UBS On-Air: Paul Donovan Daily Audio 'More uncertainty in an uncertain world'
The desk emphasizes heightened uncertainty surrounding the US economy, driven by ongoing trade tax appeals and their unknown impacts on inflation and consumer spending. Per the full note source, President Trump's appeal against the ruling on illegal trade taxes has created three layers of uncertainty, complicating the economic outlook. Notably, upcoming inflation data from the US may further clarify how consumers and firms respond to changing fiscal policies. This context underscores the importance of tracking related economic indicators, particularly as we approach the release of crucial consumption data.
What the desk is arguing
The desk highlights a tripartite uncertainty regarding US trade taxes and their implications on inflation, consumption, and firms' behavior. As outlined by Paul Donovan of UBS, the ongoing appeals related to trade taxes leave essential questions unanswered, notably whether these tariffs will ultimately remain enforceable or if companies will face repercussions from potentially illegal taxes.
Current inflation metrics, including today's announcements of personal consumption expenditures (PCE), will be pivotal for gauging economic sentiment. The interplay of front-loaded purchases in Democrat-leaning states and the potential payback in consumer spending could distort April's consumption data, making it vital for traders to closely monitor today's results.
Where it sits in our coverage
Currently, the consensus target for the notably affected EUR/USD pair is 1.075, with foreseen limits ranging from 1.04 to 1.12. Specific firm targets include: - jpmorgan: 1.10, Mar26 - bofa: 1.04, Mar26
This position is notably aligned with jpmorgan, suggesting a view on the stronger euro in contrast to bofa's more conservative outlook. Given this dispersion, the desk's current thesis leans slightly towards the upper end of the target range.
How other firms see it
Firms such as jpmorgan and others appear aligned with a more positive outlook concerning the EUR/USD pair, likely preferring a stronger euro amidst ongoing fiscal uncertainties. Conversely, bofa takes a more cautious stance, expecting weaker euro dynamics.
Traders should also watch the interplay between upcoming data releases and central bank communications, particularly the impact of US CPI on market comprehension of trade tax complexities and overall economic stability.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US tariff uncertainty creates multiple layers of economic unpredictability.
- 02Inflation data and consumption trends are critical for understanding the broader impact of fiscal policies.
- 03Recent consumer behavior suggests a potential payback, complicating future spending forecasts.
- 04Market expectations for EUR/USD reflect a spectrum of bullish to cautious perspectives among firms.
Market implications
Traders should focus on today's PCE and consumption data for immediate market reactions. A sustained deviation from expected inflation metrics could shift sentiment surrounding USD dynamics, particularly against the euro.
Risks to this view
Reversal of this outlook may occur if the trade tax appeal leads to a favorable ruling for US businesses, reducing tariffs significantly and altering consumption forecasts positively. Additionally, unexpected shifts in inflation data could alter trading strategies significantly.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management at 7 o'clock in the morning London time on Friday the 30th of May. There is yet more uncertainty over the US economy, if that were possible. US President Trump appealed against the ruling that half their trade taxes are illegal.
The appeal has allowed the existing tariffs to remain in force. There are now three levels of uncertainty. In the first place, will these taxes ultimately survive?
Second, if they are illegal, will US companies and US consumers get their money back if they've paid their taxes? And third, which seems to be overlooked a little, are these taxes actually being collected? In the chaos of the current trade tax policy, and with random losses in government employment, that's not necessarily certain.
Added to which is the general uncertainty of how US firms react, especially with their pricing, to all of this uncertainty. We do get some inflation data from the US today in the form of the personal consumer expenditure deflator, and of course we'll also get consumer spending numbers. This is all for the month of April, and so comes well before any direct trade tax impact is going to be felt.
The consumption data is perhaps of some interest, as there has been evidence of Democrat-leaning states front-loading more expensive purchases earlier this year in anticipation of the tariffs. The thing about front-loading consumption is that there is a payback of weaker consumer spending later on, and that could well be showing in the April numbers. We also have the timing of Easter to contend with with the consumer data, however.
In addition, we've also got final Michigan consumer sentiment polls for May coming out today. This is not useful data in and of itself, but looking at how partisan and unreliable data has evolved over the course of the month is possibly helpful. Comparing the final with the preliminary data gives a limited sense about how US consumers have responded to Trump's trade tax retreats.
Europe has some more May inflation data. Italy and Germany are both expected to give evidence of disinflation this time. This reinforces the idea that Europe has few obvious obstacles to further interest rate cuts.
Indeed, not to cut headline interest rates in Europe would effectively be a tightening of policy, as the real cost of borrowing would be rising. Outside of the United States, advanced economies are generally in a disinflation mode. German retail sales were in theory weaker than expected, but the massive positive revisions to previous month's data, as is so often the case with German numbers, left us with a stronger overall level of German consumer activity.
Japan came out with a range of data releases, none of it terribly surprising. The labour market was stable and as expected. Tokyo inflation was also basically in line with the market consensus, remaining at a relatively high level, however.
The only slight surprise was a somewhat stronger industrial production data set for the month of April. That's all for today. Have a good day.
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