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Euro Plunges On Dovish Trichet Comments, Says ECB Has Credibility Because Hiked First (What Does That Leave For The Chairsatan?)

Tyler Durden's picture




 

Trichet says:

  • CPI rates likely to stay above 2% in coming months
  • Risks on economy from Japan disaster
  • Geopolitical tensions pose growth risks
  • Paramount that rise in HICP inflation does not lead to second-round effects
  • Risks to medium term inflation outlook are on upside
  • Inflation expectations must remain firmly anchored
  • Monetary analysis indicates underlying pace of monetary expansion picking up but moderate
  • Confirm banks have continued to expand lending to private sector
  • Governments need to achieve their fiscal consolidation targets in 2011

Most importantly: he says nothing about a June hike which was largely "priced in" by the Wall Street lemmingraty.

From the Q&A:

  • Will not comment on the market, but the ECB can delivery price stability in the medium run
  • Can increase rates whenever judge appropriate to do that
  • Incorporate the EURUSD FX rate in the ECB's analysis, have noted that on April 26 Geither said "our policy has been that a strong dollar is in our interests as a country, will never embrace strategy of weakening our currency at the expense of our trading partners"
  • No response on whether the ECB will resume or cut bond purchases
  • Says as to credibility was first Central Bank to increase rates
  • What has changed in inflation picture? Money markets have hit a brick wall: are they improving? - Not changing attitude regarding inflation - continue to monitor developments to upside price stability. Will always do what is necessary to deliver price stability. 
  • Progressively looking at more appropriate function of the money market which is visible in the positioning of the EONIA. If EONIA vol is less pronounced than before it would be good. Liquidity situation of overall banks is normal.
  • W/R/T Portugal will expect that all countries live up to their responsibility.
  • Responds: 'I don't think we have a policy of normalisation'
  • Question of the day: "Do banks that are not raising rates have a credibility problem" FTW
  • Do you think Portugal will be available to come back to market any time? Did not work with Greece. Also, on normalization there are those on the ECB who do use the term. Answer: Not sure who you are alluding to in the governing councel. Must be semantics. On Portugal believe the program contains elements to stabilize the economy.
  • Will ECB need more capital from regional banks? Have no new decision in the pipe.
  • Greek Restructuring is not in the cards.
  • Will EFSF be fully activated regardless of Finnish stance? Why should Finnish taxpayers guarantee funding for portugal? In contribution of Eurobodies must consider that EFSF and EFSM both must contribute one third each of the bailout package. We as governing counsel are calling all countries to be "up to their responsibility in the circusmtance." [sic] 
  • People don't seem to think Irish bailout package is working. Does ECB think it is working? ECB has a plan approved by the international community which is being implement by the government. We share the view that Irish bailout is Credible.The level of commitment by Eurosystem to Ireland has no precedent .
  • What would level of losses be to ECB if there is an event of restructuring? Answer: "It's not a problem" [laughter in the room]
  • Have not bought government bonds for a number of weeks, why? "We are transparent" Does it concern you that you can no longer sterilize your bond purchases? My understanding is that we are back in an episode where market is working better than usual, where banks are asking for less liquidity. [How that is an answer to the question is beyond even sarcasm]

Net result is this, just as predicted earlier:

And the pain continues as of 9:08 am Eastern:

Full prepared comments:

Jean-Claude Trichet, President of the ECB, Vítor Constâncio, Vice-President of the ECB, Helsinki, 5 May 2011

Ladies and gentlemen, the Vice-President and I are very pleased to
welcome you to our press conference here in Helsinki. I would like to
thank Governor Liikanen for his kind hospitality and express our special
gratitude to his staff for the excellent organisation of today’s
meeting of the Governing Council. We will now report on the outcome of
the meeting, which was also attended by Commissioner Rehn.

