UBS On-Air: Paul Donovan Daily Audio 'Public and private unpredictability'
Per the full note source, UBS frames the Gulf war outcome as driven by 'publicly unpredictable' US policy and 'privately unpredictable' Iranian decision-making, making market pricing nearly impossible. The rapid retreat from guiding ships through Hormuz, despite prior administration support, highlights this volatility. With US gasoline above $4.50/gallon and South Korea capping oil prices via fiscal policy, physical shortages remain a tail risk absent transparency on Iranian concessions.
What the desk is arguing
The desk argues that the Gulf war conflict presents an 'almost impossible challenge' for markets because US policy is publicly unpredictable—yesterday's rapid reversal on guiding ships through Hormuz underscores this—while Iranian decision-making is privately unpredictable, lacking transparency.
Supporting this, US gasoline prices exceeding $4.50 per gallon publicly pressure the administration, yet without knowing Iran's position, the duration of the Hormuz blockade and its economic impact remain unknowable. The source uses a Wiley-Coyote cliff analogy: markets know a fall is coming but cannot time it.
Implicitly, the desk rejects any deterministic timeline for the conflict's resolution, arguing that only publicly available data (like US fiscal policy responses) offers a foothold, as seen in South Korea's April CPI data where fiscal caps muted oil price pass-through.
Key takeaways
- 01US policy in the Gulf is publicly unpredictable, making market timing impossible.
- 02Iranian decision-making is privately unpredictable, blocking concession estimates.
- 03US gasoline >$4.50/gallon pressures the administration to act.
- 04South Korea's fiscal oil cap shows policy response, but does not resolve uncertainty.
Market implications
Watch for any increased transparency from Iranian sources or surprise US policy shifts; the immediate catalyst is the evolution of gasoline prices and any signs of physical oil shortages.
Risks to this view
A sudden Iranian concession or public negotiation could collapse war risk premia rapidly. Alternatively, a sharp US gasoline price spike forcing a policy flip would also invalidate the current wait-and-see 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 Wednesday the 6th of May.
Financial markets face an almost impossible challenge in trying to price outcomes in the Gulf War. US policy has been unpredictable, but publicly unpredictable. Thus yesterday's decision to execute a rapid retreat from guiding ships through the Strait of Hormuz was not necessarily predictable, especially as it had been lauded by administration officials only hours before it ended.
The decision taken has been public, however, and with gasoline prices over $4.50 per US gallon, the pressures on the US administration are also fairly public. On the other hand, the decisions of the Iranian government are privately unpredictable. The lack of transparency on that side of the conflict challenges any attempt to time outcomes in the war.
Without knowing the Iranian position, it is impossible to know how many concessions the US will need to make in order to strike a deal and extricate US forces from the region. Without knowing that, it's very difficult to know if the war, or more specifically the blockade of Hormuz, will last until the point when physical shortages start to really impact the global economy. The inability to resolve public and private unpredictability means that markets know that we have run off the edge of the cliff in the Wiley-Coyote scenario, but it's almost impossible to know whether economic gravity is going to take hold and plunge the global economy into the abyss below.
South Korean consumer price inflation was released for April and came in as expected. Ignoring food and energy, there was no change in the rate, and with food and energy, the increase in inflation was very modest. This reflects the government's policy of taking the economic pain of higher oil prices onto fiscal policy with a price cap, rather than passing on the full price effect to the end consumer.
The problem with this approach is that it gives less incentive to consumers to cut back on consumption. The pricing mechanism is the most basic economic mechanism for matching supply and demand in a market, and supply is now constrained. Interfering to prevent the pricing mechanism from working to lower demand has potentially negative consequences.
Sweden's inflation hit a near 30-year low on the core measure, reflecting a lack of underlying inflation pressures there. The data calendar ahead is cluttered with business sentiment opinion polls taking up space required for other purposes. The value of these polls has to be considered even more limited than normal given the fog of unpredictability.
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