Whatever The ECB Does This Week, It Won't "Deliver A Significant Impulse To The Real Economy"

Tyler Durden's picture

Ahead of this Thursday's ECB meeting, speculation is rife about what Mario Draghi will announce, and as the following Nomura chart highlights most pundits are convinced that the most likely announcement is a cut in the refi and deposit rate with a probability of around 90%, an LTRO in distant third at 34%, and a full blown QE dead last with 10%.

However, as SocGen predicts, which is rather aggressive in its assumptions expecting a negative deposit rate of -0.1%, a targeted LTRO to "boost lending to the private sector", and a "signal" of €300 billion in asset purchases, the bulk of this new-found liquidity will almost exclusively go to boost capital markets, and the wealth effect. As for the broader economy? "We do not expect the 5 June measures to deliver a significant impulse to the real economy. Should euro area policy makers step back further from austerity, this would lift the economy in the short-term. Ultimately, however, the euro area needs deep structural reform. For all the energetic talk and many promises, actual progress on this front remains all too slow."

Which, as is all too clear by now, is precisely what QE does: it stimulates risk assets, and does little if anything to promote actual economic growth: for that Keynesian doctrine demands a surge in loan and credit-money creation, something Europe, with its -2.0% annual contraction in lending to the private sector, will hardly experience.

More observations from SocGen on what Draghi may announce this week:

With just four days left to the 5 June ECB meeting, the excitement is palpable. When President Draghi announced the OMT back in the summer of 2012, the impact on financial markets was spectacular; spreads narrowed, equities rallied and the euro appreciated. Consensus growth estimates, however, tracked lower (!) as the forecast for 2013 dropped from 0.5% to -0.4%. Granted, the ECB must be given some credit for the 1.2% growth now forecast for 2014. Notably, in easing market pressure on governments, fiscal drift also provided part of the answer. Recovery in key export markets was an additional boon.


Should the ECB deliver a truckload of liquidity on 5 June, we have no doubt that financial markets will rally. Short of announcing monetary financing of fiscal stimulus, which is forbidden by the Treaty, we believe that the impact on the real economy is likely to be very modest. As Italy prepares to take over the European Presidency, the hope is that Prime Minister Renzi will be able to drive a new European agenda delivering growth and jobs. Our concern remains that this will prove all too slow to give the medium-term growth outlook, of around 1.5%, the boost it really needs.


5 June shopping list: Negative deposit rate, targeted LTRO, ....


With numerous possibilities on the table, most forecasts for the ECB resemble a shopping list, with lots of items but not all equally important. Our ECB preview offers all the details, but of the major items we expect (1) a negative deposit rate (-0.1%), (2) a targeted LTRO to boost lending to the private sector, and (3) a signal of asset purchases – we look for €300bn of purchases in 2H14, split between €100bn of ABS and €200bn of European issues (EFSF/ESM, EIB, etc.) and liquid, high-grade privates assets.



In this first round, we do not expect to see large scale sovereign asset purchases. To trigger large-scale sovereign asset purchases, we believe a more significant deterioration of the outlook is required. Even then, we remain concerned that the ECB would not be able to make such purchases on a pari-passu basis.


Easier monetary policy conditions will feed through to the real economy through the following main channels:

