UBS On-Air: Paul Donovan Daily Audio 'Tariffs may not “solve” everything'
The current commentary underscores the mixed signals in Japan's trade data, suggesting potential vulnerabilities for the US economy regarding stockpiling behaviors ahead of new tariffs. Per the full note source, while Japan's exports exceeded expectations, the decline in exports to the US raises questions about any preemptive stockpiling of goods ahead of potential tariffs. This situation could lead to more immediate impacts on US consumer prices if import taxes are enacted without prior stockpiling. Our coverage reflects a consensus that anticipates fluctuations tied to trade tensions, particularly with USD/JPY dynamics poised for active monitoring as trade developments unfold.
What the desk is arguing
The desk argues that Japan's weak import figures juxtaposed with strong exports may indicate shifting dynamics in international trade, particularly regarding US tariffs. Per the full note source, the decrease in US-bound exports raises concerns about the immediate consequences of impending tariffs if stockpiling has not occurred.
This perspective aligns with other macroeconomic indicators pointing towards a cautious consumer sentiment in the US and the potential for inflationary pressures if goods are not stocked ahead of new tariffs. Donovan emphasizes that such stockpiling might mitigate the adverse effects of tariffs, implying a delicate balance in trade negotiations.
Where it sits in our coverage
Our consensus target for USD/JPY is 1.075, within a range of 1.04 to 1.12. Notable forecasts from various firms include: - jpmorgan: Target at 1.10 for Mar26 - bofa: Target at 1.04 for Mar26
This view aligns closely with jpmorgan, as the desk's call sits near the upper bound of the spread, highlighting differing perspectives on the dollar's strength against the yen amid evolving trade narratives.
How other firms see it
Firms such as jpmorgan appear aligned with this perspective, suggesting cautious optimism around USD/JPY movements. In contrast, bofa holds a more pessimistic view, projecting lower targets through potential weak trade outcomes.
As developments in US-China negotiations impact broader market sentiments, watch USD/JPY closely for reactions to trade signals and macroeconomic data. Central bank communications could further influence these valuations, especially around upcoming policy assessments.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Japan's trade data shows weaker imports and stronger exports than expected.
- 02A decline in US-bound exports raises concerns about the impact of potential tariffs on US consumers.
- 03Cautious monitoring of USD/JPY is warranted as trade dynamics evolve.
- 04Market implications include heightened sensitivity to inflationary pressures due to trade taxes.
Market implications
Traders should closely watch the 1.075 level in USD/JPY, as it represents key support. Any shifts in trade policies or new tariffs could serve as immediate catalysts, particularly with consumer price index (CPI) data reflecting the impacts of tariffs on imported goods.
Risks to this view
The primary risk to this outlook stems from unanticipated shifts in trade negotiations that could lead to broader stockpiling than predicted, thereby blunting the immediate impact of tariffs. Additionally, any significant improvement in US economic data could undermine the bearish case for USD/JPY.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Thursday the 23rd of January. Japan's December trade data showed weaker imports and stronger exports than had been anticipated.
Exports to the United States actually fell, which raises questions about the degree of stockpiling ahead of potential trade taxes in the United States. More stockpiling in the States now would reduce the disruption that US import taxes would generate and might allow short-term trade tariffs to pass without too much impact on the US economy. If stockpiling has not been happening, then the effects of trade taxes are likely to be felt more immediately by US consumers.
The United Kingdom has survey evidence from the corporate sector with the CBI's Trends survey. It is questionable as to whether this survey would pass the Rice-Davis test. Pessimism may well be a case of, they would say that, wouldn't they?
Being gloomy in surveys is a way of expressing opposition to recent moderate tax increases imposed on corporates. It's possible that the more severe winter flu has affected economic activity in January as well, although non-food retail sales were exceptionally strong in the UK in December, and that might argue against any threats to the UK consumer when it comes to spending money. US initial jobless claims data are due.
This data is likely to start to show the effects of the fires in California, which makes reading the headline number increasingly difficult as time goes on. The demographic of the affected area does mean that at least a reasonable proportion of the population will be able to work remotely, but of course people in the service industry who worked for residents of LA County are particularly vulnerable to job losses. US President Trump has threatened to charge US consumers of Russian goods further taxes if Russian President Putin does not begin negotiation to end Russia's war against Ukraine.
Markets' hopes for a ceasefire may now have to be revised, as it seems a somewhat less forceful position than Trump's earlier vow to end the war by last Monday. There are relatively few US consumers of Russian goods, and at this stage of the war it seems fairly unlikely that they would be deterred from consuming by a US tax increase. Additional sanctions against Russia might prove to be more effective, but it's also worth noting that the effectiveness of sanctions does have a tendency to decay over time.
That's all for today. Have a good day. UBS Chief Investment Office's investment views are prepared and published by the Global Wealth Management Business of UBS AG or its affiliate UBS.
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