Based on its regular economic and monetary analyses, the Governing Council decided to keep the
key ECB interest rates unchanged following the 25-basis
point increase on 7 April 2011. The information that has become
available since then confirms our assessment that an adjustment of the
very accommodative monetary policy stance was warranted. We continue to
see upward pressure on overall inflation, mainly owing to energy and
commodity prices. While the monetary analysis indicates that the
underlying pace of monetary expansion is still moderate, monetary
liquidity remains ample and may facilitate the accommodation of price
pressures. Furthermore, recent economic data confirm the positive
underlying momentum of economic activity in the euro area, with
uncertainty continuing to be elevated. All in all, it is essential that
recent price developments do not give rise to broad-based inflationary
pressures. Inflation expectations in the euro area must remain firmly
anchored in line with our aim of maintaining inflation rates below, but
close to, 2% over the medium term. Such anchoring is a prerequisite for
monetary policy to make an ongoing contribution towards supporting
economic growth and job creation in the euro area. With interest rates
across the entire maturity spectrum remaining low and the monetary
policy stance still accommodative, we will continue to monitor very
closely all developments with respect to upside risks to price
stability. Maintaining price stability over the medium term is our
guiding principle, which we apply when assessing new information,
forming our judgements and deciding on any further adjustment of the
accommodative stance of monetary policy.

As stated on previous occasions, the provision of liquidity and the
allotment modes for refinancing operations will also be adjusted when
appropriate, taking into account the fact that all the non-standard
measures taken during the period of acute financial market tensions are,
by construction, temporary in nature.

Let me now explain our assessment in greater detail, starting with the
economic analysis. Following the 0.3%
quarter-on-quarter increase in euro area real GDP in the fourth quarter
of 2010, recent statistical releases and survey-based indicators point
towards a continued positive underlying momentum of economic activity in
the euro area during the first quarter of 2011 and at the beginning of
the second quarter. Looking ahead, euro area exports should be supported
by the ongoing expansion in the world economy. At the same time, taking
into account the high level of business confidence in the euro area,
private sector domestic demand should contribute increasingly to
economic growth, benefiting from the accommodative monetary policy
stance and the measures adopted to improve the functioning of the
financial system. However, activity is expected to continue to be
dampened somewhat by the process of balance sheet adjustment in various
sectors.

In the Governing Council’s assessment, the risks to this economic
outlook remain broadly balanced in an environment of elevated
uncertainty. On the one hand, global trade may continue to grow more
rapidly than expected, thereby supporting euro area exports. Moreover,
strong business confidence could provide more support to domestic
economic activity in the euro area than currently expected. On the other
hand, downside risks relate to the ongoing tensions in some segments of
the financial markets that may potentially spill over to the euro area
real economy. Downside risks also relate to further increases in energy
prices, particularly in view of ongoing geopolitical tensions in North
Africa and the Middle East, and to protectionist pressures and the
possibility of a disorderly correction of global imbalances. Finally,
there are still potential risks stemming from the economic impact on the
euro area and elsewhere of the natural and nuclear disasters in Japan.

With regard to price developments, euro area annual HICP inflation
was 2.8% in April according to Eurostat’s flash estimate, after 2.7% in
March. The increase in inflation rates during the first four months of
2011 largely reflects higher commodity prices. Looking ahead, inflation
rates are likely to stay clearly above 2% over the coming months. Upward
pressure on inflation, mainly from energy and commodity prices, is also
discernible in the earlier stages of the production process. It is of
paramount importance that the rise in HICP inflation does not translate
into second-round effects in price and wage-setting behaviour and lead
to broad-based inflationary pressures. Inflation expectations must
remain firmly anchored in line with the Governing Council’s aim of
maintaining inflation rates below, but close to, 2% over the medium
term.

Risks to the medium-term outlook for price developments remain on the
upside. They relate, in particular, to higher than assumed increases in
energy prices, not least on account of the ongoing political tensions
in North Africa and the Middle East. More generally, strong economic
growth in emerging markets, supported by ample liquidity at the global
level, may further fuel commodity price rises. Moreover, increases in
indirect taxes and administered prices may be greater than currently
assumed, owing to the need for fiscal consolidation in the coming years.
Finally, risks also relate to stronger than expected domestic price
pressures in the context of the ongoing recovery in activity.

