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

Good morning. This is Paul Donovan, Chief Economist at UBS Global Wealth Management.

It's 7 o'clock in the morning, London time, on Monday 27 April.

Media reports suggest that the Iranian government has proposed terms to the United States,

which would allow the straight of onwards 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 straight is the principal concern for investors as having the biggest economic impact.

The Iranian proposal suggests nuclear discussions be deferred until after the straight 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.

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 Wash.

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, Wash 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 Wash time to build the necessary coalition of support

for rate cuts later this year, assuming the Gulf War is resolved.

Wash has two challenges in that aim.

First, Wash'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, Wash wants rate cuts alongside a shrinking of the balance sheet

and the economic arguments around the 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 comment 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 comment 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.

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