What Janet Yellen Could Say Tomorrow To Unleash A Market Surge

from Zero Hedge:

“The dovish surprise is if she explicitly removes March from the hiking calendar (which would be Draghi-esque in front running the FOMC), broadly hints at a delay or expresses concern on downside risk to long term inflation or structural stagnation. The intention would be to show US households, business and investors that the Fed has their back... It is unlikely, however, that pointing to negative rates or QE4 would work, as investors are increasingly skeptical that more of the same policy mix would be effective in hitting final goals.”

While the markets have been generally lacklustre in the past two days, much of the enthusiasm associated with the last hour spike on both Monday and Tuesday had to do with optimism involving a significant relent by Janet Yellen during her semi-annual 2-day testimony in Congress starting tomorrow at 8:30 am.

And while Yellen will certainly have a tough time reconciling the worst start for the S&P since 2008, or the accelerating slowdown across the global economy with the Fed’s dot plot which still forecasts 4 rate hikes in 2016, some such as Citi’s Steven Englander believe that Yellen will not only not relent as much as consensus believes she will (negative rate odds are well over 10% by the end of 2017), but will “deflate some of the recent enthusiasm” and “unwind some of the panic buying” of US fixed income.

While Englander admits that while the prevailing sentiment will be one of more of the same by Yellen, and will likely be accompanied by selling of rallies by traders,there is an odd chance that Yellen will try to break out of the trap the Fed has put itself in, and capitulate with a dovish relent, unleashing a major stock surge.

This is how she would do it:

The dovish surprise is if she explicitly removes March from the hiking calendar (which would be Draghi-esque in front running the FOMC), broadly hints at a delay or expresses concern on downside risk to long term inflation or structural stagnation. The intention would be to show US households, business and investors that the Fed has their back.

The Citi strategist notes that there is a major problem with this admission of policy error: “investors would likely interpret removing March from the calendar as a prelude to endorsing the much bigger unwind of policy rate hike expectations that is now priced into asset markets.”

Moreover, it is unclear whether the dovishness would be viewed as asset market friendly or as affirming the economic and asset market slump without really offering any policy alternative that would be considered effective. She may even be pressed on what policies the Fed would put in place if these downside risks manifested themselves. So there is a risk that a soothing message will end up as being viewed as an opportunity to sell from better levels.

And then this:

It is unlikely, however, that pointing to negative rates or QE4 would work, as investors are increasingly skeptical that more of the same policy mix would be effective in hitting final goals.

In other words, after massive policy errors by Draghi in December and Kuroda in January, Yellen may complete the trifecta by panering to a petulant stock market, and in the process not only not send it higher, but destroy the last shred of cred the Fed may have had, leaving the central bank cabal with just one option, the final one: money paradrops, the kind many serious economists have already called for.

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