Slow the Retreat

With war drums of trade in the background
The ECB may find it’s now bound
To slow the retreat
Of their balance sheet
As gains in growth might now be unwound

Today is when the real onslaught of new news starts to arrive. Yesterday’s ADP Employment report was certainly better than expected at 235K, and I expect that has heightened expectations for tomorrow’s NFP report. Of course, that was largely overshadowed by the late report from the White House that the tariff measures would be signed into law today. The one concession seems to be that both Canada and Mexico will be exempt as long as the NAFTA negotiations continue. However, looking to this morning, we hear from the ECB at 7:45, where there is certainly no policy change expected, although there are those who believe that the policy statement may contain some important changes. Then, of course, at 8:30 Signor Draghi will hold his press conference and that is where things can get interesting.

To recap the narrative, continued above trend growth within the ECB has led many pundits to expect that the ECB will start to officially close off avenues of further QE at this meeting. So they will no longer include the line about possibly increasing QE again if necessary, and may even discuss a definitive finishing point. Certainly the hawks on the committee would like to see that. However, Draghi has a few valid reasons today to avoid any real changes. First, the US trade tariffs on steel and aluminum are a completely new event since they last met and one that cannot be seen as an economic positive in any light. While the Eurozone has highlighted the countermeasures they plan to take, that will not help growth there either. So increased uncertainty over the future trajectory of growth on this basis is certainly a valid reason to avoid tightening policy further. In addition, while growth in the Eurozone has been solid, the data is showing signs of rolling over which implies that further acceleration is no longer likely. In an economy with steady, but not accelerating growth, price pressures are not likely to become an issue. In the current situation, that means higher inflation may well be much further in the future than previously hoped expected. And one thing that has not gotten much play at all, but I believe could be quite important, was commentary from Bundesbank President Jens Weidmann a short while ago. He has been one of the most ardent hawks on the committee. However, in an interview he remarked that there was no reason to hurry on the tightening front, completely uncharacteristic of his previous views. I believe the explanation is that he is angling for Draghi’s job when it becomes available next year and if he is seen as too hawkish he will not get the votes of the peripheral nations who rely on low rates. In that calculation, a few extra months of low rates is worth the installation of the first German as head of the ECB. One can never discount politics in these situations.

At any rate, I would be extremely surprised if Draghi came across as anything other than dovish today, and I expect that he will do all he can to delay any changes in wording of the statement. As you all know, I continue to believe that the ECB will remain more dovish than the narrative all year and the euro will eventually suffer for it, so this is just part of that thought process.

In the end, the market has bid the dollar higher this morning, albeit not by very much, roughly 0.2% overall. However, it has been pretty universal. This has not been a data driven move, but rather it seems to be more positional as traders reduce risk ahead of the ECB. In fact, the euro, prior to the ECB statement, has been the worst performer in the G10, falling 0.3%. But we have seen lots of 0.15%-0.2% moves there overall. Even in the EMG bloc there have been few currency moves of note with the bulk of the bloc biding its time, I believe, for the next big shoe to drop. Now while today that is the ECB, I think there are far more EMG eyes on tomorrow’s payrolls report here in the US.

As to today’s session, likely Draghi and his comments will drive it. The only US data point is Initial Claims (exp 220K) but that is not going to have an impact. So it’s really all about Mario today and whatever he says. The initial reaction to the statement was mildly hawkish, but I’m still betting on a dovish slant.

Good luck