Draghi Faces Day Of Communication Reckoning In Final Test Of Central Bank Omnipotence
By Tyler Durden
2016 has been the year that investors turned bearish on central banks.
Something snapped in the market’s collective psyche when Kuroda went NIRP and things haven’t been the same since. It’s as though everyone suddenly realized just how utterly insane this global monetary experiment has become.
In all likelihood, fiscal policymakers (i.e. elected officials) will also come to the conclusion that this has gone (way) too far – but not soon enough. Monetary authorities should have been reined in long ago, but they weren’t, and as a consequence, we are all guinea pigs in a global experiment that, if no one intervenes, is going to end with the abolition of physical banknotes and the possible imposition of deeply negative deposit rates.
Today we’ll get what may turn out to be the last gasp for previously unassailable central banks as Mario Draghi is widely expected to announce a flurry of easing measures including a further cut to the depo rate and both an extension and expansion of PSPP.
We documented how to trade the ECB announcement on Wednesday evening, but from a longer-term perspective, the record suggests equity markets are Fed up. “Mario Draghi is having no success convincing stock investors that the European Central Bank has the firepower to reignite growth,” Bloomberg notes. “In the first year of quantitative easing, the Euro Stoxx 50 Index fell 17 percent, and volatility reached levels not seen since 2008. The gauge has dropped in each month but one following an ECB meeting since April.”
As it turns out, “reality” trumps central bank fiction. Here’s the visual:
But that likely won’t stop the ECB from “trying.” This (hopefully) temporary descent into insanity still has a few more rounds to go. But Draghi will face his Waterloo on Thursday. There’s no way he can exceed expectations. In order to “impress” markets, he would need to cut by at least 20 bps, expand PSPP by €20 billion per month, and extend QE by at least six months. That’s a tall order, to say the least. Here’s what economists think:
On top of that, Draghi will need to devise some manner of tiered deposit scheme if he cuts the depo rate further. Europe’s banks are already under siege in the market and a further cut to the depo rate isn’t going to do them any favors from a NIM perspective. The last thing the ECB needs is a swift sell-off in euro bank stocks. Here’s a look at predictions for today’s ECB announcement:
Expectations for today’s ECB meeting are high, but without consensus pic.twitter.com/7psqOvIciG
— Bond Vigilantes (@bondvigilantes) March 10, 2016
And here’s WSJ’s preview:
1. The rate decision
No rate cut would be a major disappointment for markets. Most analysts expect the ECB to cut the deposit rate by 10 basis points to take it further into negative territory, to minus 0.4%. The refinancing …read more
Source: Draghi Faces Day Of Communication Reckoning In Final Test Of Central Bank Omnipotence
