UBS On-Air: Paul Donovan Daily Audio 'How to survive an affordability crisis'
The UBS commentary highlights potential shifts in crude oil dynamics as Iran and Oman near an agreement on a shipping route through the Strait of Hormuz, which may inform market expectations around oil prices. Per the full note, this development could alter perceptions of inflation, particularly as elevated gasoline prices linger in the U.S., exacerbating the affordability crisis. The desk posits that these dynamics could influence broader market sentiment, especially for currencies sensitive to oil price fluctuations. Currently, gasoline prices remain above four dollars per gallon, impacting consumers' inflation experiences, which could maintain pressure on the Federal Reserve's policy outlook.
What the desk is arguing
The recent agreement between Iran and Oman regarding a shipping route signifies a potential reconsideration by Iran to reopen the Strait of Hormuz. This could lead to changes in oil supply dynamics, but immediate effects may be limited, as emphasized by UBS's Chief Economist Paul Donovan. As noted, factors such as gasoline prices have kept inflation perceptions elevated in the U.S., which directly influences consumer affordability and spending trajectories.
Despite the observed reduction in crude oil prices, the rise in gasoline costs indicates a persistent inflation dilemma within the U.S. economy. The commentary suggests that the perception of inflation might remain high, as gasoline prices are expected to exert outsized influence on consumer confidence and spending. This interrelationship between oil prices and consumer sentiment could create ripples across various asset classes.
Where it sits in our coverage
Our analysis currently projects a consensus target of 1.075 for USD/JPY with a range of 1.04 to 1.12, where firmId JPMorgan aligns its March 2026 target at 1.10, while firmId BofA takes a contrary stance with a target at 1.04. This positions our desk's outlook within the upper middle of the forecast spread, indicating relative confidence in a stable or increasing USD on the back of persistent inflationary pressures stemming from energy costs.
How other firms see it
Several aligned firms, including firmId JPMorgan, reflect a bullish sentiment regarding the USD, largely influenced by the inflation narratives tied to energy prices. On the other hand, firmId BofA expresses a more bearish outlook, countering the prevailing narrative about inflation sustaining.
In this context, the ongoing dynamics in crude oil prices, particularly regarding USD/CAD and the broader impact of energy prices on central bank policy, are noteworthy as they provide critical insight into potential market movements.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Iran and Oman may open a new shipping route, signaling potential changes in crude oil dynamics.
- 02Persistent gasoline prices above four dollars per gallon are contributing to consumer inflation perceptions in the U.S.
- 03This inflation backdrop could influence monetary policy and market sentiment broadly.
- 04The commentary underscores the complexity of GDP growth versus actual household economic experiences.
Market implications
Watch for further developments on the shipping agreement as it could lead to fresh movements in crude oil prices. A sustained increase in gasoline prices could prompt shifts in consumer behavior, affecting the USD's strength against other currencies, particularly in oil-sensitive pairs like USD/CAD.
Risks to this view
If geopolitical tensions escalate or if a significant shutdown of oil supplies occurs, it would likely reverse the current market dynamics and could lead to a spike in oil prices, heavily impacting inflation measures and dollar strength. Any abrupt changes in U.S. Federal Reserve policy in response to new inflation data could also alter the current outlook.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Wednesday the 26th of August. Crude oil prices have declined again on reports that Iran and Oman have agreed a route for shipping through the Strait of Hormuz.
This would not of itself signal a reopening of the Strait, but it does signal that Iran is willing to consider reopening the Strait. Investors are already assuming that future Iranian control will incur some kind of additional cost, but that cost will not be so significant as to create an economic issue. It's worth noting that this summer's decline in crude oil prices has not been matched by refined oil prices.
The retail price of gasoline in the States remains elevated at comfortably over four dollars per US gallon, the same level as in the early weeks of the war. That will continue to affect consumers' inflation experience, and perhaps more important, their perceptions of inflation. It is the perception of inflation that contributes to the affordability crisis in the United States.
We had some further insights today with a bit of a data dump coming out of the US. There is GDP data for the second quarter, which is revised. This is mainly about political bragging rights.
The headline numbers are not likely to change that much from the initial data, but the headline numbers don't tell us much about the economy that most US households are actually experiencing. This is because the growth has become more focused, income inequality being a key factor here. GDP does not reflect the change in living standards for the overwhelming majority of US households.
The personal consumer expenditure data and the deflator are the most important indicators, and July numbers will be released here. The US inflation story is likely to remain quite elevated on the headline numbers because of gasoline prices. The expectation has been that this number will come down quite quickly in the second half of the year, but the recent spate of tariffs raises questions around that.
The US is apparently considering putting more pressure on domestic prices with yet another round of tariffs on consumers of Canadian product, in retaliation for the Canadian response to earlier US tariffs. Consumer spending should still be supported by a willingness to use savings to offset stagnant or falling real incomes. This has been a common theme across developed economies.
While the compulsion to consume may well be stronger in the US than in Europe, the resources to do so are not. Last year's tariffs in the States were met by cutting savings rates, which the rest of the world didn't have to do. That means that US consumers' ability to rely on savings adjustment is now more constrained than elsewhere, though it should still hold out for the remainder of this year.
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