UBS On-Air: Paul Donovan Daily Audio 'Giving weight to risks'
The desk interprets President Trump's ultimatum to Iran as a significant geopolitical risk, leading to a firm stance in oil prices and potential repercussions for consumer inflation. Per the full note from UBS, the mention of a 10 to 15-day deadline coupled with the U.S. military presence in the Gulf has increased market sensitivity to these political developments. This, alongside a narrative of stabilizing U.S. consumer spending despite previous tariff impositions, lays the groundwork for a fragile economic outlook where oil prices can impact inflation perceptions. Our assessment is further shaped by the anticipated personal income and spending data from the U.S., which contribute to a broader understanding of inflation metrics and consumer behavior in the current climate.
What the desk is arguing
The desk views President Trump's recent comments regarding Iran as a catalyst for increased geopolitical tension, compelling traders to reassess oil prices and their implications on the broader economy. Per the full note from UBS, the U.S. military presence in the Gulf lends significant weight to these remarks, contributing to a slight rise in oil prices that could become noteworthy for U.S. consumers in the coming weeks.
Furthermore, the context of U.S. consumer behavior is critical here; lower gasoline prices have previously been a buffer for consumer spending amid tariffs, and the December personal income and spending data is likely to reflect this ongoing resilience. Details regarding personal consumption expenditures (PCE) are especially pertinent as the Fed leans towards this measure over its more traditional index[1].
Where it sits in our coverage
Our current consensus target for USD/CAD sits at 1.075, with a range from 1.04 to 1.12. Specific firms such as: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk's interpretation aligns with jpmorgan’s target but sits above bofa’s lower forecast, indicating a more cautious approach towards inflation dynamics and geopolitical risks.
How other firms see it
Firms like jpmorgan and others aligned with a bullish view on oil markets could be interpreting this geopolitical tension as a strengthening of their economic forecasts. In contrast, bofa appears more wary of potential downside risks.[2] This divergence may reflect differing views on central bank actions and oil's persistent volatility.
Watch for fluctuations in related pairs such as EUR/USD as the Fed continues to assess inflation data in the context of shifting consumer sentiment and potential geopolitical disruptions.[3]
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Trump's ultimatum to Iran heightens geopolitical risk, impacting oil prices.
- 02Oil price fluctuations could challenge consumer inflation perceptions in the U.S.
- 03Anticipation of personal income and spending data may reinforce current consumer resilience narratives.
- 04The Fed's focus on personal consumption expenditures will be crucial amid these developments.
Market implications
Watch for movements around the 1.075 level in USD/CAD as geopolitical tensions may prompt volatility. The impending U.S. personal income and spending data release could provide crucial insights into ongoing consumer behavior, influencing market sentiment significantly.
Risks to this view
The main risk to this outlook would be a swift de-escalation of tensions with Iran, negating the current geopolitical risk premium in oil prices. Additionally, a stark downturn in consumer spending data could force a reevaluation of forecasts and diminish inflationary pressures, impacting currency valuations.
Good morning, this is Paul Donovan, Chief Economist at GBS Global Wealth Management. It's 7 o'clock in the morning London time on Friday the 20th of February. US President Trump has said that Iran has 10 or 15 days to do a deal before unspecified negative consequences.
Markets have given more weight to these comments than to some of the other pronouncements of the US President of late. The obvious presence of US military forces in the Gulf region has added credibility to these remarks. This has been sufficient to push the oil price higher, not dramatically so, but in a way that might start to be noticed by US consumers, not now but in a few weeks' time.
Obviously the retail price of oil is not exactly the same thing as the crude price, sticking a barrel of crude oil into the tank of a family SUV is not a recommended course of action. But lower gasoline prices hitherto have been one of the few high frequency price declines and that is what matters in terms of inflation perception and the US affordability crisis. The US affordability crisis is more about perception than reality.
In reality, US middle-income households have been able to maintain their spending levels by using lower savings rates to pay for the tariffs. The December personal income and personal spending data from the States today should keep that narrative intact. After volatility associated with the imposition of tariffs in the first half of 2025, the US consumer has offered a relatively stable pace of consumption growth subsequently at an upside surprise to today's numbers may not be that surprising to economists.
The report is of course accompanied by the personal consumer expenditure deflator. By repute, the US Federal Reserve's favoured inflation measure and one that places less emphasis on the fictitious owner's equivalent rent number than does the consumer price data. The Fed minutes this week made it very clear that there is a spectrum of views around inflation amongst policy makers, but this is mainly about inflation in the future rather than inflation right now.
There is a general expectation of a tariff effect showing up in the December PCE deflator, keeping both the headline and core measures just below 3%. The Fed knows this and the policy debate is not about the effects of the tariffs of 2025, but whether they linger on with second round effects in 2026. Separately, Fed President Kashkari gave an unusually blunt criticism of one of Trump's economic advisers for a perceived attack on the Fed's policy independence.
The UK has had some strong economic data and hints that there may be positive revisions to figures in the future. The government fiscal surplus in January was larger than expected, the highest on record indeed beating the Office of Budget Responsibility forecast. Tax receipts come in during January, of course, and the side hustles and other forms of economic activity that are not captured by official data are often captured by the tax authorities.
Sources & References
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