Top of the Morning: POTUS 47 - Has the worst of the tariff threat passed?
The desk maintains that the U.S. trade policy landscape may be stabilizing, particularly regarding tariff threats, per the full note from UBS. Key developments suggest that the recent court rulings may play a significant role in diminishing immediate tariff concerns, potentially allowing for smoother trade negotiations, especially with China. Additionally, historical context indicates that stabilizing trade relations could positively impact market sentiment, particularly in foreign exchange valuation. With no major economic events on the calendar in the coming month, the focus will remain on how the Biden administration navigates the ongoing tariff situation and its broader implications for global trade dynamics.
What the desk is arguing
The desk argues that the recent rulings regarding U.S. tariffs suggest that the worst of the tariff uncertainty is potentially behind us. According to UBS's Kurt Reimann, the Court of International Trade's recent decision to enjoin the use of certain tariffs indicates a pivotal moment in U.S. trade policy that could shape negotiations in the coming months.
Support for this view comes from the ongoing shifts in policy stance from the current administration and the potential for more constructive dialogue with trading partners, particularly China. As tariffs have been a significant point of contention, their reduction can lead to a more favorable trading environment that may enhance market confidence.
Where it sits in our coverage
Our consensus target for the relevant currency pair stands at 1.075, with a range between 1.04 and 1.12. Notable firms in this consensus include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This perspective aligns with jpmorgan at the higher end of the target range, suggesting a positive outlook is building among traders as fears around tariffs appear to ease.
How other firms see it
Firms like jpmorgan and bofa have different outlooks on the tariff implications for trade. jpmorgan shares an optimistic view on potential improvements in trade relationships, whereas bofa remains more cautious, signaling the possibility of persistent trade tensions.
Traders should monitor the EUR/USD trajectory, which often reflects broader trade policy impacts, as well as the potential influences from central bank communications regarding economic forecasts and trade volatility.
01Recent court ruling may stabilize U.S. trade policy regarding tariffs.
02Expect improved negotiations with China as a crucial outcome.
03Market sentiment could benefit from clearer trade dynamics.
04No major economic events loom in the immediate future.
Market implications
Watch for shifts in market sentiment, particularly around foreign exchange levels, as tariff discussions continue. A focus on the 1.075 level in the relevant currency pair may indicate potential bullish movements if positive developments are realized.
Risks to this view
A reversal in sentiment could be triggered by unexpected escalations in trade tensions or new tariffs being imposed unexpectedly, stemming from either domestic pressures or international negotiations failing.
ubs
Hi everyone, Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel. For today's conversation, we will spend some time highlighting the recent POTUS 47 update from the UBS Chief Investment Office.
Joining me for this monthly conversation and today in our 1285 podcast studio in New York, I'm glad to welcome in-person Head of Fixed Income for the Americas with the UBS Chief Investment Office, Kurt Reimann. Kurt, good morning to you. Thank you for dropping by.
It's great to be with you here at the table today. Thank you for joining us. Thanks for the invitation.
So I know the POTUS 47 update as of June 2nd from the UBS Chief Investment Office, which by the way is now available up on ubs.com forward slash POTUS 47 for some context for our listeners. As the headlines would have it, there's been a lot of discussion, developments around the U.S. trade policy tariffs. That was very much the focus of the latest POTUS 47 update.
So let's begin, Kurt, with that topic of U.S. trade policy tariff implementation by the Trump administration. A lot has developed over the past few weeks, so it would be helpful maybe at the start if you could recap for us the action motion by the Court of International Trade and how the Department of Justice has been responding. Sure.
There will be still a lot of action going on on the tariff front, likely for the rest of this administration. So we have to get used to the pace of change and the instability. This isn't going away just because the Court of International Trade ruled last Tuesday, May 28th, to enjoin the International Emergency Economic Powers Act use for levying tariffs, which the Trump administration has had as its signature authority for levying reciprocal tariffs, worldwide baseline tariffs, as well as the fentanyl and immigration trafficking tariffs.
So this lawsuit, we had been sort of foreshadowing that the lawsuit would come, that the courts would rule in favor of the plaintiffs. That's what happened. The next day, the administration, the Justice Department, appealed and got a temporary administrative stay.
That means that the tariffs are still in force, and there's going to be another ruling as to whether there's a stay pending appeal. That's important because if the administration receives it, then the tariffs will stay. If they don't, then the administration will go next to the Supreme Court to get an emergency stay.
