UBS On-Air: Paul Donovan Daily Audio 'Longer-term concerns'

0:00Good morning. This is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning, London time. On Thursday, the 19th of March. The latest escalation in the Gulf War has pushed energy prices higher again. Attacks on gas fields and oil infrastructure raise longer term concerns. To date, markets have been relatively willing to look through short-term oil price moves because consumers and companies can adapt and call on alternative resources as long as there are not actual physical shortages of oil. However, those mitigating factors cannot last forever. Households won't use savings indefinitely for instance. Attacking oil infrastructure risks delaying a normalization of energy markets, and that raises questions about economic behaviour in the latter part of this year.

1:00However, US President Trump's rather urgent social media posting about infrastructure attacks does suggest perhaps some awareness of the domestic costs of the war, politically, if not economically, which would keep investors focused on the idea of a potential US withdrawal. US retail gasoline prices rose again on Tuesday and an average of $4 a gallon is not now very far away. While the price levels of various fuels in the United States are not at records, the change in certain retail fuel prices is at all time highs, and with prices at the pumps, the change in the price as well as the level of the price has political resonance. US Federal Reserve is obviously trying to balance all of this and gave a response yesterday that was more or less in line with expectations. While there was only one descent from the

2:02decision to keep rates unchanged, the tone is still consistent with the possibility of rate cuts over time. There was some focus on tariff effects on inflation. Of course, there are also other considerations for inflation as well. Trucking costs were rising in the producer price inflation data, which might possibly be tied to declining employment in that sector and related immigration policy. For the oil effect, the Fed is focused on inflation expectations. These are tricky as they're not easily measured in the fevered partisanship of the United States these days, and they only really matter if they cause a behavioral change on the part of consumers or businesses. Fed Chair Powell offered a fairly clear defense of the Fed's independence, pledging to stay in place for the foreseeable future, including continuing as chair of the FOMC after May. That was more or less what markets had expected to happen, and it means that for the

3:03time being, it is Powell's views that matter, and those of former Fed Governor Wallshire, a bit of a side show. The Bank of Japan also left rates unchanged. The impact of the Gulf War on Japan is perhaps even less clear than in other economies, as Japan does have a history of society acting collectively in the face of a challenge, and that might potentially shift energy demand. Japanese Prime Minister Takiichi meets with Trump today. The meeting is of some interest. The global gold bar diplomacy of last year has rather given way to less willingness to compromise, and obviously issues like trade are going to remain important for Japan. We have the Bank of England and European Central Bank decisions today, both of which are expected to leave policy interest rates unchanged. For the European Central Bank, this is part of a trend, masterful inactivity, on the part of ECB, as the norm, and it is likely to endure this year.

4:08Expectations for a rate increase seem completely detached from both economics and reality. The Bank of England is more uncertain, with rate cuts still likely in the medium term. The weirdness of UK energy pricing does create some risks for higher inflation down the road, but underlying inflation pressures remain quite modest. Today's labour market data showed a decline in unemployment and a slowing in the pace of average earnings growth, even though the numbers have been distorted higher by a temporary effect with regards to public sector pay. 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,

5:14and 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.ubbs.com forward slash CIO hyphen disclaimer to read the full legal disclaimer

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