UBS On-Air: Paul Donovan Daily Audio 'Managing expectations'
The desk interprets the latest commentary concerning U.S. gasoline tax implications amid ongoing geopolitical tensions, framing it as a reflection of the larger economic landscape influenced by President Trump's political maneuvers. Per the full note from UBS, managing consumer price expectations is crucial, especially given that gasoline prices significantly impact U.S. inflation metrics. With gasoline prices having risen by over $1.25 since the onset of the Gulf war, the suggested removal of the federal tax on gasoline may only yield a minimal reduction of about 19% per gallon. This scenario suggests potential optimism in U.S.-Iran relations could offset some inflationary pressures affecting the forex landscape.
What the desk is arguing
The desk believes that the political and economic ramifications of President Trump's gasoline tax proposal may influence broader consumer sentiment regarding inflation. This perception aligns with UBS's assessment that while the proposed reduction is modest, the political landscape could shift positively if U.S. attitudes towards negotiations with Iran improve.
Additionally, the desk will watch closely how the market reacts to these proposed changes and the resultant consumer price impact. The current inflation trajectory and sentiment towards energy prices will likely define market movements in the near term, particularly for the U.S. dollar.
Where it sits in our coverage
Our consensus target for USD/BRL is 1.075, with a range spanning from 1.04 to 1.12. Notably, firmId forecasts include: - JPMorgan: 1.10 by Mar 26 - BofA: 1.04 by Mar 26 Thus, the desk's perspective appears slightly more optimistic when compared to BofA’s lower target, suggesting we are positioned at the high end of the spectrum.
How other firms see it
There is a cluster of firms, primarily those anticipating higher targets, that align with this sentiment—specifically, firmId like JPMorgan. In contrast, those with a lower outlook, such as firmId BofA, reflect a more conservative view of the current geopolitical tensions impacting currency values.
As U.S. inflation metrics, particularly gasoline prices, consistently correlate with consumer sentiment and spending, we advise monitoring energy prices and broader inflation indicators closely, as they are critical determinants in this calculus.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The Gulf war's political cost is impacting U.S. consumer prices, particularly through gasoline prices.
- 02President Trump’s tax proposal may influence market optimism about U.S.-Iran negotiations.
- 03The current inflationary pressure, exacerbated by rising gasoline prices, remains a focal point for U.S. economic sentiment.
- 04Potential gains in consumer sentiment may lead to a stronger U.S. dollar in the short term.
Market implications
Traders should watch the USD/BRL cross closely, particularly as gasoline price trends may signal shifts in inflation data. The current levels around 1.075 could see volatility driven by any substantive news related to U.S.-Iran negotiations amid fluctuating consumer sentiment.
Risks to this view
Should Congress fail to pass any significant tax changes or if geopolitical tensions escalate further, the anticipated positive sentiment may wane, leading to a potential pullback in the U.S. dollar's strength.
Good morning. This is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 6.30 in the morning London time on Wednesday the 7th of October.
The political costs of the Gulf War are still being signalled. US President Trump was musing about removing the US federal tax on gasoline. Gasoline, unlike the diesel price, feeds directly into the US consumer price level.
The damage of higher oil prices has not really been felt economically in the US because consumers have used savings rates to pay for the higher prices. The political cost of a high frequency purchase like gasoline rising in price is very different. However, even assuming Congress could actually stay in session for long enough to pass the legislation, the move would amount to a reduction of less than 19 cents per US gallon.
That has to be considered against the more than $1.25 increase in gasoline prices in the States since the war began. Consumers are inclined to remember the $3 a US gallon price as being the fair price for gasoline and any price above that fair price level comes with a political cost. However, this political sensitivity to the gasoline price might again raise some investors' hopes for a move towards some kind of settlement with Iran.
It at least indicates that there is pressure that is being felt within Washington. Gasoline prices are disproportionately important to forming inflation expectations and the New York Federal Reserve releases its poll of consumers' one-year inflation expectations today. However, inflation expectations are utterly irrelevant economically unless people have either the willingness or the means to change their behaviour in response.
The lack of any significant slowdown in spending suggests little willingness and the lack of any evidence of inflationary pay claims suggests little means to do anything about higher inflation expectations. This fact should be remembered when reading through the minutes of the last US Central Bank meeting. We should of course be grateful that US Federal Reserve Chair Walsh has not stopped the publication of these minutes as part of a policy of not saying anything of any use.
The minutes might signal more nuance than the unanimity of the decision to raise rates implied and give a signal as to just how far rates are likely to go. There should not be any sign that policy makers expected the rate increase to do anything about inflation. It will have no inflation impact of course.
It would be interesting to see if there was any discussion about the financial stress that will be increasing as a result of the rate hike, reducing the capability of the US economy to deal with future shocks. Japan's labour force cash earnings were in line with expectations in August but earlier data was revised somewhat lower. Earnings are rising more than inflation but not in a way that suggests a significant cost pressure building in Japan at the moment.
Bank of Japan Governor Ueda was signalling a willingness to raise interest rates in remarks yesterday however. This in part reflects the fact that the Bank of Japan has needed to move from an accommodative to a neutral policy stance over the course of this year. We'll be getting German industrial production data for August today.
The factory orders numbers that were released yesterday were a little disappointing but the previous data was revised stronger as is so often the way with German economic data. French manufacturing figures were more in line with expectations yesterday but the data is of course subject to the distortions of the summer break. Overall the trend of European manufacturing reality has been OK, despite some summer softness in the initially reported figures.
That's all for today. Have a good day. This material has been prepared and published by the Global Wealth Management Business of UBS Switzerland AG, regulated by FINMA in Switzerland.
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