions contribute to the dollar's resilience against major currencies, impacting positioning among traders. There are no imminent catalysts on the economic calendar that could alter this trajectory in the near term.
What the desk is arguing
The current stance of U.S. trade policy reflects a commitment to maintaining tariff pressures amid a complex global economic landscape, according to insights from UBS. The metaphor of a 'brick in the tariff wall' symbolizes the ongoing fortified U.S. position, suggesting that trade negotiations may not soften, as some had speculated.
Kurt Reiman noted the effective tariff rate has increased, although not uniformly across sectors, risking further distortion in trade flows and associated economic impacts. The impacts are already being felt domestically, potentially heightening inflationary pressures as supply chain costs rise due to tariffs, which could influence future Federal Reserve policy responses.
Where it sits in our coverage
Our consensus target for USD/EUR stands at 1.075, with a range from 1.04 to 1.12. Firms like jpmorgan set their targets at 1.10 for Mar-26, while bofa is more conservative at 1.04.
This perspective aligns closely with the cross-firm consensus, although it skews slightly toward the upper bound of the spread, which suggests a relatively optimistic outlook on the dollar against the euro.
How other firms see it
Firm views diverge, with jpmorgan and citibank remaining aligned in their outlooks favoring the dollar, while bofa and goldman adopt a more bearish stance.
Indicators like the USD/JPY currency pair could reflect the broader impacts of U.S. trade policies, while adjustments in the Federal Reserve's interest rate posture remain critical to market movements.
01Ongoing U.S. trade policy reinforces tariff structures, impacting inflation and economic activity.
02Despite some exemptions, the effective tariff rate is firmly in place, providing support to the dollar.
03No significant calendar events ahead imply continuity in current positions concerning trade.
04Market volatility may increase if further tariff actions materialize, reflecting shifts in economic sentiment.
Market implications
Watch for USD strength, particularly if tariffs continue to escalate or remain firmly in place, potentially pushing the USD/EUR rate toward the upper bounds of our forecast range. Positioning signals could shift around trade rhetoric or upcoming data releases that stress inflation pressures.
Risks to this view
A significant reversal of trade policies or withdrawal of tariffs could undermine the dollar's position, particularly if coupled with renewed dovish signals from the Federal Reserve. Should the U.S. administration pivot towards mitigating trade tensions, expect potential volatility in currency pairs sensitive to the dollar.
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Hi, everyone. Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel.
For today, we are continuing with what has been a monthly series of conversations around CIO's POTUS 47 series. I will point out up front that the latest update now available up on UBS.com forward slash POTUS 47. One of the main contributors to the piece has been joining me for these monthly conversations.
Glad to welcome back once again. Joining me here at the 1285 podcast studio in New York, Kurt Reiman, head of fixed income Americas with the UBS Chief Investment Office. Kurt, good morning.
Great to have you back here at the table. And to be with you, too. Thank you for having me.
So as always, no shortage of topics going on being talked about in Washington and beyond. I know you covered a lot of those in the latest update to the POTUS 47 series. One of those topics has been recurring in our conversations over the past few months.
That, of course, has been U.S. trade policy. We did see some developments on that front this week. I'm sure, Kurt, you'll speak about that as we're recording here on August 13th.
But I'll ask you broadly, where do we stand with U.S. trade policy today? What is outstanding in terms of deals yet to be made? And what might economic impacts be felt here at home domestically, if not already?
OK, well, the piece that we just published is called Another Brick in the Tariff Wall, a little homage to Pink Floyd. And the whole notion of this wall, I think, is a good one. It's a good analogy, in part because there is one.
And it's much higher than when we started the year. There have been these discussions about whether the administration is chickening out on tariffs. That's not happening.
They're being quite aggressive. The effective tariff rate hasn't risen as much as it could have if there weren't as many kind of holes in the wall, exemptions, exclusions, carve-outs, and so forth. The one that stands out to me is right here in North America, where Canada was facing a 35% tariff.
This was related to fentanyl and immigration. The president lifted it from 25%. But 90% of Canadian goods come into the U.S. tariff-free.
In the case of Switzerland, the 39% tariff rate, it's not as aggressive as it sounds in the headline, because 60% or so of Swiss exports to the U.S. are pharma. Pharma is excluded for now. Maybe there will be some pharma tariffs, but even those, we don't know exactly how strict they'll be.
So the effective tariff rate, right now it stands in the high teens. And that's up from the low single digits when Trump took office. Now, the risk is, and I think it partly explains why countries have been willing to agree to higher tariffs without retaliating.
I mean, this is really, to me, one of the big surprises relative to expectations. A year ago, when people were handicapping, what would happen is that countries haven't retaliated. Why haven't they retaliated?
