ECB comment and Manuel from Barcelone

 

Private note: NOT for publication unless agreed on please……….

 

 

 

ECB Comment:

 

ECB left behind the legacy of "not pre-committing which has been in place since 1999"  - The monetary doctrine is now All American as "verbal intervention" to talk down market expectations has replaced actual policy rates.

 

The later reminds me of Abenomics coming in the 8th inning of QE - looks good for a very, very short time then reality kicks in. Talking the market anywhere with Fed on "normalisation path" will be at best difficult at worst a disaster.

 

Clearly ECB felt cornered  - painted into a corner from Fed speak, stabile, yet not outstanding data support, lack of fiscal commitment from politicians.....

 

The press conference had Draghi in a very forceful speech and remark session - he was REALLY making the point this was unprecedented - and there was NO TIME limit on ECB's commitment to lower rates, but he also CLEARLY felt this was another Draghi "star moment"- He was semi -rude to reporters (among them my friend Geoff Cudmore), cutting people off and clearly very aggressive. He was in my opion extremely unbalanced in his body language - maybe a sign of what is at stake but also a kind of desperation..

 

ECB feels they have more ammunition to lower interest rates post the German election I presume.....

 

Conclusion:

 

The real surprise was the force by which Draghi tried to sell his "unprecended" change to outlook and guidance not the actual move towards more communication.

 

Maybe its just the skeptical part of me, but since first Fed, then ECB and BOE seems to be more willing to communicate with me and the market I have become less confident in both their forecast and projection because ultimately what they are telling is: We have tried everything - now we can only talk to you - dazzle you with our ability to make a song and a dance, but meanwhile in the streets of Europe (but also US) - the main street - the 80% uneffected by this caberet shows goes: Que? Me? Or in my favorite character of all times Manuel from Fawlty Tower words:

 

I know nothing – I'm from Barcelona

 

 

Link below with excellent write up by the good people at Soc. Gen.

 

 

Zero Hedge: What The ECB's "Unprecedented" Forward Guidance Means

2013-07-04 15:06:19.918 GMT

 

http://www.zerohedge.com/node/476035

 

"Forward Guidance" Introduced, from SocGen

 

The ECB came out with all dovish guns blazing today to reverse the tightening in money and financial market conditions since June, stoking a rally in euribor futures (lower rates) but causing the EUR to drop nearly 1% vs the USD. The only thing that was missing today was a cut in the refi rate and/or negative deposit rate, but neither has not been ruled out given that downside growth risks continue to exist. Casting better macro data side, the ECB officially introduced 'forward guidance' on rates and said exit is "very distant".

 

The introduction of 'forward guidance' characterises the fact that all key ECB rates will stay low for a longer period. This makes the ECB fall in line with the guidance by the US FOMC on the Fed funds target, the Bank of Canada and most probably, the BoE in August. Put on the spot during the press conference, president Draghi rejected claims the ECB had come off the proverbial fence in response to a changed outlook for US monetary policy given the spill over effect from a steeper US yield curve across the Atlantic and the steepening impact on eurozone core and periphery debt markets. Taking after the BoE earlier (a coincidence, Draghi said), the ECB is worried that the tightening in financial conditions will handicap the prospects for economic recovery in the euro area where the credit growth remains very weak and fragmented.

 

The move clearly marks an innovative step in the ECB's communication and policy strategy for a bank that previously had always refused to pre-commit on interest rates. Draghi did not commit explicitly how long rates would stay low but hinted that there would be no change for at least 12 months ("extended period is not 6 or 12 months"). The decision to introduce forward guidance was unanimous and how long this bias will be observed will depend on the assessment of three variables ie inflation, growth and monetary developments (credit flows, monetary aggregates). The case for a cut in the refi rate was also discussed but there was no agreement.

 

The retention of ammunition should the economy move back into reverse was important to the ECB and this probably explains why there was no consensus to cut the refit rate from 0.50%. Draghi categorically said that 0.50% is not the "lower bound" for rates. This implies that further stimulus is still possible. For EUR/USD, key support now rests at 1.2877 before selling towards the April 1.2746 low is stepped up.

 

 

 

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