Euro Tumbles As JPM Predicts ECB Rate Cut To 0.50%, "Deep Euro Area Recession"

Tyler Durden's picture

The ECB may soon have to change its policy of keeping a 1.00% rate floor if JPM is correct.In a note just released by JPM's Greg Fuzesi, the JPM analysts says that "with the Euro area economy entering a potentially deep recession, we now think that the ECB will cut its main policy interest rate to just 0.5% by mid-2012. We expect the interest rate corridor to be narrowed to +/-25bp, so that the deposit facility rate will be 0.25%. We recognise that the ECB did not cut rates below 1% during the 2008/9 recession. It never fully explained why it did not, but we think that the two most likely reasons will be less important this time." And when the ECB does cut which it will have no choice considering Germany's stern reluctance to allow it to print outright, Hugh Hendry will make some serious cash. As a reminder, 'He’s made bets that he says will deliver a 40-to-1 return if the ECB cuts rates below 1% next year." Lastly, and as fully expected, the EURUSD is tumbling on the news.

Full note: 

First, by the time the policy rate had reached 1% in May 2009, the Euro area economy was already beginning to stabilise – the PMI troughed in Feburary and had increased almost ten points by June (first chart). This made it easier for the ECB to stay patiently on hold at 1%. This time the recession is only just starting, which we think will keep pressure on the ECB to make incremental policy changes. We also note that the already low level of interest rates and the small-ish benefit of additional rate cuts have not to stopped the ECB from cutting rates this month.


Second, the main policy rate can only be cut below 1%, if the ECB narrows its interest rate corridor below the current +/-75bp (or if it cuts the deposit facility rate to effectively zero). Back in 2009, the ECB saw positives in keeping a wider corridor of +/-75 bp as it implied a bigger gap between the effective overnight interest rate (at which good banks trade liquidity) and the main policy rate (at which troubled banks borrow from the central bank) (second chart). Hence, it saw a wider corridor as encouraging interbank activity and giving troubled banks an incentive to recapitalise. But, today, the EU has launched a more effective bank recapitalisation plan. In addition, the sovereign crisis has created a much more fundamental problem for banks, which limits the scope for using interest rate penalties in the same way.


As we expect the Euro area economy to be in recession until late 2012, we think that a 25bp cut in December will not be the last. Hence, we have now pencilled in additional easing of 25bp at the policy meetings in March and June 2012. As the deposit facility will reach 0.25% already in December, the additional cuts may not lower the effective overnight rate much. In our view, those moves would nevertheless send important policy signals.


What about other policy measures? Following Draghi’s comments about the huge challenges facing banks in terms of funding, collateral availability and capital-raising, additional support measures could be forthcoming. The ECB could, for example, commit to additional longer-term refinancing tenders, with maturities likely out to one year, and it could loosen its collateral requirements again.


What about QE? To many, the ECB is already doing this through its SMP, and believe it will be forced to continue by the lack of a political solution. There are similarities between this and QE, as both increase the size of the central bank’s balance sheet by purchasing government bonds. But, there are also differences in terms of motivation, context, sterilisation, and choice of bonds that are bought. It appears quite unlikely to us that the ECB will launch a more traditional asset purchase programme, which would buy government bonds from all countries and would be aimed explicitly at tackling downside risks to inflation. In contrast, the SMP is aims to reduce market dysfunctionality.

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Gandalf6900's picture

ah yes genious, keep up the great work, you are earning all the gratitude of europe

BaBaBouy's picture

This is not a Crisis ...


It's a DEBACLE ...

Carlyle Groupie's picture

You can't eat a 0.50% Rate Cut!

kito's picture

not yet. the dow jones sheep-a-meter is still above 11,000. all it needs is one hint of a promise and bam, back to 12,000. finally my DOG shorts have been paying off. im nervous to keep the position open too long. the dow momo rocket is just waiting to blast off again...........

NumberNone's picture

Market tanks every time Obama speaks...tanking now on the Turkey Pardon speech. 

The Fonz's picture

momo's need profesional money to ride and without a solution with enough duration to make it worth the month of time it takes to get back in and then back out and enought time between to make a profit I don't think they'll be back in force. Half way measures won't be enough for them to get their fat asses in long enough for a profit. I do see professional money moving into gold sometime soon though. I wouldn't mind that one going momo :P

DCFusor's picture

A floor trader talking on BBerg this AM mentioned that everyone - particularly the big houses - is getting together dry powder for later.  Add to that the performance anxiety, and yes, I think you're right.  The market "wants" to go up, even if on fumes and hopium, and the money is gathering, looking for the right place and time.  There's been plenty comment here about that one already.  The question is "when".  I'm going to close most of my open trades today, most likely, including the very nice looking shorts, and at least get as net-neutral as I can, and have a nice weekend.  It's easier to get burned on shorts it seems, so taking some money off the table seems wise.

