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Previewing The 7:45AM EDT ECB Rate Decision

Tyler Durden's picture




 

While the BOE's decision came and went exactly as expected (rate unchanged at 0.50%, no new Quantitative Easing), leading to a slight jump in the GBP but nothing too notable, all eyes now turn to the ECB in 20 minutes and whether or not Jean Claude will admit defeat and announce the end of the bank's very ill-timed decision to start tightening from 6 months ago, which as much as it is overdue, will unfortunately not happen, egos and all. Here is a complete preview, but in a nutshell the consensus is for rates to remain unchanged at 1.50%, for an announcement that downside risks have intensified, and that both lower growth and lower inflation will be forecast.

Preview per RanSquawk:

Crisis management…

Even though some of the more bearish market commentators, including Nouriel Roubini, said that the ECB should reverse this year’s interest rate hikes to prevent another recession, the policy council is expected to keep the benchmark borrowing rate unchanged this week.

As per usual practice, attention will turn to the press conference held by the President Jean-Claude Trichet, where the head of the central bank will also announce the latest macro economic projections. Given the unexpected slowdown in economic activity from the core Euro area, as indicated by the GDP and PMI data from Germany and France, market participants will be looking for any hints from Trichet on a potential monetary policy U-turn.

Of note, the recent speech to European parliamentarians in Brussels by Trichet did not feature the ”upside risks to price stability” statement and instead, he said that risks to the medium-term outlook for price developments are under study in the context of the ECB staff projections. The head of the central bank is also expected to say that downside risks to the growth outlook have intensified, while reinforcing the widely followed viewpoint that individual states must honour their austerity pledges. In turn, the downbeat assessment of the economy by the fiscally prudent Trichet will likely lead to a temporary flurry of risk averse trade flow.

As a result, the financial sector and in particular French banks, known for their heavy reliance on short-term funding will likely bear most of the brunt. This will also translate into a sell-off in the Eurodollar futures as market participants bet that in spite of ECB announcing an extension of its USD swap line and a resumption of its 6-month money program; that borrowing costs will remain elevated. However, market participants should remember that unconfirmed reports of ECB buying various government bonds via the SMP during the last press conference managed to offset some of the bearish sentiment. As such, close attention should be paid to the peripheral yield spreads, which remain at levels widely perceived as unsustainable. The ferocity of the selling pressure may also abate if Trichet signals that the ECB is prepared to re-introduce its 12-month money operation or even cut the benchmark borrowing rate.

Question time…

The Q&A session will likely focus on the SMP program, which was recently resurrected in order to prevent contagion fears from spreading to Italy which so far has failed to convince markets of its austerity measures. Trichet is expected to defend the program, but remind market participants that the ECB will only act during times of acute stress and that this task will be passed onto the EFSF once approved later in the year. Another topic of discussion will likely be Greece, which following reports that the country will fail to meet its latest deficit reduction targets became subject to speculation of debt restructuring. However Trichet will likely refute any talk of restructuring and insist that the ruling governments across the Eurozone must take whatever measures necessary to meet the proposed deficit reduction measures.

Finally, the ECB will release updated macro economic forecasts, which are widely expected to show lower than expected GDP and inflation projections. Most recently, Standard & Poor’s said that it now forecasts growth of 1.7% in 2011 and 1.5% in 2012, down from estimates in July of 1.9% and 1.8% respectively.

 

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Thu, 09/08/2011 - 07:38 | 1645413 spiral_eyes
spiral_eyes's picture

How to crash the price of gold:

(short answer, you can't)

http://azizonomics.com/2011/09/08/how-to-crash-the-price-of-gold/ 

Thu, 09/08/2011 - 07:38 | 1645414 Highrev
Highrev's picture

An announcement that downside risks have intensified, and that both lower growth and lower inflation will be forecast pretty much flies in the face of continued tightening.

Thu, 09/08/2011 - 07:54 | 1645430 Highrev
Highrev's picture

I guess they think the Swiss backstopping will do (for now).

Thu, 09/08/2011 - 07:40 | 1645418 oobrien
oobrien's picture

Good Citzens of Metropolis!

We're all completely fucked.

Even Batman can't save us!

But what's a boy to do?

http://geraldcelente.proboards.com

Thu, 09/08/2011 - 07:46 | 1645423 LongSoupLine
LongSoupLine's picture

Hmmm, wonder what page of, "Bernanke's QE for Dummies" Trichet's on.  Or...perhaps he just picked up the Cliffs Notes version and is winging it.

Thu, 09/08/2011 - 07:48 | 1645425 tony bonn
tony bonn's picture

"...very ill-timed decision to start tightening from 6 months ago..."

raising rates was the right thing to do....it's counter-intuitive to the keynesian-monetarist mind....lowering interest rates destroys capital and is the economic equivalent of blood-letting and voodoo...

Thu, 09/08/2011 - 07:58 | 1645438 Highrev
Highrev's picture

Good point (and that's an understatement), and the fact that they're not lowering indicates that they're not too worried about downside risks, deflation, etc. (I would think). So now let's see what the future brings and whether they were right or wrong.

Again, good point.

Thu, 09/08/2011 - 08:16 | 1645461 janus
janus's picture

you are gonna make janus a RICH man, TD.

and he will NEVER forget it.

sage and prophet, he is.

Thu, 09/08/2011 - 08:22 | 1645474 janus
janus's picture

just read it again...GBP has no choice but to mega-QE -- announce today, tomorrow, whenever...i guess it's best to annouce it by the 100+billion pound installments, no?  don't wanna drag this out, might make for political problems...

No. 10, exchequer, ect. yer all so royally (no pun, limeys) fucked.  but, i guess not as bad as those twits across the channel -- it's all relative...especially now that the SNB has forced your hand.

or are you all just going to give into gold at the very time you've run out of it?

again, so royally fucked!

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