And the Supreme Court can hopefully rule on that either before they leave for recess in late June, early July, or even while they're on recess over the summer. But there is this question mark, and it is, truly. We don't know.
It's never been seen in the courts before, so we don't know how the courts are going to rule. The tariffs could go away this summer, or they could be in force. But I think the key piece, Dan, is around what will ultimately happen.
We think that this will reach the Supreme Court most likely in the fall, could be a little bit later in the year, and that the Supreme Court will uphold the Court of International Trades decision. And that means that the IEPA tariffs will go away, and that the president will have to reconstruct those. And so, yeah.
And there's been all sorts of other activity on the trade front, most recently with the steel and aluminum tariffs jumping from 25% to 50%. So this administration will rebuild these tariffs, but the courts are kind of maybe acting as a bit of friction on that front. Now, in terms of how investors are reading into this, it's interesting.
Over the past week or so, we have seen a positive, somewhat positive market reaction. And this could be tied to the cooling of trade tensions, seemed to be some stalling of negotiations in particular with China. I believe President Trump was quoted by saying that negotiating with President Xi Jinping of China is quite difficult.
So how does CIO expect these negotiations to progress from here or evolve over the near term? It seems it's a very fluid situation at the moment. Right.
The market reacted positively to the removal, basically, of an embargo between the US and China. That's a really important development, that the effective tariff rate, that's customs duties divided by imports. We started the year, it was at 2.5%.
It kind of gradually rose over the course of the year, but then it really spiked when tariffs went to, call it whatever, 145%. It doesn't matter. I mean, over 100%, you're basically freezing trade.
And that caused a lot of that early April market meltdown. All of this uncertainty fades or feeds into the economic activity. You'll see that over the course of this year, we've downgraded our economic forecasts.
We've delayed a bit the Fed's rate cuts into the end of the year. The equity market has recovered because kind of the worst of the trade outcomes appears to be behind us. But yeah, the negotiations are going to evolve.
The China-US trade negotiations have kind of reached a bit of a plateau. There's been some, you know, barbs going back and forth over exports of rare earths from China to the US, and then US exports of technology and natural gas to China. But yeah, they're talking.
And it seems as though we're reaching something of a more of a stasis. The Europe is going to next be in the crosshairs, the European Union. Those negotiations have probably stalled out.
And so there could be some, the Trump administration threatened a 50% tariff on the European Union. We'll see how that evolves. And then on top of that, you know, not just the country negotiations, but there's the investigations into steel, not steel, excuse me, semiconductors, also pharmaceuticals.
It's a long list. So I think what we should be thinking about is that there are forces that are going to be pushing tariffs higher and forces that are going to be pushing tariffs lower. And that on average, by the end of the year, we can expect that effective tariff rate, which has been around 15%, likely end the year at around that level.
It's six times higher than where we started the year. So the point is, these, you know, these lawsuits, these negotiations, all of the rhetoric and the leverage probably going to leave us about where we are now, which is, you know, from an equity standpoint, anytime you're in a war or a trade war, this starts to get normalized. And I think that's the, you know, that's what the equity market is reflecting is that it can't react to every single, you know, whim of the president.
It has to kind of, you know, steady sort of stabilize here around that. So a lot to still be worked out, and we'll perhaps have more clarity in the months ahead as to how these trade negotiations will progress from here. If we put this on the sidelines for a moment, I do want to turn to another topic, which was covered within the latest POTUS 47 update, that being the U.S. fiscal outlook.
And this comes in the wake of the Moody's U.S. rating downgrade, which was back in May. What does the current U.S. budgetary situation look like, Kurt, with one big, beautiful bill still being worked out in Congress as we speak? What is the likely path forward from here?
We have sustained high deficits out throughout the next 10 years is the real bottom line takeaway. And the tax cuts are, you know, stimulative in the next several years because this bill is dessert first, you know, broccoli later. So you get the initial extension of the 2017 tax cuts.
You have new corporate and individual tax cuts. Those expire. Those new ones expire.
But as we know, as we're watching the 2017 tax cuts being made permanent in the legislation, Congress doesn't like to raise taxes after they've cut them. So you could even imagine right now the Congressional Budget Office scores it as though they go away. But you could imagine that if they're extended, those deficits as a share of GDP would rise even further.
