What we learned from the ECB President
1) The market is truly priced for problems
The main 'action' from the ECB was to extend forward guidance through H2 2020.
The Governing Council now expects the key ECB interest rates to remain at their present levels at least through the first half of 2020
Keeping rates lower for longer is bad, right? Wrong. The market was looking for something more dovish, a sign that rate cuts could be right around the corner and this was seen as a more wait-and-see indication and the euro rallied to 1.1309 from 1.1230, despite some initial confusion.
2) Not so fast
Draghi reeled that sentiment back in during his Q&A when he repeatedly highlighted that the ECB had discussed "at a granular level" easing if "contingencies" unfolded. Those contingencies are clearly an escalation in the global trade war and the underlying message was that they were prepared to act if it deteriorates. This is similar to recent messages from the Fed. These comments from Draghi pulled the euro 40 pips from the highs and left it only 20 pips above pre-ECB levels.
3) The ECB is genuinely concerned about market messages
Draghi repeatedly acknowledged that markets are pricing central bank rate cuts, falling inflation and other problems. At the same time, he pivoted to say that survey-based measures are more positive on all fronts. He said the ECB believes in its forecasts but acknowledged the risks. At the end of the press conference, he had a revealing comment that indicated that the ECB is truly having a hard time understanding why bond markets are so bearish. He said that market pricing reflects something even worse than a trade war. He wasn't dismissive of that but concerned (and surely a bit puzzled).
4) TLTRO terms more generous
The problem with more rate cuts is that there could be adverse affects on banks as they lose deposits because of negative rates. However, Draghi said the ECB has investigated it closely and so far the aggregate effect is still positive. He said that wouldn't necessarily be true of more cuts, but they didn't know yet. At the same time, bank have been pining for more help but the ECB has so far brushed aside tiered deposit rates. So far the impression has been that the ECB isn't a friend of the banks. However today's TLTRO announcement was more generous that expected so there are signs the ECB is listening.
5) Forecasts affirm the poor outlook
The growth forecast for this year was raised by 0.1 pp while it was cut by 0.3 for the next two years combined. Inflation was bumped up one tick this year but lowered by one next year. I don't think the market took much of a signal from this but it was a reminder of just how poor the outlook is.
Bottom line:
The euro is a conundrum for traders. There is a genuine desire to get out of US dollars and US assets on trade risks and because dollar longs are overcrowded. Yet you can't find a good reason to stay invested in Europe. They would be cutting on the same timeline as the US and if the economy goes sour there isn't an appetite or mechanism to stimulate growth via deficits like there is in Washington and elsewhere. Looking at the growth and inflation forecasts, they're dismal and the demographics are getting worse. So while there were some positives in the ECB announcement and Draghi remains a superb communicator, there is no case for falling in love with the euro or Europe.
