Macro Digest: Dragi speech - Out of context?

Team,

 

Despite headlines to the opposite the actual speech by Mr. Draghi is far less hawkish  - let me illustrate:

'In 2015-16, around two thirds of the deviation of euro area headline inflation from a model-based mean can be accounted for by global shocks linked to oil prices.

'Even though the downward pressure on inflation from past oil price falls is now waning, oil and commodity prices are still having a dragging effect – if only because they continue to lack a clear upward trend. In fact, lower oil and food prices than those assumed in the March 2017 projections are an important factor behind the downward revision of our latest inflation forecasts'

 

In other words 2/3 of external impact on prices derives from energy – what has energy done?

 

Collapsed – this is an academic discussion for ECB Forum on central banking more than a policy signal…. I am buying more fixed income on this as China reports PMI later this week, the credit impulse continues to deteriorate and energy turns south… That central bank feels confident is nothing new – the response should always be to fade their optimism as the model they  use continues to hamper productivity.

 

 

 

 

The part of the speech taken as hawkish:

 

'Now, we can be confident that our policy is working and that those risks have abated. The threat of deflation is gone and reflationary forces are at play. And since one of the drivers of inflation today is positive supply developments, this should feed back positively into potential output rather than produce hysteresis. In these conditions, we can be more assured about the return of inflation to our objective than we were a few years ago.

This more favourable balance of risks has been already reflected in our monetary policy stance, via the adjustments we have made to our forward guidance.

Another considerable change from three years ago is the clarification of the political outlook in the euro area. For years, the euro area has lived under a cloud of uncertainty about whether the necessary reforms would be implemented at both the domestic and Union levels. This acted as a brake on confidence and investment, which is tantamount to an implicit tightening of economic conditions. Today, things have changed. Political winds are becoming tailwinds. There is newfound confidence in the reform process, and newfound support for European cohesion, which could help unleash pent-up demand and investment.

 

Nevertheless, we are still in a situation of continuing slack, and where a long period of subpar inflation translates into a slower return of inflation to our objective. Inflation dynamics are not yet durable and self-sustaining. So our monetary policy needs to be persistent'

 

The market was looking for an excuse to take EUR higher – and we have been bullish the EUR all year – now we have reached our target 1.1400/1.1500 we step aside……furthermore we use this "hawkish tilt" to increase exposure to fixed income, again, mainly in the US where we have bought some more 30Y futures

 

Finally,

 

The "other" central banker Yellen has classic quote yesterday – which reminds me of Bernanke

 

 

 

 

 

 

Safe travels,

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Investment Officer

 

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