Top of the Morning: CIO Strategy Snapshot - Where do we go from here?

Hi everyone, Dan Cassidy here. Welcome back to the top of the morning on the UBS Market

Moves Podcast channel. Coming off of a holiday short and week that experienced the first

positive market performance in over a month, but with further risk of escalation in the

U.S. around war, the question that investors are going to ask at the start of a new week

is where do we go from here? So joining us here on this Monday morning to try and answer

that very question. Glad to welcome back. Head of asset allocation for the Americas

with the UBS Chief Investments Office, Jason Trejo. Jason, welcome back. Hope you enjoyed

a nice holiday weekend. And thank you for spending some time with our listeners to begin

another week.

Thank you.

Morning, Dan.

Happy Monday.

Yes, it's a back after with a short and weekend. And I know a colleague's else went

around the world, and we're still lost. So still not fully, I could globally this week.

Jason, at the start of this week, we can point to market stabilization last week and that

was good to see what exactly happened and more importantly, why did it happen?

Well, let's just take a quick summary of market performance across different asset classes.

We saw bounce back in equities within the U.S. the S&P 100 rose 1.6%. You know, on the

weekend, you know, the short and the week, you know, because Friday was off, it is now

down 4.3% from its February 27th level right before the conflict began. This was led by

kind of large cap growth, a little bit more, you know, economically sensitive sectors,

but also more so secular growth, like 10 means we're all so up around 4%. If we look

outside of the U.S., you know, European equities is an example. We're up even more, you know,

the, you know, Euro stocks index up 2.3%, German equities up to 2.5%. So kind of a bounce back

in equities is kind of globally. This course pointed to be decline in the VIX volatility index.

You know, the market from the period gauge, it was lower 30 as the week began and then it

fell to around 25, you know, by the end of the week, it was dropping around a little bit,

but you know, decline there. Another market, big income, we saw yields across the entire

treasury curve go lower by 12 basis points for the two year, 11 basis points for the 10 year,

and then market pricing for, you know, Fed expectations further went from price in

and hikes to like at some point even last week. Again, pricing in cuts as the week went on.

And you know, this led to a 7% or contributed to a 7% jump in gold last week. As weeks have

gone up, gold has sort of moved in virtually and now it's rates go lower. You see gold

bouncing back. And on currencies, the dollar was up very slightly and so still consistent with

kind of a risk of flow, but not as much as the other markets even move. On the other key thing,

and this is kind of the, perhaps, you know, driving moments, this is, if we look at oil prices and

not spot oil prices, which continue to go higher, because you know, ultimately a lot of

billion oil markets, engine markets are spot market, meaning they have to kind of clear right now

with opposed to equities are sort of discounting of future earnings. But if we look at where, you know,

the kind of the forward curve is pricing for oil, especially in the US WTI, you're six to 24

months out, you know, it was down about three to five dollars last week. So new term stress,

but the view is that ultimately this is going to lead to a little crisis later on, at least well

to the way we were the prior week. So still high, but the direction of travel is positive.

So you sum it all up. It was a positive market story last week, which gets it to go higher,

you know, a pretty interesting lower future oil prices go overall. You know, why did this happen?

What we saw when we talked last week, you know, President Trump did further delay it until April 6th,

you know, some actions on, you know, attacking missiles on Iranian power facilities,

y'all made some comments early last week regarding what you have to all be over, you know, very soon,

the job is almost done. You know, by the middle of the week, you know, when he gave his press conference

there on Thursday, the market reaction was a little less favorable. You seem like not necessarily clear

into the site. Yet here we are Monday morning. There's some other signs that suggest efforts have

been made to try and, you know, bring this conflict towards the end. There is a UN resolution to

open the straight-of-homones. There are different 40 different nations meeting with the same goal.

You know, there's Iran, Oman, negotiations about the, you know, straight-of-homones access.

I'm more apparent involvement in, you know, European and Chinese officials are trying to all bring this

to, you know, at least I cease fire. And again, there's reports this morning that some allies,

such as Turingi, Pakistan are also pushing for a 45-day ceasefire. That would ultimately,

to a end of the conflict. So it is still a very fluid situation because we also saw the President,

you know, you know, freed out over the weekend that if Iran does open the straight, he will launch attacks.

So very fluid situation. But if I were to look at what's kind of going on overall and what the

market reacted to last week is it's sort of reducing a little bit the downside of risks of oil

spiking to $250 a barrel onto this standard-prepared time. So, you know, a little bit less downside of

this. It means the markets can react sort of favorably and that's what we saw last week.

Now, Jason, if we focus in on the macro economic environment, reflecting on last week,

we did receive important March economic data, including the payrolls report on Friday markets

and the US, of course, were closed. What's the takeaway from the latest jobs data?

Well, if we just look at the overall data because we also call it the ISM,

manufacturing index and some other data, it's still showing an economy through the data we have.

A lot of it will be surveyed based on, like, mid-March, so not the most current.

It's showing an economy that is, you know, well-played resilience, you know,

GDP tracking for Q1 is still, most estimates would be, you know, 2.5 to 3 being a percent.

Ignorant Atlanta Fed, which is lower because it's being distorted by some trade data.

So that's positive. Some of these surprising disease still suggesting the data was a little

bit unexpected last week. That culminated with the payrolls data that we did get on Friday.

So the, you know, the headline number, the payrolls, non-point payrolls number,

well, rose 128,000 in March, where the consensus forecast was 65,000.

Now, there was definitely some payback in that headline number, you know,

some of those weather because in February it was quite cold during the time period in March,

the weather was better, and that may have added upwards of, you know, 60,000 jobs.

