UBS On-Air: Paul Donovan Daily Audio 'Extending the “ceasefire”'
Per the full note source, Paul Donovan argues that the ceasefire extension between the US and Iran is cautiously received by oil markets, with Trump needing days to approve and Iranian officials signaling insufficient concessions. This suggests limited near-term relief for oil prices, keeping upward pressure on inflation-sensitive currencies. Japan's May Tokyo CPI slowed, partly from base effects and gasoline subsidies, while retail sales proved resilient due to government cost-shifting. The desk frames the oil supply risk as a persistent factor for FX markets, with no near-term resolution expected.
What the desk is arguing
The desk frames the Iran ceasefire extension as a fragile development that offers little immediate relief to oil markets. Trump's pending approval, coupled with Iran's skeptical tone, limits the potential for a rapid normalization of supply.
Supporting evidence comes from Japan's May data: Tokyo headline CPI slowed, core CPI eased, but retail sales held up. The desk attributes this resilience to government subsidies shifting oil costs from consumers to the state, masking the true demand impact. The counterfactual rejected is that a quick agreement could cap oil prices—the desk sees insufficient Iranian concessions and structural damage as barriers.
Key takeaways
- 01Iran ceasefire extension is tentative, with key approvals still pending and Iran signaling inadequate US concessions.
- 02Oil market rally is capped by supply uncertainty, sustaining inflation risks for import-dependent economies.
- 03Japan's May data show subsidized inflation relief but resilient retail sales, suggesting artificial demand support.
- 04EUR/USD remains sensitive to oil price swings given the Eurozone's net energy import position.
Market implications
Watch EUR/USD for spillover from oil price moves—a sustained break below $70/bbl could push EUR/USD above 1.10, while an unexpected deal might weigh on the dollar. Japan's data reinforce the BOJ's dilemma: CPI slows but retail sales buoyancy may delay policy normalization.
Risks to this view
A rapid US-Iran agreement, possibly within days if Trump approves, would drop oil prices sharply and reverse the cautious market tone. Conversely, a breakdown in talks could spike oil, hitting JPY and EUR due to higher import costs.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Friday the 29th of May. The oil markets have seen some further decline in the futures prices on US administration officials suggesting that some kind of agreement is very close with Iran, subject to key approvals.
US President Trump apparently needs to think, which will take a couple of days. However, in spite of the inherent optimism bias of markets throughout this war, there is still a limit to the current enthusiasm. The Iranian side has not sounded so positive on the outcomes and suggested that the US might not have conceded quite enough yet.
Investors have learned that reports on Axios are not always entirely reliable summaries of what is actually happening. Moreover, markets, especially the oil and gas markets, need to consider the post-war environment, the speed of any normalisation of future production, the extent of current war damage, and what a newly empowered Iran means for the wider Gulf region. Japan released a few key economic data points overnight.
The Tokyo inflation rate for May actually slowed, both on the headline and on the core readings. There are some base effects which have flattered the numbers. Rice, for instance, was expensive last year and that's helped to lower this year with prices in comparison.
Gasoline subsidies are also containing inflation generally, though this does not encourage the sort of demand-shifting behaviour that would ultimately be necessary. A number of government-influenced prices have also fallen. April retail sales were more resilient, though if the cost of higher oil is being shifted from the consumer's balance sheet to the government's balance sheet, that resilience is not perhaps quite so surprising.
Germany is giving its May inflation data preliminary numbers, but uncharacteristically for Germany, these data are almost never revised. The data is expected to be essentially unchanged. The first-round effects of higher oil prices should already be included in these figures because the costs have been passed down supply chains pretty quickly.
There are no second-round inflation effects in evidence as yet. Why, then, are German policy makers baying for a rate increase? Why indeed?
The US Federal Reserve President Williams said yesterday that monetary policy was well-positioned at the moment. Williams is a respectable economist with a reputation at the Fed that makes these remarks significant as a guide to what sensible policy makers are thinking. The remarks were uttered against a backdrop of negative revisions to US GDP growth in the first quarter, although even with revisions this data remains very unreliable at this stage.
Nonetheless, the downward revisions are disappointing, as there was supposed to be a post-government shutdown bounce-back in the first quarter of this year, and that bounce-back was not as bouncy as had been expected. The pattern of consumers using savings to cover higher oil prices and higher tariffs was very obvious. This is a reminder that before the war, the assumption was that Fed policy was too restrictive and should be modestly eased over the course of the year.
Getting back to that position is going to take time, but if the war's impact is allowed to gradually fade from the US economy, that is the baseline position to consider. That's all for today. Have a good day.
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