The last few days (leading up to this week's Dec 13 meeting - when it is likely to end its QE program), ECB officials (unlike their Fed brethren, who just won't stop talking) have gone silent on monetary policy as market confidence, economic data, and expectations for monetary tightness all collapse.
European economic data continues to serially disappoint...
But that doesn't stop Mario Draghi, (Brussels, Nov. 26), from talking it up...
“...risks relating to protectionism, vulnerabilities in emerging markets and financial market volatility remain prominent.”
“The underlying strength of domestic demand and wages continues to support our confidence that the sustained convergence of inflation to our aim will proceed, and will be maintained even after a gradual winding down of our net purchases.”
He is not alone, as Bloomberg notes, most officials have steadfastly ignored the euro area’s summer slowdown, blaming it on temporary issues (such as German car production) and predicting a rebound this quarter. While acknowledging the threats, they’ve stuck to their line even as some numbers suggest the bounce-back may not be much to cheer about.
“Surveys of euro area business activity and sentiment indicators have softened perceptibly relative to their earlier highs, although they remain in expansionary territory and are still above long-term averages for most sectors and countries.”
Jens Weidmann is another 'ignorer' of the truth...
“Fluctuations in the data can’t hide the fact that the economic upturn in Germany and the euro area remains intact.”
Because no matter what, The ECB wants QE to end, despite the ugly data, as they know they need ammunition for when the next crisis hits.
As Peter Praet, the ECB's chief economist, has been at pains to say that capping quantitative easing is a far cry from actually tightening.
“Significant monetary policy stimulus is still needed… The end of net asset purchases is not tantamount to a withdrawal of monetary policy accommodation.”
So just like The Fed, balance sheet expansion (QE) is generous easing , but balance sheet stability or contraction (QT) is not tightening. There's just one thing... huge redemptions...
But, perhaps most problematic for both Powell and Draghi - the market is now pricing The ECB as more hawkish than The Fed...
The ECB has said it will keep rates unchanged “at least through the summer of 2019” – economists see no move until at least the fourth quarter (expectations for The ECB's rate-trajectory have fallen recently to just 11.5bps).
But, after last week's jawboning, expectations for Fed rate-hikes in 2019 amount to just 8.25bps - more dovish than The ECB and a colossal regime shift from just two months ago.
So ultra-low rate-hike expectations already priced into Eurodollar markets (the most liquid market in the world), albeit likely that de-growth outlook not priced into stocks, just how are Draghi and Powell going to pull off a 'dovish' rate-hike that everyone is hoping will send stocks on a glide-path to Santa's little year-end rally...
It may just be a lump of coal this year.
Finally, it may be worth noting that Draghi’s term as ECB boss expires in October 2019... can he keep it all together until then?