UBS On-Air: Paul Donovan Daily Audio 'The Supremes'
The desk interprets the commentary from UBS regarding the US Supreme Court's deliberation on tariffs, suggesting that a potential ruling against them could lead to fiscal stimulus as businesses receive refunds on tariffs paid. Per the full note source, the Chief Justice's remarks have raised expectations among investors, which translated to a rally in tariff-impacted equities. This scenario opens up various implications for both the domestic economy and market dynamics, notably in the FX space as risk sentiment evolves with these developments.
What the desk is arguing
The desk believes the likelihood of the US Supreme Court ruling against the legality of tariffs could fundamentally shift market sentiment, impacting both equities and currencies. The implications of potential tariff refunds could act as a domestic stimulus, particularly favoring smaller companies that typically bear the brunt of increased costs. According to the UBS commentary, the market response thus far reflects an increased optimism, spurred by judicial questioning that appears critical of the tariffs.
The commentary suggests that should these tariffs be overturned, it could trigger a refund process for prior tariffs, stimulating domestic spending. Importantly, this point connects to the potential for a broader fiscal boost to the economy, although the actual implementation of refunds would depend on an operational government and possibly new legislation. Thus, caution remains regarding the timing and magnitude of any such fiscal impact on the economy.
Where it sits in our coverage
Currently, our consensus target for USD/EUR stands at 1.075 with an established range of 1.04 to 1.12. Notably, firms such as jpmorgan target 1.10 by March 2026, while bofa has positioned a more conservative target at 1.04 for the same timeframe.
This view aligns with the outlook from jpmorgan, indicating a bullish sentiment on the dollar if fiscal stimuli materialize compared to the more cautious stance of bofa, suggesting divergence in expectations across the market players. The desk's interpretation leans towards the higher end of this trading range given the recent developments.
How other firms see it
Firms such as jpmorgan and citi seem to reflect a consensus that supports a bullish outlook on USD following likely fiscal stimulus. In contrast, bofa holds a more pessimistic view, expecting continued weakness in the dollar. This divergence underscores the market's varied responses to potential judicial outcomes impacting economic policy.
Relevant currency pairs to monitor include USD/JPY, which may react sharply to shifts in investor sentiment triggered by upcoming legal and economic developments, as well as EUR/USD for direct exposure to Eurozone responses to US fiscal policy shifts.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The US Supreme Court's potential ruling against tariffs could lead to significant market implications.
- 02Expect a fiscal stimulus effect from refunds on previously paid tariffs, boosting smaller businesses.
- 03Market sentiment has turned bullish, reflected in tariff-related equity rallies.
- 04Watch USD/EUR movements closely as market dynamics shift with legal proceedings.
Market implications
Traders should monitor USD/EUR closely as shifts in sentiment around tariff rulings could drive significant price action. A breakthrough above 1.075 could validate bullish trades in this pair, while forecasts adjust amid evolving fiscal expectations.
Risks to this view
If the Supreme Court rules in favor of enforcing the tariffs, or if there are delays in government function and legislation regarding tariffs, this could lead to a sharp reversal in current market sentiment and affect forecast adjustments significantly.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 3.30 in the morning London time on Thursday the 6th of November. U.S.
President Trump's tariffs did not appear to be winning a great deal of support in the arguments before the U.S. Supreme Court concerning their legality. Chief Justice Roberts referenced the fact that tariffs were a tax on the U.S. people and that this was something that Congress was supposed to do.
Justice Gorsuch also seemed to be taking a somewhat hostile tone. Betting markets have already signalled that the disputed tariffs, amounting to around 70-75% of the total, would most likely be overruled. Financial markets may now need to consider the potential implications of that.
Certainly, tariff-impacted equities rallied in response to the questioning at the hearing yesterday. There are two key economic points. The first is that assuming tariffs are declared to be illegal, there would then be a good chance that tariffs paid up to the point of the ruling would need to be refunded.
Those tariffs were paid by U.S. importing companies and the refund would therefore represent a domestic fiscal stimulus, disproportionately benefiting smaller companies. It would be realistic to assume that the fiscal boost would not be immediately after any Supreme Court ruling. Aside from anything else, getting a refund from the government requires there to be a functioning government and that's still not a thing the U.S. has.
There would also possibly be a need for congressional legislation. However, it is also assumed that tariffs would be re-imposed under different authority. That would necessitate a change in tariff rates for certain products from certain countries.
Some tariff rates would potentially fall. However, on admittedly limited evidence to date, when tariff rates have fallen this year, consumer prices have not then declined. In other words, while a tariff increase may feed through into inflation, a tariff cut may not reverse past inflation effects.
Even if changing tariffs results in the same overall effective tariff rate, the stickiness of past tariff price effects might mean that higher inflation is the overall result. The amounts are still modest. We should not be thinking of substantial impacts on inflation, but this presents an additional complication for the Federal Reserve.
The Bank of England decides interest rates today, with almost every economist expecting no change. The Bank of England is always a rather uncertain policy process, as multiple opinions can be on display. Nonetheless, it would be considered more than a little unusual to change rates ahead of a budget that is expected to make changes to fiscal policy.
Sources & References
How we cover this story