Mario Draghi, the Caesar of European monetary policy, took the ECB meeting on the road to Naples and wowed the world with his ability to hold an hour-long press conference and say nothing. The world waited for some clarity on the proposed European QE programs and the result was confusion. President Draghi announced that the Asset-Backed Security Purchase Program (ABSPP) would commence this quarter but the ultimate size of the program remains a mystery (NOTE: Europe’s asset-backed securities market is about $317 billion). We do know that the ABSPP is intended to last for two years but if economic activity remains dormant the time period could be extended.
The ECB remained leery of pushing too hard against the Germans so continued emphasis on structural reform. The problem for President Draghi is that France and Italy are receiving political pressure against fiscal tightening and opposition in France from the euroskeptic National Front led by Marine Le Pen is gaining in popularity. I believe that the ECB held its fire so as to see the results from the Asset Quality Review (stress tests) that will be released in two weeks. The ECB has run the AQR and for Draghi’s sake the worse the results for European banks the more aggressive the ECB can be in creating its QE program, especially if some of the worst capitalized banks reside in Germany. The mantra for the ECB’s AQR results is: Worse is better.
The world has certainly arrived at the conclusion that the European economy is struggling and it’s necessary for the ECB to be as aggressive as the FED. Draghi came to Naples. He saw the data. He conquered the fears of the global markets with his words of comfort. But words will not suffice for much longer for even President Draghi knows the previous two years have bought the EU time, yet the governments have squandered the period of calm through their incompetence and German intransigence on fiscal restructuring. Because the ECB failed to provide new information on liquidity programs, the EURO had a short covering rally .
The test will be tomorrow on the U.S. employment data. If the nonfarm payrolls and average hourly earnings are strong then the selling should return to the euro and strength to the dollar. The consensus for nonfarm payrolls is a gain of 215,000 jobs and for average hourly earnings to increase by 0.2%. Be sure to watch revisions to last month’s tepid gain of 142,000. The greatest problem for tomorrow’s release is the seasonality of education jobs as the school year begins in September.
In regards to the equity markets, with global interest rates at ZERO and the U.S. QE program coming to an end, the SPOOs will need good news to rally. Good economic news will drive corporate profits in a more meaningful way than low interest rates. It is low rates that have supported the equity markets for the last five years. Global investors are aware that Europe is a huge headwind so U.S. data is going to have to be robust enough to maintain the hopes of investors.
***The best part of the Draghi press conference was when Wall Street Journal reporter Brian Blackstone asked President Draghi about the recent value of the EURO and its possible impact on ECB policy. In a nasty answer, Draghi accused the reporter of trying to EXTORT an exchange rate level that the ECB may be trying to achieve. Some European nations would like a weaker Euro but Mr. Draghi knows this is very treacherous ground for the ECB for it may fall afoul of the G-20 and the European Commission. If economic divergence between the U.S. and Europe drives the dollar higher … so be it. Again, Mario came, saw and conquered. Bring on the bank stress tests.