There was also a payback from strikes that lowered the payroll growth in February,

like these are in, within the health care field, they could have taken away 30,000 in February,

added 30,000 in March. So given there's a lot of volatility in the numbers for payrolls,

if we look at this three month moving average of private sector payroll growth,

it rebounded sharply, it was 15,000 through the February data, it's back up to 79,000 through

the March data. And this is comfortably above with most estimates that say, like, how many jobs

do we need to be creating in a month to maintain the unemployment rate at the stable level?

That's the breakeven job growth. So the latest data suggests where at least at that level is not

above. All that matters, you know, because the feds, you know, research suggested,

all we need to have for the stable unemployment is, you know, upward to maybe 10,000 new jobs

per month. Other parts of the payroll data also encouraging, which is the unemployment rate.

This is perhaps the most critical signal, meaning it considers like the labor market supply

story, and also for what the fed will really going to be engaged on or focused on, they make policy

decisions. The unemployment rate fell 18 basis points to 4.26%. And the three month average

was more than about a tenth of a percent below its November high. So the unemployment

and the reinforces the message that the labor market is stabilizing. There were other details

in the report that a little bit less encouraging on more mixed. For example, they declined the

participation rate, exaggerated the acid of the improvement of the unemployment rate,

average our average will weekly hours worked. It's done a little bit lower and way,

way to go up to decelerated. So it's not a great source of labor market, but it is consistent

with, if you kind of take an average over the past four or five months, that would seem to be

some stabilization, if there was a clear trend of softening last year. So that's from the positive

development. This week, the big focus will be on inflation. The data comes out on Thursday.

That's the ninth. The headline number is going to go up a lot because it's going to

incorporate the big surge in energy and oil prices and gas at the pump on national averages

up about 35% from roughly $3 to $4. As a result, the headline inflation number of consensus

forecast is going to be 1% on a month of a month basis. For context, it was 30 basis points

for February. So you'll see new stories on by the end of the week of his massive surge of

inflation, which the market has already anticipated. But I think the question then will be how much

is built into core measures of inflation, and not just headline, which you know I'm at the

sadwood that I'm going to look through. So I think that's what the key thing is, is this the

to look at next week or later this week is the details of inflation and is it starting to impact

the core in some way? And you know, time will tell on that. But otherwise, the number is going to

look shocking even if the details aren't so bad. So Jason, just taking these factors into account

that you've covered with us, the state of the US macro economic environment, you think about the

fluid geopolitical landscape, taking all of this into account, what recommendations currently

Jason do you have for investors? Well, last week I heard a pretty good reminder that

you're trading geopolitical risks and events is difficult because markets can move very quickly

on well to be little news or or significantly on actual substantive news. And just like

in at the price of a gold up to 7% last week, equities especially on Tuesday and Wednesday,

you know, up combined in the US, you know, over 4%. So you can get these significant moves very

quickly, which also then is the reason why you want to stay invested and not begin to penetrate

the market, you know, to significantly be recovering equity markets outside of the US. So the

bounce back I mentioned, you know, in Europe, in the equities is not going to remind that you

want to be diversified globally, not be sort of too concentrated because other parts of the world

have been hit even harder than the US during this, you know, conflict in likewise, if the

situation stabilizes and then your term, then the bounce back is basically for you know,

yeah, where your equities can be very sharp. I mean, again, we saw that last week, you know,

some mid-single digit type of returns for some of the Asian equity markets. Overall,

our view on the US economy on equity markets remains kind of constructive on a six to nine-month

view, but acknowledge that look at the near term, it's very fluid and we may have more downside

versus upside in the in the very near term, but ultimately, you know, we do believe that the

situation will start to de-escalate by the end of the month or will start kind of increasing its

flows through the streets here by the end of the month, and like that doesn't mean oil price

that will come down quickly, they could be elevated for a long time, but what it does mean from

a market perspective is that those gallant hours can start to recede in quite a bit. And if that's

the case, when investors start to look at the economic fundamentals, they bring in fundamentals,

you start to see more upside, which is why we haven't so it's still just kind of constructive

view on a, you know, it's called six to 12-month view. If you look at their fixing or other

classes, like a big tankum, you know, rates 12 past week, we've had the view that the fun

end of the treasury curve, like the two-year point roughly, was pricing in too much in terms of

the fed hikes. We still believe that that is going to cut this year, twice, September, December,

as that happens, yields go lower, especially the front end, so that's where if you want to have

exposure and changes rates, especially in high quality fixed income, go ahead and front end of

the curve, the two to five-year points are a desired area. The 10-year did decline, 11 basis points,

and it is getting close to the midpoint of the rains that we've had for a while, which is

like around four to four and a half percent. But the next couple days, depending on what happens

with the price of oil, the 10-year heat easily should back up over to 4.4 or 4.5, or close to 4.5 percent.

So they look cautious on taking a lot of interest rate risk exposure at this time, and maintaining

high quality fixed income in general. And then gold, even some advocates still can be a good

diversifier portfolio. And while it was struggling earlier in this conflict last week, bouncing back

and suggesting that in as rates go lower, it should benefit. And also as things stabilize,

some of the technical from flows may be reduced exposure to gold that happened in the past few

weeks as investors have monetized the significant gains they would have had while we're trying to be

in kind of buyers, which will provide support to gold to move high entry rate as well.

So bottom line is a lot of the key views that we've had in the past few weeks. Those are maintained

on last week's price actions of the value that some of those views.

Well, Jason, very helpful touch base. Thank you for dropping by on this Monday morning to keep

our listeners informed on CIOs, thinking when it comes to the current geopolitical landscape,

the macroeconomic environment, how it all translates to market action, and guidance when it comes

to positioning one's portfolio. So thank you again for joining us today, Jason, and look forward to

picking back up with our conversation again next week. Come on, have a good weekend.

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