  • A weaker euro will deliver higher import prices ... and may be slow to impact exports: as we discussed on these pages a few weeks ago, the lesson from both the recent experiences of the BoE and BoJ is that a weaker currency may not do much to boost exports in the short-term, but will erode household purchasing power via higher import prices. Rules of thumb suggest that a permanent 10% depreciation of the trade weighted euro would boost GDP by around 0.7% in the first year after the shock. Our concern is that this elasticity may at present be lower for two main reasons. First, a significantly weaker euro could come with a new widening of peripheral spreads. Second, slowing demand in emerging economies, and China in particular, is unlikely to be offset by any price effect.
  • A negative deposit rate comes with a cost: the main motivation for a negative deposit rate is to weaken the currency. To our minds, this has already been factored in by markets and we think it unlikely that this measure will deliver much further euro depreciation. The experience from Denmark, however, illustrated that negative deposit rates also carry a cost.
  • Portfolio reallocation effects may even boost the euro ... but wealth effects are slow to trickle down: should markets deliver a thumbs-up to the ECB on 5 June, then flows in the hunt for yield could deliver a very significant boost to euro area assets ... and may even lift the euro! Stronger asset prices are welcome, but experience shows that such effects are again slow to trickle down to the real economy, unless the boost is to real estate prices.
  • Credit conditions are already favourable in the core - easing financial fragmentation would be helpful: the hope is that a targeted LTRO program would trigger a wave of SME lending, resulting in job creation across the euro area. It is worth recalling that in the core, SME lending conditions are already quite favourable. In the periphery, red tape and bureaucracy, already high debt levels and a lack of domestic demand are other factors holding back SMEs. Easing financial conditions for SMEs in the periphery is helpful, deep rooted structural reform would be even better.


In sum, we do not expect the 5 June measures to deliver a significant impulse to the real economy. Should euro area policy makers step back further from austerity, this would lift the economy in the short-term. Ultimately, however, the euro area needs deep structural reform. For all the energetic talk and many promises, actual progress on this front remains all too slow.

Also considering that once again just Draghi's jawboning has managed to push the EURUSD lower by a massive 400 pips in the past month, from 1.40 to 1.36, the central banker may opt to do nothing at all, as the core target of ECB intervention, a weaker currency, has already been achieved. It is unclear if the former Goldmanite would risk this: after all as Deutsche Bank said, zero action by the ECB this week would destroy what credibility it may have left.

Which means that once again, well over 5 years into this "recovery", the one segment of the population to benefit from whatever the ECB will unveil will be those very rich few who will immediately benefit from the surge in risk assets. As for everyone else, keep up the hope.

The only remaining question is how much of the ECB intervention has already been priced into risk assets. Considering the relentelss surge in both global stocks and bonds, one would be tempted to say that this is shaping up to be more of a "sell the news" type of event...

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SheepDog-One's picture

There will no longer be any significant dips to buy, maybe 20 DOW points or so but that's it.

Silver Bug's picture

QE to infinity, that is all governments know how to do. The money printing madness will continue.

Just Keep Stacking.

LetThemEatRand's picture

"Portfolio reallocation effects may even boost the euro ... but wealth effects are slow to trickle down."

You just can't make this shit up that anyone still thinks trickle down is a viable economic model.  It.  Doesn't.  Work.  The wealthy .01% use the extra money to buy influence for things like free trade agreements, then they go build factories in low wage countries.   Someone with $10B doesn't spend more into the economy when he gets to $11B.

SheepDog-One's picture

'Whatever the ECB says, it won't deliver any impulse to the 'real economy'.

Oh bullshit, the 'real economy' is stawks, so just do some jawboning and stawks will rise no matter what, very easy here in Idiocracy.

malek's picture

I'd say it's not about any "Impulse", but to keep the Potemkin village from collapsing for a little longer...

Tasty Sandwich's picture

the one segment of the population to benefit from whatever the ECB will unveil will be those very rich few who will immediately benefit from the surge in risk assets. As for everyone else, keep up the hope.

It's better to become hopeless.

SheepDog-One's picture

'Keep up the hope'.....hope is for dopes.

SheepDog-One's picture

Almost 100% are sure the ECB will cut rates.....yet the bailout sponge banks desperately telegraph rates are going to rise any minute. It's all just a joke.

SheepDog-One's picture

'Cut the deposit rate to -0.01%' seems to be a very popular idea among the bailed-out banksters. Assholes. But hey if the people stand for it then they deserve nothing better.

Yen Cross's picture

 What ever the ECB does or doesn't do this week has been "priced in"! 

 European banks are -3x undercapitalized. Europe has an unsustainable "youth" unemployment rate. Europe has no "universal" debt/equity disbursement mechanism.

  I have rolls of Deutschemarks. ;-)

buzzsaw99's picture

they better do something poste haste. if china ptb thought they could sit on their asses until the usa and eu demand-killing depression was over they have got a long fucking wait ahead of them.

