UBS On-Air: Paul Donovan Daily Audio 'Data’s phony trade war'
Lead — The desk interprets recent US consumer price inflation data as lacking clear signals of the impact from tariffs or trade tensions, while highlighting significant increases in appliances as a factor worth monitoring. Per the full note from UBS, inflation figures showed only vague hints of tariff effects, with international travel declining as visitors express caution about the US, particularly from Canada. This analysis suggests that while tariffs remain a concern, their immediate effects on consumer prices are still unclear. As the market responds, the upcoming producer price index data will be crucial to determine if manufacturers are using tariffs to support price increases further, which may affect inflation forecasts and market positioning.
What the desk is arguing
The desk believes the current US inflation landscape indicates muted immediate impacts from trade tariffs, but highlights potential sectoral pricing pressures, particularly in appliances. UBS's insights suggest that recent trends in consumer prices lack definitive evidence of direct trade-related effects, feeding speculation about the delayed and diffuse nature of tariff impacts.
Specifically, appliance prices have been rising at the fastest pace since early 2022, drawing attention to sectors that could be vulnerable to trade tariffs. This aligns with observed weak tourism-related price trends linked with declining interest from international travelers due to safety concerns. Furthermore, the upcoming producer price index data could reveal whether US manufacturers are leveraging tariffs to pass on higher costs to consumers, further complicating the inflation narrative.
Where it sits in our coverage
Our consensus target for the EUR/USD is currently at 1.075, with a range spanning from 1.04 to 1.12. Specific firms include: - JPMorgan: 1.10 (Mar-26) - BofA: 1.04 (Mar-26) This view diverges from the cross-firm consensus, where JPMorgan suggests a more optimistic outlook compared to BofA, which presents a more cautious stance towards the euro's strength against the dollar.
How other firms see it
Firms oriented towards bullish perspectives on inflation and tariff impacts, such as JPMorgan, see potential for price pressures to rise, supporting a stronger dollar view. Conversely, firms like BofA maintain a bearish outlook, reflecting concerns about the broader implications of trade tensions and their effects on the economy.
Given the backdrop of US inflation trends and tariff implications, watch the EUR/USD trajectory as it intertwines with central bank policies and consumer price indices, especially in gauging market expectations moving forward.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US inflation data shows vague hints of tariff effects.
- 02Appliance price inflation is a rising concern, at the fastest rate since early 2022.
- 03Upcoming producer price index data will be pivotal for understanding manufacturer pricing behavior.
- 04Weak tourism prices reflect concerns for international travelers visiting the US.
Market implications
Traders should closely monitor the EUR/USD exchange rate, with the next pivotal data release being the producer price index. A significant upward shift in producer prices could prompt a reevaluation of inflation expectations and lead to consequential movements in dollar valuation.
Risks to this view
A sharper-than-expected rise in inflation data could invalidate the current call, particularly if producer prices soar and compel the Federal Reserve to adopt a more hawkish stance. Alternatively, a continued decline in tourism could provoke stagflation concerns, ultimately impacting consumer confidence and spending.
Good morning. This is Paul Donovan, Chief Economist at GBS Global Wealth Management. It's 6.30 in the morning London time on Wednesday the 14th of May.
Yesterday's US consumer price inflation data was too soon to tell us much about the effects of tariffs. There were some vague hints, but they are very vague. Tourism-related prices were weaker and that might relate to increased concerns from international travellers about visiting the United States.
Canada in particular seems to have reduced its leisure travel to the US. However, the seasonal complications of the timing of Easter also have a bearing here. The ever politically sensitive egg prices finally fell, though they are still higher than at any time under US President Biden's administration.
This is just a reminder that governments can do very little to control relative price changes in the face of a supply shock. There's a little more concern around things like appliance prices, however, which were rising at the fastest pace month on month since early 2022. These are areas that are vulnerable to higher trade taxes.
Thursday's producer price inflation data will show whether US manufacturers have been using tariffs as a mechanism to increase their own prices, potentially causing higher consumer price inflation. There are European consumer price inflation data releases today, but these are generally final figures for April and are not on a special focus. The data almost never changes from the initial release.
The bias of price risks in Europe is towards disinflation anyway, as to date retaliatory trade taxes, which would obviously raise European living costs, have been kept to a minimum. None of today's data is likely to inform market expectations about European central bank rate cuts. There are also a few ECB speakers on the schedule today.
US President Trump announced that Saudi Arabia would invest $600 billion into the United States. To put this in context, that would be about 60% of the entire size of the Saudi economy. This has the appearance of what might be termed a penny dropped deal.
US President Trump previously declared they would stop producing one cent coins. There was a lot of noise about this, and in the end the coins are still being produced. Similarly, such pledges on investment, which can be couched in suitably open-ended terms, allow a positive spin without necessarily offering a great deal in terms of economic substance.
There therefore seems little need to revisit economic forecasts on the back of such announcements. Reports of a disagreement between China and the UK over the Anglo-US trade understanding are something to monitor. One of the key characteristics of the current trade tensions is that they've tended to be unilateral.
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