Draghi Says Euro-Area Turnaround Warrants Policy Dial-Back
Comment of the Day

March 08 2018

Commentary by Eoin Treacy

Draghi Says Euro-Area Turnaround Warrants Policy Dial-Back

This article by Piotr Skolimowski for Bloomberg may be of interest to subscribers. Here is a section:

The European Central Bank unexpectedly dropped a pledge to ramp up bond buying if the economy deteriorates, saying the turnaround in the outlook has given it to confidence to change a key part of its monetary-policy guidance.

In what the ECB President Mario Draghi said was a unanimous decision, policy makers in Frankfurt surprised investors by ending an easing bias on quantitative easing, effectively a conditional promise to increase debt purchases in “size and/or duration” if needed. But he said downside risks remain, and added rising trade protectionism to the list of threats.

“These are unlikely contingencies now, the ones that would suggest that we would activate this easing bias,” Draghi said Thursday. The language “was introduced in 2016 -- think about how different the situation was at that time.”

The revision coincided with an upgrade to the ECB’s outlook for 2018. At the same time, Draghi emphasized that, currently scheduled to run at a monthly pace of 30 billion euros ($37

billion) until at least the end of September, will continue until inflation is solidly back on track toward its goal.

Eoin Treacy's view

The ECB is edging towards the exit of quantitative easing. First, they put an end date on purchases, now they are removing the proviso that purchases will be increased and in September they will cease to add €30 billion to their balance sheet. This timetable is subject to the belief that the economy will continue to improve.

The ECB’s balance sheet has more than doubled since late 2014 and at its current pace will expand by an additional €210 billion by September to approximately €2.7 trillion. Capital is both global and mobile so that money printing tends to move around the world to capture yield, currency or capital market appreciation.

The composite of central bank balance sheets is still trending higher and currently stands at $20.6 trillion. When the ECB eventually removes it stimulus the onus for continued monetary expansion will fall to Japan. News today that Japanese economic growth is expected to moderate in the first quarter improves potential for the Bank of Japan to persist in easing but, even then, the question remains whether that will be enough to support liquidity fueled bull markets next year as Fed run-off becomes more pronounced and the ECB likely follows suit.

The MSCI World Index, in common with the majority of global indices hit a meaningful medium-term peak in January and continues to hold the low posted in early February. It has been my contention that we can expect ranging as it will take time for investors to come to terms with the speed of the decline. A sustained move below 500 would be required to question that view.

The Nasdaq-100 is the clear exception since it has recouped all of its decline and is back testing its peak. 

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