UBS On-Air: Paul Donovan Daily Audio 'Independent thinking'

0:00Good morning. This is Paul Donovan, Chief Economist at UBS Global Balth Management. It's 7 o'clock in the morning, London time. On Tuesday, the 22nd of September. The Gulf countries, meeting on the fringes of the UN's General Assembly, have suggested that peace talks between Iran and the United States are not really progressing. Markets surprise at this news is likely to be quite muted. More significantly, the suggestion is that a long-run solution in the Gulf will involve a new cooperation between the Gulf states and Iran. This acknowledgement might open the way to Iranian tolls on shipping through the straits of Hormuz, for instance, although of course the tolls could be cunningly disguised as tariffs or environmental protection charges. The idea of a more independent security arrangement with less reliance upon the United States

1:02has implications for financial markets. The Middle East has traditionally skewed defense procurement towards the United States, and that has historically been an important mechanism for recycling petrodollas without weighing on the dollar's value. That flow might become less dependable. Separately, the UK has committed to supporting the Saudi government through the use of refueling aircraft in operations against the Houthi. In the world of central banking, European Central Bank Chief Economist Lane gave a media interview of acknowledging that the oil price increases and the associated gas price increases might keep inflation higher for longer, although service sector prices should stay contained. This rather sums up the ECB's problem. The oil price shock is a one-off temporary shock, but it's lingering, and it comes after a series

2:05of other one-off shocks. How many one-off shocks does it take to change the perception of inflation? The only way a central bank can counter a one-off shock on the supply side is to create a downturn in other parts of the economy in order to induce deflation there. So is Lane ready to commit to creating a European service sector recession so that the oil price shock does not keep pushing headline inflation above the magic 2% target? Lane's comments overall were focused on the European growth story, which suggests that inflation will be allowed to run over 2% for longer, but this is a debate that is likely to resurface. We'll also be hearing from Williams of the US Federal Reserve, US monetary policy falls into the same dilemma as that of Europe, should an economic downturn be engineered in the non-oil economy to offset the price effects

3:08of a supply shock that central banks cannot control. The Fed has the additional complication of needing to prove that it's not under political control, and the challenge of dealing with an increasingly divided economic experience. The data calendar is not especially exciting today. There are some business sentiment polls during the United States but of a regional nature, and anyway it's getting very hard to take sentiment polls especially seriously. We know from the Michigan sentiment polls that political polarization effects consumer sentiment and there's no reason to suppose that the biases of the consumer do not impact the biases of the corporate poll respondent, that both human beings after all. With US President Trump's approval rating hitting new lows, that polarization is likely to be ever more extreme. Euro-area consumer confidence is due and falls into the same pattern, though perhaps the political polarization in

4:11Europe is not quite so powerful as in the United States at the moment. 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. 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

5:15other 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-ford-ci-i-o-disclaimer to read the full legal disclaimer applicable to this material.