UBS On-Air: Paul Donovan Daily Audio 'Tariffs start to show up'
The desk views the recovery in South Korean export data as a cautiously positive sign, albeit with underlying weaknesses, particularly in consumer-oriented sectors. Per the full note from UBS, exports for early March rebounded following Lunar New Year distortions, led by strong demand in shipping and semiconductor industries. However, diminished growth in exports to major partners like the U.S. and China raises questions about the global trade outlook. This mixed performance frames a broader narrative of potential vulnerabilities stemming from evolving trade policies, particularly as concerns about U.S. tariffs arise and could affect consumer sentiment and spending behaviors.
What the desk is arguing
The desk believes that while South Korean exports have shown recovery, the composition of these exports may not signal robust global demand. The commentary from UBS illustrates that while shipments of ships and chips are up, the broader context of declining consumer-oriented export strength highlights more vulnerabilities beneath the surface.
Exports to the U.S. increased but at a slow pace, indicating a cautious outlook ahead, particularly as rising trade tensions could dampen growth. As noted, exports to China also showed slower growth, impacting Korea's role as a pivotal link in global supply chains and signaling a potentially tempered global trade environment.
Where it sits in our coverage
Our consensus target for the USD/KRW stands at 1.075, with a range between 1.04 and 1.12. Specific targets from other firms include: - JPMorgan: 1.10 by Mar-26 - BofA: 1.04 by Mar-26
This view aligns with JPMorgan, leaning slightly towards the upper end of the predicted spectrum as concerns about U.S. tariffs juxtapose the economic landscape. The desk’s outlook reflects a tightening narrative around trade and employment fears, which could amplify downward pressure on consumption if left unchecked.
How other firms see it
Firms like JPMorgan are aligned with the desk’s cautious optimism regarding South Korean exports, while BofA takes a more bearish stance, indicating concerns over underlying trade dynamics. The divergence presents contrasting views on the robustness of global demand and the potential for future economic contractions.
Related currency pairs to watch include USD/KRW, given its sensitivity to shifts in trade sentiment and U.S. economic indicators. The dynamics between the KRW and trade flows should also remain a focal point amidst discussions of monetary policy shifts in response to trade developments.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Exponential growth in South Korean exports was driven primarily by ships and semiconductors.
- 02Exports to major markets like the U.S. and China exhibited slower growth, raising concerns about global demand.
- 03Existing U.S. tariffs could influence consumer sentiment, affecting spending and savings behaviors.
- 04The broader implications of trade tensions may create vulnerabilities for various sectors within the South Korean economy.
Market implications
Traders should monitor USD/KRW, particularly if it approaches resistance levels around 1.075, to assess shifts in market sentiment towards trade concerns. Upcoming economic data releases from South Korea may also provide further clarity on the trajectory of exports and overall economic health.
Risks to this view
A significant reversal could occur if new developments in U.S. trade policy lead to substantial job losses in key sectors, fostering a climate of uncertainty that dampens consumer spending behavior. Additionally, any unexpected strong rebound in consumer-oriented sectors could sway current bearish sentiment.
Good morning. This is Paul Donovan, Chief Economist at UBS Global Wealth Management at 7 o'clock in the morning London time on Friday the 21st of March. South Korean export data for the first 20 days of March showed a recovery from the February figures, which was of course distorted by the moveable Lunar New Year holiday.
Key drivers in March were ships and chips. Ships are of course a rather lumpy category, and chips are somewhat independent of the anxiety over economic nationalism and rising trade taxes. Exports to the United States did grow, but relatively slowly.
Exports to China, which has a role as a late-stage link in global supply chains, were also slower. The numbers are relatively positive, seen from a Korean perspective alone, but the composition is not perhaps sending quite such positive signals about the general state of global trade. In the United States, we're starting to get media reports of job losses that are being directly attributed to US President Trump's trade taxes.
Steel workers in Minnesota being the latest high-profile case, as tariffs threaten the auto sector's demand for steel. In the politically partisan environment of the United States, it is wise not to take everything at face value. Whatever the circumstances in the Minnesota case, tariffs can be a convenient excuse for job losses that would be driven by other reasons.
Nonetheless, if the narrative takes hold that jobs are at risk, the economic consequences are significant. It is the low fear of unemployment over the past four years that allowed US consumers the security to spend rather than save. If uncertainty breeds more fear of unemployment, then the risk is that consumer spending slows in favor of saving as an insurance against an unpredictable future.
The level of fear of unemployment is the difference between the expected slowdown of the US economy and the risk case of a much more severe contraction in the US economy. Japan's February inflation figures slowed on the headline rate, but higher food and fuel prices did mean that inflation was slightly more than had been expected. The international standard measure of core inflation was stable at 1.5% on the year.
Private sector service prices, which are assumed to be more sensitive to labor market costs, have been slowing somewhat. Government service sector inflation has been rising. This is not terribly different to what we've been seeing in other advanced economies.
The market forces of supply and demand are producing relatively benign inflation, and it is controlled, manipulated and invented prices that are the key forces pushing inflation higher. Yesterday's Bank of England meeting was accompanied by some statements of the obvious from Bank of England Governor Bailey, who noted that there was a lot of uncertainty at the moment. For the benefit of international listeners, that should be taken as polite British understatement, the economic equivalent of saying it would be unfortunate if you ignored the national tea time alarm.
Sources & References
How we cover this story