UBS On-Air: Paul Donovan Daily Audio 'Do tariff cuts cut prices?'
The desk interprets potential tariff reductions on Swiss imports into the US as a developing narrative likely to affect inflation dynamics, although the immediate impact on US consumer prices may be limited. Per the full note from UBS, the reduction of tariffs from 39% to 15% could send important signals regarding overall pricing behaviors in the economy. Notably, prior tariff cuts have not consistently translated to lower consumer prices, suggesting that inflation could remain sticky despite such reductions. This scenario plays into broader market narratives around inflation and US monetary policy expectations.
What the desk is arguing
The desk posits that the proposed lowering of tariffs on Swiss products could serve as a precursor for discussions about inflation in the US, albeit with limited immediate benefits for consumer price indices. Per the full note from UBS, tariff cuts have historically not resulted in proportionate consumer price reductions, raising questions about the overall effectiveness of such measures to mitigate inflation in practice.
Data from previous instances show that tariff reductions have tended not to pass through fully to consumers, which could lead to persistent inflation pressures—especially if the Supreme Court were to strike down existing tariffs as illegal, potentially prompting further adjustments by importers and impacting final sale prices for consumers.
Where it sits in our coverage
Given our current consensus target for USD/CHF at 1.075, which aligns closely with estimates from other firms, we see a modest consensus forming around the impact of Swiss tariffs. Notable insights show that jpmorgan has a target of 1.10 for March 2026 while bofa sets a lower target of 1.04 for the same tenor: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This desk's narrative aligns closely with these targets but suggests a rising risk that the consensus on inflation might become less coordinated if tariff effects differ from expectations.
How other firms see it
Firms such as jpmorgan reflect a similar view that lower tariffs could lead to some shifts in inflation expectations, while bofa appears more cautious, suggesting limited effect on consumer price dynamics. This divergence reflects broader uncertainty in how US inflation trends will respond to trade policy changes.
Keep an eye on pairs like USD/CHF and EUR/USD, as their trajectories may be influenced by shifts in US inflation sentiment and trade policy dynamics emanating from these tariff discussions.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Lowering tariffs on Swiss imports is unlikely to have a significant immediate impact on US consumer inflation.
- 02Historical data show that tariff reductions do not always lead to proportionate price cuts for consumers, indicating potential inflation stickiness.
- 03Market reaction to tariff cuts could signal broader trends in inflation and monetary policy expectations.
- 04The direction of the USD/CHF remains closely tied to evolving perceptions of US inflation dynamics influenced by trade policy.
Market implications
Traders should closely monitor the USD/CHF pair as developments unfold regarding tariff adjustments, particularly if there are signals from consumer price indices. Additionally, watch for shifts in inflation expectations to influence positioning in related currency pairs like EUR/USD.
Risks to this view
If the Supreme Court were to rule that previous tariffs are unlawful, it could lead to unanticipated adjustments in pricing dynamics, forcing a reevaluation of inflation expectations and potentially creating a scenario for significant price drops on consumer goods. This could destabilize the current market outlook regarding consumer prices.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's three o'clock in the morning London time on Tuesday the 11th of November. There are media reports that US importers of products from Switzerland may be able to pay a lower tariff than is currently being charged.
The 39% rate imposed in August would be lowered to 15% according to these reports. The impact of this on US inflation is of course likely to be minimal as Swiss exports to the United States have a relatively modest place in the US consumer basket. Nonetheless, this could play an important role as a signal.
There has been limited evidence to date of what happens to US consumer prices when tariffs paid by US importers are lowered. But where tariffs have been passed through in the form of price increases to consumers, those price increases have tended to be sticky. In other words, if a retailer has got away with passing on a price increase, they do not retreat from that just because tariffs have reversed.
If this is the case with product from Switzerland, it would reinforce the idea of price stickiness. The importance of this lies in the fact that if the Supreme Court declares around 75% of the US administration's tariffs to be illegal, then the likely replacement tariff regime will introduce lower tariffs for a number of products. That may not lead to lower consumer price inflation.
The likely replacement tariff regime will introduce higher tariffs for other products and that may lead to higher consumer price inflation. The British Retail Consortium's retail sales data showed modest growth in October. The numbers are nominal and they might perhaps hint at some slowdown in food price inflation.
Retail sales data does not include most of what might be categorised as spending on having fun. And so these numbers will probably understate the position of the consumer overall. But there's nothing in these numbers for retailers to complain about and it certainly suggests that past government fiscal action has little visible negative effect on the UK consumer.
Ahead, there is the rather limited range of UK labour market data. This should show that real incomes continue to rise for UK employees, which is one of the things that provides a solid foundation for UK consumer spending. Germany offers the ZDW Business Sentiment Poll, which has tended to give a sort of stability over the course of this year.
However, as with any sentiment survey, the media narrative may have more influence than actual economic reality. From the United States, there's the National Federation of Independent Business survey of small business sentiment. The politically polarised environment of the United States is such that any survey evidence has to be treated with considerable caution.
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