UBS On-Air: Paul Donovan Daily Audio 'War and affordability'
The desk observes that the implications of President Trump's recent social media post regarding Iran will likely go unnoticed by investors, as the messaging appears targeted primarily at his support base rather than providing any new policy direction. Per the full note from UBS's Paul Donovan, this scenario reflects a broader inclination within markets to ignore geopolitical tensions if they do not manifest in significant policy shifts or economic repercussions. With March inflation data set to release imminently, the situation remains fluid, particularly as oil prices surge, affecting consumer affordability and economic sentiment in the US.
What the desk is arguing
The desk posits that the limited market impact of President Trump's comments signals a narrowing focus on essential domestic economic indicators, notably inflation, rather than international political developments. Per the full note from UBS, Trump's communication style skews towards rallying his faction, leaving investors disinterested in geopolitical posturing unless it prompts tangible, policy-driven outcomes.
Current energy market instability, exacerbated by Iranian military actions, aligns with broader concerns about inflation and consumer spending. Recent trends highlight a significant rise in gasoline prices, with averages jumping from below $3 to over $4 per gallon in March, spelling a potential affordability crisis for US consumers as noted in Donovan's analysis.
Where it sits in our coverage
The current consensus target for USD’s performance against a basket of currencies suggests a pivot point for broader trends. Firms such as jpmorgan project a target of 1.10 for March 2026, while bofa takes a more cautious stance with 1.04.
This view diverges somewhat from the consensus spectrum, with the desk's analysis leaning towards concerns about affordability influencing market sentiment, suggesting pressures that could impact trading positions significantly in the near future.
How other firms see it
Currently, firms like jpmorgan and citigroup are predicting further strength in USD as tight monetary policy persists, while bofa is adopting a cautious approach regarding potential reversals in inflation trends. Key currency pairs to monitor include USD/EUR and USD/JPY as their trajectories will be shaped by upcoming data releases and price stability.
What the calendar says
The key event to watch this week is the US consumer price index scheduled for Friday, which is likely to overshadow ongoing geopolitical narratives given its potential impact on Federal Reserve policy discussions later in the month.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Trump's recent social media remarks on Iran are perceived more as political commentary than indicative of new policy, reducing investor focus on geopolitical issues.
- 02Upcoming US inflation data is set to take precedence this week, particularly in light of recent surges in oil prices, which could strain consumer affordability.
- 03Market optimism appears to be overly influenced by attempts at mediating a ceasefire in Iran, which may not align with the realities of energy trade and pricing.
- 04The desk believes economic indicators will dominate sentiment over geopolitical events, a sentiment echoed in current market analyses.
Market implications
Traders should focus on the potential volatility surrounding the upcoming US CPI data release; a reading above expectations could further complicate market perceptions of affordability and likely provoke a reassessment of USD's strength. Maintaining vigilance on oil price movements will also be crucial as these directly affect consumer inflation dynamics and spending habits.
Risks to this view
A sudden escalation in geopolitical tensions leading to significant supply disruptions may invalidate this call by driving up oil prices unexpectedly. Additionally, unexpectedly low inflation figures could challenge the prevailing narrative, forcing a reassessment of trading strategies around USD.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Monday the 6th of April. Both the language and the content of US President Trump's weekend social media post on Iran mean that it's likely to receive relatively little emphasis from investors.
The target audience of the post would appear to be Trump's faction of the US Republican Party and the nature of the post means that investors are increasingly unlikely to try and analyse US policy within a framework dependent on the norms of international policy. Taken at face value, there is a suggestion that Trump has extended the deadline to Iran for reopening the Strait of Hormuz by 24 hours. Markets are not inclined to place much weight on such deadlines.
Trump plans to speak in public later today. Iran has continued to strike at targets within the Gulf region and the apparent focus on energy targets will delay the normalisation of the oil market even if Iran chooses to reopen the Strait. Nonetheless, markets have been biased to the optimistic in trading so far on rather limited reports of attempts by mediators to get a ceasefire declared.
This appears to be another instance of investors' desire to believe that the current situation cannot continue. The oil price remains well below levels required to bring about the necessary demand reduction to offset the loss of oil from the Gulf. The oil price feeds directly into the US affordability crisis.
Both politically and economically, that is likely to be the focus for this week. US March consumer price inflation data is due on Friday and that's likely to hang over the markets for the whole week. The data will not fully capture the oil price moves.
Over the month of March, the average gasoline price in the States went from below $3 per US gallon to over $4 per US gallon. So March will depend on precisely when prices were surveyed. Prices have obviously continued to rise in April.
As a high-frequency purchase, this price will influence the inflation perception that is so much of the affordability crisis. Aside from inflation perceptions, income is an important factor in determining the idea of collapsing affordability. Friday's employment report in the States was presented as strong because unemployment fell, but the details were not so good.
More unemployment was long-term and employment participation rates were reported lower. The household survey, which is what determines the unemployment rate, had a lower response rate than occurred during the pandemic, hitting an all-time low. Fear of giving information to the US government is now starting to create real problems with data quality.
Average earnings, not the same thing as wages, which can be distorted by the composition of employment, also weakened. The labour market data is therefore not a convincing offset to the US affordability crisis. That's all for today.
Have a good day. This material has been prepared and published by the Global Wealth Management Business of UBS Switzerland AG, regulated by FINMA in Switzerland. It's subsidiaries, or affiliates, collectively referred to as UBS.
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