2017/03/12 WEEKEND: Hawkish Draghi? & Bull Age
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WEEKEND: Sunday, March 12, 2017
Hawkish Draghi? & Bull Age
After watching every bit of the ECB press conference we were a little surprised to hear the collective response from quite a few analysts and the financial fourth estate that the ECB was now quite a bit more ‘hawkish’ overall. It must be allowed that Mario Draghi was indeed a bit less dovish, but hawkish? Of course, a good deal of that was the sense that the ECB is moving on from its most accommodative positions, which included its shift away from keeping its very most aggressive tools on the table in the current environment. Yet as we review below, the degree to which that amounts to a shift to a really hawkish stance is specious at best. And thanks to Zero Hedge blog for the interesting graphic’s play on trigger happy ‘Dirty Harry’.
Before we get back to a concise dissection of just what and what was not said at the ECB press conference, and the ‘street’ interpretation, we revisit another matter on which we have opined recently: the ‘age’ of the current equities bull market. That is of course relevant in the context of the folks who measure how much longer a bull market has to run based in part on how long it has already been trending higher.
As we noted in the March 2nd Commentary: Trumponomics & Kool-Aid Coda and previous, “…those who are using any classical calendar assessment of how ‘old’ this bull market might be are significantly misguided. Talk of it being in its eighth year, meaning it cannot continue much longer, fails to take a key influence into account…” That was of course the ‘Fed Factor’. This is degree to which the equities were able to avoid any setback since Ben Bernanke’s 2012 institution of QE-3. Now there is another perspective on that.
In a Bloomberg column on Friday the estimable Barry Ritholtz opined on This Bull Market Isn't as Old as Some Seem to Think. It is a very interesting column which allows there are quite a few different ways to view this. However, he chooses to fall back on a classic definition of a bull trend: it is only confirmed once a new cyclical high is established. This means the age of the current US equities bull can only considered since the May 2013 front month S&P 500 future new high above the 1,586.75 October 2007 high. So just short of four years at present, with quite an interesting discussion on all that.
Authorized Silver and Sterling Subscribers click ‘Read more…’ (below) to access the balance of the opening discussion. Non-subscribers click the top menu Subscription Echelons & Fees tab to review your options. Authorized Gold and Platinum Subscribers click ‘Read more…’ (below) to also access the Extended Trend Assessment as well.
NOTE: Given the likelihood the US economy will now get the structural reform that we (along with Mario Draghi and others) have been loudly complaining was not forthcoming since our dual It’s Lack of Reform, Stupid posts in January 2015, we need to adjust our view that a potential economic and equity market failure is coming. We previously referred you back to our December 8, 2015 post for our major Extended Perspective Commentary. That reviewed a broad array of factors to consider Will 2016 be 2007 Redux? While a continued regime of higher taxes and more regulation (i.e. under Clinton) might have fomented a continued weak or even weaker US economy, the tax and regulation changes proposed by a Trump administration that will likely be approved by the heavily Republican Congress now diminish the similar fears we had to what transpired in 2007-2008.
▪ The ECB becoming quite a bit more hawkish is another matter altogether, which we do not see as making much sense simply based on the information shared during the post-rate decision (or non-decision if you will) ECB press conference Thursday morning.
Note the steely stare in the picture, which might reinforce this post’s opening image of a Draghi determined to raise the ECB base rate sooner than not. There is only one problem with that sentiment: that’s a file picture, and nothing as remotely aggressive as that look ever took place at last Thursday’s press conference. In fact, whatever might have been communicated on the ECB becoming more hawkish was strictly by inference of the listeners and the press.
That is not to say that some things were not discussed (apologies for the double negative as the best way to express this) which indicated a less aggressively accommodative position. Yet the reaction by the financial fourth estate and the ‘street’ might have been a bit overdone in light of that.
