UBS On-Air: Paul Donovan Daily Audio 'The Fast and the Furious'

Paul Donovan · UBS Global Wealth Management

Diesel focus could enable profit-led inflation if firms blame fuel costs for margin-expanding price rises; no evidence yet.

If the diesel story becomes dominant, companies may feel able to add margin-expanding price increases and attribute them to fuel costs, which is profit-led inflation. Donovan notes there is no evidence of this so far. He adds that profit-led inflation depends on how much the story is talked about rather than on the costs themselves, so the risk rises with the volume of the narrative.

“The focus on diesel might conceivably allow some second round inflation, specifically profit led inflation, if the story becomes so dominant that companies feel able to sneak in some margin expanding price increases and claim that it's all due to fuel costs.”at 1:10

Paul Donovan · UBS Global Wealth Management

Affordability politics is driven by inflation perceptions more than inflation reality, so expectations matter most.

Donovan argues that the US affordability crisis is far more about inflation perceptions than inflation reality. He points to sentiment polls showing independent voters' reported inflation expectations rising to 4.7% over the next year. He says these perceptions are what will matter politically, given the upcoming midterms.

“affordability is far more about inflation perceptions than inflation reality. If one can give any credibility to sentiment polls, the rise in independent voters reported inflation expectations to 4.7 over the course of the next year is what is going to matter politically.”at 2:19

Paul Donovan · UBS Global Wealth Management

Trump's weekend Russia diesel focus argues against a US-Iran deal anytime soon.

Donovan says the weekend's actions, the Russian diesel deal and the energy ceasefire push, might argue against expectations for a deal with Iran anytime soon. He implies the administration chose the Russia route to claim action on oil and diesel prices because no Iran options were available that would allow the same political spin. The hedged claim is that an Iran deal is unlikely in the near term.

“Trump's actions this weekend might also argue against expectations for a deal with Iran anytime soon.”at 1:46

Paul Donovan · UBS Global Wealth Management

Russian diesel purchase deal unlikely to meaningfully change diesel prices; mainly lets the administration claim action.

Trump announced a deal with Putin to buy Russian diesel over an undefined period. Donovan argues the Russian diesel focus is unlikely to make a meaningful difference to diesel prices. Its real purpose is to let the administration claim it is taking action on the affordability and diesel cost issue ahead of the midterms.

“The Russian focus with the diesel sales unlikely to make a meaningful difference to diesel prices do at least allow the administration to claim that it's taking action.”at 1:55

Paul Donovan · UBS Global Wealth Management

EU-China hybrid car export deal averts harsher EU tariffs for now; economic nationalism will keep recurring.

The EU agreed a deal with China to reduce China's hybrid car exports to Europe, which Donovan describes as making European consumers pay more for cars they do not want to buy. The deal averts a more aggressive set of trade taxes on European consumers, but only for now. Donovan argues that economic nationalism remains a feature of the global stage and that this trade issue will recur.

“There was a 16 agreement between the two sides that averts a more aggressive set of trade taxes on European consumers for now. But the economic nationalism continues to be a feature of the global stage.”at 2:55