"Whatever It Takes" > "Whatever"

Submitted by Michael Every of Rabobank

Market comments

Yesterday was the ECB’s big day in the sun. As our ECB experts Mr De Groot and Van Geffen note, Draghi both revised down growth and inflation expectations a tad, allowed for yet more TLTROs, flagged that rate hike that was expected last December now isn’t happening, re-opened the door to a possible rate cut, hinted at more QE to come, and even appeared to accept that there is an argument that at this stage Europe needs fiscal policy not monetary policy in order to escape. (For more granular analysis, please see here.)

For such a conservative institution that kind of volte-face, or just six months after proudly saying the opposite I would argue a volte-farce, should have been major news to the markets. However, while Draghi might have thought he had wheeled out “Whatever it takes” again to show off in public, judging by both Bund yields and the inflation gauge of the EUR 5-Y-5Y forward swap, the market reaction was “Whatever”. True, EUR jumped vs. USD, but given USD is having a great year vs. most EM FX, that just makes Europe even more expensive as exporters and holiday destinations.

After all, it isn’t as if we haven’t seen other central banks--just look at the BOJ!--talk big and then endlessly fail to deliver on inflation promises alongside far more impressive monetary and fiscal policy combinations than the thin-gruel-at-some-point-down-the-road being offered by the ECB in a Europe where Germany appears determined not to have any public debt at all. (In conjunction with no functioning infrastructure or NATO and an impending existential clash with Italy: how do you say “So much winning!” in German?)

By contrast, the press is discussing the Fed discussing a rate cut as soon as this month. Again, that would be a volte-farce, but at least it’s rapid. However, as our Fed watcher Philip Marey--who was correctly calling Fed cuts back in December, thank you very much!--argues, even an insurance cut will prove to be insufficient, especially if the threat of trade wars escalates. And it is escalating, with US Vice President Pence saying tariffs on Mexico start at 5% on Monday, while Huawei is apparently working 10,000 engineers three shifts a day to work out how to strip all US components out of their phones. (Does it really take that many engineers to drop the phone in the toilet?) Indeed, the threat of a recession will most likely force the Fed to start a full-blown cutting cycle in 2020, says Philip, as Rabo’s recession probability model, based on the yield curve, now indicates an 83% probability of that happening by October 2020. (See here for more.)

At which point, of course, the ECB will be waaay behind the curve; and let’s pray that the German response to a US recession isn’t more fiscal tightening to ensure that its precious deficit doesn’t get out of control. That would be the final mad feather in the European cap after yesterday’s warning in the Daily about what happened when Chancellor Brüning tried the same pro-cyclical policy back in the 1930s. (On which note, some observant readers might have noticed that my partial list of historical US political scandals yesterday inadvertently attributed some of the Bush I administration’s to Bush II and Bush I to Reagan: apologies for the editorial slip, but I think the pattern of “things weren’t any different pre-November 2016 except in terms of free trade” still holds.)