This is, I think, a really important question, because if they had been up till now, we'd have much worse economic outcomes. Global inflation might be higher. But they haven't been retaliating, and that may be because they think this tariff wall might come crumbling down sometime early next year, when the Supreme Court eventually hears the court challenge.
And I think they rule that these tariffs are going to be ruled illegal, just like the Court of International Trade has already ruled. We're going to hear from the Federal Circuit Court of Appeals this month, I believe, on a decision. But it doesn't matter what they say.
One of the parties, the loser, is going to appeal this to the Supreme Court. They'll get the final say. It's not going to come until later next year.
So, yeah, I mean, there's so much we can talk about on the tariff front. But I think the key point is on this, especially when it comes to the economic and financial market implications, because investors are wondering, like, why is the market at all-time highs, and tariffs are just creating all this pressure on the economy? Why haven't we seen it in the economy?
I think there I would say it's going to take some time. It takes a while for ships to get loaded and reach ports and get goods on store shelves. We started seeing some early indications of this yesterday's CPI report, that this is starting to filter through.
The labor data has been weak. So our view is that this is going to soften the economy. The Fed's going to respond to the rate cuts.
And so, yeah, it's still kind of, we should anticipate that the hit from tariffs will come. But we're not of the camp that this is going to push the economy into a recession. It is a big move in tariffs, but companies manage through changes in input costs all the time of a similar order of magnitude, whether it's currency swings or commodity swings.
So we think this is a manageable risk, and that we're probably going to be at around a mid-teens effective tariff rate this time next year also. Just a bit of a follow-up, Kurt, if you don't mind. If countries at the moment seem to be taking this wait-and-see approach as they wait to see what the court rulings might be, once more clarity is received, if these tariffs do ultimately remain in place, might then will we see countries take more retaliatory measures against the US?
Is that something to anticipate or be mindful of down the road a bit? Right. So let's just assume that these are declared illegal, just for the sake of simplicity.
There's another scenario where they're not. But if they are, then do the tariffs just go away? And the answer is no.
They rebuild them. They use other means. The means are less flexible.
They're probably even a little bit more predictable, which is, I think, kind of nice from a planning standpoint. But yeah, it's at that point I would think that the countries would start thinking about, because they'd be more long-lasting, they'd be on stronger legal footing, they'd be here to stay. And if on a bilateral basis, if countries don't like what they see, then they might end up retaliating and waiting until that point.
I mean, why retaliate now if all that's going to happen in six to nine months is that the tariffs come down and they have to be rebuilt again? I think the key would be to wait. And also there's this argument that, well, why retaliate?
You're just hurting your own economy. You're hurting your own consumers. This is a tax on your domestic economy.
So I think the idea here is, wait, let the courts see this through. And at that point, then maybe they start toughening their stance. Well, some very interesting dynamics in play at the moment.
So we will see how this plays out, though. Thank you, Kurt, for the update on trade tariffs as we're speaking today. Another topic top of mind for many in recent weeks, concerns over Fed independence.
That, of course, has crossed the minds of investors. How should investors be thinking about this? Meaning is threat to the Fed's autonomy real here?
It was interesting today as well, Treasury Secretary Scott Besant suggested that the Fed should cut by 50 basis points at the upcoming meeting, not in the running for the next chairman of the Federal Reserve, though the White House seems to be very vocal in terms of what the Fed should be doing. Very vocal, threatening a lawsuit. Now there's a list of I guess it's a nearly a dozen individuals being considered for the Fed chair role.
So, yeah, I mean, the threats to the Fed's independence, it's been a media obsession even before Trump took office, even before the election. Last summer, we wrote about the challenge to the Fed's independence, so even before the election. And investors have every right to be concerned over some of the developments that we've been seeing this year, ones we've just talked about.
But, you know, confidence in the Fed chair's ability to make the right decision is near the lows since Gallup began polling Americans on this question back in the Greenspan years in 2001. It's right around 37 percent. And it's really not that different if you poll Republicans or Democrats.
So trust in the in the Fed chair, trust in the institution is low. It could use some help. And is this any surprise?
I mean, we after 2022 with the runaway inflation and the inflation being so front and center and voter minds in the election, I don't see this as terribly surprising. But if we wanted to observe if investors were really worried about the Fed's independence, we'd see it in asset prices. And yes, the dollar has weakened by mid to high single digits this year, but it's a decline from multi year highs, not a dollar bloodbath.
And it's not clear that we're seeing international investors panic over this question of the Fed's independence. Gold is higher, but this is also a function of dollar weakness. And the rise in gold prices happened mostly between January and April.
And that was largely around tariff concerns. I would be looking at inflation expectations embedded in the bond market as the kind of truest test of whether the Fed is retaining its control over its mandate. The bond market is saying that inflation expectations are well anchored.
