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"Not Doing Anything Next Month Would Completely Shatter The ECB’s Credibility"
Mario Draghi has gone and done it.
After nearly two years of playing the market like a fiddle with nothing more than verbal intervention, Draghi was finally cornered today when during the ECB press conference earlier he explicitly stated that "the Council is comfortable with acting in June." Just that statement alone was enough to push the EURUSD lower by 150 pips from just shy of 1.40 to 1.3850.
However, this may end up being a pyrrhic victory: the reason is that until now ECB was the only central bank for which forward guidance had worked following the spectacular failure of future "thresholds" both in the US and the UK, and where central bankers are scrambling to preserve the credibility of doing nothing even though their previous fed-hike employment targets have been trampled (as we predicted in December would happen). Of course the only real threshold central bankers have is to push their respective stock markets to unseen heights and pray, but that's a topic for a different day.
Going back to Draghi, the reason why traders decided to take the former Goldman banker on his word is because what he did today was finally push the recurring bluff the ECB has used time and again one step too far.
Having done nothing far too long in the face creeping deflation and an absolute collapse in record low private loan creation, today's gambit was for Mario crossing the one bridge he can't uncross. Because as Deutsche Bank notes, "not doing anything next month would in our view completely shatter the ECB’s credibility, and trigger a further appreciation in the euro exchange rate." Or, said otherwise, the time when Mario Draghi could manipulate markets with merely a smirk, a smile and a promise to do something in the indefinite future, just ended with the whimper of EURUSD longs.
From this point the market will demand real action from Draghi, which also means that any utility the ECB's forward guidance may have had until now was just destroyed as well, since absent action the ECB will indeed have, as DB notes, zero credibility.
As such, now that he has been forced out of his "jawboning comfort zone", the ECB may as well go ahead and slip merely rate cuts, and go the full QE hog, considering that in Japan the BOJ is unable to boost its own QE now that "non-core" and imported energy and food inflation is off the charts, while the Fed is on pace to end tapering by December. And the last thing this centrally-planned world knows how to do five years after the Lehman and the recession "ended" is discover prices efficiently without central banks injecting trillions in liquidity every year and not so invisibly propping the entire market to record highs.
Below is the full take by Deutsche Bank's Gilles Moec and Mark Wall
ECB: Compounded verbal intervention
Last month’s more dovish than expected statement had left the ECB with the usual legacy problem of verbal intervention: left unchanged, and unsupported by actual decision, the strength of the message erodes very quickly, which means that Draghi needs to up the ante every time just to keep the market on his side. This is how we interpret today’s performance. While the prepared statement was virtually unchanged, Draghi’s Q&A was full of dovish nuggets such as “the Council is comfortable with acting in June”, or “the euro exchange rate is a serious concern”. Now that the June meeting is explicitly going to be crucial, not doing anything next month would in our view completely shatter the ECB’s credibility, and trigger a further appreciation in the euro exchange rate. We were expecting a move in June anyway. Today’s press conference strengthens this view. However, we are expecting a small move only – to be precise an extension in full allotment to nail the “decoupling from Fed” theme home. True, after today, odds for more decisive conventional action – negative deposit rate is an obvious candidate – are higher, but we think that two conditions would need to be met for the ECB to cross that Rubicon: some material change in the ECB’s economic outlook and/or further appreciation in the euro.
June confirmed as the crucial moment
Calling, as Draghi did this afternoon, today’s Council meeting a mere “preview” of the June meeting, and stating that “the council is comfortable with acting in June” probably reflects a series of three concerns. First, the central bank probably wants to create a tight relationship between the timing of inflation forecasts and actual policy decisions. In retrospect, the central bank may have come to the conclusion that it had made a mistake when issuing a very subdued inflation forecast in March without accompanying it with either action or a substantial dovish turn in communication (the latter came in April only). As the ECB, in our view, will have to revise its inflation forecast down in June, at least for 2014, given the lower starting point, it makes sense to keep some dry powder. This is also
consistent with Draghi’s comment that the ECB could consider fewer monthly meetings.
