UBS On-Air: Paul Donovan Daily Audio 'National security vanities'
The desk sees recent announcements from the U.S. administration regarding new trade tariffs as a potential strain on consumption but anticipates minimal market disruption. Per the full note from UBS, the tariffs encompass foreign goods categorized as 'vanity units,' soft furnishings, heavy trucks, and pharmaceuticals, with furniture tariffs specifically invoked on national security grounds. Notably, higher prices already stemming from previous tariffs may have limited immediate impact on discretionary spending, given that these purchases occur with lower frequency. The anticipation of impending tariffs has seemingly influenced earlier consumer behavior, as suggested by changes in purchasing patterns among U.S. buyers this year, especially from Democratic households.
What the desk is arguing
The desk interprets the new trade tariffs announced by President Trump as a strategic maneuver whose effects may not be as severe as predicted. According to the UBS report, although tariffs on household items and other goods may apply, these purchases are typically low-frequency, thus reducing price sensitivity and consumer reaction speed.
Moreover, the earlier implementation of tariffs has already prompted significant price increases, leading consumers to adjust their purchasing behaviors in anticipation of further cost hikes. This insight hints that sectors like furniture, where prices have already seen upticks, might exhibit resilience despite new tariffs.
Where it sits in our coverage
Our consensus target for USD/CAD is 1.075, with a range anticipating fluctuations between 1.04 to 1.12. Notably, jpmorgan has aligned with this view, setting a target of 1.10 for March 2026, while bofa presents a contrary stance with a lower target of 1.04 for the same tenor.
The desk’s outlook aligns closely with the consensus mid-range target of 1.075, suggesting a cautiously optimistic approach may soon prevail among traders, who may reflect this sentiment in their market positions.
How other firms see it
Firms such as jpmorgan and others holding similar views maintain an optimistic outlook on the currency pair, likely anticipating limited negative fallout from new tariffs. In contrast, firms like bofa caution against overestimating the tariffs' potential impacts, suggesting more significant price ramifications could be in play.
Additionally, the USD/CAD trajectory is worth watching, as it may reflect broader U.S. economic sentiment influenced by these tariff decisions, impacting the domestic consumption narrative.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01New tariffs on foreign goods reflect a strategic approach to domestic manufacturing but may have muted impacts due to consumer adjustment.
- 02Furniture tariffs tied to national security highlight ongoing trends in U.S. trade policy; higher prior costs reduce sensitivity.
- 03Consumer behavior shows signs of preemptive adjustments, hinting at a resilient market response despite globalization friction.
- 04Cross-firm consensus suggests a stable range for USD/CAD amidst current geopolitical shifts.
Market implications
Traders should watch price action around the USD/CAD level of 1.075 as a key resistance point, indicating market sentiment toward the economic impacts of these tariffs. The potential for further announcements or consumer data releases could provide additional volatility.
Risks to this view
The call could be invalidated should subsequent economic data reveal sharper impacts from the tariffs than anticipated, or if consumer sentiment shifts notably due to unanticipated inflation spikes, leading to decreased spending.
Good morning. This is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Friday the 26th of September.
In overnight social media posts, US President Trump has imposed tariffs on US buyers of a range of foreign-made products. Vanities have been declared a national security issue, along with soft furnishings, other furniture and heavy trucks. The long-awaited tariff on imported pharmaceuticals has also been announced at 100%.
There are different consequences from these moves. The national security crisis around furniture comes on top of existing tariffs. Furniture inventories were built up dramatically in March of this year and they have been underperforming trends since then, indicating that those furniture inventory stockpiles have been drawn down.
It's little surprise that furniture price inflation has risen. Furniture import prices before tariffs have increased all year. Consumer price inflation for furniture turned from a negative rate to positive.
It's also noticeable that domestically made furniture has been increasing in price this year at the producer price level. However, furniture tends to be a durable good and so consumers are less aware of price changes. Consumption patterns also shifted this year.
Democrats and Republicans have exhibited different relationships with decorating. Earlier this year, there tended to be abnormally high demand in Democrat-leaning states, indicating perhaps a front-running of consumption and consequently greater indifference to furniture tariffs being imposed now. But this was not the case in Republican-leaning states.
Pharmaceutical products are a different issue. The 100% tariff applies to branded products, not to generic products, and exemptions are promised to those who build factories in the United States. It will rather depend on how much that exemption is spin or substance.
Many pharmaceutical companies have factories in the United States and a gesture of undertaking construction or repurposing existing plans could perhaps relatively easily be made. Exempting generic drugs means that many US consumers will not be affected, but the manufacturers of branded drugs do tend to have pricing power because of the nature of the product. Demand will tend to be less sensitive to the price.
Yesterday's US GDP data did revise consumption numbers higher and today we get the August personal consumer expenditure data. The consumption revisions do signal that US households, or at least some US households, have the resources to maintain consumption, even as prices rise and real incomes slow. This has been the story all year.
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