No Country For Old Hawks.

On Sunday evening, in the course of previewing this week’s ECB meeting, we wrote the following:

While the ECB acknowledged mounting downside risks in January, and while communications since then have generally been on the dovish side, the bank hasn’t yet had the opportunity to “officially” (if you will) join the global dovish pivot — this week they likely will.

That was confirmed on Wednesday morning (US time) thanks to a predictable leak which found Bloomberg reporting that the Governing Council will likely slash their economic forecasts “by enough to justify another round of loans for banks.”

That’s according to the ubiquitous “people familiar with the matter” and is generally in keeping with the GC’s habit of letting these decisions get out to the market ahead of time.

Apparently, we’ll get “extensive” downgrades for both inflation and growth tomorrow, with the inflation outlook slashed all the way out to 2021.

For weeks, the ECB has been attempting to build a “monetary policy case” for launching a new round of TLTROs and as more than a few desks have noted, that really wasn’t all that challenging a task.

“To get this out of way right away, we do not think it is very difficult for the ECB to make a ‘monetary policy case’ for a long term liquidity injection”, BofAML wrote last week, adding that while it’s obvious a LTRO/TLTRO “would help more in countries where banks are facing funding difficulties, it would not be the first time the ECB decides to deal with ‘fragmentation’ or ‘policy transmission’ issues.”

Despite the fact that everyone already knew the ECB would, at the very least, lay the groundwork for a new round of loans this week, the euro dropped in response to the Bloomberg leak, before recovering. That was accompanied by a quick move higher for European equities which was faded once the currency regained its footing.

This was met with the kind of cross-asset knee-jerk you would expect, but it’s likely already priced in – or at least mostly priced in.

Given that the European economy is on the frontlines of the global slowdown, the ECB has no choice but to join its global counterparts in adopting a dovish lean. Early last year, when the data started to roll over, the hope was that the malaise would prove fleeting. Mario Draghi added date-dependent forward guidance to the statement (in addition to the traditional state-dependent language) and in December, he tweaked the language around reinvestments in an effort to calm markets. The data, though, generally refused to cooperate. After inflecting a bit throughout 2018, things have decelerated meaningfully, with Italy falling into recession, Germany barely avoiding a similar fate and the ECB itself acknowledging in January that downside risks have proliferated.

On Wednesday, the euro-area bore the brunt of the OECD’s latest cut to the global growth outlook.

All of that follows the end of net asset purchases in January. The juxtaposition between ending PSPP and CSPP (reinvestments notwithstanding) and the rapid deterioration in the outlook is stark, which means the ECB needs to do something, now, and a new round of TLTROs justified by deep cuts to the forecasts for growth and inflation is the obvious first step.

The broader question, though, is what this means for the future of monetary policy across the pond. It would appear that normalization in any real sense isn’t possible.

Read more

It’s ‘Eerie’: One Bank Asks Whether Europe Is Now Japan

Meanwhile, on the heels of last week’s GDP data which was variously described as a disaster of epic proportions, the Bank of Canada pivoted dovish as well in the statement accompanying Wednesday’s hold – technically, it’s a dovish tightening bias, which, in the world of monetary policy nuance, isn’t a contradiction in terms.

While not a “full surrender” (to quote CIBC), the BoC deployed some notably dovish language including the contention that “the outlook continues to warrant a policy interest rate that is below its neutral rang” and a reference to “increased uncertainty about the timing of future rate increases.” The loonie dove – I doubt you need me to annotate the chart for you.

“The statement softened the hiking bias [and] now explicitly says that the outlook warrants a policy rate that is below its neutral rate instead of saying that the BoC needs to raise the policy interest rate over time into a neutral range”, BofAML wrote following the decision, on the way to changing their BoC call to no hikes this year and two in 2020 (versus one previously).

Whatever – it’s just a matter of time before the BoC is forced to shift outright neutral.

Taken together, the above (i.e., the ECB’s imminent outlook cut and the BoC statement) serve to further cement the global central bank pivot in the face of a deteriorating growth outlook.

As ever, there are questions about the capacity of monetary policy to ride to the rescue this time around, given the proximity of the lower bound and constraints on the ECB, BoJ and, to a lesser extent, the Fed, with regard to the scope for additional asset purchases.