UBS On-Air: Paul Donovan Daily Audio 'They’re back'
The desk interprets recent commentary from UBS regarding the re-emergence of tariffs proposed by US President Trump, which could impact both inflation perceptions and the affordability crisis in the US consumer market. According to Paul Donovan, the implications of these tariffs may be less severe than previous ones given consumer behavior and pricing pressures surrounding high-frequency purchases. Per the full note source, this suggests that while tariffs are politically charged, their inflationary impact could be mitigated by the context of prior tariffs that became embedded in pricing structures. With significant US consumer spending already under pressure, the market will be keenly watching reactions in inflation metrics and overall consumer sentiment as this situation develops.
What the desk is arguing
The desk posits that the newly proposed tariffs by Trump, while potentially politically damaging, may have a diminished impact on inflation compared to past tariffs. As noted by UBS, exemptions on certain essential goods indicate awareness of current consumer inflation psychology, suggesting that the administration aims to alleviate some direct cost burdens on consumers.
Furthermore, Donovan articulates an important understanding that once passed on, tariffs often stick to pricing streams regardless of their subsequent legality. This historical context implies that if new tariffs are levied on goods already subject to previous illegal tariffs, the net inflationary effect might be less impactful since prior tariff-related price increases are already factored into current consumer pricing.
Where it sits in our coverage
The consensus target for the USD/EUR pair currently sits at 1.075, with a range from 1.04 to 1.12. Notably, the following firms have set their respective forecasts: - jpmorgan: 1.10 for Mar26 - bofa: 1.04 for Mar26
This perspective aligns with jpmorgan's position at the higher end of the range, indicating a bullish sentiment on USD strength, contrasting with bofa's more cautious stance at the lower end.
How other firms see it
Aligned firms, including jpmorgan, portray a confident outlook on the US dollar's resilience amid anticipated tariff impacts. Conversely, bofa has adopted a more bearish view, suggesting room for downside in USD valuations.
Moving forward, it's essential to monitor how these tariff discussions influence broader metrics like inflation rates and consumer spending behaviors, especially in relation to the USD/EUR dynamic.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Tariffs proposed by Trump may have a reduced inflation impact compared to past measures.
- 02Consumer behavior significantly shapes price perceptions, as seen with high-frequency purchase items.
- 03Political sentiment surrounding tariffs remains volatile, potentially creating market swings.
- 04Market participants should watch for changes in inflation metrics as a key signal.
Market implications
Traders should monitor the 1.075 level closely as a pivot point for further USD strength or weakness, especially as consumer inflation data for June becomes available in a few weeks. Positioning adjustments may be necessary ahead of any detailed announcements on tariff exemptions and their market reception.
Risks to this view
A significant reversal in sentiment could occur if consumer inflation unexpectedly spikes, leading to heightened economic stress and potentially forcing the Federal Reserve to reconsider its monetary positioning. Additionally, effective pushback against tariffs, either through legal means or market pressures that stimulate consumer anger, could undermine the proposed economic strategies.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Wednesday the 3rd of June. The trade war would seem to be back on the agenda.
US President Trump is proposing tariffs of at least 10% on a wide range of countries, with higher tariffs applied to selected other countries. This rationale is not necessarily terribly important unless it fuels expectations of future legal challenges. The proposed tariffs exemptions for key foodstuffs seem to indicate that someone in the administration is aware of the way high-frequency purchases are shaping inflation perceptions and thus contributing to the affordability crisis.
The critical question is what this means for the US consumer. Certainly there is little evidence that past price increases were rolled back when the last wave of tariffs were declared to be illegal. Once a tariff has been passed through to the consumer it tends to stick, whatever the fate of the tariff, and becomes a boost to profits if that tariff is reversed.
However, if the new tariff applies to the same products as the now illegal tariffs, there may be less need to pass through that tariff to the consumer. In that situation, the consumer paid the illegal tariff, there's then been a brief period of windfall profit gain without any price reductions after tariffs were reversed, and then when the proposed new tariff comes in it will eat into that windfall profit gain and margins return to where they were. The inflation impact of these tariffs should therefore be less than last year's tariffs, although politically there is of course a risk that any price rise motivated by whatever factor will be blamed on tariffs.
The European Central Bank report that the value of gold holdings have overtaken the value of dollar holdings in official reserves is something which should be interpreted with some considerable care. This was not because of a massive buying of gold, though there has been buying of gold. This was largely because the price of gold has risen so much in the past year that revaluing gold holdings at current market prices inflates their value in reserves in a corresponding manner.
It is also worth remembering that gold is a dollar-denominated asset, so from a foreign exchange perspective it doesn't matter whether foreign exchange reserves are treasury bonds or shiny bits of metal, the dollar is still dominant as the currency. Nevertheless, the dollar's market share as a reserve currency has been eroded in recent years and may well be eroded further by the Gulf War. World states have to pay to support their economies, to repair war damage and to rearm.
That money may require cashing in some of the sovereign wealth fund reserves, which have a dollar bias, in order to spend the money in Europe and in Asia. US Federal Reserve Chair Walsh has been signalling changes in style at the US Central Bank. Specifically, Walsh seems to have an aversion to forward policy guidance.
In the sense that this may lead to the end of the fabled dot-plot projections of the Fed, this is to be welcomed. Dumbing down economic outlooks into individual dots on a chart is not terribly helpful as the world becomes more and more complex. It creates illusions of absolute certainty and of precision and neither of those things are remotely true in economics.
On the other hand, not offering more nuanced forward guidance about how the Fed sees the future path of the economy is a lot more troubling. That could increase financial market volatility as the complexity of the economy, about which the Fed has an information advantage, leads to confusion amongst investors. That's all for today.
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