Second, we think that there could be here another episode of Draghi’s habit to create a “fait accompli” configuration which forces the hand of the Council. Indeed, we think that the Q&A – very much controlled by Draghi alone – was significantly more dovish in tone than the prepared statement. We knew last month was the Council was “unanimous” on its commitment to contemplate “all instruments”, but after extracting an important concession on the “what” in April, Draghi may have cornered the Council into the “when”. Third, the recent data and news flow is erratic. That is particularly true of the inflation numbers given the Easter disturbance mentioned by Draghi. The print for May – which will be the first “pure” reading – will matter. The Ukraine crisis (geopolitical issues have been upgraded in the ranking of the downside risks to the economic outlook) adds another layer of uncertainty. Draghi also mentioned the need to take a hard look at credit developments “in the next few weeks and the next few months”, as the central bank is probably increasingly frustrated by the continuing contrast between fairly positive surveys on lending behavior and still poor loan origination. There again, the next batch of monetary statistics could help the ECB to decide.
We find it quite interesting that Draghi today told us that the ECB is “dissatisfied” with the current trajectory for inflation, and “not resigned” to a low inflation regime (two more dovish nuggets). Well, since their forecasts in March already pointed to “protracted low inflation”, this may beget the question of why then did they not act already. However, there probably still are internal hesitations around the right instruments to use, and this, rather than a debate on the actual diagnostic on the deflation risks, may actually explain why the ECB has not acted sooner.
On balance, we are still expecting only small move
Draghi today re-affirmed that the strength of the euro ranks first on the ECB’s list of concerns. Last week in a speech in Amsterdam the President of the ECB stated that the exchange rate was part of the “monetary conditions” contingency, and that this would fall under the realm of “conventional policy” which includes policy rates (refi and deposit rate), traditional LTRO and full allotment. Jens Weidmann stated earlier that the most obvious instrument to address exchange rate appreciation was a negative deposit rate. Draghi, unlike last month, did not mention QE once, which suggests that indeed June will be primarily about conventional policy tools. We find it interesting that Draghi let Luc Coene, National Bank of Belgium’s Governor, restate his view that cutting the refi without taking the depo rate down would not be productive, after a question from a journalist.
We were expecting such move at the beginning of this year and we were wrong. True, the euro has appreciated since then from USD1.36 to USD1.39, but the lesson we drew was that the reservations of some members of the Governing Council against a negative deposit rate were strong. The example of Denmark suggests that a negative deposit rate can have counter-intuitive effects on banks’ lending behavior, which would run counter the ECB’s willingness to spur more credit origination.
We reiterate our view that the ECB will choose a “small” move in June, extending full allotment further, and that some “private QE” scheme will come out later this summer, as the central banks gets more comfortable on buying private assets outright after getting granular information on banks’ loan-books through the AQR. This is likely to underwhelm. The ECB could “spice up” the June decisions by suspending SMP sterilization, offering some relief on the short end of the curve.
Of course, we acknowledge a distinct risk that the central goes for a negative deposit rate in June already, but in our view this can be a baseline only if (i) the market calls the central bank’s “bluff” and brings the exchange rate well above 1.40 by June already or (ii) if some of downside risks to the economic outlook materialize (visible spill-over from the Ukraine crisis, deepening of the credit origination strike in the next data batch).
Another risk is that the “private QE” scheme we expect for September is brought forward to June. However, we don’t think that the ECB will have time to process the AQR data by then. In addition, such policy would fall in the realm of unconventional policy which, in our view, would require a downward revision in the inflation forecast well into 2016, while for now we think that the ECB is concentrating on the short run inflation developments in a context of appreciating exchange rate.
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You think any CB gives a shit about credibility?!?
Like a Goldmanite has Europe's best interest at heart.... LMFAO.
It will come. They are stretching out their liquidity hoses because things are deteriorating too quickly. Ahead of schedule in a bad way.
It comes back to the same messed up game the Fed plays. They have to infer that "everything is all right" in the economy by cutting back on overt QE even though they know it is BS. They are running out of the ability to artificially pump up the dystopic economy politically.
Fact is,........we dont know shit about whats really go on here.
They working to shore up the Dollar? Bring us into the NWO? work for themselves? Start a war with Russia?
We are all just along for the ride.
Pretending we can read these tea leaves is folly.
It's populist but wrong. Credibility is the most important asset in a fiat fractional reserve system.
On May 25th are elections to the "European Parliament".
The globalists wait with their money printing after these elections, so the German and the sheeple from the other net paying countries will not flee the criminal establishment parties in bigger numbers than they would do with knowledge of the soon to come money printing.
