The Draghi Disappointment
Yesterday’s ECB meeting has seen the euro spike dramatically after the latest policy announcement was a profound disappointment. Deposit rates were cut by 10bps (less than consensus), QE was extended by six months with no increase in purchases (less than consensus) and additional measures around deposits or extending asset purchases to take in buying different things.
Given the language that the European Central Bank has employed over the past few weeks this was a painful case of ‘over promising and under delivering”. The market mood going into the meeting was one of expectation and that same market is wounded as of yesterday afternoon.
In the longer term this policy shift will do nothing to relieve the deflationary pressure on the Eurozone in the short term and I believe that the ECB will see this a missed opportunity soon enough. Unfortunately any goodwill afforded to ECB policymakers is now in the gutter thanks to this enormous guidance foul-up and markets will be unwilling to do Draghi’s bidding so easily in the future. His strength has been that he could jawbone markets lower almost at will; traders will now need more proof in the pudding.
Help for other central banks
GBP/EUR is lower, as is everything against the single currency, but I think that once this disappointment is digested euro weakness will continue into 2016. The next leg of December markets remains USD strength as today’s move makes the Fed hike in a fortnight more likely as the dollar index has taken a hit.
Conversely this move is also positive for sterling in the short term as it releases some of the pressure on the UK economy from a strong pound. Bets on an increase in interest rates from the Bank of England next year surged yesterday. Similarly market belief that the central banks of Switzerland, Sweden, Norway and Denmark would need to dramatically loosen policy has also sunk away.
Everyone thought that he would give the European economy a whopping great big present yesterday but instead he has given it to the Fed and a few central banks.
Fed now looking down the curve
Although we still have a Fed meeting to deal with in 12 days’ time, there is a lot to be said for markets trading sideways into the New Year; investors who got the wrong side of Draghi yesterday will be happy to close up shop and come back in January. That being said, today and the rest of the month does still offer some volatility.
Today is Nonfarm Payrolls day and although the ship may have sailed on a December rate rise already we must view the ongoing rate curve through a prism of eventual inflation. That means looking to see just how tight the US labour market is becoming and whether that is driving wages. Yesterday’s services report from the UK showed a slowing of employment expansion, a necessary and welcome sign of a tightening labour market – a key development on the road to pay increases and wage driven inflation. US payrolls watchers will want to see something similar.
The Day Ahead
Likewise, today’s OPEC meeting of the world’s oil suppliers is expected to trigger further commodity and currency volatility. We do not expect a cut in production – a boost to prices and inflation everywhere – but remain unsure as to how long supply can stay at this level with margins so squeezed.
Have a great day and a better weekend.