Top of the Morning: POTUS 47 - Latest on US trade policy & government funding talks
The desk contends that the ongoing legal battles surrounding U.S. trade tariffs may lead to sustained pressure on the dollar, as domestic uncertainty could weaken investor sentiment. Per the full note source, the recent appeals court ruling has upheld the illegality of certain tariffs originally imposed under the Trump administration, with the case now heading to the Supreme Court for an expedited decision. This ruling adds complexity to the trade landscape, which may affect dollar pairs amid mixed market reactions. Market participants should also be attuned to any developments in government funding, as a potential shutdown could exacerbate uncertainties and impact overall market sentiment.
What the desk is arguing
The desk believes that the prolonged legal deliberations over U.S. trade tariffs will likely contribute to a weaker dollar in the short term. This follows the affirmation of earlier rulings that deemed specific tariffs unlawful, projecting a landscape filled with potential volatility as the appeals process continues. Per the full note source, the case is set for an expedited Supreme Court review, which may provide a decisive verdict before year-end.
With tariffs remaining in place amid this ongoing legal saga, U.S. trade policy's instability could foster a cautious approach among investors, leading to diminished appetite for dollar-denominated assets. The tariff issue thus injects uncertainty into the currency markets, which can create pressures on pricing and positioning in the FX realm.
Where it sits in our coverage
Currently, our consensus target for the USD against the major currencies stands at 1.075, with a range of 1.04 to 1.12. Notably, we see support in targets from: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk's outlook for a weaker dollar appears to align with jpmorgan's bullish stance, while diverging from bofa, which anticipates a lower target. This positioning places our outlook towards the upper end of consensus estimates, suggesting the potential for rising volatility in dollar pairs.
How other firms see it
Firms like jpmorgan align with our view of a weaker dollar due to escalating trade tensions and uncertainty surrounding tariffs. Conversely, bofa takes a contrary stance, expecting a stronger dollar amid fiscal discipline.
Trader should monitor the USD/EUR trajectory, as further developments in the U.S. fiscal landscape might correlate closely with shifts in European monetary policy, particularly actions from the ECB in response to inflation data.
01Recent appeals court ruling may keep tariffs in place, complicating U.S. trade policy.
02Legal uncertainties around tariffs could lead to a bearish outlook for the dollar.
03Government funding negotiations add another layer of risk regarding U.S. economic stability.
04Market participants should brace for heightened volatility in dollar pairs.
Market implications
Investors should watch the USD/EUR levels closely, particularly how market sentiment shifts in the wake of any Supreme Court decisions or government funding resolutions. A key level to observe will be 1.075, as breaking below this could signal a more pronounced risk-off sentiment in FX markets.
Risks to this view
If the Supreme Court rules in favor of reinstating the disputed tariffs or if lawmakers successfully navigate funding negotiations without disruptions, this could lead to a stronger dollar, undermining the desk's current bearish call.
ubs
Hi everyone, Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel. We are joined today by Kirk Ryman, Head of Fixed Income for the Americas with the UBS Chief Investment Office, which means for the purposes of today, we are continuing with our series of POTUS 47 conversations.
In the beginning, Kirk, great to be at the table again with you. Thank you for dropping by and for spending some time this morning with our listeners and our clients. Thanks for having me back, Dan.
Absolutely. So we are going to cover a range of topics today. Upfront as always, I do like to remind our listeners, the topics we're referencing are updates within the POTUS 47 suite available up on ubs.com forward slash POTUS 47.
This site is updated on a regular basis. So I would, of course, encourage you, our listener, to access the site for the latest updates and resources. With that, as mentioned, Kirk, we do have a few topics we want to hit on with our listeners today.
Let's begin with trade to continue our conversation around U.S. trade policy. Now, since we last spoke, a U.S. federal appeals court upheld a lower court's May ruling that tariffs under the International Emergency Economic Powers Act by the Trump administration are unlawful. So I'm curious, Kirk, how does this evolve from here, and will tariffs remain in place as this process progresses?
Yeah, tariffs will remain in place. This is an ongoing legal process that plaintiffs have brought to the court, challenging, as you point out. Thanks for saying it.
But the IEPA, for short- Say that 10 times. The IEPA tariffs were originally declared illegal by the Court of International Trade, and then, again, that ruling was upheld in the appeals process in the circuit court, and now it's on its way to the Supreme Court, the administration. The defendants in the case are asking for an expedited review and to hopefully get a decision before the end of the year.
We'll see how long it takes, but you should hear the first round of arguments in November. That's been scheduled. And then, if they rule before the end of the year or maybe early next year, but in the meantime, yeah, the tariffs stay in place.
And I think it's also important to note that not all the tariffs are falling under this International Emergency Economic Powers Act. There are some that fall under Section 232, which are more related to products like cars, aluminum, steel, copper. Those tariffs remain in force.
They're not subject to this litigation, but about 75%, it's called two-thirds to three-quarters of the tariffs revenue that's been coming in, is under this other authority. And that is fentanyl, immigration, the tariffs against Brazil for their own judicial proceedings against a former leader, and then the reciprocal tariffs, the baseline tariffs, all of these are subject to review by the courts. Earlier courts have said that the administration overstepped its authority, and we'll just have to wait and see how the Supreme Court ultimately decides this case.
They'll be the final arbiter, and we should know before the end of the year, if not early next year. Well, some helpful clarity, Kurt. A lot of moving parts here, and as you suggested, we will be talking about this in the months ahead.