Turning to the
monetary analysis, the annual growth rate of M3
increased to 2.3% in March 2011, from 2.1% in February. Looking through
the recent volatility in broad money growth caused by special factors,
M3 growth has continued to edge up over recent months. The annual growth
rate of loans to the private sector remained broadly unchanged at 2.5%
in March, after 2.6% in February. Overall, the underlying pace of
monetary expansion is gradually picking up, but it remains moderate. At
the same time, monetary liquidity accumulated prior to the period of
financial market tensions remains ample and may facilitate the
accommodation of price pressures in the euro area.

Looking at M3 components, the annual growth rate of M1 remained
broadly unchanged in March, while that of other short-term deposits
increased. The development partly reflects the gradual increase in the
remuneration of these deposits over recent months. At the same time, the
steep yield curve implies a dampening impact on overall M3 growth, as
it reduces the attractiveness of monetary assets compared with more
highly remunerated longer-term instruments outside M3.

On the counterpart side, there has been a further slight
strengthening in the growth of loans to non-financial corporations,
which rose to 0.8% in March, after 0.6% in February. The growth of loans
to households was 3.4% in March, compared with 3.0% in February.
Looking through short-term volatility, the latest data confirm a
continued gradual strengthening in the annual growth of lending to the
non-financial private sector.

The overall size of bank balance sheets has remained broadly
unchanged over the past few months, notwithstanding some volatility. It
is important that banks continue to expand the provision of credit to
the private sector in an environment of increasing demand. To address
this challenge, where necessary, it is essential for banks to retain
earnings, to turn to the market to strengthen further their capital
bases or to take full advantage of government support measures for
recapitalisation. In particular, banks that currently have limited
access to market financing urgently need to increase their capital and
their efficiency.

To sum up, based on its regular economic and monetary analyses, the
Governing Council decided to keep the key ECB interest rates unchanged
following the 25-basis point increase on 7 April 2011. The information
that has become available since then confirms our assessment that an
adjustment of the very accommodative monetary policy stance was
warranted. We continue to see upward pressure on overall inflation,
mainly owing to energy and commodity prices. A
cross-check with the signals coming from our monetary
analysis indicates that, while the underlying pace of monetary expansion
is still moderate, monetary liquidity remains ample and may facilitate
the accommodation of price pressures. Furthermore, recent economic data
confirm the positive underlying momentum of economic activity in the
euro area, with uncertainty continuing to be elevated. All in all, it is
essential that recent price developments do not give rise to
broad-based inflationary pressures. Inflation expectations in the euro
area must remain firmly anchored in line with our aim of maintaining
inflation rates below, but close to, 2% over the medium term. Such
anchoring is a prerequisite for monetary policy to make an ongoing
contribution towards supporting economic growth and job creation in the
euro area. With interest rates across the entire maturity spectrum
remaining low and the monetary policy stance still accommodative, we
will continue to monitor very closely all developments with respect to
upside risks to price stability. Maintaining price stability over the
medium term is our guiding principle, which we apply when assessing new
information, forming our judgements and deciding on any further
adjustment of the accommodative stance of monetary policy.

Turning to
fiscal policies, current information points to uneven
developments in countries’ adherence to the agreed fiscal consolidation
plans. There is a risk that, in some countries, fiscal balances may fall
behind the targets agreed by the ECOFIN Council for the necessary and
timely correction of excessive deficits. It is essential that all
governments meet the fiscal balance targets for 2011 that they have
announced. Where necessary, additional corrective measures must be
implemented swiftly to ensure progress in achieving fiscal
sustainability. The implementation of credible policies is crucial in
view of ongoing financial market pressures.

At the same time, it is of the utmost importance that substantial and far-reaching
structural reforms be implemented urgently in the euro
area in order to strengthen its growth potential, competitiveness and
flexibility. In particular, countries which have high fiscal and
external deficits or which are suffering from a loss of competitiveness
should embark on comprehensive economic reforms. In the case of product
markets, policies that enhance competition and innovation should, in
particular, be further pursued to speed up restructuring and to bring
about improvements in productivity. Regarding the labour market, the
priority must be to enhance wage flexibility and incentives to work, and
to remove labour market rigidities.

The Governing Council, in line with the ECB’s opinion of 17 February
2011 on the six legislative proposals on economic governance, urges the
ECOFIN Council, the European Parliament and the European Commission to
agree, in the context of their “trialogue”, on more stringent
requirements, more automaticity in the procedures and a clearer focus on
the most vulnerable countries with losses in competitiveness.