Atomizer's picture

Repeat post

Wine Country Conference II Videos: Stephanie Pomboy "Confessions of Ben Bernanke", Mebane Faber "Global Stock Valuations"



HUGE_Gamma's picture

SP500 2000 by July expiration 

Yen Cross's picture

 The VIX quotes are getting wider. You might want to rethink that idea.

  Bruce Krasting didn't show-up to be taken to the "wood-chipper" on Z/H for nothing.

 He was was warning us. June is going to be nasty.

dragoneyes74's picture

I've been meaning to write, especially with the chart-shifting events of late, but I have my head involved in too many things.  Six months ago I said I would tell you why I think silver is going to $9 when the time comes.  There's a lot of big events this week with ECB on Thursday and NFP on Friday, so we will see how this plays out, but it's possible that time is near.  It's an interesting story that I will condense to save us both time.  As you will see it's not analysis you can trade on alone, but interesting nonetheless and something to consider.  

In March of 2012 I woke up one night from a vivid dream.  In that dream I saw a chart of silver with a giant red bar on it and the bottom of that bar ended at $18.  You might think I'm joking.  I'm not.  The materialists of the world will try to convince you that dreams are just the physical brain working off stress or whatever theories they want to propose.  And while I think many dreams are scrambled nonsense that have little practical connection to everyday life, I personally believe when we go to sleep our spirit leaves this body and has experiences in other planes of existence, and the remnants of those experiences are what we remember when we wake.  And while the nature of dreams is beyond the scope of this post, I will just say that I've had a vast array of different degrees of experience when the body is asleep that leave me with no doubt of a higher reality beyond this one.  Some dreams I have are special and more vivid and I wake with a feeling of downloading information from a source that is beyond me, whether it's an idea for my writing, an insight into someone or some thing, or a vision of some sort.  Take that as you will.  It doesn't change my direct experience.  

At the time of this dream, silver was trading at $32, and while it started going down within a week, it eventually stopped at $26 support, and then rallied into the QE3 announcement all the way to $35 before ultimately rolling back over to the capitulation move down to $18.  So the timing of the dream was tricky, but the end result was correct.  The attempted navigation of this was documented on posts here on ZH, although, I've never mentioned the dream before, and I didn't become confident in it until I saw the tepid response in the metals to the announcement of QE4 in December 2012.  That's when I knew the dream was going to be right.  And it was.  Now for the part no one, including me, will like.  I've had two more dreams of the same vivid quality about the future of silver in the last six months.  

The first one happened sometime in November.  In this dream I was in my parent's house for some kind of family event, but I was on my laptop and I saw silver trading at $9, but I had no idea of the timing of how it got there.  I woke with the same feeling of awe like I saw something profound and was downloading information from somewhere beyond me.  A couple weeks ago I had a second dream of the same vivid quality.  In it I saw silver being violently sold from $14 to $13 and in the background there was a football game on TV.  I don't expect anyone to trade on some random guy's dream on the internet, but I'm not inventing this and I have no agenda.  It happened to me in 2012 and then it came true.  Now it happened again.  And I expect it will come true.  However, I don't yet know the timing or the path of how it gets there and even I'm not crazy enough to trade just on a dream. You can go bankrupt having the end result correct but the timing wrong.  It has to make sense both technically and be based on the underlying positioning.  I haven't yet had that tepid QE4 moment when I knew the upside is over for sure, although, the triangle breakdown in the metals last week may be a candidate.  And it makes sense that it might be now because it would likely take until fall when football starts for silver to get down to $13.  I'm just trying to piece it together.  

The only thing that will truly confirm to me that the time is now is a capitulation close at new lows in both gold and silver.  If the ECB joins the madhouse in any form this Thursday we might see the Euro plunge, the dollar soar, and the metals tank.  The big question I have is whether the Commercials are lurking beyond or around new lows to support the metals like they did the previous two times of the double bottom in June and Dec of last year.  If the sellers run into a wall of buyers and we get a strong reversal, then now is not yet the time, and the metals could have a rally left in them, even a signifcant one, depending on factors like what if the Fed halts tapering due to the negative GDP print?  Ultimately, though, I believe 100% that the dream will turn out true.  It's just a matter of figuring out the timing.  It's entirely possible Draghi disappoints on Thurs and the dollr tanks causing the metals to soar.  

