Trading with point and figure

dow into horizontal supp...will it hold ??

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Draghi not as dovish as markets would have liked, but he was never going to be

1) No changes to rates, no changes to QE volume, no changes to current QE operational parameters, but under review with various committees

2) Forecast tweaks were always going to be marginal, and by extension were not going to be sufficient to justify any policy changes. In the detail: (i) a slight upward revision to 2016 GDP forecast to 1.7% y/y from 1.6%, was offset by downward revisions for 2017 and 2018 to 1.6% from 1.7%, (ii) CPI forecast for 2017 edged lower to 1.2% from 1.3%, 2016 and more importantly 2018 CPI forecasts unchanged at 0.2% and 1.6% respectively.

3) Whether it has been the distraction of the BoE's easing package, or just symptomatic of QE and easy policy addiction, markets had gotten rather ahead of themselves in rasing their expectations of some policy moves, or at the very least some hints of policy easing at this meeting. In truth, the ECB has been sending a very clear signal since May that there would be no reassessment of policy until Q4. Indeed today's press conference was not a case of signalling less accommodation, but rather 'wait and see' with a clear easing bias 'if necessary', perhaps best encapsulated in the sentence ""Underlying price pressures continue to lack a convincing upward trend and remain an ongoing source of concern." The disappointment for markets was that extending the QE programme was not discussed; the latter once again underlining that it is the flow of QE, rather than the outright volume, which is key for market participants.

4) To some extent, there is a clear desire to put some indirect pressure on governments to act on fiscal measures and structural reforms, by not signalling further easing, and indeed by acknowledging that there will be "consequences" as a result of this unprecedented period of negative rates and unconventional policy measures. The ostensible shift towards 'fiscalism' remains the overarching theme, with monetary policy options in principle exhausted, even if central banks will be loath to admit that.

5) It should also be noted that tasking "the relevant committees to evaluate the options that ensure a smooth implementation of our purchase programme" is not merely about what either widening / extending the maturity profile of government bonds eligible for the PSPP, or looking at other assets, or asset sub-classes. It will also be about how to bring the QE exercise to a close, i.e. the possibility of tapering, which Nowotny has already hinted at.

6) While the Euro flailed gently vs the USD in response to the policy announcement, long-dated Bund and EZ government bond yields extended the correction to the post-payrolls fall, though they appear to have found a short-term ceiling, and are still not signalling a break out of the range that has prevailed since the end of July (see chart and table).

7) Markets still continue to discount December as the most likely date for a rate move, though it is as well to note that it would make the Fed's task a lot easier, if both the ECB and BOJ appeared to be less likely to enact further easing measures.

..........................................................................

Marc Ostwald
Strategist
ADM Investor Services International
 
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