Counting the week to December 3rd ECB meeting, I have to ask one simple question: does anyone over in Frankfurt has a clue what they are doing?
Earlier this week, Reuters reported on a conversation with an unnamed ECB source
Here’s what we have learned:
Things are far from smooth in the Euro area. We had some serious talking up on Money Supply side earlier this week, and we had incessant chatter about improving credit conditions. We even had promises of accelerated purchases in December (to offset holidays). But the ECB still appears to be directionless in so far as it still views QE road as insufficient. Menu of options is as wide as ever: more government bonds buys, deeper cuts to deposit rates, including a possible two-tier charge, purchases of municipal and regional debt, and even ‘buying rebundled loans at risk of non-payment has been discussed in preparatory meetings, although such a radical step is highly unlikely for now’. You really have to wonder: do they have any sense of direction (other than strictly forward)? “There are some who say you should surprise markets. But you cannot surprise indefinitely. Sooner or later, you are bound to disappoint.” That is per ECB official. Wait a second, sooner or later? Just how many iterations of this circus will we be looking at? ECB’s commitment (rumoured) to push through a major surprise is a desperate bet. If surprise works, markets are likely to overshoot fundamental valuations on all fronts: from EUR/USD and EUR/Sterling to major equities indices and bond prices. But overshooting is not likely to hold unless the ECB continues to surprise the same markets. If, as likely, inflation remains anchored at low levels over the time of these surprises, the ECB will find itself in a situation where the only way to trigger any positive response from the markets will be to double down on every turn. Scared yet?..
This post was published at True Economics on November 26, 2015.
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