And so I'm not seeing a sign really yet in the markets that this is truly a question. Now we're going to get a new Fed chair. That's happening.
And they may want to do some things differently than Jay Powell. The balance sheet is top of mind. It's nearly seven trillion still.
That's roughly 20% of GDP, over three trillion in reserves. Some of the heir apparents have been talking about the balance sheet. So that's on the table.
There's likely to be more dissent within the FOMC, even now, without a new Fed chair for potentially political reasons. But there's also tension in the Fed's mandate if the labor market weakens and inflation expectations, or sorry, inflation measures move higher and drift away from the Fed's target. So the Fed might over deliver on rate cuts, could cause some concern on the back end of the curve.
This is why we're neutral on our interest rate exposure. We think the curve steepens with the front end outperforming. But there's a risk that the curve steepens also because longer rates move higher for a period of time.
I thought the nomination of Mirren to the Fed governor vacancy was interesting. You wonder if the administration was testing the waters of the market to see how investors would react. Mirren serves as chairman for the Economic Council, how markets would respond to that.
But it seems the administration may be testing the waters or keeping options open, knowing that there are a lot of people out there being talked about. Yeah. I mean, it's not a long appointment.
Right now, the Senate's slow walking nominations, the Democrats in the Senate, because they have all the, you know, sort of toxicity that has been left since the one big beautiful bill and some of the spending decisions and so forth. So definitely part of the administration, the White House will love to have him on the FOMC, you know, as a governor. Yeah, we'll see where it goes.
And I'm sure we'll speak more about the Fed during our September conversation leading up to the meeting. For sure. It's not going away.
Exactly. So one more topic, and this lends itself to a bunch of topics within, though, when you think about geopolitics, the administration has been settling global conflicts as well as working towards settlements of others. Most notably come to mind those being Israel, Hamas, Russia, Ukraine.
It's interesting how markets have digested geopolitical concerns fairly well here in 2025. Might that be the case going forward as so much uncertainty with these geopolitical points of interest remain? And I know coming up on Friday of this week, we do have a notable summit taking place in Alaska involving Russian President Vladimir Putin as well as President Trump.
Yeah, the markets have digested a lot of change, you know, a lot of uncertainty, not just geopolitics, but the tariff news, all the political upheaval. So yes, it is in some senses quite remarkable. But as an observer of geopolitics, one of the most time-tested statements we can make about geopolitical risk and its impact on financial markets is that world events have to have a real economic impact to have a sustained effect on asset prices.
And to be sure of any progress towards a ceasefire between Russia and Ukraine would be a welcome humanitarian victory and would also potentially prove positive for risk assets. But we have to keep in mind this is a long road in these negotiations. The sides are very far apart.
So it's a great development that potentially the U.S. and Russia are talking, but there's a lot to get through. And there is a risk that the conflict spills over into the real economy through oil markets still. The White House, part of its pressure campaign, you know, no surprise, they're using tariffs.
And on what? Well, those countries that are buying Russian oil. So they're targeting that revenue, imposing a 25% tariff.
India has already gotten word that they will be subject to that 25% tariff. There are other buyers we all know that it doesn't have to be consistent, but there's China, there's Turkey. And so these tariffs on Russian energy, if they're imposed, could begin to disrupt oil markets to say nothing, as you mentioned, about, you know, possible U.S. strikes or Israeli strikes on Iranian nuclear infrastructure.
If they believe that the job was not completed, there's a window. That window is not going to be open for long. So, you know, potentially this year we start seeing some hostilities there.
So we've got to keep our eye on oil markets. I think that's still something that, you know, could, you know, could be a risk here. But so far it's been, you know, it's been well behaved because we haven't seen, you know, we haven't seen the blocking of the Strait of Hormuz or other larger impacts to supply.
Well, a lot of moving parts. We will see what comes from this summit on Friday in Alaska, though. Kurt, thank you for covering the ground that you did with our listeners, our clients.
I know a lot of heavy, complex topics here, but you break it down nicely for our listeners, our clients, and do look forward to continuing the conversation around these topics and others coming up in September. Thanks, Dan. Enjoy the rest of your summer.
Likewise. Thank you, Kurt. And again, today we have been joined by Kurt Reiman, the head of fixed income for the Americas with the UBS Chief Investment Office.
Again, I want to point out the update to the ongoing POTUS 47 series from the UBS Chief Investment Office. That title one more time, Kurt? Another brick in the tariff wall.
Excellent. Which can be found up on UBS.com forward slash POTUS 47. 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. UBS Chief Investment Office's investment views are prepared and published by the Global Wealth Management Business of UBS AG or its affiliate, UBS.
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