UBS On-Air: Paul Donovan Daily Audio 'Twelve billion dollars'
The recent commentary from UBS highlights a larger-than-expected trade surplus for Germany in October, driven by a significant drop in import demand alongside robust export performance. This positive trade balance, coupled with solid industrial production data, is likely to sustain German economic strength into Q4. Per the full note source, the backdrop of global trade remaining strong outside the US boosts the case for the Euro amidst ongoing geopolitical pressures. With important economic indicators expected to trend positively in Europe, market sentiment can continue to support this thesis.
What the desk is arguing
The desk emphasizes that Germany's October trade surplus reflects not only resilience in exports but also a notable contraction in imports. This dynamic showcases the German economy's relative strength, even amid global uncertainties, underscoring a solid economic foundation as indicated by UBS.
The surplus, which was reportedly larger than market expectations, signals that external demand remains robust, particularly from nations beyond the US. This is corroborated by figures suggesting significant declines in imports, which could point to strategic shifts in supply chains and consumer purchasing behaviors that might emerge in the ongoing trade environment.
Where it sits in our coverage
Currently, our consensus target for the EUR/USD pair stands at 1.075, with a range of 1.04 to 1.12. Specific insights include targets such as: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This perspective is generally aligned with other institutions, particularly jpmorgan, whose target places a positive outlook near the upper bound of our spread. However, bofa presents a contrasting view, asserting a more cautious approach at the lower end.
How other firms see it
The prevailing sentiment amongst aligned firms like jpmorgan suggests a continued bullish outlook on the Euro, generally aligning with the positive German trade data narrative. In contrast, firms such as bofa maintain a contrarian stance, cautious about potential downside risks in global trade and economic stability.
Key factors to monitor include the EUR/USD currency trajectory as it reflects broader risk sentiments and central bank policy stances, particularly the ECB's future actions and comments that could affect Euro strength.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Germany's trade surplus exceeds expectations, signaling economic resilience.
- 02Robust export performance supports growth amid falling import demands.
- 03Market sentiment remains bullish on the Euro despite global uncertainties.
- 04Political actions and tariffs may introduce unforeseen risks to the agricultural sector.
Market implications
Watch closely for EUR/USD testing key psychological levels such as 1.075 and any shifts in market sentiment in response to evolving geopolitical dynamics. A confirmation of the trend in upcoming European economic data releases can further solidify this outlook.
Risks to this view
Key risks to this thesis include any adverse shifts in US policy regarding tariffs that might blunt import flows, alongside political instability affecting the Eurozone. A rapid deterioration in consumer confidence or rising inflation may also impact Euro strength significantly.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Tuesday the 9th of December. German trade data showed a larger trade surplus than had been anticipated in October, led by weaker import demand and some considerable resilience in the export sector.
The fact that most of the world outside of the United States continues to trade very nicely with one another is a help here. Alongside stronger industrial production data yesterday, these numbers will support the German economy into the fourth quarter. The German consumer has already been supporting the economy in a steadier fashion over the course of the last year.
US President Trump has pledged a $12 billion package for farmers to be funded by tariff revenue. Such a move should require Congressional approval, as government spending has to pass through Congress. Tariff revenues have been used to justify quite a lot of actual and proposed spending.
But tariff revenues have been less than economic modelling would strictly predict, mainly because US purchasers of imports have been adept at finding ways of avoiding the most burdensome of the tariffs through rerouting supply chains and other means. Trump has also suggested a possible additional tariff on importers of Canadian fertiliser, which might go somewhat to counteract the effects of any farm bailout. The bond market is unlikely to be very concerned about the willingness to pledge tariff revenues for spending projects, as this is relatively small scale.
Investors looking at the broader picture might see this as heightened political concern about food prices. By September, grocery prices had risen 1.9% from the December 2024 level, with some things like banana or meat rising well over 7%. Price increases of that size in high-frequency purchases tend to be very noticeable to consumers.
The UK's November British Retail Consortium retail sales figure was weaker than expected, slowing to 1.2% year-over-year growth. This is a nominal number, and so the fact that UK food price inflation on the BRC measure has been slowing will have had some impact here. There's also the rather complicated issue of Black Friday sales.
Black Friday is not something that's really a UK festival in the way that it is in the States, but like an internet virus, it's leaked over into the UK via online platforms. But this raises the question of whether that shifts sales online and away from the physical stores that are being captured by the BRC survey. The UK already has the highest online retail sales rate in the world.
Sources & References
How we cover this story