UBS On-Air: Paul Donovan Daily Audio 'Time for more taxes'
The desk interprets recent remarks from US President Trump regarding tax increases on imports from Canada and Mexico as a catalyst for potential inflationary pressure in the US economy. Per the full note from UBS's Paul Donovan, the proposed taxes are expected to impact consumers quickly, especially if retaliation from Canada and Mexico restricts oil supplies. The potential 25% tax could translate into a 10% price increase for consumer goods, significantly affecting inflation metrics and consumer sentiment. Current consensus among key players, including **jpmorgan**, supports this view, projecting a USD strength against the CAD, while **bofa** takes a contrary stance. There are no imminent calendar triggers to note, but the market should prepare for price shifts in response to these developments.
What the desk is arguing
The desk positions the potential tax hikes from the Trump administration as a serious risk to US inflation levels and overall economic sentiment. Per the full note from UBS, Donovan underscores the unpredictability surrounding the Trump administration's taxation policies, particularly noting the swift retreat from previous tariffs on Colombian coffee. The commentary highlights that consumer prices may rise quickly if these taxes proceed, affecting how investors approach inflation data in the coming months.
Donald Trump’s intended tariffs on goods from Canada and Mexico, suggested to start imminently, could lead to significant price shifts. With specific reference to oil, Donovan notes that US refineries are uniquely equipped to process oil from these countries, suggesting that the likely inflationary effects may be felt immediately if supply chains shift. The transitional dynamics between tax implementation and consumer behavior will be crucial in estimating the longer-term impacts on inflation and pricing strategies in the retail sector.
Where it sits in our coverage
With a consensus target of 1.075 for USD/CAD, specific projections include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This perspective aligns with the stance of jpmorgan, which is predicting upward movement in USD/CAD, while bofa offers a more cautious view. The desk is positioned near the upper bound of the consensus range, suggesting a bullish outlook on USD relative to CAD.
How other firms see it
Consensus is largely aligned among firms like jpmorgan and others emphasizing inflationary risks stemming from increased tariffs. In contrast, firms like bofa are skeptical, expecting less significant movement. Attention should also be paid to the implications for other pairs, particularly USD/MXN, as changes in consumer behavior could spill over through interconnected markets, influencing Federal Reserve policy reactions.
What the calendar says
No high-impact calendar events are imminent that would directly trigger shifts related to these developments, which means the market's focus will remain on the practical implications of the proposed tariffs and any responses from Canada and Mexico.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Trump's proposed tariffs could significantly impact inflation and consumer prices in the US.
- 02Market reactions may unfold quickly, especially if oil supply is affected.
- 03Consistent bullish outlook on USD against CAD reflected in current projections among some firms.
Market implications
Watch for the USD/CAD exchange rate, especially with current pressures for upward movement, as any enacted tariffs could swiftly influence consumer goods pricing. Price action leading up to anticipated inflation readings will be critical to assess market sentiment.
Risks to this view
Should Canada and Mexico effectively respond with export restrictions, or if the administration reverts on its tax plans as seen with Colombian coffee tariffs, this could swiftly shift market dynamics, potentially favoring a bearish outlook on USD strength.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Friday the 31st of January. US President Trump reiterated their intention to impose significant taxes on US consumers of goods from Canada and Mexico from tomorrow.
Trump has hinted at not taxing US oil consumers. Several US refineries are specifically set up to handle the sort of oil produced in Canada and Mexico rather than, say, Texas. That shows a sensitivity to the inflation impact of these taxes, although Mexico and Canada may choose to restrict or tax the export of their oil supplies to the United States in response.
The immediate question is how serious investors should take any tax hike. The speed with which Trump retreated from plans to tax US coffee drinkers by taxing imports from Colombia is a reminder that unpredictability is a risk with the current administration. If the taxes do go ahead, how quickly do US consumers then face higher prices?
If oil supplies are restricted, oil prices would rise relatively quickly. Food prices would also see some swift response. Price changes for other goods will depend on how much has been stockpiled in the United States.
The full inflation effect also depends on whether US companies raise their prices in the face of less competition and how quickly profit-led inflation by retailers is established. These second-round effects might happen more quickly. Sometimes prices rise in advance of tariffs, if the narrative has been screamed loudly enough.
It's also worth remembering that a 25% tax on goods from Canada and Mexico would equate to about a 10% price increase for those goods in store. So 25% price increases should not be looked for unless profit-led inflation is very rapid Ultimately, the plausibility and duration of any taxes probably depends on the political reaction, which depends largely on consumers' perceptions of inflation and the importance they attach to that. The trade taxes are being framed in the context of controlling illegal drugs, but the price of a dozen eggs in the United States has soared since Trump's election and significantly exceeds the street price of a hit of cocaine.
In December, Canadian egg prices were rising 5%, Mexican egg prices 5.7%, US egg prices 37%. Inflation is certainly likely to form part of the market focus today. The United States is offering the personal consumer expenditure deflator alongside the regular consumption numbers.
The core PC deflator is expected to be stable in year-on-year terms, with food and fuel prices adding a bit more to the headline rate. Preliminary German and French inflation is not seen doing very much, a slight increase in the headline French rate but still to a level below the ECB's magic 2% target. German retail sales data for December was a lot weaker than six surveyed economists expected.
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