People in Democracies are so incredibly dumbed down, they recognize nothing.
Please asshat. The west and the western "leadership" in general, has no credibility.
Credibility? Yeah right like they had any in the first place. DragQueen is hoping that the rest of the banking world can get a good war started so he isn't forced to eat his words.... again.
It's not that kind of credibility. Not a question of whether anyone believes him. It's a question of looking around the room and trying to determine if there is anyone ELSE who believes him.
"I know he's lying, but is anyone else buying this bullshit? Ah, there's one. We still have a Greater Fool, so everything's good."
Stay tuned!
Has the Bernanke started his consulting firm yet?
QE Advisors, we guarantee your profit!
So the worthless turd Sanders is worried about billionaires oligarchs like the Koch brothers, but he is okay with billionaire oligarchs like George Soros:
Fed Chair Unsure If Capitalism or Oligarchy Describes the U.S.http://cnsnews.com/news/article/susan-jones/fed-chair-unsure-if-capitali...
Well, it cetainly cannot be captialism as that would require a respect for capital.
Nuggets for muppets
funny i would think printing hundreds of billions would lead to a lack of credibility.......what a world.....
cough, cough... trillions... cough
Given the great economic success of the Fed's QE program, and of Abenomics, I'm sure the ECB is just itching to follow the same path...
funny, funny, stuff
...completely shatter the ECB’s credibility
ECB's credibility, LOLZ
From this point the market will demand real action from Draghi...
the market, LOLZ AGAIN
Who needs credibility when you have liquidity!
Who needs credibility when you have STABILITY..there fixed that one
Nobody wants to be the last to experience hyperinflationary collapse.
No one really wants to be first either.
The bullshit is strong with this one.
I was going through various bond markets and almost fell over laughing. Southern European bonds are in the 3.00% area, and Australian 10 year bonds are currently yielding 3.826%. Australia is top rated and has a 20.4% debt to gdp.
http://www.tradingeconomics.com/australia/government-debt-to-gdp
Not a fucking 150-200% debt to gdp like Southern Europe.
Does "Private" QE infer we will not be told what assets they buy?
Feds to schools: You must accept children of undocumented immigrants - CBS News
treason
http://codes.lp.findlaw.com/uscode/8/12/II/VIII/1325
" Those two bastards, They smiled at me"
- Bonasera, The Godfather
If they keep forcing that paper on you either through threat of violence or pyschological control you and keep taking it and using it, you give consent to the actions so credibility don't matter one bit as long as consent keeps being given.
Well the only question worth asking Draghi at the June meeting is the following :
Is he prepared to change his OLD ways and adopt new ways to SAVE the Euro, by using "unconventional means" like FED and do QE...?
That's the question and what will be the answer then ?
TO Mr Draghi : ARE YOU PREPARED TO BURN THE BERET AND BURY THE BLUE DRESS IN JUNE??
QE will not "save" the Euro.
but he may still want to burn the beret; its his past that haunts him.
I think it's hilarious that a fuckin Italian is leading the ECB.
Italy: a great country...wine...women...great art....
BUT A FUCKED FOR DECADES ECONOMY, CORRUPTION OUT THE ASSHOLE, AND FECKLESS "LEADERS" FOR DECADES.....
....perfect
Sure - the bouys at Deutsche would love nothing more that to transfer some of that German and European middle class wealth (what small amount remains) into their coffers to shore up their pathetic balance sheet.
The reaction: https://www.youtube.com/watch?v=MYvy3kBYN4Q
They are choking on the 140 euro. No one can trash a currency like the U,S can!..no one.
If things get rough across the globe expect eyes return to Europe, where they continue to talk. I have not written much about the Euro-zone economy or banking system as of late because nothing is really happening.
The Euro-zone is engaged in a talkathon, with fear of an immediate collapse off the table the members of the Euro-zone much like their political counterparts in America just talk about solutions without any action. Below is an article updating what is not happening in Europe.
http://brucewilds.blogspot.com/2014/04/euro-zone-update.html
Not only is Draghi an ass hole, he must think we all are as well to put up with this garbage.
Make the best you can out of the mess you helped create Mario because the Europe you think holds your key to Nirvana can't exist much longer when half the population is dependent on the Welfare Socialist Republic.