Finally, the Governing Council welcomes the economic and financial
adjustment programme which was agreed by the Portuguese government
following the successful conclusion of the negotiations with the
European Commission, in liaison with the ECB, and the International
Monetary Fund.

The programme contains the necessary elements to bring about a
sustainable stabilisation of the Portuguese economy. It addresses in a
decisive manner the economic and financial causes underlying current
market concerns and will thereby contribute to restoring confidence and
safeguarding financial stability in the euro area.

The Governing Council welcomes the commitment of the Portuguese
public authorities to take all the necessary measures to achieve the
objectives of the programme. It considers very important the broad
political support for the adjustment programme, which enhances the
overall credibility of the programme.

We are now at your disposal for questions.

 

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Thu, 05/05/2011 - 08:48 | 1242586 ZeroPower
ZeroPower's picture

Net result is pain for the spec EUR longs. Plenty of those (lets say, mostly retail sheep?) ready to cave-in and start the eventual decline?

Thu, 05/05/2011 - 08:54 | 1242637 cswjr
cswjr's picture

Anyone long EUR/JPY has got to be in the Pit of Despair about now.  Ouch.

Thu, 05/05/2011 - 09:33 | 1242825 eurusdog
eurusdog's picture

Actually Dukascopy and FXCM retail positioning showed retail EURUSD net short, for well over 4 weeks now. Retail got scewed over the last 4 weeks and will flip long on this weakness, just intime to get screwed by the fall.

Thu, 05/05/2011 - 08:49 | 1242588 Xibalba
Xibalba's picture

anything to force a dxy rally

Thu, 05/05/2011 - 09:24 | 1242788 SheepDog-One
SheepDog-One's picture

Force a DXY 'rally' so stocks go down? Seems theyre running out of moles to whack.

Thu, 05/05/2011 - 09:34 | 1242840 e_goldstein
e_goldstein's picture

If Eurodisney hikes rates, shouldn't that be bearish for the UDX? Oh wait, I forgot, we became bizarro world a long time ago.

That leads me to another question. If superman gave up his US citizenship, does that mean that bizarro superman is now working for the feds?

Thu, 05/05/2011 - 08:46 | 1242592 FOC 1183
FOC 1183's picture

in the meantime, when should we expect the boj?

Thu, 05/05/2011 - 08:51 | 1242625 tellsometruth
tellsometruth's picture

that was hilarious to watch on netdania

Thu, 05/05/2011 - 09:01 | 1242671 kaiten
kaiten's picture

Funny that EURUSD moves more forcefully on Trichet´s than Bernanke´s comments.

Thu, 05/05/2011 - 09:06 | 1242694 Bazooka
Bazooka's picture

I believe the USD is commencing is bull run...the upside could be huge.

I say this because i'm a deflationist, not a believer of gold or silver as safe havens (their are a pair of equities)...look they rise and fall with equity markets.

Once deflation rapes every economist projections, puts every wanta be hyperinflationist to quietly step back into darkness and silence lest others blame them.....the USD will post record gains. This will not happen right away, but once social mood sours again, we will be in a primary Wave 3 up move for USD.

Disclosure: Long VXX, FAZ, UUP and S&P Puts

Thu, 05/05/2011 - 09:08 | 1242720 kaiten
kaiten's picture

If you are deflationist, here´s something for you:

http://blog.atimes.net/?p=1781

Thu, 05/05/2011 - 09:14 | 1242751 falak pema
falak pema's picture

Battle of Bull Run! ....at Little Big Horn !...

Thu, 05/05/2011 - 09:06 | 1242696 Cassandra Syndrome
Cassandra Syndrome's picture

Credit to ZH, he predicted that there would be no more ECB rate hikes after the initial 0.25%.

Its checkmate for the central bankers.

 

Thu, 05/05/2011 - 09:10 | 1242730 writingsonthewall
writingsonthewall's picture

Ah well - at least they tried.

 

UK and USA haven't even bothered - so back to another year of record low interest rates then.

 

I wonder when the net savers (pensioners) will start blockading the banks?...or worse...start spending like there is no tomorrow driving inflation through the roof.

