Well, say what you will about the relative merits of Jerome Powell’s “plain English” approach to press conferences, but Mario Draghi just delivered a clinic how to do this “right.”
He managed to announce the end date for ECB QE (December) and (basically) pre-commit to a rate hike next summer while simultaneously sparking a decline in the euro and a rally in European equities.
I don’t know what it is about this that seems to be vexing folks when it comes to why the market interpretation is dovish. Most of what I’ve read over the past several months indicated that a “dovish” outcome in terms of APP would amount to a taper to €10 billion/month through December starting in September. Now we know the number will actually be €15 billion/month in Q4, so that’s dovish.
As far as the actual announcement, it was either going to be today or it was going to be next month, so it’s not entirely clear that putting it off until July would have done anything other than perhaps signal concerns about Italy and had they done that, they might have inadvertently sent the “wrong” message in terms of their assessment of the systemic risk posed by the Five Star-League government.
On rates, Villeroy already reiterated that we’re talking about “quarters” not “years” in terms of how long after APP the ECB would wait to hike and if APP ends in December, well then summer 2019 splits the difference between “quarters” and “years”. Plus, now there’s more clarity.
One person who gets it is Bloomberg’s Cameron Crise. “Mario Draghi and the ECB reminded markets what a dovish policy outcome really looks like,” he wrote this morning. Here are some further excerpts from a longer column:
While the end of QE was bang in line with expectations, the governing council managed to surprise the Street by committing to keep rates on hold through next summer. Depending on the timing of the September ECB meeting, that could imply that the ECB won’t move rates until the fourth quarter of next year. That’s quite a bit later than markets had projected. In fact, if one takes Draghi at face value then the ECB didn’t even bother to discuss when to start hiking rates.
Right. And keeping the out-year inflation forecast unchanged while revising up the near-term forecasts is another example of threading the proverbial needle – things are going well, but not well enough for anyone to believe that the ECB believes that inflation is likely to overshoot materially over the longer-term, necessitating aggressive tightening (or whatever counts as “aggressive tightening” in the post-crisis world).
This seems, to me anyway, like a clinic in how to put an unequivocally dovish spin on an inherently hawkish outcome. In other words: this was flawlessly executed. Look at this:
You know those trade jitters and Trump’s threats about ridding 5th Avenue of Mercedes? Well, have a look at this:
Clearly, the guidance here has the potential to tamp down volatility.
“Coming into the June meeting, the key question was when would the ECB announce an end to QE and when would the ECB begin to normalize rates,” Goldman Sachs Asset Management’s Iain Lindsay, writes, before noting that “we now have a lot more clarity on all of these questions and we think market volatility could decline somewhat as a result.”
For his part, Deutsche’s George Saravelos says the pre-commit on holding rates until summer of next year marks a “material negative development for the euro” and adds that the central bank’s decision to adopt date-based forward guidance is dovish and “severely constrains” the market’s ability to price in more hawkish outcomes. Here are his full comments:
We were expecting an ECB tapering announcement today but not a commitment to keep rates unchanged until at least “the summer of 2019”. While the market has not been pricing a rate hike until later next year, we view the introduction of calendar-based guidance as a material negative development for the euro.
First, this is the first time in the history of ECB where such unconditional calendar-based guidance has been introduced. Given that the ECB has refused to “pre-commit” in the past and always ascribed to state-contingent guidance, the willingness to enter into fixed date-based guidance is a material evolution to the policy framework signalling a greater dovishness of the council.
Second, even if the market has not been priced for a rate hike until after the summer of 2019, calendar-based guidance shifts the distribution of risks. While the ECB can always extend the calendar guidance further out in the event of negative news, the ability for the market to reprice more hawkishly in the event of better news is now severely constrained. This is further reinforced by the conditional based nature of the end to the PSPP program that has been announced.
From a market perspective, the main implication of the “refreshed” ECB guidance should be to depress European rates volatility as well as encourage the use of the euro as a funding currency. We argued in favor of a 1.15-1.20 EURUSD summer range earlier this morning. Our conviction in the lower end of that range holding has now been materially reduced.
Again, that will obviously help keep a lid on rates vol. and that, in turn, should help ensure that credit remains stable.
The other thing I would note here is that while the UST-Bund spread did widen out this morning, it’s just back to where it was following the Fed on Wednesday and still well short of intraday wides hit when Italy blew up a couple of weeks ago, so it’s not even entirely clear that the dovish slant materially impacted the policy divergence narrative. (Incidentally, the above-mentioned Crise has more on that in his column if you have access to it).
Not everyone agrees. For instance, UBS’s Dean Turner says the knee-jerk lower in the euro is unlikely to hold and volatility should rise.
“The end of QE will underpin the euro and lead to upwards pressure on euro-zone bond yields,” he said Thursday, before suggesting that “the evolving backdrop is likely to keep market volatility elevated in months to come.”
Maybe, but remember, there’s still room for long euro positions to be unwound, piling pressure on a currency that now has a pre-set rate path baked into it.
(Goldman)
So you can draw your own conclusions here, but it looks to me like Draghi is in full control of this situation for the time being, a demonstrably difficult feat to continually pull off considering the fact he’s dealing with disparate economies, a woefully flawed union, and a monetary policy transmission mechanism that doesn’t work particularly well for myriad reasons.
Dismount? Now? No way in hell. Time to pick up some more of that sweet Powell carry, bay bee!
This isn’t Draghi being in control of anything – it’s market participants constructing their own narratives around words rather than properly construing them.
‘Next summer at the earliest’ is not the same as ‘(basically) precommit to a rate hike next summer’.
‘Unconditional calendar-based guidance’ is one of those meaningless terms beloved of today’s market analysts. ‘We will raise rates in June 2019 and irrespective of incoming data will continue to raise them every other meeting until we announce an intention to stop,’ would have been ‘unconditional’ and ‘calendar-based’. (As well as a tad surprising.) All they have in fact said is that they’re going to do squat for at least a year, after which who knows.
As for ‘quarters rather than years’ – in whose world does four quarters not equal a year? That meaningless wordfest should now be struck from the lexicon.
And just for good measure, even the September wind-down has a data-dependency loophole. Granted the hurdle to doing nothing on this one is now very high, but thereagain it is Europe we’re talking about.