ECB Itching To Pull The Trigger On More Stimulus

Boom went the bank

Mario Draghi and the European Central Bank have cranked up the pressure on the euro today as part of their latest policy decision. Despite holding off on any change in interest rates or the amount of assets the central bank will purchase before September 2016, the hints suggest some form of monetary policy weaponry will be unleashed at the Bank’s next meeting on December 3rd.

The euro has continued to restore some presence in the past weeks, pushing EUR/USD and EUR/GBP towards the 1.15 and 0.7450 levels respectively.

A higher euro is not what the ECB wants however. A stronger currency tightens financial conditions and, being part of a world in which the slips in oil and other commodity prices have destroyed headline inflation, there is little room for a currency that is also importing deflation.

Today’s policy press conference has made it clear in my mind that the European Central Bank will amend its policy offering. The question is how.

More and for longer

Firstly, we will be looking for an extension of the current plan beyond its deadline of September 2016. Working on the basis that the European Central Bank remains a conservative institution and that the December publication of new economic forecasts does not show a dramatic decline in medium-term inflation expectations, then we would be looking for an extension of 6 months – i.e. until March 2017.

A slight increase in the amount spent on a monthly would not go amiss either.

The problem with this plan however, is that it has been done before. Any student of central banks and their policy through the Global Financial Crisis knows that asset purchase plans have done little for the wider economy, particularly inflation metrics, except drive stock markets higher and bond yields into the ground.

What is needed is an interest rate pressed evermore below zero.

Euro swoons heavily

There was no need for the European Central Bank to enact that sort of policy however; just look at the performance of the euro in the aftermath of the press conference. Draghi and the Executive Council couldn’t have been clearer that additional policy easing was coming if they’d had the words “SELL THE EURO” tattooed on their faces. For now scaring the cattle is sensible.

They’ve bought time to gain a consensus and deal with internal European issues such as the Volkswagen (DE:VOWG_p) scandal and the migration situation in the east of the continent, and, further from home, a Federal Reserve that seems happy to procrastinate and a wobbling emerging market picture. We may have the answers to these questions by December.

UK helped by rugby

Sterling was further helped by World Cup boosted retail sales numbers in September. Sales volumes rose by 1.9% on the month which is the largest increase since December 2013 with falling prices in food and alcohol components contributing to a 2.3% gain.

Overall the dynamics of the UK economy are strongly in favour of additional consumer expenditure with negative inflation and strong wage rises boosting overall confidence. The wobble in emerging markets has merely served to allow the man in the street to continue to think that interest rates will not be moving higher anytime soon.

Unfortunately this bumper performance is unlikely to be maintained as we head into Q4 but will have given UK GDP calculations a strong finish into the end of Q3 – Tuesday’s initial expectation is seen to rise by 0.7% on the quarter. Maybe the ONS should have done the England half-time talks…

The Day Ahead

Markets will be chewing through the details of Draghi’s speech for the rest of the day one would think and I don’t think we have seen the near-term bottom in the single currency.