It’s yet another day of aimlessness across markets as the entire financial universe awaits Janet Yellen’s Jackson Hole speech.
Just about the only other thing anyone seems to care about this week is EpiPen prices. As far as Yellen goes, Citi conducted a survey to find out what the market expects. Here are the results:
(Chart: Citi)
So it’s the whole “dovish hike” thing again.
We’ve said before that we don’t care much for that concept. It’s an oxymoron. The term “dovish hike” simply conveys desperation. If you’re hiking rates but you’re dovish then by definition you’re only hiking to give yourself room to possibly cut later on down the road. Obviously, that’s not a particularly palatable situation to be in.
Here’s the rather amusing response Citi got when the bank asked what investors would be inclined to do if the Chair leans dovish but preserves the 2016 optionality:
(Chart: Citi)
Right. So sell the short-end, buy the long-end, and of course, buy stocks. Apparently 11% of people are so confused they don’t even care anymore.
Meanwhile, as the Street sweats it out over the possibility that there’s a possibility (and no, that’s not a typo) of a 25 bps rate hike sometime in the next six months, there’s an election coming up and as we’ve been pretty keen on reminding you, no one seems to care:
Make no mistake, Hillary Clinton is the Street’s preferred choice here. The bulge bracket has paid her millions in speaking fees over the years and no one wants the uncertainty that would invariably accompany a Trump administration. Given that, you can take banks’ election analysis with a grain of salt, but for what it’s worth, Citi is out warning on the global economic ramifications of a Trump victory. Here are some excerpts:
“There are also sizable (and probably unusually large) election-related risks to the outlook for US growth and financial conditions. On the upside, the elections could be followed by a major fiscal boost, perhaps as a deal is struck to increase infrastructure spending while allowing companies to repatriate foreign profits at a discounted rate (under a Clinton or Trump administration) or due to sizable tax cuts (more likely under Trump)."
“Against that, a Trump victory in particular could prolong and perhaps exacerbate policy uncertainty and deliver a shock (though perhaps short-lived) to financial markets. Tightening financial conditions and further rises in uncertainty could trigger a significant slowdown in US, but also global growth. Assuming, somewhat conservatively, that a Trump victory would lead to a 1 sd increase in global policy uncertainty and a 1 sd tightening in US financial conditions (and that the two shocks affect global growth additively), a Trump victory could lower global GDP growth by around 0.7-0.8pp, according to our estimates, pushing GDP growth easily below our benchmark for a global recession of 2% global growth at market exchange rates in 2016/17.”
(Charts: Citi)
We would concur. You’re also reminded that just about the last thing the world needs at this juncture is more policy uncertainty:
(Chart: Goldman)
It says a lot about the state of markets when the utterances of a single policy maker matter far more than a Presidential election but alas, that’s where we find ourselves headed into Friday.
Of course if Trump is elected Yellen’s reign may be cut short - something else to consider.