UBS Sees Minimal Probability for 'Tariff Shock' Recession Scenario

Investing.com -- As global equities rise, Treasury yields have fallen, and the U.S. dollar has declined over the past 24 hours. This occurred following a report from the Washington Post that Trump's aides are considering universal tariffs. These tariffs would apply to all countries but would only cover critical import products. If implemented, this move could reduce the most comprehensive element of Trump's campaign plan.

President-elect Trump quickly denied the report on social media and criticized the Washington Post's journalistic standards. This reaction helped alleviate some of the pressure on the dollar and Treasury yields. However, stock demand continued, and Asian markets broadly rose on Tuesday despite Trump's denial.

The future of tariff policy and negotiations remains uncertain. According to UBS, there are a few clear takeaways for investors: The U.S. negotiating stance is expected to differ from the ultimate outcome. It is not surprising that President-elect Trump denied the report. He aims to use the threat of universal tariffs as a credible bargaining chip in bilateral trade negotiations. Eliminating this option now would limit bargaining power.

The report is seen as an indicator of the difference between a bargaining position and policy objectives. It is important to remember Trump’s threat to impose tariffs on non-trade issues at the end of November; here he had confirmed his willingness to use tariffs as an operational tool.

It is believed that Trump’s economic team understands its role. While there is speculation that potential media criticism could push Trump to insist on tougher tariffs, doubts remain about whether the administration would pursue extreme policies that could lead to rising inflation, significant supply disruptions, or broader economic repercussions.

There is also a political calculation at play, as the Republicans' majority in the House of Representatives is already quite narrow. A "shock therapy" approach could considerably damage the Republicans' chances in the 2026 midterms.

According to Marcelli from UBS, there is a small likelihood of a “tariff shock” bear scenario.