UBS On-Air: Paul Donovan Daily Audio 'The new tax wave'
The desk believes that President Trump's newly announced tariffs will have immediate repercussions for consumer prices and trade dynamics, particularly concerning imports from Japan and South Korea. Per the full note from UBS, this policy could translate to a 0.1 to 0.2 percentage point increase in consumer price inflation, as these countries together represented about 8.5% of U.S. imports last year. The implications of rising prices may intensify pressures on consumer sentiment and spending, which are critical indicators for the broader economic landscape. With no significant events on the calendar for the next month, traders should closely monitor inflation data and any further policy announcements for potential market shifts.
What the desk is arguing
The desk frames this as a pivotal moment that could impact U.S. consumer behavior and inflation. The tariffs—set at a steep 25%—indicate an escalatory trend in trade policy that could reverberate through diverse sectors reliant on Japanese and South Korean goods.
With Japan and South Korea contributing approximately 8.5% to U.S. imports, this round of tariffs is poised to raise consumer prices modestly, with estimates suggesting an uptick of about 0.1 to 0.2 percentage points in inflation. Such changes could cultivate an environment of increased caution among consumers, ultimately influencing spending patterns in the coming months.
Where it sits in our coverage
With the absence of specific internal coverage data related to the pertinent currency pairs affected by this announcement, there are no established consensus targets or forecasts to compare.
How other firms see it
In the current landscape, it's challenging to align views due to the lack of available internal coverage data. It remains essential to observe how broader consensus might evolve as the impact of these tariffs processes through market sentiment and inflation indicators.
What the calendar says
There are no significant events scheduled on the calendar in the foreseeable future that could directly impact market reactions to the announced tariffs.
Key takeaways
- 01Trump's new tariffs introduce a 25% tax on imports from Japan and South Korea, risking higher consumer prices.
- 02The trade policy shift could add around 0.1 to 0.2 percentage points to U.S. consumer inflation.
- 03Consumer spending may be negatively impacted, suggesting cautious sentiment ahead.
- 04No major economic events on the calendar to catalyze immediate market responses.
Market implications
Traders should watch consumer inflation indicators closely, as the forthcoming readings will reflect the immediate effects of these tariffs. The potential to influence consumer sentiment could shift market dynamics significantly.
Risks to this view
Should there be a notable backlash against these tariffs leading to trade negotiation resolutions or a reversal in policy, it could invalidate the current outlook by alleviating price pressures and restoring consumer confidence.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's six o'clock in the morning London time on Tuesday the 8th of July. US President Trump announced the start of a wave of tax increases for US consumers on Monday, suggesting any consumer who wanted to buy goods from Japan or Korea would have to pay a 25% tax, that's up from the current 10% tax.
Consumer goods from elsewhere in the world were also subject to tax increases, but it seems a little pointless to keep track of every pronouncement, as investors will naturally expect Trump to retreat. Economists have finite time to allocate to the infinite demands on our intellect, and it seems a waste of that finite time to react to every single Trump social media post. However, by way of context, Japan and Korea accounted for a little over 8.5% of US imports last year.
That means that the direct effect of a 15 percentage point increase in US importers' tax burden would add somewhere between 0.1 and 0.2% to US consumer price inflation. Of course, the indirect effects are potentially more concerning, but those depend on how US businesses react to the higher tax burden on US consumers. In other words, this tax increase is not of itself a huge problem, but if magnified by domestic profit-led inflation or other effects, or accompanied by more aggressive tax increases on other products or other countries, it would become more concerning, always assuming there is no rapid retreat or defeat for Trump in the courts.
The US has some data that offers a little insight into the way in which the economy is responding to the general climate of policy uncertainty and the increased tax burden, but the quality of this data is generally pretty poor. The June National Federation of Independent Businesses Small Business Survey is subject to the normal political partisanship that plagues all survey evidence. In this case, there has historically been something of a bias towards the Republican viewpoint.
The sample size for this survey is also quite small. A small number of economists forecast this number, and they do so with a wide range. It's worth noting Republican consumer confidence turned up noticeably in the June Michigan data.
The New York Fed's one-year inflation expectations data will be plagued by partisan bias too. That's expecting extreme highs and Republicans expecting unrealistic lows. US consumer credit data is not necessarily that relevant at the moment, but it will become more relevant as time goes on.
As US real incomes start to decline, consumption may well be maintained by dipping into savings and utilising credit. Germany offers the May trade balance. Ordinarily, this is not a figure that people worry about, but the extraordinary political focus means that it is now something that matters.
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