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Good morning. This is Paul Donovan, Chief Economist at UBS Global Wealth Management.
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It's 7 o'clock in the morning, London time. On Thursday, the 19th of March.
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The latest escalation in the Gulf War has pushed energy prices higher again.
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Attacks on gas fields and oil infrastructure raise longer term concerns.
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To date, markets have been relatively willing to look through short-term oil
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price moves because consumers and companies can adapt and call on alternative resources
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as long as there are not actual physical shortages of oil.
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However, those mitigating factors cannot last forever. Households won't use savings indefinitely
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for instance. Attacking oil infrastructure risks delaying a normalization of energy markets,
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and that raises questions about economic behaviour in the latter part of this year.
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However, US President Trump's rather urgent social media posting about infrastructure attacks
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does suggest perhaps some awareness of the domestic costs of the war,
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politically, if not economically, which would keep investors focused on the idea of a potential
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US withdrawal. US retail gasoline prices rose again on Tuesday and an average of $4 a gallon is
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not now very far away. While the price levels of various fuels in the United States are not at
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records, the change in certain retail fuel prices is at all time highs, and with prices at the pumps,
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the change in the price as well as the level of the price has political resonance.
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US Federal Reserve is obviously trying to balance all of this and gave a response yesterday
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that was more or less in line with expectations. While there was only one descent from the
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decision to keep rates unchanged, the tone is still consistent with the possibility of rate cuts
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over time. There was some focus on tariff effects on inflation. Of course, there are also other
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considerations for inflation as well. Trucking costs were rising in the producer price inflation
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data, which might possibly be tied to declining employment in that sector and related immigration
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policy. For the oil effect, the Fed is focused on inflation expectations. These are tricky as they're
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not easily measured in the fevered partisanship of the United States these days, and they only
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really matter if they cause a behavioral change on the part of consumers or businesses.
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Fed Chair Powell offered a fairly clear defense of the Fed's independence,
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pledging to stay in place for the foreseeable future, including continuing as chair of the FOMC
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after May. That was more or less what markets had expected to happen, and it means that for the
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time being, it is Powell's views that matter, and those of former Fed Governor Wallshire,
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a bit of a side show. The Bank of Japan also left rates unchanged. The impact of the
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Gulf War on Japan is perhaps even less clear than in other economies, as Japan does have a
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history of society acting collectively in the face of a challenge, and that might potentially shift
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energy demand. Japanese Prime Minister Takiichi meets with Trump today. The meeting is of
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some interest. The global gold bar diplomacy of last year has rather given way to less willingness
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to compromise, and obviously issues like trade are going to remain important for Japan.
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We have the Bank of England and European Central Bank decisions today, both of which are
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expected to leave policy interest rates unchanged. For the European Central Bank, this is part of
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a trend, masterful inactivity, on the part of ECB, as the norm, and it is likely to endure this year.
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Expectations for a rate increase seem completely detached from both economics and reality.
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The Bank of England is more uncertain, with rate cuts still likely in the medium term.
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The weirdness of UK energy pricing does create some risks for higher inflation down the road,
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but underlying inflation pressures remain quite modest. Today's labour market data showed
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a decline in unemployment and a slowing in the pace of average earnings growth,
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even though the numbers have been distorted higher by a temporary effect with regards to public
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sector pay. That's all for today. Have a good day.
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