In the aftermath of Yellen's "hung hold" decision, which left the world confused if the economy is getting better or worse, global equity markets proceeded to take both Europe and Japan to task, trying to push one of the last two remaining central banks to boost their QE. And until this morning it was unclear who was going to take the lead. Then, following comments over the past several hours from ECB governing council members Ewald Nowotny and Bostjan Jazbec, as well as a well-directed leak via Market News, we got confirmation that anyone hoping for Mario Draghi to blink first may be disappointed this time around.
First it was Nowotny who said that he is wary of increasing central-bank stimulus any time soon even as policy makers struggle to boost inflation. The question of whether more easing is needed “deserves a much more thorough examination,” he said in a Bloomberg Television interview in Vienna on Wednesday. “Monetary policy should be a steady-hand policy. We shouldn’t act in a too-active way.”
On the option of new asset classes, “I personally wouldn’t look at them but there’s a discussion about what those classes would be,” Nowotny said. “A prolongation of the program has certain signaling effects, not a very direct effect.”
ECB policy makers have expressed concern about the impact of the U.S. Federal Reserve’s decision this month to wait before making its first interest-rate increase since the financial crisis. Benoit Coeure, the ECB’s markets chief, noted that there had been “a significant appreciation” of the euro against the currencies of the bloc’s major trading partners. He said the Fed nevertheless confirmed the ECB’s diagnosis “of the existence of risks in the global economy.”
As Bloomberg adds, the Frankfurt-based ECB has already committed to pump more than 1.1 trillion euros ($1.2 trillion) into the 19-nation currency bloc, buying an average of 60 billion euros a month of public and private-sector debt through September next year in a bid to rescue the region from too-low inflation. Fresh challenges range from a slump in commodity prices to a worsening slowdown in emerging markets that could yet force the central bank to do more.
His comments, just around 5am Eastern, helped push the EUR off its overnight lows just above 1.11.
Perhaps just to hammer home the case that the ECB will not be pushed around by the Fed, shortly thereafter another GC member, Bostjan Jazbec also hit the tape saying it is "too early to talk about new stimulus."
As Reuters reports, "the ECB is not currently discussing either prolonging its 1-trillion-euros plus asset purchase programme or exiting it," ECB Governing Council member Bostjan Jazbec said on Wednesday.
Monetary policy works with a lag so it was too early to discuss any other scenario other than what has been agreed upon, Jazbec, who heads the Slovenian central bank, told a news conference.
The ECB earlier this month said there was a growing risk that inflation would undershoot its target in 2017 so it stood ready to modify the size, composition or duration of its asset purchase programme, also known as quantitative easing, if necessary.
Then, concluding the Trifecta of ECB's anti-QE - if only for the time being - rhetoric and leaks, was a special report by Market News which said "the European Central Bank's Governing Council appears unlikely to announce any additional policy steps when it meets next month in Malta, preferring instead to continue monitoring global emerging markets, Eurozone inflation and the impact of its quantitative easing programme, senior Eurosystem sources have indicated to MNI."
Recent conversations with these sources suggest a desire to have more information on the China-led slowdown in emerging markets and the impact it has had on global commodity prices before getting into detailed discussions as to the ECB's next potential move, if such a discussion takes place. However, while persuasive arguments during the October meeting that steer the Governing Council towards further easing measures can't be ruled out, the tone of the conversations with MNI indicated satisfaction with the results of the ECB's E60 billion in monthly asset purchases to date. Furthermore, all three sources insisted that changes in issue limit rules were merely technical and not meant to signal any policy intention.
"I wouldn't be building up expectations of some concrete new action in October," said one senior Eurosystem source. "Every month we are putting more liquidity into the system. And it's having an effect, so let's see how things evolve; they're moving somewhat in the right direction, despite adverse pressures from international commodity markets."
A second senior Eurosystem source agreed with that assessment, adding that it was "too early" to begin discussions on new action given that the current QE programme has "quite a long time" to go until its presumptive September 2016 conclusion and that there are still many questions surrounding developments in China.
"We think the situation in China has been viewed too dramatically," said the second Eurosystem source. "It's too early to say whether China and the emerging markets are a short-term hiccup or really a turning point. For the time being there are good arguments suggesting it is not a turning point. Therefore, it would be premature for us to make any more fundamental moves, but it is of course something we are monitoring."
A third Eurosystem source noted the implications for growth and inflation in the Eurozone as a result of the China slowdown, but again stressed that it was "too early" to talk about potential adjustments to the suite of measures the ECB already has in place.
"China means weaker external demand, and that's why you get some revisions in the GDP growth forecasts. So obviously, the issue of China means that you get less of a boost from the net export side," the source said. "But one has to wait and see, so that the impact of the low energy prices is digested."
So we wait and see then.
In the meantime, the ECB may simply be experimenting whether a market which is starved for someone to tighten financial conditions, will respond approvingly to less liquidity. For the time being, judging by the spike higher in the EURUSD and EURJPY, and the resulting melt up E-Minis, this may be working.
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Of course, if and when the market wakes up from its latest ether binge and realizes that it is still addicted to endless free liquidity, more QE is precisely what is needed in a world without any growth, the ball will be in the BOJ's court as everyone will look to the last bank that hasn't rejected more QE outright in the immediate term.
