ECB decision ..... No action mustn't look like inaction

ECB decision ..... No action mustn't look like inaction

ref :- "Draghi poised to temper optimism with caution" , The Financial Times, Markets and Investing

We were only musing the other day about how there was no such thing in markets as a "sure thing". The European Central Bank announce their decision on rates at 12.45 GMT today and ECB president Mario Draghi gives his statement 45 minutes later. We may have to avoid saying that anything is certain but a "no change" decision on rates is as close to a foregone conclusion as you're going to find. Quite what Mr Draghi will say in response to changing conditions in the Eurozone ..... well, that's another matter.

The rising rate of economic growth and , after years of fighting the spectre of deflation, an inflation rate (2.0%) that actually exceeds the ECB's target (just below 2.0% !), means that the pressure is on Mr Draghi to give some clue as to his plan to further reduce the current level of monetary stimulus. Germany in particular is keen to see at least a framework for monetary tightening after the yield on their two-year bonds hit a record low of MINUS 0.93% recently. That such a thing could happen at a time of respectable German growth is an anomaly they could do without, even if a flight-to-quality inspired by French election jitters played a part in the move.

As the FT says, Mr Draghi will have to tread a very fine line between being upbeat about an improved economic performance in the Eurozone and caution about withdrawing stimulus too early. If some in the northern Eurozone suspect the ECB boss of having an overly accomodative streak to policy-making, there are legitimate arguments in favour of remaining cautious : 

HEADLINE inflation may have reached 2.0%, but CORE inflation (that strips out the distorting effects of energy and food prices) is only at 0.9%.

There is little sign of wage growth pressures

More than one month's numbers are required for confirmation of any change of trend

The ECB must set policy for the whole of the Eurozone, not just the wealthier elements of it.

On balance therefore it is thought unlikely that Mr Draghi will make any direct statements regarding when the ECB might further scale back (or "taper") its bond purchasing programme (QE). Even so, many good judges feel that improving economic performance and a growing scarcity in the bonds available for purchase mean that we will see an end to QE next year. And whether he mentions tapering or not, he'd be foolish not to acknowledge the problems of tumbling short-term yields faced by Germany and others.

US Jobs and another foregone conclusion (almost) .....

Travelling tomorrow so a quick heads-up regarding February's US employment data, due Friday at 1.30 GMT . 

Again, it may not be sensible to call it a sure thing but if the US Federal Reserve DON'T put rates on Wednesday, then one of two things should happen. Either we should pack up and find something else to do, or the whole board of the Federal Reserve should resign in shame after the co-ordinated signals they've been sending.

Before a week ago say, we were saying that the only thing that could conceivably derail a rate hike was some truly awful economic data appearing out of the blue. Most important of all the releases was always going to tomorrow's jobs data, and if now it seems that even a hugely disappointing report would not be enough to stop a rate increase, it could still affect sentiment regarding future moves  --  how many will there be this year ? 3, or 4 ?  When will the next one be after Wednesday (June?).

As it happens, yesterday's ADP job numbers (a measure of private sector employment) were the strongest in three years with a gain of 298,000, 100,000 more than expected. Now, ADP numbers don't ALWAYS translate into the general employment data, but it's certainly a strong pointer as to which way things are going. Forecasts for non-farm payrolls tomorrow have edged up to +200,000, and the chances of the data being the cause of an extraordinary reversal in Fed thinking look infinitesimally small.