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85% Of Wall Street Expects a "Dovish Hike Signal" From Yellen Tomorrow

Earlier this week, Citi's head of G10 FX strat Steven Englander conducted a survey among 350 participants (40% from the leveraged community, 21% real money, 23% Citi colleagues, 5% corporate and a smattering of central bankers and others), asking them what they expect from Janet Yellen's Jackson Hole speech. According to a vast majority, or 85% of the respondents, Yellen will lean toward one 2016 rate hike with hiking risk “overwhelmingly” in December even as September hiking risk is seen as “modestly underpriced."

He also writes that about 2/3rds expect an indication of a December hike in the speech, "with many more seeing it in abroad dovish context, rather than hawkish", however respondents see market as expecting just over 50% probability that 2016 hike is indicated in speech. He notes that almost 50% see higher EM as the outcome, but much more split on G10 outcomes.

Englander points out that if she does deliver a dovish long-term message, but signals one 2016 hike, investors expect to:

  • Buy EM
  • Buy S&P
  • Buy10s
  • Sell 2s
  • A couple of respondents would buy EM debt or other parts of the US yield curve

Less than 10% think Yellen will endorse a higher inflation/nominal GDP/price level target, but 25% think she will refer to inflation asymmetry. Remaining 2/3rd expect her to stick to 2%

29% think they will change their targets in the next two years (but not necessarily signaled at Jackson Hole); 50% think the targets will change only if there is a recession

With consensus so pronounced, there is substantial risk of pain trades. This is what they are:

  • An indication of a September hike – she may try and spin as dovish
    long-term but it remains so unexpected that it...