Counting down to Article 50
The euro swamped lower yesterday as the European Central Bank cut their bond purchases on a month by month basis but extended the length of time that they will continue their QE program. Some would call this a tapering of asset purchases as we saw from the Federal Reserve back in 2014; the ECB was at pains to say that this was not the case. So, in 2016 it is clear that Brexit means Brexit but taper does not mean taper.
The main driver of this euro weakness however was the emphasis that the ECB President put on his comments that inflation will not hit target within the bank’s 2 year forecast horizon. I can’t remember the last time that Draghi was as explicit as he was about an undershoot of inflation within their forecast period and a subsequent continuation of QE policy but needs must in an economy that cannot reliably construct growth and inflation towards target.
Fudge as far as the eye can see
All in all this is classic Eurozone political fudgery; the Germans and more conservative elements of the ECB council will be happy because the monthly purchases are lower and the periphery will be happy because the balance sheet is still increasing. Whether it works or not is another matter entirely.
It is evident also that Draghi does not trust this bond sell-off and allowing the ECB to buy bonds with a yield that is more heavily negative than their deposit rate has unanchored the short end of the European yield curve. You’d have to be pretty sceptical of it doing much for banks that are struggling to make money in the short term.
Draghi finished his press conference in typical form; urging politicians to pull the fingers out and start sparking. Fiscal policy will be at the forefront of every Eurozone election campaign next year but it remains to be seen whether anything actually happens.
Parity in EUR/USD is a common call in times of European angst and we think that the circumstances of a strong, Trump driven dollar and European political issues now makes a better opportunity for that price level to be reached than in the past.
South Korea one step closer to ousting President
South Korean lawmakers have held and passed an impeachment vote of the President Park Geun-Hye. The matter will not sit with the Constitutional Court who will have to ratify the vote. A failed impeachment is expected to damage the economy more than a successful one as consumer spending declines and investment decisions slide.
This move is not to be confused with the increases in populism that we are seeing in Western economies; this is getting rid of a President who has been guilty of a drastic dereliction of her duties.
Chinese inflation rallies higher
Chinese producer price inflation has risen to the highest level in 5 years in November courtesy of higher commodity prices and a weaker yuan. While this continues the global reflation conversation, I don’t believe this meaningfully extends it and chatter of a potential People’s Bank of China interest rate hike as a result are fantasy.