Here’s some shit you probably won’t read. But I wasted time on it anyway, because why not?
That was the tagline I slapped on a post I did last week called “Thoughts On The ECB Minutes And A Bearish Euro Call For EURUSD Bulls.”
You can read that post for yourself (because as noted in the tagline, you probably didn’t read it when I originally published it – who in the U.S. reads the ECB minutes let alone someone else’s read on the minutes, right?), but the point was to talk about the account of the ECB’s March meeting in the context of the recent spate of poor incoming data in Europe and also in the context of the “policymaker paradox”.
That post was itself a followup to my take on the ECB’s annual report, which touched on the same issues. You can read that here.
The worry, generally speaking, is that Draghi may have missed his window or if he hasn’t missed it yet, he may be well on the way to missing it:
The data is rolling over and although the ECB is gingerly tapering asset purchases, rate hikes are still a distant prospect (by design, given that they’re not going to hike until APP is officially over) and there’s still no guarantee that QE won’t be tapered further (to say, €10 billion/month) in September, before it’s wound down completely. The point: Draghi is nowhere close to replenishing his ammo, and as noted above, it looks like he might have missed his chance.
The removal of the the dovish language around APP in the March statement was really nothing more than a free pass to claim they’re making progress on normalization without actually having done anything. That dovish guidance served almost no purpose whatsoever, as no one doubts whether they would be willing to ramp up purchases again should the proverbial shit hit the fan.
Well on Friday, Draghi said this in statement at the IMF meetings in Washington:
Notwithstanding the latest economic indicators, which suggest that the growth cycle may have peaked, the growth momentum is expected to continue. Protectionism may have already had some negative impact on global sentiment indicators. In this context, preserving free and open trade that is underpinned by multilateral cooperation is crucial to foster a favorable global economic environment. While our confidence in the inflation outlook has increased, remaining uncertainties still warrant patience, persistence and prudence with regard to monetary policy. An ample degree of monetary stimulus remains necessary.
That bit there about the recent data “suggesting that the growth cycle may have peaked” is either a poor choice of words or else a rather dire admission that the time to normalize policy and replenish the countercyclical war chest was yesterday.
You’re reminded that this situation is made worse by the weak dollar policy implicitly adopted by the Trump administration. Don’t forget that Draghi had to chin check a certain Treasury Secretary back in January whose weak dollar Davos rhetoric threw a monkey wrench in the ECB’s efforts to normalize without triggering an outsized FX reaction.
All of this reflects the policymaker paradox in a world governed by coordinated easing. If you “win” (i.e. if your efforts at accommodation end up engineering the type of on-target inflation and robust growth you intended to engineer), well then the FX market is going to “reward” you by driving up your currency. In a cruelly ironic twist, that can come back and short-circuit everything you’ve been working towards. The only way to avoid this is if the global exit from accommodation is as coordinated as the global plunge down the monetary rabbit hole was, and that’s clearly not going to be the case across disparate economies operating at different points in the cycle.
And so here we are with a euro that’s appreciated some 15% against the dollar over the past year and the econ rolling over just as the Trump administration is adopting an increasingly protectionist lean.
Unsurprisingly, Bloomberg subsequently broke a story (these ECB leaks to the press have become predictable) suggesting that they’re considering whether to wait until July to tip their hand on calling an end to APP. To wit:
Governing Council members want sufficient time to judge if the economy is overcoming its first-quarter slowdown, the officials said, asking not to be identified because the internal deliberations are confidential. That could mean the June meeting, which would have the advantage of linking the decision to updated economic forecasts, might be too soon.
Some governors don’t see any need to change the ECB’s guidance on interest rates at the same time, arguing that they can afford to wait to see how the market reacts to the announcement of an end-date for quantitative easing, though not everyone agrees.
There’s a certain extent to which this is just the same old song and dance – i.e. trial balloons designed to reinforce the two-way communication loop between markets and central banks. This whole normalization process has to reinforce reflexivity because as soon as the market gets the idea it’s out of the loop, well then “bad” things can happen.
I think the more important point here is that this just reinforces the notion that exiting these policies is exceedingly difficult unless everyone exits together, a prospect which, as noted above, is impossible as disparate economies are not all at the same stage in the cycle or otherwise in sync.
When you introduce things like protectionism into this equation, it sets up a scenario where central banks are hamstrung further in their ability to normalize – the BoJ is similarly fucked, as the yen’s safe haven status combined with appreciation pressure from political turmoil around Abe and downward pressure on the dollar makes any semblance of hawkishness from Kuroda a non-starter lest he should inadvertently trigger undesirable yen strength.
So there’s some context for today’s ECB/Draghi double-news-dip.