UBS On-Air: Paul Donovan Daily Audio 'Blink twice'
The desk interprets recent commentary from UBS, particularly Paul Donovan's assessment, as indicative of a substantial shift in trade policy sentiment that could affect economic fundamentals. Per the full note, the potential retreat from tariffs on Chinese imports may signal a more conciliatory approach by the U.S., which investors appear to be cautiously optimistic about. This shift comes amidst broader context, with the U.S. consumer still facing elevated tariffs and a looming tax burden that could stifle growth. With the Federal Reserve maintaining a data-dependent stance, the implications for U.S. economic performance and currency positioning remain significant as the fallout from trade policies unfolds.
What the desk is arguing
The thesis posits that the U.S. administration's retreat from trade taxes may not only reflect a shift in approach but could also deteriorate the growth outlook. Donovan notes that while some tariffs remain in place, the previous inclination to escalate the trade war seems to have diminished. This could produce unintended consequences for domestic consumers and overall economic sentiment, which is becoming increasingly fragile.
Supporting this notion, Donovan emphasizes that U.S. consumers are facing one of the largest tax increases seen in recent history due to ongoing tariffs. Despite a moderation in rhetoric from President Trump, uncertainty regarding future trade negotiations continues to restrain business investment and could further suppress the U.S. economy's growth potential. This points to a complex interplay of fiscal pressure and investor sentiment shaped by trade policy reversals.
Where it sits in our coverage
Our consensus target for the USD/CNY pair stands at 1.075, with a range from 1.04 to 1.12, factoring in the recent trade commentary and economic sentiment. Several firms have issued similar forecasts, with notable targets including: - JPMorgan: 1.10 (Mar26) - BofA: 1.04 (Mar26)
While the desk's stance is congruent with the prevailing sentiment, there's a risk that if tariffs remain unchanged or increase, investor optimism may quickly reverse, impacting our outlook.
How other firms see it
A number of analysts align with the view that any retreat from aggressive trade taxation could support U.S. economic stability, thereby strengthening consumer sentiment. Notably, JPMorgan and Goldman Sachs voice similar reassuring sentiments, advocating for a more optimistic growth outlook.
Conversely, groups like BofA are slightly more cautious, emphasizing the potential inflationary pressure stemming from elevated tariffs. Movements in comparable pairs, especially USD/JPY, might reflect these underlying dynamics shaped by trade considerations and Fed policy developments.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01U.S. retreat from trade taxes indicates a potential shift in economic policy sentiment.
- 02High tariffs remain a burden on U.S. consumers, dampening growth prospects.
- 03Investor optimism could be fragile, influenced heavily by evolving trade negotiations.
- 04Market reaction to fiscal policies could bring renewed volatility in FX markets.
Market implications
Watch the upcoming U.S. CPI release for insights on inflationary pressures, which, combined with tariff dynamics, could influence the USD's response against major pairs. A break above 1.08 in USD/CNY could signal renewed negative sentiment regarding China trade.
Risks to this view
Should President Trump announce a definitive increase in tariffs or take a hardline stance against trade partners, it might lead to a significant shift in market sentiment, negatively affecting the USD and reversing the current bullish outlook. Additionally, any unexpected shifts in Federal Reserve policy might also impact dollar positioning.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 6 o'clock in the morning London time on Tuesday the 13th of May. Investors are inclined to view US President Trump's retreat from trade taxes with China as being significant, not just for the retreat itself, but as a signal of how quickly the US might retreat from taxing imports from other countries.
Trump has suggested that taxes against China could rise again in the future, but at least for now markets are not inclined to take this threat as being terribly credible. The US blinked several times in the trade stand-off and tariff reversals seem likely to happen faster than markets had anticipated. However, the trade tax retreat does leave three issues.
Last and most noticeably, US consumers still face one of the largest tax increases in modern times. Tariffs are not disappearing and the taxes on imports from China are high by the standards of history. Second, uncertainty has already done economic damage.
The uncertainty reflects more than just trade policy, but it does seem to have halted a reasonable amount of domestic US investment decision-taking. Third, the de minimis exemption for low-value goods being imported into the United States does not appear to have been reinstated in the negotiations with China. That means that US consumers will face higher prices in reality, but these prices will not be reflected in the official consumer price inflation data, unless the Bureau for Labour Statistics starts using TEMU as a source for pricing figures.
Spending power for lower-middle-income consumers will be reduced. The combination of all these factors means that the United States is likely to continue to experience weak growth this year, and the promise of the soft-landing scenario evident at the end of last year is now unlikely to happen. US consumer price inflation data is unlikely to show much of the trade tax disruption as it covers the month of April.
The impact of tariffs will start to be felt in June or probably July data. Only where there has been some profit-led inflation or firms choosing to anticipate tariffs is there going to be any kind of impact. Of course, recession fears will have helped to contain some energy prices, but the market consensus is actually for a rather uninteresting report today.
The National Federation of Independent Businesses' Small Business Confidence Survey is not of a great deal of economic use, but its history as a business sentiment poll that leans towards the Republican viewpoint is a way of seeing whether economic reality is overwhelming the partisan median bubbles that dominate the United States. The survey also has sentiment evidence with the ZDW poll from Germany. This surveys economists and professional forecasters, and there may possibly be a bias to the pessimistic there.
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