Whether you decide to hedge your stack via long dated puts if we close at new lows is up to you. I have enough trouble keeping track of me.  I will update with my attempted navigation of this as we go.  My main concern is watching out for a reversal near the lows.  It's possible we see a rally first like the one from $26 to $35 in the playing out of the first dream that you don't want to hold through short.  A lot will become clear this week, or later this month with the Fed.  Silver has been rejected by its downtrend line from $49 a dozen times now over the past 3 years.  If it slides through even sideways, it could open the door to some significant upside.  That's actually what I'm hoping to see.  I'd rather see a reversal, trade it up, and then short it from higher prices, but I'm fully prepared for a reversal not happening.  In full disclosure, I got short small in gold on the triangle breakdown and covered half on Friday, hoping to add on a backtest of the breakdown this week, which may or may not happen.  I plan on being short all the way to the lows unless a clear reversal happens, particularly if its from a news event. 

As for equities, the top "seems" to be destroyed now since there's been serious technical damage to the topping pattern that was forming.  I don't sound alarm bells for the fun of it.  The issues in the real economy are not fixable by central banks and I think this bull market is based on Fed liquidity, the carry trade, an optimism that the Fed's policies will work, a bias of stock brokers and asset managers to stay long with the herd, meaning, it's okay to lose money on the long side but not on the short side, and the simple psychology of a bull market feeding on itself.   My personal opinion for why we saw so much derisking and selling at the tops all year is based on the tapering policy change, but as it turns out that is only one component driving the market and there just isn't an urgent enough bearish catalyst to keep pushing the market lower so it runs out of sellers and the short covering frenzy begins once again. Wash, rinse, repeat.  It may take a more urgent and impedning threat like Japan flirting with default, or a country leaving the Euro, or the BoJ talking about tapering, for the bears to sustain downside action.  At some point the rubber of the stock market has to meet the road of the real economy.  I would love to be wildly bullish, but real economic growth isn't driving this bull market.  And since central banks can't print manufacturing jobs, it's just a matter of time before reality sets in. But who knows how long that will take. 

The bulls aren't completely out of the woods just yet.  There's one more scenario to watch out for.  Look at the Yen futures.  It's forming a triangle of its own, and you can even say an ascending wedge of higher lows, building toward the 99.20 breakout.  If the Yen breaks out to the upside (downside in USD/JPY), that could put pressure on stocks as the carry trade would be one more component of the bull market fuel to be eliminated.  The only way I will be a buyer of equities is if the Yen futures break the ascending wedge to the downside, bonds continue reversing and lose the 20-day, and we get a decent pullback to support in the ES and NQ.  Then I'm a buyer for more than just a short term trade.  There's plenty of other markets.  Like the Euro.  I expect a long-term trending move to come out of Thurs one way or the other.  The Yen will eventually breakout of its triangle and should run.  And gold and silver are gonna make some noise.  

Lastly, since the NQ could probably use a pullback, beware of the stop run reversal this week, especially if its timed with a news event.  I'm hoping it backtests the 3632 right shoulder failure breakout.  I'd be a buyer close to that area, depending on the Yen, but I can't buy anywhere near the current price.  I need a normal style pullback first.  And if it closes and holds new highs, the bulls can break out the champagne.  Just watch that Yen. 

Haager's picture

There would be a way to improve real economy by killing any LTRO, hiking rates, taxing wealth-increase and especially wealth gained on financial transactions, reduce taxes on producing capital including work and for the workforce, killing several banks that are/act poisonous and so on... Which is almost the opposite of what they did before.

Last of the Middle Class's picture

My Ass! they will talk of not doing it and about how everything is coming along nicely, but once all the money has been stolen by way of offering loans that had no chance of being paid back, they will print. ECB is in a corner and Mario has no choice to save the Euro.