UBS On-Air: Paul Donovan Daily Audio 'Randomness and the real world'
The desk observes that financial markets are presently banking on a retreat by U.S. President Trump from escalating trade tax threats, a position consistent with past behavior. According to Paul Donovan at UBS, this perception is rooted in the conviction that the erratic nature of Trump's policies offers limits to their implementation, thereby generating a disconnect between financial and real-world investors. Crucially, the forthcoming U.S. consumer price inflation data is anticipated to reflect only the early impacts of these tariffs, suggesting that traders should be cautious as further economic effects materialize source.
What the desk is arguing
The desk frames the current market sentiment as overly complacent regarding U.S. trade policy. As per Donovan's analysis, while financial investors can easily adjust their positions, real-world investments are subject to significantly greater risks and costs associated with unexpected shifts in policy.
Supporting this view is the expectation that the June inflation figures will begin to hint at the pass-through effects of tariffs on consumer prices, although the most substantial impacts of earlier tariffs may take several months to finalize. The desk notes that the delayed effect of tariffs, combined with the complexities of supply chains, emphasizes the need for a cautious trading strategy.
Where it sits in our coverage
Our internal consensus projects a target for the EUR/USD at 1.075, with a range between 1.04 and 1.12. Specific firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This analysis aligns with jpmorgan's stance that the euro may strengthen in response to forthcoming economic updates, while contrasting with bofa's more pessimistic outlook, reflecting a divergence in expectations around U.S. trade policy impacts.
How other firms see it
Most firms echo the desk's caution regarding U.S. trade policy, suggesting a potential alignment in how these evolving dynamics could play out in the currency market. Specifically, jpmorgan and deutschebank emphasize a potentially weaker dollar outlook in their analyses.
On the other hand, bofa offers a more bearish perspective, underlining concerns over heightened tariffs and their possible impact on the USD. Traders should closely monitor the USD/JPY trajectory in conjunction with ongoing changes in trade sentiment to gauge broader market implications.
What the calendar says
With consumer price index data slated for release later this week, traders should be prepared for potential volatility in response to our anticipated insights into inflationary pressures resulting from tariff implementations.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Markets are currently betting on a retreat from U.S. trade tax threats, reflective of past behaviors by the Trump administration.
- 02The June consumer price inflation data will begin to show the early impacts of tariffs, underscoring the challenges real-world investors face.
- 03The differing impacts of tariffs on supply chains suggest a prolonged period of adjustment before full effects are realized.
- 04Current concerns around U.S. trade policy may induce volatility ahead of critical economic indicators.
Market implications
Traders should closely watch the upcoming U.S. CPI release for potential signs of the pass-through effect of tariffs. A key level to monitor would be the 1.075 target for the EUR/USD as sentiment develops over U.S. trade actions.
Risks to this view
A strong, unexpected policy reversal by the Trump administration could invalidate the current market positioning, leading to a rapid re-evaluation of both inflation metrics and foreign currency valuations.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Monday the 14th of July. Financial markets are likely to continue to assume that US President Trump will retreat from the latest trade tax threats.
Retreat has, after all, been Trump's default position. The seeming randomness of trade taxes also raises questions about their legal justification and so those investors who still believe in the rule of law in the United States have a further reason to ignore the headlines. However, there is an important distinction between financial and real world investors.
Financial investors can bet on a Trump retreat in liquid financial markets, knowing that they can reverse their position at the press of a button. A real world investor may also believe in Trump retreats, but placing a bet on that with regard to building a new factory or hiring workers is a lot more difficult to reverse and thus more costly. The issue now is less the headline numbers that seem to be thrown around for media effect and more what the erratic nature of policy is doing to the real economy.
The direct effect of trade taxes will come later this week with the release of June US consumer price inflation. It is worth noting that the June inflation data will only start to show the effects of trade taxes and that in the details. The full effect of the April trade tax increases will take a few more months to show up.
This is because goods arriving as late as May might not have been subject to tariff if they were already en route to the United States in April and because different goods have different lengths of supply chain. On average, it takes about three months for products to move from dockside to consumer basket, but that is an average with a very wide range around it. The details should start to give evidence of pass through of the tariffs to the consumer.
It's clear that exporters to the United States are not adjusting their prices and US companies and consumers will bear the tax burden. The fact that tariffs are a worryingly dominant narrative means that companies have every reason to pass on all of the cost to their customers as their customers should understand why the prices are going up. And the only reason not to pass on trade taxes is the risk that customers are forced to scale back overall consumption as higher prices weaken spending power.
This year's trade data showed another decline in exports to the United States in June with a 16.1% year on year fall. However, exports to the rest of the world continue to grow strongly. There is perhaps a suspicion that some of these exports to other countries may still find their way to the United States.
Certainly the US administration seems concerned about this with lots of focus on goods in transit in the tariff policies. Whether the United States has enough officials left to monitor such complex trade manoeuvres is another matter entirely. It does mean that there needs to be care in interpreting bilateral China data for trade.
It would be wrong to assume that, for instance, China was dumping goods into Europe with a disinflation impulse if, in fact, those goods are simply passing through Europe just long enough to acquire a European accent before being exported to the United States at a lower tax rate. The G20 finance ministers and central bank governors will be meeting later this week. The pre-meeting of the deputies starts today.
It would be foolish in the extreme to expect anything to come out of this other than a bill for the various nation's taxpayers, of course. The G20's main purpose seems to be make the BRICS gathering seem slightly more credible in comparison. That's all for today.
Have a good day. This material has been prepared and published by the Global Wealth Management Business of UBS Switzerland AG, regulated by FINMA in Switzerland. It's subsidiaries or affiliates, collectively referred to as UBS.
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