Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Friday the 27th of March. The economic and market outlook from any economist today could be summed up with a sigh of resignation.
US President Trump's deadline for reopening the Strait of Hormuz was today. That has now been pushed forward until the 6th of April, in theory. This decision follows a sharp increase in the oil price and a sharp decline in US equity markets and it follows a pattern established by Trump's deadlines for trade deals.
However, the consequences of this situation are somewhat different to the consequences of trade disputes. Trade tariffs matter less than people tend to think because as long as goods get through there are ways for US consumers to absorb the price increases, last year by cutting back on saving, for instance. The physical disruption of a loss of 20% of global oil supply is a real economic effect and the price effect is just a symptom of the problem.
There is also the problem of scepticism. Markets are desperate to believe in good news. No one wants to have to trade assets in a world where uncertainty is spiralling ever higher.
That removes the veneer of professional objective analysis from the markets and turns them into a casino with the added risk that the games might be rigged. However, Trump's retreat may reflect a desire for more troops to be sent to the region, risking a further escalation in the future. While Iran and the United States both do seem to be talking to mediators, investors are not giving much credence to the idea of direct interaction.
The Iranian government seems to have increased its domestic control and become more radical since the war began, making compromise more difficult. The result is that while the rise in Brent crude prices seems to have been slowed by Trump's deadline retreat, investors do not seem to be prepared to reverse the price increases entirely. It may be that Trump's statements have less and less impact in the financial markets in the absence of some kind of Iranian confirmation.
UK February retail sales were notably stronger than had been expected and the January figures, which were dramatically stronger than had been expected initially, were revised even higher. Online retail and art sales have helped to boost the numbers. The UK consumers' defiance of what models have been predicting might have something to do with the possibility that economic reality is somewhat better than initially reported.
Tax data for the start of this year certainly suggests that there has been a significant growth in income through self-employment and side hustles. Of course, the UK is about to be hit with war costs like everybody else, but this data does reinforce the idea that the consumer has been offering a fairly solid foundation for growth. From the United States, there's the final Michigan consumer sentiment data.
This will get attention because it includes inflation expectation numbers, but these numbers are economically irrelevant. The initial data for March reported the three-month average of Republicans' expectations for inflation to be 0.8% in the next year. Even if war and tariff effects are stripped out, no credible economist is going to suggest US inflation data would be that low, and that suggests that the reported expectation may reflect some motive other than objective economic analysis.
Democrats' expectations at 4.5% — again, a three-month average, so only partially incorporating war effects — is just above the OECD's wartime projection. Not that OECD projections are necessarily more reliable. That's all for today.
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