Surprise! Draghi Offers No Surprises
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The substance of what ECB President Draghi contained few surprises. The tone was cautiously optimistic that the worst is past for EMU.
The substance of what ECB President Draghi contained few surprises. The tone was cautiously optimistic that the worst is past for EMU.
There were minor tweaks in the economy forecasts. The growth estimates for this year and next was unchanged at 1.5% and 1.9% respectively. The forecasts for 2017 shaved to 2% from 2.1%. This year’s inflation forecast lifted to 0.3% from zero previously, but the 2016 and 2107 inflation forecasts were unchanged at 1.5% and 1.8% respectively. The ECB targets “close to but below 2%,” which does not look achievable until 2017.
Draghi quickly dashed ideas that the ECB could end its asset purchase program earlier. He specifically indicated that the ECB anticipates full implementation. Recall that every central bank that has engaged in QE had to do more (not less) than initially anticipated. Indeed, Draghi himself said that “if anything ECB will actually add to policy stance.” He indicated an exit was not part of the discussion.
Draghi recognized that loan dynamics have improved but that they are still subdued. That sense seems to pervade Draghi’s overall remarks. Developments have been in the right direction, but it needs more work. He urges countries to pursue structural reforms to maximize the opportunity offered by monetary policy initiatives. The ECB President made no apologies for recent dramatic market moves. He said investors must get used to higher volatility.
The euro briefly pushed below $1.11 but bounced back to unchanged levels near $1.1150 when no follow through selling came from the break. It turned back from near $1.12 yesterday and again in late Asia earlier today. Large options struck near $1.12 roll-off today. Core bond markets, including German bunds, are extending yesterday’s sell-off.
At the same time, the US reported as expected ADP employment and a smaller April trade deficit. Both reports are consistent with a gradual economic recovery after the Q1 contraction. It gives us no reason to question the divergence (of monetary policy trajectory) that we continue to think is a major driver of the capital markets.
ECB Cautiously Optimistic that Worst is Behind EMU is republished with permission from Marc to Market
