Yesterday’s European Central Bank meeting was one of disharmony, and draws an end to a year that has seen the bank go further with its policy decisions than a lot of people thought was ever possible. It is the prospects for additional policy looseness that the market was watching yesterday, however, and the moves in the euro were testimony to just how disappointed the market was.
The European Central Bank President Mario Draghi’s job yesterday was to make sure the market remained acquiesced around the likelihood of additional asset purchases by the bank. While he was able to sit there and say that the ECB would ‘reassess’ the situation around purchases early next year, the market remained dubious as to his ability to actually deliver the magic potion.
The economic situation certainly deserves it. Growth through the Eurozone was downgraded from 1.6% to 1.0% in 2015 and to 1.5% from 1.9% in 2016 but it was the news around inflation that increased the overall feeling that more needs to be done by the central bank. The latest staff projections on prices see CPI at 0.5% from 0.6% in 2014 and only 0.7% vs 1.1% in 2015. There is a whopping great big caveat on these however. These estimates do not include a large amount of the recent fall in oil.
Submissions of these estimates had to be made by November 11th when WTI crude was trading around $80 a barrel; it is $66 a barrel at the moment. There is another impulse of disinflation to hit the Eurozone economy in the next month and we cannot rule out December’s preliminary CPI number, due late January, falling to 0.0% from 0.3% at the moment.
Decisions around oil remain the most difficult for policymakers right now, be they in Frankfurt, London, Washington, Tokyo or, maybe most of all, Moscow. Yesterday someone told me that it was not Mario Draghi that controls Eurozone monetary policy but Saudi Arabia. There is a lot of truth in that with policy makers balancing the beneficial effects of lower oil prices with the havoc that it is playing on the CPI outlook.
What the lower prices may also be able to do is build a consensus around what additional policy measures need to be created to combat the inflation problem. At the moment, there is a consensus around the need for additional monetary support but little agreement on what can be done. Draghi said yesterday that the ECB did not need unanimity on these measures which begs the question, why have we not seen the policy launched already? Draghi does not have the support he needs currently.
As of Jan 1st the frequency of European Central Bank meetings moves from one every four weeks to one every six weeks. The first one of 2015 is Jan 22nd and then we must wait until March 5. We have to believe that the ‘reassessment’ of the need and possibilities around stimulus will run into the March meeting. The table is set for the ECB to dine on assets and expand its balance sheet, but nobody is quite ready to sit down.
Euro weakened through Draghi’s speech and looked to be heading higher through the US session until, out of nowhere, ‘sources close to the matter’ told newswires that the ECB was ‘preparing a broad-based QE package for its January meeting’. I’m not allowed to swear in these updates but this ‘announcement’ embodies the frustration that I have for these markets at the moment. There is nothing to be said on this apart from ‘so?’ We know that they’re going to have to at some point and as such, it is not a surprise.
EURUSD remains below the 1.24 level this morning with GBP/EUR back in the mid-1.26s. The single currency should be a lot stronger. What is stronger overall however is the USD. Yesterday’s dollar price action saw it break fresh seven year highs against the Japanese yen, pushing through the 120 level handily and makes the reaction to today’s payrolls announcement that much more difficult to call.
The most popular way that traders like to express a decent increase in payrolls is buying USD against the yen but yesterday’s moves, and the moves over the past few months, have muddied things considerably. Obviously if today’s number is poor then the swing lower in USD will be a sight to see, especially given fears over the US inflation outlook, but nothing is assured when we look at the US jobs market.
For the record I think that the number will disappoint. The impetus in job creation as seen in the ISM reports earlier in the week has slowed from August onwards and 230,000 jobs being created seems a bit rich for me. I’m looking for a number of around 200,000 and a little bit of USD weakness to end the week.
