Same Script Emerges
On July 4th, the Bank of England warned in its policy decision that ‘the significant upward movement in market interest rates would…weigh on the [economic] outlook’. On Wednesday this week, Fed Chairman Bernanke appears to have been reading from a similar script, stating that ‘tightening financial conditions’ could ‘jeopardise’ the Fed’s ability to meet its ‘dual mandate’, and this warranted a far more cautious outlook than markets were expecting. Financial conditions tighten through higher yields or a stronger currency: from July 19th until before Bernanke’s Wednesday speech, the DXY and 10-year Treasury yield have made around 5% and 55bp respectively. This is hard for the Fed to countenance in good times, let alone during (weak) recovery mode and while central banks move the other way.
Read the full report: UBS