I'm willing to have some "opportunity costs" over the weekend, my US fiat won't collapse that quick.  Better that than to watch the nice green profits on my shorts go poof I think.


BandGap's picture

You meant genius, correct?

Undecided's picture

Bush and Blair found guilty of war crimes


Well its a start

GeneMarchbanks's picture

Yes. That's relevant. Uhhh ... thanks.

TruthInSunshine's picture

"Deep Euro Area Recession" = JPM Wankin' F**kin' Banker talk for Depression

Manthong's picture

Al least we don't have anything to worry about here.

According to Bloomberg this hour "US Stocks Slump".

A little slump isn't a problem.

Spastica Rex's picture

The US makes its own reality. Real reality is for Greeks and Euro-fags.

Just Do It.

Be like Mike.

You're worth it.

Caviar Emptor's picture

1930s: Great Depression

2010s: Deep Depression

Undecided's picture

So what you are saying is the past military spending has no influence on our current Monitary situation?

Ethics Gradient's picture

edit: my comment was mentioned in the article. I'll shut up.

GeneMarchbanks's picture

Cue Draghi...

Good luck to Hendry collecting on his CDS or synthetics or whatever...

kaiserhoff's picture

I'll drink to that.  Who knows what will pay off or what firms will still be open in the new year?

MFL8240's picture

JP Morgan is a criminal enterprise and should never be trusted.

LouisDega's picture

Never had an issue with them. They were there when my tire popped and i needed a tow plus other emergencies. My Chase Mastercard never once refused a favor. I never had to deal with their darkside ( Yet)

Sockeye's picture

So bond/bund rates going up and policy rates going down? Seems pretty logical to me, NOT!

RobotTrader's picture

All the boys on King World News must be puking up blood.

Dollar surging to new highs, all commodities across the board getting smoked.

Muni-bonds and Treasuries still rock solid, hardly any volatility whatsoever.

New highs for the move on TLT and MUB.


Josh Randall's picture

Happy Thanksgiving RoboTrader -- here's to being thankful for your hindsight disguised as brilliance

magpie's picture

I'm good, Brussels Lira burning faster than PMs can drop.

Caviar Emptor's picture

o yeah. He went very public

stormsailor's picture

and bac about .18 away from breaching the 5.00.  once that happens i think we will see a "fuckarow hoedown"


Have a look at the debt clock my friend.  That's my leading indicator. 

Carlyle Groupie's picture

And to top it all off some idiots are actually excited about Bachmann. Lolz.

She stinks like a 881 pound tuna! Last thing we need in the Whitehouse.

Use of Weapons's picture



Paid Troll - blocking in effect.

tmosley's picture

78.92 is a "new high"?

You really do have the attention span of a gnat.

Mr Lennon Hendrix's picture

I have physical PM right in front of me and I do not care what its determined price is.  It is what I want to invest in at this price level.  $30 silver sounds great to me.  Let's keep it here for a few months so I can keep stackin'.

e-man's picture

And that would be because all the folks at King World News typically have a 4 minute investment horizon, right?  Complacency bias seems to be all you got, Robo.

Bansters-in-my- feces's picture

"dollar surging to new highs"........


Are you drinking in moms basement again....???

GMadScientist's picture

Will they understand even when Draghi is picking up Bunds (and other offal) by the 10B at 3% for lack of a bid?

Or perhaps they'll "stand strong" (teaching EZ sleazies a lesson each time) and I'll get to buy that castle I've always wanted.

jcaz's picture

LOL- yeah, that's the key move- will solve all the problems.......

magpie's picture

If it doesn't have any bearing on rising yields, it won't happen. (Hint: Draghi "supporting" Italy with the previous one.)

GeneMarchbanks's picture

Long time acomin' for that shitshow...

Caviar Emptor's picture

DB toxic dumpsite will be declared off limits for 200 years

pmcgoohan's picture

At last, the EURUSD/SPY correlation working in my favour

topcallingtroll's picture

Doesnt matter what the euro does now, rise or fall.

The dollar will increase its market share.
All hail King Dollar!

LouisDega's picture

Is that you Tom O'brien? Is this me?