It seems that the ECB has been the forgotten soldier in the war against deflation. When Mario and company packed their speedos and the latest research from the BIS and Tomas Piketty, the world became distracted by chaos and crisis other than Greece. Chinese devaluations and daily roller coast like movements in equity markets rendered Greece momentarily irrelevant, especially as Alexis Tsiparis captured the moment from the Greek referendum and steered a somewhat pragmatic course and thought to placate the Greek center. Greek 3-year yields dropped 3500 basis points as investors bought short-term Greek sovereigns once the fear of GREXIT faded.
Yes, the ECB and its President Mario Draghi soaked up the quiet in Mykonos and let others deal with financial uncertainty. Tomorrow, the quiet ends as the ECB holds a meeting to determine its interest rates and provide guidance as to the future outlook for the EU economy. There is talk of improved economic performance but tepid would probably be an over statement. Unemployment across Europe is at 11% and inflation is measuring under 1 percentage point. The ECB‘s EU60 billion monthly purchases of various asset classes will be maintained for its promised duration through September 2016. In my opinion the ECB will hold its overnight rate at 0.05% and keep the bank rate on reserves deposited at the ECB negative.
The EURO currency is in the middle of its three-month range so while President Draghi would prefer a weaker currency the fact that it is rangebound and below the 200-day moving average probably provides little concern. The press conference following the formal announcement will give us some insight into Mario’s views on the recent financial volatility and will result in Draghi’s emphasis on the ECB remaining vigilante to any deflationary fallout from a slowdown in China and other emerging countries.
The U.S. unemployment data and the possible rate increase from the FED will provide the ECB some breathing room for if the U.S. dollar RALLIES on a strong jobs report then the ECB can be patient. The worst outcome for President Draghi will be if the DOLLAR fails to rally if the FED raises rates. I believe that would force the ECB to initiate new methods of weakening the euro. But with a G-20 meeting this weekend of finance ministers and deputy central bankers. I DOUBT MARIO WILL BE ANYTHING MORE THEN COY ABOUT FUTURE ECB INTENTIONS. Tomorrow’s ECB meeting and Draghi press conference will not be sealed by the kiss of any new monetary stimulus.
***Something to ponder and is certainly in the realm of 2+2=5. In contemplating the massive doses of FEDspeak that has saturated the airwaves and computer screens, I propose the idea of the FED raising the fed funds rate while cutting the interest on excess reserve (IOER) rate. The FED had not paid interest on reserves until it was implemented as an emergency measure in October 2008. By cutting the rate on excess reserves below the fed funds rate banks would stop placing excess money at the FED and would actually put the money to work creating velocity in the money figures and possibly stimulating growth. I know there are arbitrage problems for some money market participants but it is time to remove some of the emergency measures from the 2008 crisis.
If the FED is worried that a 25 basis or even 100 basis point FED FUND increase would harm the economy, remove the incentive for banks to hoard reserves. WHAT IS THE FED SO AFRAID OF? Anyway, the readers of NOTES are an intelligent, well-informed group so I put this out there to generate some thought. BUT I OFFER THIS: IF THE FED RAISED RATES AND CUT IOER, THE YIELD CURVES WOULD STEEPEN, SPOOS WOULD RALLY, DOLLAR WOULD WEAKEN AND GOLD WOULD RISE. I’m waiting to hear from the global voices of NOTES FROM UNDERGROUND.