UBS On-Air: Paul Donovan Daily Audio 'Public and private unpredictability'

Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Wednesday the 6th of May. Financial markets face an almost impossible challenge in trying to price outcomes in the Gulf War. US policy has been unpredictable, but publicly unpredictable. Thus, yesterday's decision to execute a rapid retreat from guiding ships through the Strait of Hormuz was not necessarily predictable, especially as it had been lauded by administration officials only hours before it ended. The decision taken has been public, however, and with gasoline prices over $4.50 per US gallon, the pressures on the US administration are also fairly public. On the other hand, the decisions of the Iranian government are privately unpredictable. The lack of transparency on that side of the conflict challenges any attempt to time outcomes in the war. Without knowing the Iranian position it is impossible to know how many concessions the US will need to make in order to strike a deal and extricate US forces from the region Without knowing that, it's very difficult to know if the war, or more specifically the blockade of Hormuz, will last until the point when physical shortages start to really impact the global economy. The inability to resolve public and private unpredictability means that markets know that we have run off the edge of the cliff in the Wiley E. Coyote scenario, but it's almost impossible to know whether economic gravity is going to take hold and plunge the global economy into the abyss below. South Korean consumer price inflation was released for April and came in as expected. Ignoring food and energy there was no change in the rate and with food and energy the increase in inflation was very modest. This reflects the government's policy of taking the economic pain of higher oil prices onto fiscal policy with a price cap rather than passing on the full price effect to the end consumer. the problem with this approach is that it gives less incentive to consumers to cut back on consumption The pricing mechanism is the most basic economic mechanism for matching supply and demand in a market and supply is now constrained. Interfering to prevent the pricing mechanism from working to lower demand has potentially negative consequences. Sweden's inflation hit a near 30-year low on the core measure, reflecting a lack of underlying inflation pressures there. The data calendar ahead is cluttered with business sentiment opinion polls, taking up space required for other purposes. The value of these polls has to be considered even more limited than normal, given the fog of unpredictability. 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 its subsidiaries or affiliates collectively referred to as UBS In the USA UBS Financial Services Inc is a subsidiary of UBS AG and a member of FINRA SIPC The investment views have been prepared in accordance with legal requirements designed to promote the independence of investment research. This material is for your information only and it is not intended as an offer or a solicitation of an offer to buy or sell any investment or other specific product. The analysis contained herein does not constitute a personal investment recommendation or take into account the particular investment objectives, investment strategies, financial situation and needs of any specific recipient. This material may not be reproduced or copies circulated without prior authority of UBS. Please visit www.ubs.com forward slash CIO hyphen disclaimer to read the full legal disclaimer applicable to this material.