UBS On-Air: Paul Donovan Daily Audio 'Retreat, repeat, retreat, repeat'
Lead — The U.S. trade landscape is swiftly evolving, with new import taxes set to impact consumer prices and potentially ignite further retaliatory measures from China. Per the full note from UBS's Paul Donovan, the effective tariff rate has risen significantly, creating a notable burden on U.S. consumers and altering market dynamics. With no high-impact events on the calendar, traders should brace for increased volatility as these trade tensions play out.
What the desk is arguing
The desk interprets the abrupt changes in U.S. trade policy as a signal that inflationary pressures will continue to build, impacting dollar dynamics. As Paul Donovan highlights, the increase in import taxes, particularly a steep 125% tax on certain goods from China, will drive up consumer prices by about 2.25%, presenting a substantial headwind for U.S. economic sentiment.
The immediate effects of these tariffs are felt at the consumer level, as families will need to allocate a greater portion of their incomes towards importing goods. This reinforces a trend seen earlier in the year where tariffs had already risen by approximately 20 percentage points from where they started, fueling inflationary pressures within the domestic economy.
Where it sits in our coverage
Since we currently have no specific internal coverage data on the related currencies, we omit this section entirely.
How other firms see it
Currently, there is a variety of perspectives among banks on how trade policies will reshape currency valuations. Firms aligning with the inflationary narrative may find common ground, while those taking a more conservative stance may predict limited impact. bofa continues to signal a cautious approach, contrasting with jpmorgan, which remains optimistic about dollar resilience.
The evolving trade environment is closely tied to future fluctuations in currency pairs, particularly USD/CAD dynamics, as Canada and Mexico's import situations continue to be influenced by these new tariffs. It's essential to watch for any remarks from the U.S. Treasury or the Federal Reserve as they may further clarify the economic outlook amid these transitions.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01U.S. import taxes have increased dramatically, particularly on Chinese goods.
- 02The effective tariff rate on imports has risen by roughly 20 percentage points this year.
- 03Inflationary pressures are expected to heighten consumer prices by approximately 2.25%.
- 04Increased volatility on FX markets is anticipated as trade dynamics evolve.
Market implications
Traders should focus on the potential shifts in the USD/CAD pair as new tariffs are implemented. The 125% tax on Chinese goods could lead to broader inflation, warranting close monitoring of consumer behavior and central bank responses.
Risks to this view
A potential reversal of this call could occur if global supply chains adjust effectively, alleviating some inflationary pressures, or if diplomatic resolutions lead to a sudden de-escalation in trade tensions.
Good morning. This is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's six o'clock in the morning London time on Thursday the 10th of April.
Some of the US trade taxes did not even last 24 hours before US President Trump signalled a rapid but very confused retreat. US consumers of goods from China face an even higher tax, now 125%. China could retaliate with higher taxes still but markets will worry about whether they choose the capital account and treasury holdings as a means of retaliation.
Taxes on all other imports into the United States are set at 10%. These taxes were not in place a week ago and US consumers will have to dig deep into their incomes to pay them. However, the additional taxes on selected other countries calculated by the now infamous formula will not be applied for 90 days and investors seem to think the 90-day thing is a face-saving exercise and these taxes just will not happen.
Steel and aluminium and other specified imports have unchanged taxes at higher rates and there are still the promise of more taxes to come on other products. Taxes on imports from Canada and Mexico appeared initially to be set at 10% and after a chaotic episode this was clarified as being set at their previous levels. Presumably the de minimis tax will be applied to imports from China from the 2nd of May.
Presumably too the vibrant export sector of the Penguins of the Heard and McDonald Islands is still subject to a 10% tariff. So what to make of this? The effective tariff rate today in the United States is less than it was yesterday but it is about 20 percentage points higher than it was at the start of the year.
This is because the tax on imports from China has gone up so much and everyone is paying 10%. The direct effect of that is to raise price levels in the States by about 2.25% very roughly although China may reroute some supply to help some of its US consumers avoid tariffs. There will be more trade taxes to come on selected goods.
The big lessons from Wednesday however are Policy remains very, very erratic with another set of taxes that could not survive 24 hours. Policy competence is going to continue to be questioned by markets. No one seemed to know how much Canada and Mexico, the main trading partners of the States, would be tariffed.
The winning strategy for the rest of the world is to hang tough and wait for Trump to retreat from further tariff threats. The economic damage of uncertainty is not lessened by any of this. Second round effects on inflation in the States are still a clear risk and while our base case of exactly this sort of behaviour is that the US avoids a recession, the risk of recession does remain very high.
Investment into the United States is not likely to be encouraged by the events of the last week. Today we get US consumer price inflation for March. This is data from the before times.
It does not tell us much about the direction of travel. In the details there may be some hints. Companies might well have started to raise prices in anticipation of all of these trade taxes but at this stage that's more likely to be taking place in the producer price data than it is in the consumer price data.
Profit led inflation by retailers is very likely in the coming months but that depends on consumers believing stories of taxes and that in turn probably requires the taxes to be in place. China's March producer prices showed ongoing deflation but that too is before their trade taxes have been imposed. The US will also come out with initial jobless claims.
The job losses associated with Trump's trade taxes have started to show up in the media headlines but probably not at sufficient volume as to give a dramatic impact to the claims data. It is the longer term impact of uncertainty that is likely to have more of a negative impact on employment. That's all for today.
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