UBS On-Air: Paul Donovan Daily Audio 'Markets start to fret'
The desk observes growing concerns in equity markets regarding US taxation strategies, sparked by President Trump's social media post indicating significant tax increases on imports from Canada, Mexico, and China. Per the full note source, this rhetoric prompts a reevaluation of consumer purchasing power, particularly as estimates suggest US consumers may need to find up to 25% more cash for imports from Canada and Mexico. Currently, the market appears to view the threats towards Canada and Mexico as less credible; however, concerns around China seem to resonate more due to a potential hike in tariffs up to 30%. With market participants already showing signs of preemptive buying, inflationary pressures could emerge, warranting close attention.
What the desk is arguing
The desk contends that increasing taxation fears, particularly regarding trade tariffs, could have substantial economic implications for US consumers. This view is underpinned by the thesis that if consumers anticipate larger costs for imports, they may alter their purchasing behavior, thereby generating inflationary pressures. Per the full note source, evident consumer behaviors have been observed where purchases spike in anticipation of upcoming tariffs.
Recent social media comments by President Trump have brought these issues to the forefront, making investors wary. Trump’s statement suggested that without a significant policy shift, US consumers could see a dramatic increase in their purchasing costs, aligning with broader concerns about trade balances. The desk frames this as an indication that markets may be underpricing the risks associated with the latest tariff rhetoric.
Where it sits in our coverage
Our consensus target for USD/CAD currently stands at 1.075, reflecting an assessment of imminent trade dynamics. Notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk's perspective aligns closely with the bullish sentiment expressed by jpmorgan, suggesting an outlook toward the higher end of the target spectrum. In contrast, bofa presents a more conservative view, indicating divergence among forecasters within this currency pair.
How other firms see it
Several institutions share the desk's view regarding the inflationary effects of tariffs, including jpmorgan, which underscores that changing trade policies will influence consumer behavior. Conversely, bofa remains skeptical and warns against potential overreactions to Trump's taxation hints.
Given these dynamics, closely monitor the USD/CAD movements and potential implications on tariff negotiations as these will be pivotal to short-term market behavior. Look to connect this with broader employment data potentially impacting the USD's strength.
What the calendar says
No significant events are scheduled in the next 30 days that would directly impact this narrative, but watch for upcoming announcements from trade representatives that may further clarify the trajectory of US taxation and trade policies.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Market concerns grow over potential tax increases influencing consumer purchasing power.
- 02President Trump's social media comments lead to potential shifts in inflation dynamics.
- 03Different interpretations exist among firms regarding the credibility of tariff threats.
- 04Purchasing behavior changes could signal rising inflation ahead.
Market implications
Traders should keep a close eye on the USD/CAD pair, targeting any movements towards 1.075 as tariffs come into sharper focus. Additionally, shifts in consumer behavior driven by anticipated tariffs will play a critical role as trading unfolds in the coming weeks.
Risks to this view
A significant pivot in trade policy or assurances from the US administration that mitigate tariff threats could reverse current market sentiment, leading to stronger consumer confidence and a rise in equities, which would pressure the USD.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Friday the 28th of February. Equity markets seem to be having a bit of a bad Friday in response to the latest fears about US taxation.
US President Trump posted on social media that US consumers would have to find 25% more cash if they wish to buy goods from Canada and Mexico, and 10% more if they wanted to buy goods from China. US consumers of Canadian energy only have to pay an additional 10% tax under these threats. That reduced energy rate does rather undermine the idea that this is all about trade balances.
Excluding energy, the US runs a trade surplus with Canada, so if the aim is purely to balance trade, Trump should simply tax imports of Canadian oil 200% and just declare success. Trump seems to be more coherent on social media than in person, so markets are taking this more seriously than the comments that were made in person on Wednesday. Nevertheless, investors still seem to assume that the threats against Canada and Mexico are not especially credible, as they would do immediate and very visible damage to US consumers' living standards.
The China threats are more credible, and fit with our view that the effective tariff rate against China will end up being about 30%. Trump inherited a tax on China's imports that was effectively just over 10%, and has suggested two additional 10% increases. The US President's repeated cries of wolf over tariffs do have an economic effect, even if the tariffs do not actually appear.
There's some evidence of consumers buying imported goods as early as December, in anticipation of more taxes in the future. There's also weak evidence that it was mainly Democrats who bought, not Republicans, because these groups have different perceptions of what tariffs might mean. It's also possible that companies raise prices in advance of tariffs, fueling higher inflation, because the narrative about trade taxes gives them pricing power.
There is also uncertainty that such tariffs cause. Companies invest in an uncertain future, and the greater the uncertainty about that future, the greater the uncertainty about investing. Germany released its retail sales data for January, which were weaker than had been expected in month-on-month terms.
But previous data was revised up a lot. This has become a very common trend. Using initial data releases only, the volume of German retail sales fell by over 21% over the past couple of years.
Using revised data, which will indeed be revised further in the future, the decline is less than 4%. German retail sales are consistently too pessimistic, and the problem is that those repeatedly wrong initial data releases create a false impression that German consumers are not doing anything, when in fact they're relatively OK. Ahead we have French consumer spending alongside preliminary GDP for the fourth quarter.
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