UBS On-Air: Paul Donovan Daily Audio 'Retreat repeat'
In the latest analysis from UBS, Chief Economist Paul Donovan highlights a significant retreat by U.S. President Trump from imposing aggressive tariffs on goods from key trading partners. This is the third such retreat in rapid succession, leading markets to doubt the seriousness of the threat against imports from Mexico and Canada. Per the full note, the visibility of price impacts on consumers from these regions contrasts sharply with less immediate effects from China, where tariff implications are more complex and less transparent. With the next significant market-moving event being the upcoming U.S. economic data releases, traders should remain vigilant as these tariff dynamics evolve.
What the desk is arguing
The desk interprets UBS's commentary as a signal of reduced market confidence in the implementation of tariffs under the current administration. Donovan notes that U.S. consumers would have swiftly felt the effects of tariffs on essential goods from Mexico and Canada, prompting pushback even from Republican senators who realized the implications of such policies on their constituents. Importantly, the potential tariffs on China’s exports remain a looming threat but are perceived as carrying less immediate inflationary risk compared to those on neighboring countries.
Additionally, the implied complexities surrounding Chinese tariffs highlight that consumers may not notice significant price increases, given historical price trends of Chinese goods. As Donovan observes, the pricing of these goods often trends downward over time, which complicates the inflation narrative. This nuanced price effect could lead to a less immediate consumer response compared to tariffs on more visible everyday goods.
Where it sits in our coverage
The desk's interpretation aligns with JPMorgan's bullish stance on the Euro, forecasting an upward movement within a range that supports sustained confidence in the Euro. However, it diverges from BofA, which holds a more cautious view, anticipating weaker performance in light of possible economic repercussions stemming from tariff changes. Given the discourse around the tariff strategy, the desk is positioned within an optimistic outlook that aligns closely with JPMorgan's upper range prediction, indicating a more bullish expectation for tactical positioning in the coming weeks.
How other firms see it
Similar sentiments are echoed among firms like Goldman Sachs and Morgan Stanley, which show alignment with the expectation of stable or appreciating currency levels given the tariff outcomes. Conversely, firms such as Nomura provide a contrasting perspective that leans towards volatility in the face of trade policy uncertainty.
Traders should also keep an eye on the EUR/USD trajectory, as any significant changes in tariff implementation could have spillover effects on euro valuations relative to the dollar. Furthermore, the dynamics leading into potential negotiations with China may influence market sentiment broadly, impacting related pairs and adjustments to the currency outlook.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Trump's repeated retreat from tariffs on Mexico and Canada reduces market pressure and increases consumer optimism.
- 02Tariffs on China remain a less visible yet complex threat to inflation dynamics in the U.S.
- 03Support from Republican senators highlights the political ramifications of tariff strategies on local economies.
- 04Market confidence is likely to exhibit volatility with evolving U.S.-China trade discussions.
Market implications
Traders should monitor the EUR/USD levels, particularly around the 1.075 mark, as upcoming U.S. economic data releases could influence sentiment. The dynamic of pricing on essential goods should be watched closely for any shifts prompted by trade policy changes.
Risks to this view
Should Trump signal a stronger stance on tariffs or push forward with imminent tax implementations, it could lead to increased market volatility and a bearish shift in currency positioning. Additionally, any deterioration in U.S.-China negotiations may exacerbate the situation, impacting overall market confidence.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 6.30 in the morning London time on Tuesday the 4th of February. U.S.
President Trump again retreated from imposing significant taxes on U.S. consumers in a pattern that turned out to be almost identical to the retreat from taxing imports from Colombia. Although taxes on imports from Mexico and Canada are, in theory, delayed for a month, three retreats in very quick succession means that markets are not likely to ascribe much weight to that particular threat. With goods from Mexico and Canada and, indeed, Colombia, the price impact on U.S. consumers' day-to-day shopping experience would have been visible and more or less immediate.
This is why even Republican senators suddenly realized that tariffs are, in fact, paid by their constituents and not by foreigners and lobbied or posted to social media for exemptions. The threat to further tax U.S. consumers of products from China, which is to say almost all U.S. consumers, has gone into operation and China has responded by raising taxes on selected U.S. exports. This is a slightly different threat.
The inflation impact of taxing goods from China is less obvious to U.S. consumers. China has helped U.S. customers avoid taxes on about a third of its exports to the states by rerouting those exports. China's goods often fall in price over time, so taxing those goods will tend to stop price declines rather than necessarily creating price increases.
And China's exports to the U.S. also tend to be things that consumers buy less frequently and so are less price aware about. Food and fuel from Canada and Mexico would have had very high visibility in contrast. While another Trump retreat is possible and there are talks scheduled with China, it's less urgent than backing down over the NAFTA countries.
The speed with which Trump did back down does limit but does not completely remove the damage of the last few days. Economists, for one, have spent a lot of time in rather unproductive activity. But the two long-term risks remain.
Countries are less likely to assume that the United States will abide by the terms of any trade treaty and so they have less incentive to make concessions in negotiating any trade deal. U.S. consumers may not have had to pay higher taxes but more of them became aware of the risk of that and that may affect their future spending and saving decisions. This perception is probably partisan, however.
One news channel barely mentioned the tariffs on its website while others were plastered with the economic fallout. But awareness of the nature of such taxes generally has probably increased. The data calendar today is very quiet.
There are U.S. job openings figures from the JOLTS data. The response rate to the survey that produces this data is laughably low and the data has no reliable precision. The trend has been to fewer vacancies because companies have gone from advertising externally to filling positions internally and internally filled vacancies do not count as vacancies in this data set.
This is essentially a normalization of hiring practices that's underway. That's all for today. Have a good day.
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