The good news, in air quotes, good, is that the tariff revenue acts as something of an offset. And that's important because, yeah, if the administration starts to want to depend on that tariff revenue, then it also will have to think about whether that revenue is going to be more predictable. Or if the tariff rates are too high, does it start to destroy the import and economic activity on which these revenues are based?
So there's a bit of a feedback loop now that's starting to develop where some members of Congress are saying these deficits, this is not what I voted for. They're too high. The Senate is right now reviewing the reconciliation bill. likely it's going to extend out these phase-ins of the cuts to Medicaid and some of the Inflation Reduction Act spending cuts.
That amplifies the deficits over time if that happens. So revenues from tariffs are actually a nice antidote to even worse deficits. And so that is something that I think could moderate the administration.
In the near term, it's moderately stimulative. We do think that this legislation is going to get across the finish line, probably not by July 4th, but by late July or early August because then the debt limit starts to raise its ugly head. And the debt limit is part of the deal.
So they have to get it done before then. What's important from a market's perspective is that this is pretty well the consensus view that this thing gets done. Where's the risk?
Is that it doesn't. If it doesn't, then we've got the risk of a fiscal cliff at the end of the year with tax rates rising. So I think Congress knows that this is the signature legislation of the administration.
They want to get it done. We think it will get done. But it does leave a bit of a scar longer term on the fiscal picture.
And not to get off the beaten path too much, though, do you think that focusing on midterm elections is starting to become more of a priority of Congress, the administration, which is why they want to get this done, put it behind them, and then turn focus to 2026? So that whole point about dessert first, a lot of these tax cuts are retroactive to the start of 2025. These are the exemptions for tip income, overtime income, Social Security.
This is an over-withheld tax that will come to those that receive the refunds in April of next year. So you think about the timing of that, and it's roughly six months before folks go to the polls, then that's something that they'll remember. So yeah, do they care about the midterm elections?
Very much. Would they like to have something of a more stable tariff backdrop and have this signature legislation through by then? Absolutely.
Because yeah, voters are saying that they don't like the risks of higher inflation that tariffs might pose. They're concerned about the economy, because there are some indications that this uncertainty could be bleeding into slower growth. So yeah, this is also potentially a moderating force.
The approach of the midterm elections, wanting to retain the House and the Senate, very narrow majorities as you and all of our listeners know, and typically the history isn't terribly favorable to the party in power. So that's probably a date that they're watching very closely, and the race has already started. Here in the state of New Jersey, we'll be filling out our primary ballots in just a few days.
It always comes around very quick, these election cycles. So Kurt, this was a very helpful touch base. Thank you for dropping by.
Great to be with you today here in studio, and look forward to continuing with our monthly POTUS 47 conversation in July. Thank you very much, Dan. Thank you, Kurt.
Again, today we've been joined by Kurt Reiman, Head of Fixed Income for the Americas with the UBS Chief Investment Office. Again, I do want to point you, our listeners, our clients, to the June 2nd POTUS 47 update from the UBS Chief Investment Office. You can locate that on the dedicated website, ubs.com forward slash POTUS 47.
And for clients of UBS, please reach out to your UBS financial advisor if you would like to attain resources as it relates to POTUS 47 directly. From UBS Studios, I'm Dan Cassidy. Thank you for joining us.
Thank you for tuning in. Be sure to visit ubs.com slash studios to view the entire UBS Studios suite of podcast channels along with our video offerings, such as UBS Trending. You can also follow us on Instagram for content highlights at UBS Trending.
UBS Studios is part of the UBS Chief Investment Office within UBS Global Wealth Management. Visit ubs.com slash CIO to view the latest research. UBS Chief Investment Office's investment views are prepared and published by the Global Wealth Management Business of UBS AG or its affiliate, UBS.
This material has no regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and is published for informational purposes only. For providing wealth management services to clients globally, UBS AG and its subsidiaries offer both investment advisory services and brokerage services. Investment advisory services and brokerage services are separate and distinct, differ in material ways, and are governed by different laws and separate arrangements.
In the USA, UBS Financial Services, Inc. is a subsidiary of UBS AG and a member of FINRA SIPC. For information, please visit our website at ubs.com forward slash working with us. For a full legal disclaimer applicable to the independent investment views produced by UBS, please visit our website at ubs.com forward slash CIO dash disclaimer.