To anticipate a bit of what we have to say in the Market Observations update of the Evolutionary Trend View below, this is very important from a market activity perspective. The June Bund future significant discount to the very premium priced (even into the December contract expiration) March Bund future that expired last Wednesday was always going leave it closer to the front month 160.50-.00 support. In the event, the additional weight from bearish inferences drawn from the ECB press conference have left it down into and finally below that support area’s 159.50 Tolerance. This is very important, as the next supports are down into the 158.00 and 156.00 areas.
Just to be clear once again, we are bearish govvies overall, especially if the US tax and regulatory reforms are implemented at all timely. And the current Bund weakness may just be classical downside catchup with the US govvies that (also classically) behaved so much worse than the Bund in the wake of the US election. Neither the US T-note or T-bond have knocked out their late 2016 lows which the Bund just violated. And the previous strong sister Bund now trending more so in line with the downside leader US govvies (versus continued resilience in the Gilt) paints a fairly negative picture.
Over Anticipation?
Yet there is a good question over whether the ECB really means to imply this sort of much more hawkish view that encourages the sense of much higher long term interest rates as well? Or have the financial press and the ‘street’ drawn inferences from the somewhat less dovish aspects of the ECB press conference and other sources to talk themselves into a very modest shift being a far more hawkish position.
The key aspect of the ECB plans which Signore Draghi was keen to highlight was the removal of some previously very accommodative language from the current statement. And any who wants to read this for themselves can access the full Introductory statement to the press (with Q&A) (courtesy copy parked on Rohr-Blog) to verify the key part of a very lengthy answer to the first question (at the bottom of page 3.)
To wit, “…a sentence which has been removed from my introductory statement that used to say, ‘If warranted, to achieve its objective the Governing Council will act by using all the instruments available within its mandate’. You remember from the previous introductory statement. That's been removed, basically, to signal that there is no longer that sense of urgency in taking further actions while maintaining the accommodative monetary policy stance including the forward guidance.”
He further clarifies what is an indication by omission by noting, “…that urgency that was prompted by the risks of deflation isn't there…” And this indication from the previously very dovish ECB that the reasons for leaning toward emergency mode are no longer there is a tectonic shift of sorts. Yet still only from extreme dovishness to less aggressive accommodation… and not tightening. As such, the aggressive anticipation of any tightening might have been overblown. Possibly a bit of ‘over anticipation’.
Tightening Prior to End of QE?
There was only one real question on this potential, and to directly cite the reporter, “…there seems to be a lot of speculation out there that you could raise rates before the end of QE, which clearly contradicts your opening statement and yet the speculation seems to persist. So would it be possible for you to clarify whether you can see any circumstances under which you would raise rates before ending bond buying?”
That is fairly pointed, and does indeed seem to raise some issues regarding some sort of contradiction of the established ECB position. Here as well President Draghi could not have been any clearer than to say, “…I don't want to speculate. The forward guidance now is this one and based on current information that's what it is. It says that, ‘Until the Governing Council sees a sustained adjustment in inflation, net asset purchases will continue at a monthly pace of €60 billion, until December 2017 or beyond if necessary. The interest rates’ – where is it – yes, in the beginning it says, ‘Based on our regular economic and monetary analysis we've decided to keep the key ECB rates unchanged. We continue to expect them to remain at present or lower levels for an extended period of time’.”
So it would seem that is that. Yet the financial press needing to have something exciting to discuss managed to post roundly misleading assessments.
Financial ‘Fake News’?
Maybe it’s just us, and we encourage anyone who finds any actual ECB indication it might raise base rates prior to the end of QE to contact us. There certainly doesn’t seem to be any hint of it in the press conference opening statement or the Q&A. It is probably not as critical as all of the ‘fake news’ the current resident of the White House has indicated (rightfully or not) on major security and political issues.
Yet it is still disconcerting that the mainstream financial press is so desperate for analysis fodder that they would inflate the question of a reporter into an assertion that the ECB had ‘discussed’ the possibility of raising rates prior to the end of QE. And anyone who would prefer to view the full video of the press conference and Q&A can determine whether there was some innuendo not caught by the transcript. That would be from approximately 18:45 into the video, with the key passage from 19:20.
