UBS On-Air: Paul Donovan Daily Audio 'Old price data still interests'
The desk interprets the upcoming US import price inflation data as a critical indicator of underlying pricing pressures affected by tariffs and exporter discounting strategies. Per the full note source, even though the data pertains to September, economists will still scrutinize it for signs of how tariffs could shift costs down the supply chain. Any observable disinflation or deviation from global pricing trends in import prices could suggest that exporters are absorbing tariff impacts, influencing currency dynamics as this may affect trade balances and overall economic sentiment.
What the desk is arguing
The desk posits that the US import price inflation data, while historical, remains pivotal in understanding current market dynamics. Specifically, it will shed light on whether exporters are responding to tariffs by adjusting their prices, an important factor since the legal liability for tariffs rests with importers. Insights into these pricing strategies are essential for managers and traders alike as they will frame future pricing and inflation expectations in the US.
Economic indicators show that if import prices for specific products are trending lower compared to previous norms, this could signal an increased willingness among exporters to discount prices. Such trends might imply that import price inflation is stabilizing, potentially leading to a heavier cost burden from tariffs throughout the supply chain. This aspect is crucial to watch, especially in sectors like consumer electronics where prices typically trend lower over time.
Where it sits in our coverage
Our consensus target for the USD/CAD is set at 1.075, with a range between 1.04 and 1.12. Various firms see different trajectories: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This outlook suggests that the desk's view aligns closely with jpmorgan, placing it near the upper end of the projected range, indicative of a cautious but bullish stance on the dollar amidst potential inflationary pressures.
How other firms see it
jpmorgan and bofa represent contrasting views on the USD/CAD outlook where the former supports a stronger dollar implication. Firms like jpmorgan foresee upward momentum as tariff implications unfold, while bofa remains skeptical of such strength given historical patterns.
Import price trends are essential points to monitor, especially in context to forthcoming trade discussions that could shape further tariff policies. Observing movements in related currency pairs, like AUD/USD, may also provide insight into commodity exports and broader market sentiment.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US import price data is critical for understanding inflation dynamics.
- 02Exporters may respond to tariffs by discounting prices, affecting cost structures.
- 03Disinflation in import price inflation could signal tariff impacts.
- 04Insights might influence broader FX trading strategies.
Market implications
Traders should monitor the upcoming import price data closely, particularly looking for signs of disinflation that could solidify support for the USD. Any shifts that indicate enhanced pricing flexibility among exporters may suggest broader economic implications worth factoring into trading strategies.
Risks to this view
A sudden rebound in global commodity prices or unexpected increases in domestic prices may challenge the current readings. Should inflationary pressures emerge more strongly than anticipated, this could counter any observed disinflation trends and support a bearish case for the dollar.
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 3rd of December.
The United States provides us with September import price inflation data today. This is of course quite old news, but it is also something economists will be spending some time poring over. Exporters cannot, as such, pay tariffs.
Tariffs are a legal liability of the importer in any economy. However, tariffs may be offset by price discounting on the part of the exporter. Such discounts would show up in the import price data because this is the price before tariffs are paid.
So, the question is whether those discounts are evident in US import price prices, or whether import price inflation is holding steady, which would then shift the cost burden for tariffs further down the supply chain. It's not quite so straightforward as simply looking at the headline price reported. Other forces can create disinflation trends and, indeed, deflation trends.
Things like consumer electronics tend to fall in price over time, for instance. The two things to look at are whether import price inflation for specific products is lower than recent trends. That would indicate an additional willingness to disinflate on the part of the exporter.
And, somewhat more complicated, whether the trends in goods specific import prices in one country differ significantly from import price trends for the same products in other countries. If a price is falling globally, as happened some time for commodities, for instance, then a similar fall in US prices would signal that the tariff proportion of the price is not, in fact, being offset. There is also the release of US September industrial production data today.
This is less obviously a focus for markets as economic development over the decades has gradually reduced the importance of the manufacturing sector in the United States. However, manufacturing still inspires a great deal of nostalgia, much like agriculture did in the mid to late 19th century in Britain. And that gives political emphasis to numbers like those of today.
The US factory building boom of the past few years did start to roll over this year, and the increase in factory capacity that the earlier boom generated is still unlikely to make a great deal of difference to these numbers. Central bankers are crowding the agenda somewhat. Obviously, ECB President Lagarde is speaking, but as Lagarde has spoken almost twice a week for the past month, this is not likely to attract too much attention.
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