Two central banks announced interest rate decisions today: the Bank of Canada (BOC) and the Reserve Bank of New Zealand (RBNZ). The BOC left rates at 0.50% while the RBNZ SURPRISED markets by lowing its official cash rate by 0.25% to 2.25% as Governor Graeme Wheeler revealed concerns about a slowing Chinese economy and the ever-increasing global financial risks. There was no specific mention about the KIWI but Wheeler voiced concerns about the downward pressure on DAIRY EXPORT PRICES. The KIWI dropped 2 percent against the U.S. and Australian dollars following the surprise move but the explicit notation of slowing Chinese growth should be an alarm for those concerned about the impact of China on global commodity prices.
The BOC was content to allow rates to remain at its current level as the recent rise in energy export prices and the announcement from the Trudeau Government about fiscal stimulus plans should provide enough comfort for the BOC for growth in Canada. The Canadian unemployment data and trade numbers will provide the evidence on which to evaluate the BOC’s decision.
Tomorrow is a key day for global markets as the ECB will announce its RATES decision and the POTENTIAL for increased LARGE SCALE ASSET PURCHASES, or QE. There are all sorts of probabilities put forward about whether or not the ECB will increase QE by 10 or 20 billion euros a month and to what levels the ECB will lower the negative rates on reserve deposits. The guesses are dropping the NIRP t0 -40 or 50 basis points from -30. The announcement is at 6:45 a.m. CST, followed by the Draghi statement and press conference at 7:30 a.m. I URGE PATIENCE AS THE ALGO HEADLINE READERS WILL BE IN MAJOR VOLATILITY CREATING MODE. If the ECB announces no change at 6:45 the euro will rally and EQUITIES AND BONDS will be sold. IF THERE’S NO CHANGE IN THE CURRENT POLICY THEN THE DRAGHI PRESS CONFERENCE WILL BE FILLED WITH ALL SORTS OF CONDITIONAL AGGRESSIVE POLICIES IN THE VEIN OF WHATEVER IT TAKES AND/OR NO TABOOS.
Remember, President Draghi is a master manipulator and has done more with less–as far as moving the markets–than any other central banker. If the ECB does less than the market is anticipating be prepared for Draghi to put heavy emphasis on the need for Brussels to enact the Juncker Plan, which is a massive European-wide infrastructure investment project. The question for traders is what could Draghi do as far as projecting MONETARY STIMULUS PLANS IN A NEGATIVE RATE ENVIRONMENT.
1.Of course the obvious move is to extend the duration of QE from March 2017 until no official end date and increase size of purchases to 70 or 80 billion euros a month from 60 billion. This has not been effective wherever it has been enacted so the market reaction may be less tepid than many assume.
2. Draghi could announce that the ECB was changing the quality of the assets it will purchase by allowing the bank to absorb NONperforming loans from a multitude of European banks. On Monday, there was an article by Michael Snyder titled, “The Collapse of Italy’s Banks Threatens to Plunge the European Financial System Into Chaos” in which Snyder denotes the idea that with NPLs measuring up to 17% of all bank loans the Italian banking system is in severe crisis. Mario Draghi may use his powerful position to aid his fellow Italians but this will cause great unease within the hard money voices on the ECB.
At tomorrow’s ECB meeting Bundesbank President Jens Weidmann is a NON-VOTER because of the ECB’s rotation system (similar to the Fed’s but the ECB does it on a meeting by meeting basis) and this may be a moment in which the ECB president will have to assert his will even though Weidmann will certainly be an opposition voice.
3. As I noted in a recent blog post, pay attention to any announcement about any change in the legally imposed capital key as this will be a no taboos instrument. Bottom line for the Germans will be Draghi’s attempt to load the ECB with sub-prime paper in an effort to place an enormous financial burden on the German electorate through the BACK DOOR
4. Time is running out on Draghi and the German elections over the weekend may undermine the authority of Chancellor Merkel and remove Draghi’s main basis of support for monetary stimulus. Along with Draghi’s fear of the Bundesbank is the Eurocrats fear of the coming Brexit vote. While the talking heads are promoting the fear of financial instability if Britain leaves the EU, that is an unknown which I would not give much weight to. It will be the potential political instability from a rash of referenda by other members of the EU, which will cause the most instability. Couple that with this week’s ridiculous policy on the refugees and Turkey and the sense that Europe is leaderless and clueless is very real. TRUMP THAT. Oh well, just a day in the life in a world moving from crisis to crisis.