Could 35 Citigroup Clients All Be Wrong?


Photo: Max Westby

From Citi’s forex guru Steven Englander, a quick glimpse at what crowd consensus is these days:In about 35 client meetings in different centres over the last couple of weeks, we have been struck by the degree to which the global optimism story remains embedded as the baseline for many investors. The prevailing view remains that there will be a co-existence of growth, inflation and moderate (but not oppressive) rates tightening, with the Fed lagging on the rates front. There is some concern about EM vulnerability in the short term to both oil and rates tightening, but more as a correction than as a theme reversal.

So the overall view is that countries will tolerate higher inflation, with some modest rear-guard tightening to show the anti-inflation flag. While stagflation is often used in the press to describe the outlook, the client view is there will be less ‘stag-‘  and more ‘-flation’. The main reasons that clients anticipate more tolerance of inflation: 1) some countries such as the US, China and the UK are viewed as having bigger priorities than inflation; 2) many policymakers view inflation as being driven by external forces rather than domestic core inflation, so they are reluctant to hike until second round effects are visible — this is true to some degree of G10 and especially EM.

With respect to ‘fat tails’ whether due to EUR sovereign risk, inflation risk, oil risk, HIA-2 risk or other risks, the general view is that they remains tails. We did not come away with the view that investors were positioned for such risks, except possibly in being long oil or long oil surrogates. At this stage the pain trade remains bad news..

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