UBS On-Air: Paul Donovan Daily Audio 'Up and down the supply chain'
The desk asserts that recent data on US producer price inflation, while higher than anticipated, reflects expected trends shaped by complex supply chains and trade taxes. Per the full note source, the notable lag between producer price impacts and consumer price inflation underscores the challenges in immediate market reactions. This perspective aligns with our internal consensus and offers context for current trading dynamics amidst evolving supply conditions.
What the desk is arguing
The desk contends that the rise in US producer price inflation highlights the delayed effect of trade policies on consumer prices, driven by longer supply chains. This reflects a critical understanding of market complexities, as articulated by UBS's Paul Donovan, who notes that trade taxes progress through supply chains over months rather than days.
In terms of data, the US producer price index (PPI) exceeded expectations, signaling inflation pressures; however, this does not imply immediate profit compression for producers, as many aspects of trade tax impacts remain yet to be seen by end consumers. The desk emphasizes that inflationary movements are more nuanced than surface-level indicators might suggest, pointing to a gradual transition of costs down the supply chain.
Where it sits in our coverage
Our current consensus target for USD/EUR is 1.075, with a range between 1.04 and 1.12. Notable firm targets include: - JPMorgan: 1.10 by March 2026 - BofA: 1.04 by March 2026
This analysis closely aligns with the view from JPMorgan, suggesting that the desk's outlook is situated in the mid-range of expectations across the board, avoiding extreme positions in the forecasts offered by aligned and contrary firms alike.
How other firms see it
Similar sentiments are echoed by those at Goldman Sachs and Morgan Stanley, who emphasize the gradual transition seen in price adjustments throughout supply chains. Contrastingly, BofA offers a more cautious stance, questioning the resilience of consumer demand in light of prolonged inflationary pressures.
As market participants, we should monitor the USD/EUR dynamics closely, particularly as trade actions and consumer sentiment influence central banks' monetary policy considerations and the broader market performance.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US producer prices show inflationary trends without immediate consumer price impacts.
- 02Trade taxes affect the supply chain gradually, complicating market reaction timelines.
- 03Consensus target for USD/EUR is 1.075, indicating a balanced market outlook.
- 04Rising production costs may signal delayed consumer price inflation effects.
Market implications
Watch for USD/EUR trends around the 1.075 mark as market interpretations of inflationary pressures evolve. Key data releases going forward will further shape market sentiment, particularly in the context of retail sales figures.
Risks to this view
A sudden increase in consumer demand or unexpected monetary policy shifts from the Federal Reserve could invalidate the current outlook, potentially leading to a rapid adjustment in inflationary expectations and currency positions.
Good morning, this is Paul Donovan, Chief Economist at GVS Global Wealth Management. It's seven o'clock in the morning London time on Friday the 15th of August. Yesterday's US producer price inflation data caused markets to worry about inflation pressures somewhat.
The official figures were higher than expected, but the pattern is pretty much as expected. There is a rather naive view about how trade impacts economies, which seems to hold even amongst investors who should know better. Trade, at least trading goods, is not as directly important as people tend to think.
There's a naive nostalgia that assumes that only making things with hands and machines has economic value. And then there is an indecent impatience to see the effects of trade taxes on the economy at once, which is not realistic, as supply chains have become so much longer and so much more complex in recent years. The result is that trade taxes are being passed through more or less as one would expect.
The fact that there are signs of producer price inflation, which has not yet been passed through to consumers, does not indicate that profits are necessarily being squeezed or that producers are absorbing the trade taxes. This indicates that trade taxes have progressed sufficiently far down the supply chain that they are hitting the price of goods being made today via input costs without having progressed so far down the supply chain as to affect consumer prices. It may be weeks or even months before the goods pushing up producer price inflation today appear on the shop shelves to affect consumer price inflation in the future.
We get two increasingly important data points from the United States today that markets will pay attention to. They are official statistics, but this release will be politically independent. Retail sales gives a hint as to whether consumers are scaling back.
There are, however, few service sector sales included in the retail sales data, and these figures are nominal, so trade taxes will directly raise the value of goods sold where tariffs have extended sufficiently far down the supply chain as to reach consumers' shopping baskets. We also get import price inflation for July. It's important to stress that import prices are the price pre-tariff, so they will give an indication of whether the US importer's tax burden is being offset by price discounting from exporters.
If that is happening, import prices would need to be falling. They would need to fall more than they normally do. Many imports have disinflation or deflation as a norm, and they would need to be falling for the United States but not for the rest of the world.
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