Both Janet Yellen and Mark Carney may have previously announced they would withdraw from the ECB's Forum in Sintra, Portugal (due to pressing market stabilization issues), but it was what Mario Draghi said here that has captured the market's attention this morning. The head of the ECB avoided mentioning the U.K.’s vote to leave the European Union but instead called for greater alignment of policies globally to mitigate the spillover risks from ultra-loose monetary measures.
“We can benefit from alignment of policies,” Draghi said at the ECB Forum in Sintra, Portugal. “What I mean by alignment is a shared diagnosis of the root causes of the challenges that affect us all; and a shared commitment to found our domestic policies on that diagnosis."
Most didn't read between the lines, and assumed that "alignment of policies" was simple code for the ECB demanding another global intervention. It immediately led to statement such as the following by John Plassard, a senior equity-sales trader in Geneva at Mirabaud Securities who told Bloomberg that “stocks are rebounding on the expectation that there will be a coordinated intervention by central banks. What central banks can do is put confidence back in the market by telling everyone that they are here and ready to act. If we don’t get that sort of support, we’ll see further declines."
Ironically, what Draghi may have been referring to is not so much a coordinated response, i.e., another global central bank intervention, as much as central banks sitting down to figure out how to move on from a world flooded by central bank intervention, one where overnight every single Japanese bond across the entire curve was yielding less than 0.1%, after the latest overnight rally in Japan pushed yields on the nation’s longest debt, the 40-year bond, to 0.065% on expectation of, you guessed it, more BOJ intervention.
As the BIS ranted over the weekend in its latest annual report, central banks’ extraordinary measures to boost inflation since the global financial crisis have depressed interest rates, stoking discontent among savers and drawing accusations that they have helped boost the support for populist parties. Draghi, who has often criticized euro-area governments for inadequate structural reforms, said there is a “common responsibility” to address the sources of low inflation, such as low productivity and an output gap.
As Bloomberg adds, Draghi didn’t explicitly refer to the latest shock to markets, the U.K.’s shock vote to exit the EU, after he said Monday that the best word to describe his sentiment in reaction to the British referendum probably was “sadness.”
ECB Executive Board members Benoit Coeure and Peter Praet are scheduled to chair panel discussions on Tuesday at the ECB Forum, a European equivalent of the U.S. Federal Reserve’s Jackson Hole symposium. A panel discussion between Draghi, Bank of England Governor Mark Carney and U.S. Federal Reserve Chair Janet Yellen that was planned for the final day on Wednesday has been canceled.
“We have to think not just about the composition of policies within our jurisdictions, but about the global composition that can maximize the effects of monetary policy so that our respective mandates can best be delivered without overburdening further monetary policy,” Draghi said. “This is not a preference or a choice. It is simply the new reality we face."
So did Draghi preview more intervention, or just the contrary, hint that the monetary status quo is no longer working? Expect to say the debate play out across markets today even if as futures indicate the early read is one of even more liquidity about to be injected.