UBS House View Daily

Thought of the day

13.07 - Yellen and the subtle art of the exit

Yellen’s first day of Congressional testimony, while relatively balanced as a whole, was marked by a subtle tone shift on the inflation drivers and the longer-run neutral rate. That bolstered market expectations for a more dovish Fed, helping to lift the MSCI All-Country World Index 0.9% to a near-record high, and sending the US 10-year Treasury yield down 5bps to 2.3%.

But the Fed’s rate hike impulse is at most delayed, with the chair’s testimony still painting a positive picture of the real economy's prospects.

  • Yellen’s testimony noted a rebound in second quarter growth (which we track at 2.4% based on the latest US data), alongside gains in household spending and consumer sentiment.
  • She also used more positive language on the tightening labor market following last week’s 222,000 nonfarm payrolls (versus a consensus view of 179,000), and maintained the Fed’s call for a gradual rate increase.
  • Finally, Yellen indicated a reduction in the balance sheet would go ahead “relatively soon,” in spite of still subdued inflation, suggesting a growing dove/hawk consensus on quantitative tightening.

So nuances aside, the Fed’s message is that the economic recovery is gaining momentum and becoming more sustainable. We continue to expect one more hike in 2017, and see the continued gradual pace of Fed tightening supporting our overweight position in global equities.

Chart of the day

Yellen and the subtle art of the exit

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