UBS On-Air: Paul Donovan Daily Audio 'Gulf proposals'

Good morning. This is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Monday the 27th of April. Media reports suggest that the Iranian government has proposed terms to the United States which would allow the Strait of Amuz to be reopened. While there are other aspects of the war that matter to markets, not least the deterioration in the US fiscal position, reopening the strait is the principal concern for investors as having the biggest economic impact. The Iranian proposal suggests nuclear discussions be deferred until after the strait is reopened. That is something the US government might struggle to agree to. However, US President Trump's approval ratings have been sinking and Trump's approval for handling the US affordability crisis is extremely low. So presumably US political pressures to resolve the war are building within the administration with the aim of at least returning to something akin to the pre-war situation. On Sunday US Senator Tillis announced that they would be willing to proceed with a vote to confirm Federal Reserve Chair nominee Walsh. This follows the Department of Justice completely giving up its investigation into the Fed the investigations were perceived as a threat to policy independence If the vote proceeds along partisan lines Walsh should be confirmed as chair by the summer Fed Chair Powell may choose to remain as a governor. In terms of policy, this might give Walsh time to build the necessary coalition of support for rate cuts later this year, assuming the Gulf War is resolved. involved. Walsh has two challenges in that aim. First, Walsh's reputation within the Fed is not necessarily that high, and members of the FOMC seem more inclined to dissent from the chair these days. Second, Walsh wants rate cuts alongside a shrinking of the balance sheet, and the economic arguments around a quantitative tightening are not necessarily robust. An initial rate cut might have been easier with Powell. China reported strong growth in March industrial profits. While these numbers are volatile, they have been trending up over time. The numbers are not a major focus for investors, but they have a couple of points of relevance. First, the rising trend for profits raises at least some questions about fears of overcapacity within the domestic economy. Of course, the industrial sector is very high up in the supply chain, but it's not really a consistent story. Second the same sort of issues apply to the idea of China dumping products internationally If China is selling exports at a loss an accusation sometimes made by foreigners seeking trade protectionism then achieving a trend of rising profits domestically would be quite tricky. Elsewhere, there are only sentiment polls to attract attention, and the usefulness of these is ever more questionable. The US-Dallas Fed Manufacturing Sector Survey does offer the fun of its comments section, and those comments have some very limited relevance as an indication of political pressures surrounding the US administration in light of other opinion polls. The relevance is limited because there is selection bias. People who fill in comments sections tend to be people who want to complain about something. German consumer sentiment fell further than expected in the latest survey, Given the media and social media narratives, it's not necessarily that surprising that asking people how they feel about life is likely to produce a negative result. It's worth noting that while consumer sentiment has dropped sharply since June of last year, German inflation-adjusted retail sales are essentially unchanged. 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.