Our team did a Podcast on the major changes seen in central banking in the last 24 hours –
https://soundcloud.com/user-216073084/market-call-july-3-2019
Two events in the last 24 hours clarified something we have feared for a long time: A full frontal Modern Monetary Theory take-over for policy makers.
- Ms. Legarde is a political appointee which will lead support to Club Med, in particular Italy probably through OMT directly first and overall by moving ECB to full endorsement of MMT
- Being French is key for market – dovish by definition – being political means independence is lost
- Prepare for even lower mortgage and funding rates, a full support for OMT and MMT
- In the US Trump is trying to appoint to candidates which will look for Zero interest policy!
- Christopher Dembik did quick look at Legarde "history of monetary comments"….See below..
Actions:
Massive OVERWEIGHT US 10Y- futures…
Long Gold – look for break of 1440 to confirm…
Italy BTP to rally.
USDJPY to be offered..
Equity – short-term probably support, but medium and long-term this dilutes independence of ECB and FED meaning risk of inflation/overspending into an economy where the credit transmission is destroyed by the very same ZIRP!
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From: Christopher Dembik (CDK) <CDK@saxobank.com>
Sent: 3. juli 2019 09:34
Subject: Lagarde proposed for ECB's presidency
Quite surprised by the outcome of the EC yesterday.
Lagarde is a very brilliant politician but she has no experience as monetary expert or as central banker. I tried to look for previous speeches to know more about what she thinks about monetary policy.
Actually, she has barely taken position on that topic over the past decade (when she was France's minister of Finance then head of the IMF).
Invited as speaker by the Fed of Kansas City in 2013, she endorsed unconventional tools, including the OMT programme (which may be very crucial in coming months). She also considers -which is not very unusual – that the banking union must be completed (with the third pillar consisting in a robust deposit insurance system) and that it is crucial to set up a capital market union.
https://www.kansascityfed.org/publicat/sympos/2013/2013Legarde.pdf
She is also supportive of negative interest rates:
"We see the recent introduction of NIRP by ECB and BoJ – though not without side effects that warrant vigilance – as net positives in current circumstances" (2016).
It might be the signal that we will talk about tiering very soon again in the eurozone…
I don't think she has strong opinion about monetary policy and she is likely to follow Draghi's dovish stance, at least at the beginning of her mandate.
This is obviously a political appointment (I trust it won't threaten the ECB independence) but the problem is that we desperately need monetary policy specialists on board.
Lagarde and her vice-president, De Guindos, mostly bring management experience to the position. Coeuré, who is in my view one of the most talented and smart policy experts in the eurozone, is stepping down in January next year. To replace him, we will need a new Coeuré type figure that could perfectly work with the ECB's new chief economist, Philip Lane.
Having strong managers is great but when the crisis will hit the eurozone, we will probably be in a completely different position and we will need to implement new monetary tools/strategy/thinking.
Lagarde won't be of much help at that time.
I think this situation will shift the balance of power to the governors of national central banks and the ECB chief economist.
Talking about Lane, his first speech as ECB chief economist clearly paves the way for more easing:
"The effectiveness of the policy toolkit means that we can add further monetary accommodation if it is required to deliver our objective".
https://www.ecb.europa.eu/press/key/date/2019/html/ecb.sp190701~0c1fa3c8fc.en.html
As a reminder, odds of ECB cut in September are close to 100%...
Have a good day.
Best,
Christopher
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