For Fed, read : ECB........ for Yellen, read Draghi....... and it's not about whether to tighten, but whether to ease.

Tuesday 22nd September 2015

 For "Fed", read : "ECB"........ for "Yellen", read "Draghi"....... and it's not about whether to tighten, but whether to ease.

Ref : "Yellen Pause Ups Pressure on Draghi as Global Pessimism Mounts", Bloomberg Markets, 21/9/15

The world is on "Central Bank Watch"..... predictably, after the Fed's decision to keep rates on hold last week speculation has simply moved on to when the hike actually will occur, with traders hanging on the words of every Fed official (current front runner ? December, with 48% probability). But this week at least some of the attention will be switched to Europe and the possibility of European Central Bank (ECB) boss Mario Draghi easing policy in the face of a stronger Euro, weaker global growth and near- zero inflation.

For the most part, in the minds of central bankers it's far from ideal (though inevitable) for markets to be so sensitive to their every word or nuance. Their job is to foster the economic conditions for growth, target inflation etc, not to manage asset prices. The memories of the (in)famous "Greenspan Put"** are still fresh.

(** The Greenspan Put :  "Put" in this case refers to "Put Option"  --  the right to sell at a particular price and an insurance against downward moves. In the period 1987 - 2000, traders came to feel that they were protected from the worst of downside losses by the practice of then Fed Chairman Alan Greenspan of supporting markets by easing monetary policy every time there was a serious fall in prices. Such an approach encouraged irresponsible risk-taking, and played its part in the bubbles and crashes of that era.)

 The issue of the recently stronger Euro is an interesting one as it seems we have been talking about the strength of the US$ for so long, but the fact is the single currency has gained almost 4% in trade-weighted terms and over 4% against the dollar since mid-July. This has not been good news for the ECB but the last couple of days have seen selling of the Euro as the prospects of further monetary easing become more likely. Had the Fed made an upward move last week, pressure would have been taken off the ECB but the lack of action Stateside means that at the very least the ECB must be seriously considering an expansion and/or extension to their Quantitative Easing programme.

Tomorrow sees the release of a raft of September PMI (Purchasing Managers' Index) numbers for France, Germany and  the Eurozone as a whole :

Above 50 = Expansion

                                                         Consensus                Previous

Eurozone Manufacturing  PMI              52.0                          52.3      

Eurozone Services PMI                        54.2                          54.4

Eurozone Composite PMI                     54.0                          54.3

France Manufacturing PMI                   48.8                          48.3

France Services PMI                            51.0                          50.6

Germany Manufacturing PMI                52.7                         53.3

Germany Services PMI                         54.5                         54.9 

 

If the stronger euro brings about softer-than-expected data ,  expect calls for Mr Draghi to inject further stimulus proactively to get louder. Perhaps he'll let us know his thoughts when he testifies a few hours after the data release. Maybe he'll want to see Thursday's German IFO numbers, a measure of business confidence. But whatever the case, the Fed's decision to leave things as they were makes it harder for the ECB to do the same.