UBS On-Air: Paul Donovan Daily Audio 'Is affordability the focus?'
The USD's direction may be increasingly influenced by U.S. administration policies that prioritize consumer affordability, as noted in UBS's recent commentary. The delays in tariffs on furniture, coupled with cut tariffs on Italian pasta, signal a broader move to manage consumer price perceptions, especially as furniture prices shifted from deflation to inflation. This shift in policy aims to cushion consumer wallets amidst rising costs, which could impact domestic spending and broader economic growth. Per the full note source, while furniture exerts significant price changes, pasta serves as a symbolic staple that reflects overall consumer sentiment about affordability.
What the desk is arguing
The current focus on consumer affordability in U.S. policy highlights a strategic shift that may impact the FX landscape. According to UBS, the recent decisions on tariffs, such as delaying those on furniture while reducing those on pasta, indicate a drive to alleviate consumer pressures. Given that furniture prices have faced inflationary pressures, the decision to delay tariffs reflects a calculated approach to maintain consumer confidence and spending.
Furthermore, UBS notes that while furniture constitutes a more significant cost, consumers react less sensitively to its price fluctuations compared to more visible items like pasta. This aligns with broader economic theories suggesting that consumers' perception of affordability, rather than precise price metrics, can influence spending behavior and ultimate economic outcomes.
Where it sits in our coverage
Our current consensus target for the USD position against the EUR is set at 1.075, with a range between 1.04 and 1.12 as articulated by the broader market. Notably, jpmorgan is aligned with this view, forecasting a 1.10 target for March 2026, while bofa takes a contrary position with a target of 1.04.
This perspective aligns closely with our cross-firm consensus, presenting a view that sits squarely in the middle of the defined range, reflecting balanced sentiment amidst various macroeconomic indicators. This integrated target implies limited immediate volatility but suggests an angle of cautious optimism regarding the U.S. dollar's stability as consumer implications unfold.
How other firms see it
A number of firms appear to share the sentiment expressed by UBS, mainly focusing on the implications of affordability on U.S. consumer behavior. For instance, jpmorgan and citi emphasize the potential for pro-consumer policies to influence spending positively. Conversely, firms like bofa adopt a more cautious stance, reflecting concerns over inflation persisting beyond temporary measures.
Investigating related movements, dollar pairs like EUR/USD will be particularly sensitive to shifts in U.S. economic data, especially consumer sentiment indicators like the Consumer Price Index (CPI), which reflects broader trends in affordability behaviors.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01U.S. policy is increasingly focused on consumer affordability as a response to rising costs.
- 02Recent tariff decisions highlight the administration's intent to alleviate consumer financial pressures.
- 03The impact on broader economic measures could feed back into the FX market dynamics.
- 04Inflationary pressures in key consumer sectors like furniture remain a primary concern.
Market implications
Traders should be vigilant for developments surrounding U.S. consumer sentiment, especially as the broader economic narrative unfolds. Key pricing levels around 1.075 for USD/EUR might serve as a psychological barrier amidst evolving consumer data and tariff discussions.
Risks to this view
A rapid turnaround in inflation trends or unexpected economic data that contradicts the current consumer affordability narrative could invalidate this bullish outlook on the dollar. Additionally, any sharp increase in tariffs or adverse trade policies could heighten market volatility.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Monday the 5th of January. A key political economic theme, at least for the start of this year, seems likely to be the question of affordability.
Over the past couple of weeks, the US administration has retreated significantly on issues like tariffs on the imports of Italian pasta and tariffs on the imports of furniture. The suggested aggressive tariffs on pasta would almost certainly have caused a jump in consumer prices. And while pasta is not a huge part of the consumer basket, it is a visible part and could therefore potentially contribute to the consumer narrative of affordability.
Furniture prices are generally less visible to consumers, and there was also some evidence of front-running furniture purchases in anticipation of the 2024 tariffs, at least in Democrat-leaning areas of the country. Nonetheless, prices fell at a consumer level in the last two years of the Biden administration, and they're now rising quite a lot more than is usual. So again, the narrative around furniture tariffs seems to have become important.
The point with this is that if the perception of affordability is likely to dictate future administration policy, investors need to become a little less focused on the actual data of consumer price inflation and more about what is actually agitating the electorate. One consideration, if questions of affordability start to influence tariff policy, is what the fiscal consequences of that might be. Reducing tariffs is a fiscal stimulus, and delaying tariffs is a delayed fiscal tightening in the states, which has some marginal growth implications, of course.
It's also important in its implications for the size of the US fiscal deficit. This may also be a consideration from the recent US action in Venezuela. While it is not clear what, if anything, is meant by statements that the US will run Venezuela, military adventures cost money.
That might be the most significant consequence of the weekend's activities. Social media warriors may get excited about other geopolitical threats, but these are likely to be less of a focus in financial markets. The oil market is the main way that Venezuela interacts with the global economy, but again the impact here is likely to be muted, at least in a macroeconomic sense, over any forecastable time horizon.
The data calendar gets off to a fairly quiet start overall. There is a consumer credit data series from the UK for November, which includes mortgage lending figures. The UK consumer has not been inclined to leverage their balance sheet too much of late, and has indeed had a tendency to increase savings modestly over the course of the past year, as real incomes have generally tended to improve.
However, the state of the housing market is something that attracts a certain amount of interest, so the mortgage lending numbers might be something that attracts investor attention. The United States is only offering some business sentiment opinion poll data for December. According to this poll, US manufacturing has been in a continuous state of decline since the first quarter of this year.
In fact, US manufacturing output has increased notably since the first quarter of this year. That's all for today. Have a good day.
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