Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 6.30 in the morning London time on Tuesday the 24th of June. Overnight, US President Trump declared that Israel and Iran had agreed a ceasefire between themselves.
Israel and Iran have continued to exchange missile attacks since that announcement, but Iran has effectively said, if Israel stops, we will stop. And according to the BBC, the last Israeli attacks on Tehran took place at around 4am local time. Israel has yet made no comment.
However, this is all enough for markets and the oil price has dropped back to the levels of a couple of weeks ago. That means that the economic effect of the briefly higher oil price, assuming the situation does not change, is unlikely to be noticeable in the data. Markets are at this stage unlikely to care too much about Iran's nuclear program, the location of enriched uranium, and so forth.
These things certainly do matter in a political sense, but as with North Korea, the nuclear threat is regarded as an extreme tail risk that markets do not wish to wait. Markets may also be getting some support from a rather dovish set of US Federal Reserve remarks overnight. The general sense was that rate cuts are possible while inflation is still rising, and rate cuts could also come as soon as the July meeting, though that is unlikely to be a majority position at this stage.
The idea of cutting rates when inflation is rising is a move away from the rather unfortunate policy trap of data dependency, as it implies a more forward-looking policy. The story in the United States is a sequence of rising inflation, then falling real incomes, then slowing consumption, then slowing hiring in the labour market, then slowing growth. So if the Fed is prepared to anticipate the slowing growth part of that sequence, there should not be a problem with having falling rates while inflation continues to rise, as long as there is confidence that the growth slowdown will stem that rise in inflation within a reasonable timeframe.
Fed Chair Powell is in front of Congress today. The quality of questions from members of the House Committee on Financial Services is not always that high. There is occasionally a suspicion that members of Congress are more interested in generating soundbites for social media for their voters back home, rather than having a serious discussion about policy.
There's also a pontification of other central bankers from the Federal Reserve, the European Central Bank and the Bank of England. No fewer than 16 other individuals are speaking today, including ECB President Lagarde and Bank of England Governor Bailey. ECB Chief Economist Lane is speaking twice, but that of course is fine.
Chief Economists are worth listening to on continuous loop. The question is whether markets are likely to care about any of this noise. For the Fed speakers, probably.
There's sufficient uncertainty about the timing of US rate cuts and the analysis of the damage being done to the US economy by trade taxes and policy uncertainty to make these remarks matter. For the Bank of England, less so, as the easing cycle is underway, but there is sufficient uncertainty about the exact pace to make this of some interest. The ECB is more mundane and less likely to excite attention.
The data calendar is just a mess of sentiment surveys, and these are very hard to take seriously nowadays. Political polarisation has shredded what credibility remained around such polling. The German IFO survey does tend to get some attention in the markets, but the US Consumer Confidence data from the Conference Board doesn't really offer much useful information for investors.
That's all for today. Have a good day. This material has been prepared and published by the Global Wealth Management Business of UBS Switzerland AG, regulated by FINMA in Switzerland.
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