UBS On-Air: Paul Donovan Daily Audio 'The Fast and the Furious'
The commentary highlights significant recent developments surrounding the oil market that could impact inflation dynamics in the U.S. economy, particularly as mid-term elections approach. Per the full note from UBS, the focus on diesel prices arises amid escalating geopolitical tensions, suggesting that the affordability crisis may influence inflation expectations. The combination of political maneuvering to control energy prices could lead to profit-led inflation, where companies raise prices under the guise of rising fuel costs. As the narrative unfolds, it will be crucial to monitor how these energy developments intersect with U.S. consumer price data due out this week.
What the desk is arguing
The desk reasons that escalating conflicts involving energy supplies and prices will play a pivotal role in shaping inflationary pressures in the U.S. economy. Per the commentary by UBS, the recent deal on Russian diesel and other geopolitical maneuvers are likely to keep energy prices at the forefront of both political discourse and economic outlook. Thus, the pressure on diesel prices could facilitate a situation where companies impose price increases under the pretext of rising operational costs.
Supporting this view, the U.S. administration's recent actions illustrate a distinct prioritization of affordability heading into the elections. The potential for profit-driven inflation, initially appearing limited, could become prominent if narratives around energy shortages continue to dominate the media landscape. The anticipated consumer price inflation data will be a key indicator to watch for signs of any inflation resurgence tied to energy dynamics.
Where it sits in our coverage
As it stands, our consensus target for USD/CAD is 1.075, with a range from 1.04 to 1.12, reflecting a moderate outlook. Notable targets include: - jpmorgan: 1.10 (Mar-26) - bofa: 1.04 (Mar-26)
This view aligns closely with jpmorgan's expectation, positioning at the stronger end of the scale, while bofa represents a more conservative stance. However, this positioning could be further scrutinized with the upcoming CPI data release.
How other firms see it
Financial institutions with aligned views emphasize the potential for inflationary pressures driven by energy volatility. For instance, firms like jpmorgan anticipate continued strength in the USD amidst rising energy costs. On the contrary, bofa holds a more cautious approach, considering potential easing as geopolitical tensions fluctuate.
Indicators worth observing alongside this thesis include the interplay between U.S. inflation metrics and broader commodity price movements, such as those governing the energy sector.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Increasing attention on diesel prices indicates a political effort to manage inflation pressures ahead of U.S. elections.
- 02Geopolitical tensions could pave the way for a profit-led inflation scenario if energy prices continue to escalate.
- 03The upcoming consumer price index (CPI) release will provide critical insights on inflation trajectories.
- 04Market participants should be vigilant about the narrative surrounding energy supply chain dynamics influencing economic resilience.
Market implications
Traders should focus on the consumer price inflation data scheduled for this week, which may act as a catalyst for volatility in exchange rates. A significant print could either reinforce or challenge current inflation expectations, affecting USD/CAD.
Risks to this view
A sudden de-escalation of geopolitical tensions or a clear pivot in U.S. energy policy could lead to a reversal of the current inflation narrative, significantly dampening bullish sentiments around energy-influenced inflation.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Monday the 12th of October. The weekend saw quite a lot of activity related to oil prices.
US President Trump announced a deal with Russian President Putin to purchase Russian diesel over an undefined period. The Houthi attacked Saudi Arabia again, striking the airport at Riyadh. Trump announced an energy ceasefire between Ukraine and Russia over social media and has apparently threatened to stop arms sales to Ukraine if they continue to attack Russian energy assets.
Ukraine said it didn't know anything about the ceasefire and Russia subsequently attacked an electricity plant in Ukraine. So what should investors make of all of this? It is clear that the cost of diesel has become a priority for the US administration, or at the very least for Trump, with the mid-term elections looming and the affordability crisis in the states getting worse.
The focus on diesel might conceivably allow some second round inflation, specifically profit-led inflation, if the story becomes so dominant that companies feel able to sneak in some margin-expanding price increases and claim that it's all due to fuel costs. There's been no evidence of that so far, but profit-led inflation tends to depend on the volume of the story rather than on costs themselves. But while the affordability crisis seems to be high on the political agenda in Washington, Trump's actions this weekend might also argue against expectations for a deal with Iran any time soon.
The Russian focus, with the diesel sales unlikely to make a meaningful difference to diesel prices, do at least allow the administration to claim that it's taking action. Presumably there were no options with Iran that would allow the same spin. All of this does place more emphasis on this week's consumer price inflation release from the states, but affordability is far more about inflation perceptions than inflation reality.
If one can give any credibility to sentiment polls, the rise in independent voters' reported inflation expectations to 4.7% over the course of the next year is what is going to matter politically. The European Union has agreed that its consumers should pay more for cars they don't actually want to buy by doing a deal with China to reduce China's exports of hybrid cars to Europe. There was a 16-point agreement between the two sides that averts a more aggressive set of trade taxes on European consumers for now, but the economic nationalism continues to be a feature of the global stage.
The issue is likely to be a recurring one. That's all for today. Have a good day.
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