Open letter to Mario Draghi: Grow some cojones! If the onset of deflation scares you and other ECB members, why is it that you do not have the intestinal fortitude to enact the QE policy that you have pontificated about for the last 30 months? Either deflation is to be feared or it is a straw man that elevates the your self-importance. On November 21, Mario appeared to announce that the time had come for the ECB to begin a meaningful QE program, but December 4 brought no action, just words. President Draghi, the honeymoon is over and it is time to reveal the testicles that can give birth to policy. Mario, if the Germans won’t compromise point to the EUR/YEN cross at 149 and ask Jens Weidmann how German manufacturing is going to compete against Japanese high-end engineering.
The Japanese are also beneficiaries of lower oil prices but have a currency that has depreciated 11 percent since the BOJ initiated the newest QE program. (An interesting aside, the EUR/YEN failed to take out the high of 149.15 made on November 20, the day before Mario Draghi’s attempt at manhood.) The EUR/YEN becomes a very important barometer for the markets as the Japanese has made QE a mandatory response for the ECB.
The markets behaved as expected with the ECB‘s inaction. The euro rallied; the DAX fell; and commodities struggled (although GOLD failed to drop as much as expected). While I criticize President Draghi, my take away is this: WE CAN LOOK FOR A DRAMATIC STATEMENT FROM DRAGHI BETWEEN NOW AND THE NEXT MEETING FOR THE ECB HAS ALREADY PROVIDED SUPPORT FOR UNCONVENTIONAL MONETARY POLICIES. IT SEEMS THAT PRESIDENT DRAGHI LIKES DRAMA. IN JULY 2012 THE ECB PRESIDENT’S FAMOUS “WHATEVER IT TAKES AND NO TABOOS” CAME AT A TIME OF NO ECB MEETING. IF ECONOMIC DATA CONTINUES TO FAIL BE ALERT TO A DRAGHI PLAN OF ACTION. THE HOLIDAY MARKETS WILL BE HERE SHORTLY AND ANY ECB ACTION WILL BE GREATLY MAGNIFIED BY LESS LIQUIDITY. MARIO MAY BE SINGING CASTRATO BUT HE IS A WILY FOX.
During Mario’s press conference it was noted that there is a political part to all of this maneuvering but Draghi took the high road and maintained that the ECB has an inflation mandate and acting to realize its mandate is not a political action. He left the possibility of buying all assets classes except GOLD. I think the Swiss referendum would prevent the ECB from buying GOLD for it would be a slap in the face of the SNB. Again, Mario Draghi stressed that the EXCHANGE RATE is not a policy target but of course that is nonsense for if QE is done correctly the EURO will depreciate and the French and Italians will be momentarily content. The Italian BTPs saw yield rise as the ECB disappointed the peripheral bond markets.
***Quick look at tomorrow’s unemployment data from the U.S. and Canada: The U.S. nonfarm payrolls are projected at 230,000 with the rate remaining at 5.8 percent and average hourly earnings rising 0.2%. The surprise can be on the upside as seasonal hirings my be larger than usual as the Christmas season brings hopes of robust retail sales. A number over 300,000 would provide a boost to the DOLLAR while the recent strength in the equity markets may be priced in, especially in light of the disappointment from the ECB. If the U.S. data is stronger than expected look for yields to rise on the short-end of the yield curve in the light of speeches this week from Stanley Fischer and Bill Dudley maintaining that falling energy prices would not deter the FED from a mid-2015 interest rate hike.
The Canadian data is expected to show an increase of 5,000 jobs after a very robust October gain of 43,000. The Canadian unemployment dropped 0.3% to 6.5% in October so an increase to 6.6 is expected. The interesting point about Canada is that employment is gaining strength even as the energy sector is being battered by falling prices. The recent weakness in the Canadian dollar may be providing a boost to manufacturing and service sector exports. Large job increases in the auto sector will be deemed a positive for the U.S. growth story.