UBS On-Air: Paul Donovan Daily Audio 'More hawkish, less depth'
The current geopolitical tensions between the US and Iran are driving oil prices back above $90 per barrel, impacting inflation dynamics. Per the full note from Paul Donovan at UBS, while these missile exchanges signal heightened risks, the market reaction remains muted due to a lack of concrete developments on the ground. The recent speech by Fed Chair Walsh highlights concerns over inflation, where he identified troubling price increases, yet his analysis lacks depth regarding tariffs, potentially limiting the Fed's narrative toward an easier monetary policy path. Without imminent high-impact events, watch for how US consumer perceptions may further dictate price stability in the lead-up to upcoming economic releases.
What the desk is arguing
The desk believes that heightened geopolitical risks from US-Iran hostilities will maintain oil prices above $90 per barrel, contributing to ongoing inflationary pressures domestically. Per the full note, while gas prices stabilize near $4.10 per gallon, consumers' perceptions of fairness regarding these prices could shift overall market sentiment.
Fed Chair Walsh’s hawkish rhetoric, coupled with limited discussion on tariffs' impacts on consumer prices, indicates a cautious path for monetary policy. This suggests that the Fed may shy away from aggressive tightening, especially as the market awaits stronger signals of fundamental price stability.
Where it sits in our coverage
As of now, our consensus target for USD/EUR stands at 1.075, with a range between 1.04 and 1.12. Aligned firms such as jpmorgan are targeting 1.10 for the March 2026 roll, while bofa holds a contrary position, with a target of 1.04 in the same tenor.
The desk’s view positions itself at the upper end of this range, suggesting a bullish stance rooted in inflation expectations and geopolitical risks.
How other firms see it
Firms aligned with this view, such as jpmorgan, share similar inflationary concerns, while others like bofa take a more conservative stance, anticipating stronger dollar support against the euro. Monitoring USD/EUR will be critical, as it mirrors broader central bank attitudes and inflation metrics influencing both currencies.
What the calendar says
Currently, there are no high-impact events on the calendar that could significantly alter the current dynamics or expectations in this market.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Geopolitical tensions are pushing oil prices back over $90 per barrel, impacting inflation narratives.
- 02Fed Chair Walsh expresses hawkish views, yet lacks depth on tariff impacts on inflation dynamics.
- 03US consumer sentiment regarding gasoline prices could influence market perceptions and central bank responses.
- 04Current consensus targets suggest a cautious yet bullish outlook for USD/EUR.
Market implications
Watch for potential shifts in consumer sentiment regarding gasoline prices, as this could impact inflation expectations and the Fed's policy approach. Additionally, monitor USD/EUR for volatility tied to continuing geopolitical developments.
Risks to this view
A significant escalation in US-Iran tensions could lead to a sharper market reaction, invalidating current assumptions regarding oil price stability. Furthermore, any unexpected shifts in employment or inflation metrics could prompt a reevaluation of the Fed's policy stance.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Monday the 31st of August. The US and Iran have been trading missile exchanges in the Gulf once again, pushing oil back above $90 per barrel for crude.
US President Trump posted a social media video titled, Karg Island being blown to smithereens. The video was artificially intelligence generated and there is no evidence of Karg Island being hit, so markets are not reacting to that. Hitting Karg Island would obviously be a major escalation.
The return of military action, however limited in scope, is likely to keep retail oil prices around current levels. This is not an especially inflationary position, US gasoline prices have been hovering just below $4.10 per US gallon since mid-July. The situation does, however, mean an absence of disinflation pressures.
Moreover, US consumers, who remember just above $3 oil last year and well below today's levels during the second half of the Biden presidency, are still likely to characterise today's gasoline price as unfair. At the Jackson Hole summer camp for central bankers, US Federal Reserve Chair Walsh gave a hawkish speech. There was a lot of comment about inflation and the need to get inflation lower.
In terms of intellectual thinking, by the standards of some of Walsh's predecessors, this was very definitely Fed chair-lite. Walsh identified, for instance, the percentage of prices that are currently rising by more than 3%, which seemed to be a cause for concern. Walsh did not discuss, however, the extent to which tariffs might have brought this about, a discussion that would be really rather useful.
Any product subject to a 10% tariff was likely to have around a 4% consumer price increase as the tariffs were passed through. A cynic might suggest that Walsh's focus on this measure is a set-up for an easy win. The proportion of prices rising more than 3% is very likely to decline as tariff effects fade.
Walsh's comments are a warning of higher rates if inflation persists, but as inflation is expected to moderate in the coming months, the stance is also consistent with unchanged rates at the forthcoming September Federal Reserve meeting, absent, of course, unpleasant surprises. German August flash consumer price inflation data is due out today. These numbers are, of course, unaffected by things like tariffs, but they are subject to higher energy costs.
The expectation is for the headline rate to rise to 3.1% on the year. French and Spanish inflation data were broadly as expected at the end of last week. Some figures were slightly above consensus and some slightly below, and that should essentially be considered a neutral outcome.
Japan's retail sales data for July was somewhat stronger than had been expected. It's a value-based measure, so inflation is included in this. But overall, it does show that Japan is experiencing similar consumer resilience to that of other advanced economies.
The yen has been slowly moving back towards what the market perceives to be its fair value, with a temporary breach of $1.60 against the dollar overnight. U.S. Treasury Secretary Besant seems to be a little unhappy about that.
The U.S. intervention to prop up the yen, or prop up the U.S. Treasury market, depending on one's perspective, was only going to be temporary in the absence of a change to the fundamental drivers of the currency's value. Besant has said the Bank of Japan should do the right thing on policy.
That's all for today. Have a good day. UBS Financial Services Inc. is a subsidiary of UBS AG and a member of FINRA SIPC.
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