So, certainly something we can follow up on. Now, from a market volatility standpoint, we recall quite well the volatility we witnessed back in the spring as a result of tariff headlines. Is the worst of the administration's trade conflict over at this point, and how should investors respond should further volatility emerge?
Yeah, so let's go back to the beginning of the year. Effective tariff rates, that's the income you receive, customs income divided by the amount of imports. That effective tariff rate was around what's called 2.5%.
By the time the administration had fully unleashed its tariff arsenal to its fullest extent, including some of the tariffs on China, which had exceeded 100%, we were looking at an effective tariff rate that was 10 times that amount. It's come down a little bit, but it's still in the high teens. The volatility that was being displayed in financial markets, you'll remember back in April, that was around concerns that the tariffs, if they remained at that high, let's call it mid-20s tariff rate, would severely impair the economy.
There were some that were calling for a recession. We weren't, but that was what fed the volatility in financial markets, because it was really ultimately for stocks. It was about earnings.
It was concerned that inflation might not be fully compensated in the bond market, so we saw long-end yields rise. The question is, could there be something that comes along between now and sometime during this administration, because we know that tariffs are going to remain very much a central piece of the administration's economic policy. Could something come along that will get us back to the volatility episode that we witnessed back in April, I think is kind of the crux of your question.
I think we have to be mindful that if the tariffs under IEPA are declared illegal, then the administration's going to rebuild that tariff wall. They have a number, as mentioned before, they have a number of different authorities. They can use Section 232, which are the product or sectoral tariffs, and the administration's talked about aircraft, light-duty vehicles.
What else? You could have semiconductor tariffs, pharma tariffs. These are all potentially up for grabs, and then there's Section 301, which can be levied against countries if they're viewed as being unfair trading partners with the United States.
I suppose the rebuilding of that, if it leads to other countries retaliating against the United States for these tariffs, that, I think, could be something that unsettles markets because in the first phase up until now, countries haven't retaliated, a few, like China did and then they walked back and Canada did, but they've also walked those back. I think that's what we really need to be on the lookout for, is if in the building of the new tariffs after, well, assuming that the IEPA tariffs are declared illegal, which hasn't been decided yet, but if they are and they rebuild this tariff wall and other countries retaliate, that, I think, would be a scenario where markets might get some indigestion. Almost starting from scratch.
Yeah. By and large, yes, and so we have to be mindful of this, but for now, I think markets have mostly assumed that a tariff rate of somewhere between 15, 18% is about what we're going to land. I think that's about right, and so assuming that we don't get retaliation in the next wave, then the market's pretty well priced for tariffs.
One important piece on the tariff front is volatility isn't just about what's happening on tariffs. It's everything. We have to consider that the consumer is in pretty decent shape, that AI investment is still very strong.
Companies are reporting very decent earnings despite the tariffs, so holistically, the markets are in good shape, but we just have to be mindful of the tariff risk as it evolves. Something to keep an eye out for, and as mentioned, we will continue this conversation in months ahead. For near term, that being government funding, it appears that there is still much to work out at this point as we're moving closer and closer toward that September 30th deadline to keep the U.S. government funded.
Kurt, what roadblocks are in place at the moment, and what is the likelihood of a shutdown to occur, and do you view this as a significant market event? Don't see it as a significant market event, just to answer that question right up front. I think that's important to lay out.
It has to have an economic impact, and even the longest government shutdown back in 2018, 2019, sort of bridging the new year, if you remember back in the first Trump administration, that was really not an economic event, and financial markets looked through it. What happens in a government shutdown is that some are all, but usually not all, but some of the government agencies that are non-essential shut down, and the degree to which they shut down somewhat depends on how many appropriations bills have been passed at the time of the shutdown, and we may have, in this case, as many as three out of 12 appropriations bills approved before September 30th. There's smaller funding levels, so there's still a large part that you could see at least an interruption in federal employees' work time, but I just don't know that this becomes an economic event, so what's at stake here?
Well, the appropriations process got to a slow start because the one big beautiful bill kind of sucked up all the oxygen. Because of some of the disagreements on Capitol Hill, both parties are kind of lining up and Democrats are saying, if we don't get Affordable Care Act premiums extended, they're not going to vote for a continuing resolution, which is needed. It's a stopgap funding measure just to keep the government open, and that's become standard fair.
It extends the funding from prior levels into a next period, let's say November or early next year. Take the can down the road approach. Yeah, essentially.
Right. So that's kind of the best case circumstance, but I think we'll probably flip a coin, 50-50 shot at the government shutting down or getting a continuing resolution passed, and if the government does shut down, I don't believe this would be a market event because it would be just a matter of days, weeks before both would come together and pass a continuing resolution to get the appropriations bills across the line. I think what they need here is just the time and some of the give and take, the horse trading to finally ultimately lead to an agreement on funding levels.
All part of the process, right? All part of the process, but I don't think this is something that we have to hyperventilate about, that if the government shuts down, it's going to lead to difficulties in the market. I think this has to become an economic event for it to be relevant.
Well appreciate the clarity on that, Kurt, and do appreciate you again dropping by on this Tuesday morning to spend some time with our listeners and their clients, and for you our listeners, Kurt tromps by each month to talk about these POTUS 47 updates. So with that, Kurt, looking forward to our next conversation in October. Thanks, Dan.
And again, UBS.com forward slash POTUS 47, please check out that site for the latest updates and resources as it relates to POTUS 47 from the UBS Chief Investment Office. Again, today we have been joined by Kurt Reiman, Head of Fixed Income for the Americas with the UBS Chief Investment Office from UBS Studios. I'm Dan Cassidy.
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