Frankly, we didn’t see any of it. Yet a Friday afternoon web search merely to get back to the ECB main page to access the video and transcript yielded the news story links (not live in the graphic) to the left. This is where the ‘fake news’ aspect comes into what was in fact a very ‘steady as she goes’ ECB press conference in spite of the tectonic shift on the most aggressive accommodation tools coming off the table for now. The Bloomberg article leads with, “European Central Bank policy makers considered the question of whether interest rates could rise before their bond-buying program comes to an end, according to people familiar with the matter.”
Yet it also quickly goes on to note, “…euro-area central-bank officials said, asking not to be identified because the deliberations were private. The council didn’t discuss any specific scenario or timeline and hasn’t made any formal decisions on a strategy.” However you slice it, this is a non-story insofar as confidential sources had provided a very cryptic indication on something that was not actually articulated to any degree.
It Gets Better
The incredible part is that as respected a financial news source as the Financial Times should pick up this story based on… the Bloomberg article, where we normally expect the FT to pursue its own sources. Evidently nobody wants to miss the ‘ECB rate hike prior to the end of QE’ reportage train. The FT goes on to confirm exactly what President Draghi said at the press conference, “…the bank expects to hold rates at current levels until at least the end of the bond-buying programme, known as quantitative easing…”
So the ‘confidential sources’ echo chamber has now infected the financial fourth estate along with all of the very specious political reportage we get these days. And then there is CNBC, which doesn’t do anything more than cite a Friday afternoon Reuters report on “Euro rises to 3-week high on report ECB discussed rate hike before QE end.” This is not a joke: take a look for yourself if you doubt it: http://cnb.cx/2mB7nR5
Once again this was based upon unnamed sources. And after mentioning this might have been discussed, it even went on to note, “Sources told Reuters some ECB policymakers had suggested hiking rates from their current record lows before the end of QE stimulus, but that the discussion was brief, and there was not broad support for the idea.”
And further, that potential flies in the face of something the FT article had covered… “The central bank will, from April, buy €60bn of eurozone bonds each month until the end of the year, although analysts expect the programme to be extended into 2018.” It is indeed the case that quite a few folks expect the ECB QE program to be extended into 2018, and that further reinforces the idea that rates are unlikely to rise anytime soon.
Over Anticipation
Even allowing for a slight bit of further strengthening the Euro-zone economy later this year (especially if the US economy continues to lead the way), the best guess right now (even if it is the ‘received wisdom’ we normally disdain) is that the initial ECB rate hike will be in… August 2018. This follows the mold set by the Fed, for good reason, of not pushing bond prices down while it was still committed to buying them to keep rates low.
The further good reason for that is indeed the continuation of the ECB QE program to assist weak Euro-zone members who still need the help. Rather than go back into the risks facing Greece and Italy in spite of the current German economic strength, please see our ‘European Kool-Aid’ posts from mid-February onward.
This is why we feel that in spite of the overall bear trend now unfolding in the govvies leading to major lower levels across time, it is possible the bears are feeding on a specious indication of the ECB’s near term intentions. That has been provided by a financial press which is itself hungry for any major news from an ECB that is committed to a ‘steady as she goes’ program, patiently waiting for more overall Euro-zone economic strength and inflation where many of its constituent states are still badly lagging.
This is going to make next week especially interesting on the US govvies response to what the FOMC actually does (or doesn’t do) on Wednesday. While that will be a primary influence, it is in the midst of a lot of key economic data as well as Thursday’s BoJ, Swiss National Bank and Bank of England rate decision announcements.
▪ The Extended Trend Assessment with full Market Observations have been updated below as of Friday’s US Close. This was very important in order to incorporate the reactions to Thursday’s ECB press conference and especially the US Employment report after that strong February ADP Employment report has been countered of late by the legislative stall on US healthcare reform that is impacting the prospects for tax reform.
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