UBS On-Air: Paul Donovan Daily Audio 'The dangers of being single'
The desk interprets the recent economic commentary from Paul Donovan at UBS as highlighting rising concerns over housing affordability in the U.S., driven in part by political maneuvering from the Trump administration. Per the full note, the focus on single issues, such as preventing institutional investment in single-family homes, introduces uncertainty into the economic landscape and potentially raises risk premiums for investors. The desk notes that this activity follows a trend of tariff reversals which aim at alleviating consumer price impacts, yet may inadvertently influence housing market dynamics and broader fiscal sustainability. As these developments unfold, bond yields may rise, increasing mortgage costs and thereby affecting consumer demand. This linkage suggests vigilance among institutional FX traders, particularly as the market starts reacting to fiscal measures that may not be as coherent or comprehensive as necessary for sustainable economic growth.
What the desk is arguing
The desk emphasizes that the Trump administration's singular focus on issues like housing affordability portends increased market volatility. The proposal to curb institutional purchases of single-family homes underscores a growing tension between policy intentions and market realities. Per the full note, this shift towards single-issue politics injects a layer of risk due to its potential to create unpredictable outcomes.
UBS highlights that the recent tariff reversals aim to mitigate consumer price sensitivity but may collide with broader economic goals by escalating complexity within fiscal policies. For instance, Trump's proposed 50% increase in defense spending, reportedly funded by tariffs, raises further fiscal concerns as existing tariffs yield diminishing returns over time. Such developments could adversely affect bond markets—making it imperative for FX traders to monitor these dynamics closely.
Where it sits in our coverage
With a consensus target for the EUR/USD at 1.075, a range from 1.04 to 1.12 is projected by key analysts. Notable forecasts include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk's outlook aligns predominantly with jpmorgan, signaling a cautious bullish view which is comfortably positioned above the consensus lower bound, suggesting room for potential upward adjustments in light of evolving fiscal policies.
How other firms see it
Several firms like jpmorgan and deutschebank align on potential upward movements for the EUR/USD, reflecting concerns over U.S. fiscal policy impacts. In contrast, bofa takes a more conservative stance, anticipating lower levels due to persistent affordability issues.
As the U.S. navigates these complexities, watch alongside the EUR/USD for influences from impending Federal Reserve meetings and related monetary policy statements. Increased bond yields stemming from fiscal instability could have immediate ramifications across various currency pairs as well.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The Trump administration's focus on housing affordability reflects single-issue policy risks.
- 02Increased bond yields from fiscal dynamics may affect consumer mortgage rates.
- 03Tariff reversals may not have a lasting beneficial impact on consumer prices as hoped.
- 04The uncertainty surrounding single-issue politics adds volatility to market outlooks.
Market implications
Traders should closely monitor the EUR/USD as bond yields may react to fiscal changes, particularly with upcoming Federal Reserve events likely influencing broader market dynamics. Levels near 1.075 could be critical in indicating market sentiment toward these policy shifts.
Risks to this view
A significant catalyst that could invalidate this call would be a cohesive fiscal strategy emerging from the U.S. government that aligns tariffs with comprehensive economic growth policies. Additionally, unexpected changes in consumer confidence or housing demand could alter the trajectory significantly.
Good morning, this is Paul Donovan, Chief Economist at GBS Global Wealth Management. It's seven o'clock in the morning London time on Thursday the 8th of January. It's far too early to make pronouncements about the word of the year for 2026, but it might be affordability.
US President Trump was talking about housing affordability overnight with a proposal to prevent institutional investors from buying single family homes. The rationale given was housing affordability. This follows on from a series of tariff reversals aimed presumably at undoing some of the impact of trade policy on consumer prices in the States, generally for specific products where consumers have a high degree of awareness and thus price sensitivity.
What might seem concerning to investors is the fact that the US administration's economic policy seems increasingly to focus on single issues. Single issue politics adds a risk premium because it tends to create uncertainty about the future and is often driven by popular perception and social media trends which may not tally with reality. Politics can also become contradictory if politicians are attempting to resolve single issues in isolation rather than having a coherent package of measures.
Trump's mooted 50% increase in US defence spending is a case in point. This was always one of the concerns arising from the Venezuelan situation. Foreign adventures cost money.
Trump has suggested that tariffs may cover the increased cost, but tariffs have been pledged for quite a lot of other costs, including tax cuts. They're already yielding less than the administration had hoped because of avoidance and retreats, and the tax revenue from tariffs will tend to decline over time as avoidance and sometimes substitution becomes more established. If this fiscal largesse worries the bond market, already focused on the rather unsustainable dynamics of the US fiscal position, then this would push up bond yields and lead to higher mortgage costs.
That in turn would undermine attempts to make housing more affordable. Pursuing one single issue policy may defeat the intent of another single issue policy. German factory orders data for November was substantially stronger than recent trends and completely against expectations for a decline.
Large orders were behind a bit of this move, and a small number of large orders are quite hard to predict. But there was genuine underlying strength there too. This is a reminder that the European economy is performing around about its trend rate of growth at the moment, although demographics naturally means that trends in GDP measurement will be less than in the Anglo-Saxon world.
The United States provides import and export data for October, politically sensitive more than economically useful perhaps. The distortions of stockpiling and tariff avoidance by US companies rather complicates the economic interpretation of these numbers this year. Initial jobless claims and other labour market measures are more likely to attract attention.
That's all for today. Have a good day. This material has been prepared and published by the Global Wealth Management Business of UBS Switzerland AG, regulated by FINMA in Switzerland.
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