UBS On-Air: Paul Donovan Daily Audio 'Sound and fury'
Per the full note source, UBS argues Trump's 50% tariff threat against Canada is largely performative, with markets discounting it due to a pattern of escalation that rarely fully materializes. The desk emphasizes that even if unimplemented, the uncertainty is already slowing US factory construction, which fell from 40-year highs in 2024. With no consensus data available for this cross, the call stands alone as a macro sentiment read. No high-impact events in the calendar provide a catalyst in the next 30 days.
What the desk is arguing
The UBS desk argues that President Trump's threat to impose a 50% tariff on Canadian imports, including those covered by the latest NAFTA iteration, is likely 'sound and fury' that markets are increasingly dismissing. Per the full note source, the muted reaction in the Canadian dollar and US inflation-linked bonds supports this view, as investors have grown accustomed to such threats not being fully implemented.
However, the desk warns that even without implementation, the uncertainty itself is damaging. They cite a rapid decline in US factory construction—in 2024, factory building hit levels not seen in over 40 years—and then an abrupt slowdown, which they attribute partly to policy volatility. The counterfactual that the desk implicitly rejects is that tariffs would be fully enacted and sustain higher consumer price inflation; instead, they see the primary risk as supply-chain uncertainty rather than direct price shocks.
Key takeaways
- 01Trump's 50% tariff threat on Canada is seen as largely performative by markets, with limited reaction in FX or inflation-linked bonds.
- 02Even if unimplemented, policy uncertainty is already slowing US factory construction, which fell sharply after a 40-year peak in 2024.
- 03Investors should discount the direct inflation impact but monitor supply-chain security risks.
- 04The desk remains skeptical of tariff-driven inflation, viewing it as a transient political tool.
Market implications
Watch for any further escalation in US-Canada trade rhetoric that could trigger a modest CAD selloff, but the desk sees limited follow-through. The key signal will be US factory construction data and inflation-linked bond pricing, which have remained largely immune.
Risks to this view
The call is invalidated if Trump actually implements the 50% tariff, which would surprise markets given the pattern of non-enforcement. In that scenario, USD/CAD could spike and US inflation expectations would rise, forcing a repricing of Fed rate expectations.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 1.30 in the morning, London time, on Tuesday the 21st of July. US President Trump has proposed a 50% tariff on US importers of product from Canada, including goods covered by the latest iteration of the NAFTA deal.
If this were to be implemented, it would certainly add to US consumer price inflation, even if there were to be exemptions for selected products, the proposed tax would hit US companies' costs and would likely be swiftly passed to consumers. However, markets are muted in their reaction. The Canadian dollar is a little weaker, but hardly collapsing, and there has been little reaction in US inflation-linked bonds.
As with the threat to solve Canadian wildfires by tariffing US consumers, investors are increasingly inclined to discount, if not dismiss outright, this sort of threat from Trump. Should any attention be paid to this sound and fury? Possibly.
Even if not implemented, there has to be some degree of uncertainty around supply chain security arising from this. For instance, there has been a rapid decline in the pace of factory building in the United States in the past 18 months. In 2024, factory construction was at levels not seen in over 40 years.
With policy uncertainty increasing, there has been a relatively abrupt slowdown in the building of manufacturing structures. Some of this may be investment cannibalisation by artificial intelligence, but the timing is certainly indicative of collateral damage from the more volatile policy positions of the current US administration. Policy is always a trade-off, of course, and presumably the US government has concluded that the consequences of policy uncertainty are outweighed by tax revenues from tariffs or other factors.
Whether investors agree with that conclusion is a different matter. The United Kingdom has a new Prime Minister and a new Chancellor of the Exchequer. The appointment of former Defence Secretary Healey as Chancellor was not expected, but it doesn't necessarily raise concerns for financial markets.
As Defence Secretary, Healey did exhibit signs of economic nationalism, suggesting defence spending should not necessarily be spent on the best products but instead on British products. However, economic nationalism is hardly unusual or indeed unique to the United Kingdom. Healey has experience in the Treasury, having previously worked for former Chancellor and former Prime Minister Brown, and is likely to be regarded as fiscally responsible for markets in the absence of evidence to the contrary.
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