UBS On-Air: Paul Donovan Daily Audio 'State controlled prices'
The desk is particularly focused on the interplay between US fiscal policy concerning trade and domestic inflationary pressure. As per the full note from UBS, historical parallels with Nixon’s wage and price controls indicate that attempts to manage prices through government intervention can lead to severe market distortions and inflation spikes, particularly when businesses are constrained in their ability to adjust prices amid rising costs. The implications of recent trade discussions and tariffs introduced by President Trump further complicate the U.S. inflation landscape, likely preventing any anticipated decline in inflation rates despite underlying economic signals suggesting otherwise. The upcoming PCE deflator data, highlighted by UBS as crucial for assessing inflation dynamics, is therefore critical in understanding market sentiment around consumption and pricing power.
What the desk is arguing
The desk believes that the current U.S. trade and fiscal policies are setting the stage for continued inflationary pressures rather than a cooling, as might be suggested by standard economic forecasts. Per the full note from UBS, historical experiences, like those of 1971 under Nixon, warn that price controls and trade restrictions can lead to supply shocks and exacerbated inflation when businesses cannot adequately respond to rising costs.
Supporting this view, the expected release of consumer spending figures alongside the PCE deflator will be critical in revealing the true state of inflationary expectations and management by companies. The PCE deflator is the Federal Reserve's preferred inflation measure and captures both the level of prices for consumption expenditures and influences on consumer sentiment, making it essential for trader positioning in the forex market.
Where it sits in our coverage
Our internal consensus target for USD/EUR is 1.075, with a range from 1.04 to 1.12, reflecting an ongoing divergence in views among banks. Key contributions to this consensus are: - JPMorgan: 1.10 by Mar26 - BofA: 1.04 by Mar26
The desk’s interpretation of upcoming inflation data closely aligns with JPMorgan's perspective of upward pressure on prices, given the lower bound of the range but diverges sharply from BofA's bearish view.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Historical price controls have often led to inflated prices and reduced supply.
- 02Recent trade policies may prevent the expected decline in U.S. inflation.
- 03The PCE deflator is crucial for gauging consumer sentiment and inflation dynamics.
- 04Market positioning is heavily influenced by both consumer spending data and inflation measures.
Market implications
Traders should monitor the PCE deflator figures closely, especially if they reinforce inflationary trends, as this may lead to adjustments in their positioning on the USD relative to the EUR. A notable level to watch is 1.075, aligning with our consensus target for currency trends influenced by domestic fiscal policies.
Risks to this view
The primary risk to this thesis is a significant decline in inflationary pressures that could come from unexpected supply increases or resolute consumer sentiment shifts leading to decreased pricing power among businesses. Should PCE data indicate an unexpectedly strong control over consumers' inflation expectations, it could negate our current outlook.
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 28th of March. In 1971, US President Nixon simultaneously launched a universal tax on all imports into the United States and wage and price controls in the domestic economy.
Prices were to be determined by the state. The policies were obviously contradictory and in the end were more than a little problematic. Businesses facing higher costs but unable to raise prices simply stopped supplying goods.
And when farmers stopped supplying food the controls collapsed and inflation soared. Reports in the media overnight suggest that US President Trump has told US auto companies that they should not raise prices in the wake of Trump's aggressive taxation of auto and auto part imports. Prices are in focus in the United States today with the release of the personal consumer expenditure deflator alongside consumer spending figures.
Final March Michigan consumer sentiment data also includes consumer inflation expectations. What to make of all this? The PCE deflator is a focus for the Federal Reserve and the details are going to be worth looking at now and in the coming months.
The real damage of the Trump trade taxes is likely to be felt in second round effects. US companies hiding behind tariffs to raise prices or retailers indulging in another round of profit-led inflation are the real risks. Some of those second round effects may come in anticipation of trade taxes as well.
Hence the importance of looking at the details of the PCE deflator especially around goods prices. Economics alone suggested that US inflation would slow further this year. What Trump's trade taxes are most likely to do is to prevent that decline in inflation rates.
Consumer sentiment polls are not reliable indicators. Consumers are also absolutely no good at forecasting inflation or even knowing what inflation is in real time. However even the most unreliable of data can sometimes be useful.
Political partisanship makes the Michigan figures meaningless nowadays but one of the early warning signs for problems arising from US government policy would be a shift in Republicans views both for overall sentiment and for inflation expectations. If Republican sentiment weakens or inflation expectations rise that would suggest that economic reality is penetrating the partisan media bubble. That would be an economic red flag.
It could also work on the Democrats too. Improving Democrat sentiment or falling Democrat inflation expectations would be a signal of less damage but the bias is towards the downside at the moment and so it seems unlikely that Democrat pessimism is going to turn about anytime soon. The United Kingdom published stronger economic data.
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