On The ECB’s Wholly Unsurprising ‘Surprise’

Anyone doubting whether Mario Draghi could deliver a “dovish surprise” was, well, surprised on Thursday, although this looks like a case where overt dovishness is being taken as an indication that the ECB knows something you don’t (hence the negative reaction in equities).

In addition to updating the forward guidance on rates (no hike “at least through the end of 2019”), the ECB went ahead with an announcement on a new round of TLTROs.

Depending on which desk you were inclined to listen to headed into Thursday, the decision to pull the trigger on the new statement language and move forward with the TLTRO announcement now (as opposed to simply laying the groundwork) is aggressively dovish.

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ECB Comes Out Swinging, Shifts Forward Guidance On Rates, Announces New TLTRO

The forecast adjustments were described as “substantial” and validated Wednesday’s leak. Here’s the rundown:

Growth:

• 2019, 1.1%, versus 1.7% previously
• 2020, 1.6% versus 1.7% previously
• 2021, 1.5% versus 1.5% previously

Inflation

• 2019, 1.2%, versus 1.6% previously
• 2020, 1.5% versus 1.7% previously
• 2021, 1.6% versus 1.8% previously

Obviously, that cut to the 2019 growth outlook is the headline-grabber. For the visually-inclined, below is a chart that shows euro-area GDP with the March forecasts and revisions.

And here’s what the ECB’s graphic designers spit out:

The decision on announcing new accommodation was unanimous, Draghi said at the presser. He cited the usual headwinds, noting that “the risks surrounding the euro area growth outlook are still tilted to the downside, on account of the persistence of uncertainties related to geopolitical factors, the threat of protectionism and vulnerabilities in emerging markets”.

He went on to say that in the ECB’s judgment, the chances of a recession (or inflation becoming de-anchored) are very low. Obviously, those are optimistic takes considering the backdrop, both economic and political.

Draghi also contended there was no discussion of restarting QE or of cutting rates further. Predictably, that was met with cat calls and tomato throwing from financial journalists, the Twitter peanut gallery and likely from the doomsday blogger crowd.

When you read that nonsense, do take a moment to appreciate the sheer blatant absurdity inherent in maligning the ECB for rolling back accommodation in the face of mounting risks to the outlook (which is what everyone did in December) only to turn around and malign the GC for restarting accommodation in light of those same risks in March (which is what people are doing on Thursday).

And this is why I always encourage readers to take everything they read from the financial media and from other blogs with a grain of salt. Virtually none of that content is designed to provide an honest assessment of the prevailing environment and/or evaluate the relative merits of a given policy response. Rather, it’s all aimed at generating the maximum amount of reader interest based on a perpetual effort to highlight purported “inconsistencies”, which, in reality, are not inconsistencies. What you’re seeing from global central banks right now is the “logical” policy response to an evolving economic reality defined by myriad risks to the outlook. You can of course quibble with the extent to which debt monetization and negative rates are “logical” (hence the scare quotes), but unlessin’ you’re i) someone who thinks they’ve got a shot at landing a spot as a policymaker at a developed market central bank, ii) an academic who publishes in influential peer-reviewed journals, or iii) an analyst who has some legitimate claim on an opinion in these matters, what you think simply doesn’t count. And it never will. That’s just the cold, hard reality of this situation, and what it means is that you should trade what’s likely to happen and not what you think should happen.

Speaking of that, the euro of course tanked on Draghi’s remarks, making a mockery of anyone who spent the first 15 minutes following the statement suggesting that euro bears would be disappointed on Thursday.

Earlier, we mentioned that there are mounting questions about the read through for European financials from the persistence of negative rates. Well, on Thursday, bank shares across the pond plunged on news that a rate hike is now pushed even further into the future and also on the idea that the new TLTROs are “less attractive” than previous iterations (apparently). This looks like the worst day for European banks in a month.

Perhaps more tellingly, Italian financials are down sharply, in their worst session since late January. That’s not great news considering Italian banks should theoretically benefit from the promise of new TLTROs.

In any event, this is what it is and what it isn’t is surprising. I’m not sure why anyone would have expected that the ECB was going to sit on its hands even for another couple of months given the fact that the eurozone economy is one of the key stress points for the global outlook. Political risks are mounting ahead of the EU elections, Italy is already in a recession, Germany is close and the threat of a trade spat with Donald Trump still hasn’t really receded.

Throw in the fact that (nearly) everyone else is leaning dovish and this was one of the more predictable outcomes in recent memory.

Finally (and as alluded to above), it’s entirely consistent with the economic backdrop, even if persisting in NIRP and ultra-accommodative policy isn’t consistent with your assessment of how things “should” work.