Thu, 05/05/2011 - 09:06 | 1242710 Racer
Racer's picture

"Inflation expectations must remain firmly anchored"

Oh yeah? And the people see prices soaring in all the things they need to live?

Ah but they can eat iPads instead eh?

Thu, 05/05/2011 - 09:15 | 1242756 Bold Eagle
Bold Eagle's picture

Inflation, HALT!

Thu, 05/05/2011 - 09:09 | 1242728 Racer
Racer's picture

Central *ankers around the world... big FAIL

Thu, 05/05/2011 - 09:15 | 1242729 falak pema
falak pema's picture

Lol, now there is a true central banker. Every time he opens his mouth the Euro drops. On schedule, as the feeling now is its made Euro-zone too uncompetitive. Et voilà!

Thu, 05/05/2011 - 09:29 | 1242807 topcallingtroll
topcallingtroll's picture

He wants the euro to drop.

Thu, 05/05/2011 - 09:26 | 1242808 brian0918
brian0918's picture

USD just went vertical to 73.50

Thu, 05/05/2011 - 09:38 | 1242849 topcallingtroll
topcallingtroll's picture

Only idiots short at the bottom resistance or support.

I fail to see the distinction between support and resistnce since mathematically they are the same thing with opposite signs.

Either stay neutral or go long at bottom channel resistance/support levels. Wait for sustained break lower.

You short or go neutral at tops only, otherwise you are part of the herd.

I am feeling awfully trollish today!

Thu, 05/05/2011 - 09:29 | 1242815 topcallingtroll
topcallingtroll's picture

Trichets comments about the fed are the typical comments of a small man.

After all, the whole euro project was born from dollar envy.

Thu, 05/05/2011 - 09:32 | 1242836 eurusdog
eurusdog's picture

Maybe by year end they will take back that .25%

Thu, 05/05/2011 - 09:32 | 1242837 nantucket
nantucket's picture

what kills me is that the Bernank claimed that raising/supporting equity markets was a goal of QE because it repairs consumer wealth/balance sheet/confidence and that will lead to more spending and that will lead to growth....so the theory is that the paper value of stocks rise and induce people to want to spend,  so people sell shares to spend the money, but if enough people sell then that lowers stocks prices and we're back to square one...so,...what am I missing?  Central banker theory at its best.  Too funny. 

Thu, 05/05/2011 - 09:43 | 1242873 Temporalist
Temporalist's picture

Bank of England keeping rates at .05% due to lack of recovery

May 5 (Bloomberg) -- Bank of England Governor Mervyn King has gained more ammunition in his battle to keep interest rates at a record low after reports suggested the economy isn’t yet strong enough for a withdrawal of emergency stimulus.

http://www.businessweek.com/news/2011-05-05/king-gains-ammunition-from-d...

Thu, 05/05/2011 - 09:53 | 1242926 writingsonthewall
writingsonthewall's picture

This is known as "rabbit caught in the headlights" - central banks are running out of ideas - well actually running out of 'idea' because they only ever had one.

 

Print, print and print some more...inflate away your debts before anyone notices.

Thu, 05/05/2011 - 10:31 | 1243099 Bubbles the cat (not verified)
Bubbles the cat's picture

I can see a future for central bankers. How about a new comic soap? Call it "The Monetary Policy Committee" or "Search me: I dunno where your moneys gone". Along the lines of something like "The Office" or "Extras". A series of kinda loosely connected skits.

Thu, 05/05/2011 - 11:45 | 1243498 glenlloyd
glenlloyd's picture

I can't read it all, there's so much denial in there it makes me throw up a little.

These clowns just keep marching on down the same rope bridge even as the rotting planks are falling away beneath their feet.

Thu, 05/05/2011 - 11:58 | 1243582 ivana
ivana's picture

Trichet=ChairSatan=liar
1. Greek Restructuring is not in the cards.
2. We share the view that Irish bailout is Credible.The level of commitment by Eurosystem to Ireland has no precedent.

There's no f... way they can get out of it without serious "restructuring". And even after "restructuring" , things will not get better in their economies ... because of corrupt noncompetent governments

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