As noted earlier, the very simple calculus of yesterday's Fed announcement boils down to the following: "markets are now "tantruming" and demanding that if the Fed will not hike rates, then at least the BOJ or ECB will provide more QE." Moments ago the EURUSD briefly hit 1.1450, a 150 pip increase since the Fed statement, and an unwelcome development for Europe's economy which has been treading water only due to its weak currency which has supported the European trade balance.
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So now that the Fed appears to have made a grave policy error judging by the market's initial reaction, it is up to the ECB and BOJ to step up (even if as we warned two weeks ago [7]both are running out of monetizable material) and try to preserve some confidence, i.e., halt the selling.
Sure enough, that is precisely what happened earlier today when infamous ECB board member and hedge fund leaker Benoit Coeure hinted that if only the market drives 5Y5Y's even lower, i.e., inflation expectations, the ECB will have no choice but to boost QE.
To wit:
- ECB'S COEURE SAYS ECB CAN ADAPT QE ASSET PURCHASE PROGRAMME IF DOWNWARD RISKS TO INFLATION ENTRENCH
- ECB'S COEURE SAYS WHATEVER U.S. FED DECIDES, EURO ZONE AND U.S. MONETARY POLICY ARE ON VERY DIFFERENT PATHS
This is happening even as the much touted European recovery is supposedly now faltering:
- ECB'S COEURE SAYS GLOBAL GROWTH PROSPECTS HAVE DARKENED, HAVE WORSENED MARKEDLY IN EMERGING MARKET ECONOMIES
- ECB'S COEURE SAYS EURO ZONE ECONOMIC ACTIVITY SHOULD CONTINUE TO IMPROVE BUT AT A SLOWER RATE THAN PREVIOUSLY THOUGHT
- ECB'S COEURE SAYS WHATEVER HAPPENS INFLATION WILL ONLY RISE VERY SLOWLY IN THE EURO ZONE
Better yet, Coeure came this close to admitting that which shall never be admitted by central bankers in polite company, namely that QE is nothing but a mechanism to manipulate exchange rates (and boost stocks in the process):
- ECB'S COEURE SAYS EXCHANGE RATE IS NOT A TARGET BUT IS A VARIABLE IN ECB ANALYSIS OF PRICE DEVELOPMENTS
And yet all the wrath of the world is focused on China's and its "massive" 3% devaluation when the Yen has gone from 80 to 120 in three years simply due to printing money?
The ironic conclusion: ECB'S COEURE SAYS MONETARY POLICY CANNOT RESTORE GROWTH IN LONG TERM
But it sure will try, and quite soon at that - just push those 5Y5Y fwds low enough, and sit back awaiting more Q€.
