UBS On-Air: Paul Donovan Daily Audio 'Political interference'
The desk articulates that while today’s US trade data lacks economic significance, its political implications anchor market attention—per the full note source. The political backdrop has the potential to influence economic perceptions, leading to increased tariffs which may affect consumer prices and behaviors alike. As such, the trade deficit, which continues to widen post-pandemic, reflects a trend that could invite further political scrutiny and repercussions. Current consensus on trade suggests a delicate balancing act as markets await clearer signals from evolving economic and political landscapes.
What the desk is arguing
The desk frames the current US trade data release as politically charged, affecting its perceived economic importance. While the actual economic impact may be muted, the anticipation of further trade tariffs creates a context that could sway consumer perceptions and behavior—a theme prominently highlighted by UBS Chief Economist Paul Donovan.
Recent trends indicate that the US trade deficit is likely to be larger than pre-pandemic levels, fueled in part by resilience in oil exports. However, the lingering demand for imports reflects ongoing consumer habits that may further embolden political narratives pushing for tighter trade restrictions.
Where it sits in our coverage
Our consensus target for USD/CAD is 1.075, situated within the range of 1.04 to 1.12. Key firms in this analysis include: - JPMorgan: Target of 1.10 (Mar26) - BofA: Target of 1.04 (Mar26)
This view aligns with JPMorgan but diverges from the more bearish outlook of BofA, indicating a moderately bullish stance while acknowledging the wider risk environment characterized by political developments.
How other firms see it
Firms like JPMorgan and Wells Fargo display an aligned approach to the potential expansion of the trade deficit impacting the USD strength. Conversely, BofA maintains a more cautious perspective on how domestic consumer behavior might be affected.
The evolving dynamics of the USD/CAD pair are likely to be shaped by ongoing political developments and inflation expectations as indicated by the New York Fed’s survey, emphasizing the need for traders to remain vigilant concerning both consumer behavior and geopolitical factors.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Political narratives are increasingly dictating the significance of economic data releases.
- 02The widening US trade deficit serves as a catalyst for potential tariff considerations.
- 03Consumer import patterns are indicative of a broader economic shift influenced by political decisions.
- 04Inflation expectations, though politically influential, currently show little impact on consumer behavior.
Market implications
Traders should watch the USD/CAD pair closely, particularly around the 1.07 level, as any significant shifts in political rhetoric or trade policy could trigger volatility. Market participants are also advised to focus on the repercussions of the New York Fed's Inflation Expectations Survey as they pertain to consumer sentiment and broader economic implications.
Risks to this view
A shift in political climate or a substantial improvement in trade negotiations could undermine the desk’s current stance. Should economic indicators begin to portray a narrowing trade deficit or a significant change in consumer spending dynamics, this could prompt a reevaluation of market positioning and outlook.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 5.30 in the morning London time on Tuesday the 7th of July. As in other spheres of life, politics can occasionally interfere to try and shape economics.
Today's US data is not necessarily terribly important in an economic sense. However, there are two releases which have political importance and that, to some extent, elevates their economic importance. The first of these is US import and export data for May.
US trade tariffs have created noise in this data in the recent past because companies and consumers skewed their purchase patterns to try and avoid paying tariffs. However, the trend is for a somewhat larger trade deficit than existed pre-pandemic. Oil sales will have helped the export numbers this time, but the US need for imported food, consumer goods and investment goods does, of course, continue.
This doesn't particularly matter, other than the persistence of the deficit might encourage more trade tariffs. Tariffs are not likely to produce changes in the trade balance as such, at least not by much, but the cost would fall on the consumer via higher prices. This then highlights the second politically sensitive data area, the New York Fed's Inflation Expectations Survey.
Asking 1,200 people what they think inflation will be in a year's time is not actually terribly relevant to anything. Consumers' perception of inflation today dictates consumers' expectations of inflation tomorrow, and consumers' perception of inflation today is determined by the price of high-frequency purchases like food and fuel, with an overlay of political bias and the whole thing exaggerated by media and social media sensationalisation. Economically, inflation expectations only matter if they alter economic behaviour, and at the moment, neither consumer spending patterns nor wage demands seem to be showing any kind of response.
Politically, these numbers matter because polls suggest even Republican Party supporters are now blaming US President Trump for inflation and the wider US affordability crisis. Inflation perceptions and expectations should be more modest as oil prices in particular decline, but any persistence of inflation perceptions may start to influence policy, potentially acting as a brake on tariff policy. Oil prices have barely twitched on news that a Qatari gas tanker was hit by what is being referred to as a projectile, while attempting to exit the Strait of Hormuz on the Omani side of the Strait.
A projectile in this case is not a rogue football, but either a drone or a missile. Most shipping is using the Iranian-designated route out of the Gulf. Markets have been largely indifferent because while in theory this causes disruption to peace talks between the US and Iran, the reality is that no one expected these talks to proceed in an orderly fashion.
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