UBS On-Air: Paul Donovan Daily Audio 'And so it begins? '
The desk believes that upcoming US consumer price inflation data will reflect the effects of recent trade tax policies, with only a portion of these costs currently felt in the economy. Per the full note from UBS, anticipated trade tax impacts are still to be fully realized, as evidenced by half of the tax increase yet to be enacted and stockpiling of goods keeping pre-tax prices intact for now. The market should monitor how effectively firms can pass these impending costs to consumers, a task made easier by a stronger inflation backdrop and persistent media discourse around tariffs. In this context, US inflation prints will play a crucial role in shaping expectations, especially as we attempt to navigate the broader implications on currency valuations.
What the desk is arguing
The desk posits that US inflation figures, which are due imminently, will likely begin to reflect the rising pressures from trade taxes. UBS notes that only about half of the anticipated trade tax impact is currently affecting the economy; therefore, this inflation print will serve as an early barometer for future cost adjustments by US firms.
Current effective tariff rates have already increased by approximately 7.5 percentage points, with forecasts suggesting another 6 to 7 percentage points on the horizon. As inventory management plays a pivotal role in this juncture, the ability of US firms to pass on costs will be central to how inflation is perceived in the coming months.
Where it sits in our coverage
Our consensus target for the USD against the EUR remains at 1.075, with an expected range from 1.04 to 1.12. Key firm projections include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk's analysis slightly leans towards the higher end of the currently tracked range, aligning with jpmorgan's more optimistic view while diverging from bofa's cautious stance.
How other firms see it
Firms like jpmorgan exhibit alignment with the desk’s optimistic outlook while bofa offers a more cautious perspective. This divergence underscores differing expectations regarding the inflation pass-through amid ongoing trade tensions.
Key drivers to watch include the relationship between inflation figures and dollar valuations, particularly the USD/EUR market as it may react rapidly to unexpected inflation outcomes.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US inflation data to reflect trade tax impacts, albeit gradually.
- 02Half of the expected trade tax effects are yet to hit the US economy.
- 03Increased consumer price acceptance may facilitate price pass-through.
- 04EU retaliatory measures could further complicate inflation dynamics.
Market implications
Traders should closely watch the upcoming US inflation report for indications of how trade tariff impacts are being reflected in consumer prices, especially if inflation readings exceed expectations, which could further spur dollar strength. A key level to observe is the 1.075 area for USD/EUR pair; a break above could signal stronger inflation alignment with trade impacts.
Risks to this view
Potential risks to this outlook include a scenario where inflation data comes in below expectations, suggesting that US firms are unable to pass on costs effectively. Additionally, any rapid shifts in consumer sentiment or federal policy could significantly alter market dynamics and affect dollar valuations.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Tuesday the 15th of July. U.S.
June consumer price inflation data is due. This is the first number that is likely to show any effects of the trade taxes, but the effect is only really likely to show up in the details. Only about half of the likely trade tax effect is currently in operation.
The effective U.S. tariff rate has risen about 7.5 percentage points and it probably has another 6 or 7 percentage point increase to go. To the extent that there was a stockpiling of inventory in anticipation of trade taxes, there will still be goods on shelves that reflect importers' pre-tax purchases. That front-running of inventory can be overstated, however.
Democrat and independent voters seem to have brought forward purchases of consumer durable goods, especially electronics and appliances, in anticipation of trade taxes. But this action does not affect consumer price inflation directly, though demand post-tax may be a little bit softer. One critical point to bear in mind is the tax pass-through is likely to be stronger now than in past trade tax episodes.
The post-pandemic inflation has made consumers perhaps less resistant to the idea of price increases. Moreover, tariffs have dominated media in a way that they have not done before. And for non-Republican media, the story of domestic consumers paying the tax has been reiterated.
That makes it easier for producers and retailers to sell the idea of price increases to their customers. There is more to come on inflation, which is why the details rather than the headline matter today, but a Trump inflation increase is very likely. The European Union has come up with a little list, 200 pages long, itemising the goods from the United States that would be taxed in response to Trump's threats of taxing US consumers of European product.
Obviously, as with the US taxes, these European taxes would be paid for by domestic consumers. However, some thought does seem to have gone into this list. It is not a case of seeing a colony of penguins and deciding to tax everything they sell without distinction.
These EU taxes would apply to goods that can be more readily substituted, thus reducing the impact on the EU consumer. Moreover, the proposed tax rate has not been detailed. That is probably sensible.
What the EU presumably wants to happen from this is for US companies to lobby Trump about the risks to their business arising from this mooted retaliation in order to trigger another Trump reverse. Bond and equity market moves can push Trump into reverse gear very quickly. But as those markets are now just assuming Trump will retreat, they're not acting as an effective trigger for surrendering ground.
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