From The ECB’s Failure To Communicate To US Jobs To Confirm Fed Signals

The only way to explain the largest swing in the euro in six years yesterday is to appreciate the disconnect between what was expected and what was delivered by the ECB. Draghi’s urgency and commitment to do “what it must” fanned expectations, and more importantly, substantial positions, in various asset classes–short euros, long European debt, and equities. The washout was dramatic.

Even though there was no promise by Draghi, there is nearly universal agreement that he over-promised and under-delivered. There was great suspicion that the Draghi was outflanked by the hawkish members, but subsequent reports make this seem less true. One report noted that ECB approved with a wide majority Draghi’s proposals. That is Draghi himself did not propose stronger actions. A second report claimed there were five dissents from the 25 officials who voted. These were the two Germans (Lautenschlaeger and Weidmann) and the central bank presidents from the Netherlands, Estonia, and Latvia.

Draghi promised a complete review of the monetary stance. The minor adjustment to the staff’s forecasts showed that there was little change since September in the economic assessment. Perhaps Mersch had it right. The ECB was as “innovative as necessary and as conservative as possible.” Or perhaps, it was Bernanke who’s insight into US monetary policy is applicable to the ECB: It is 98% communication and 2% action. Ultimately, the failure to communicate mixed with the extreme market positioning and unleashed powerful forces.  

Some see in the ECB’s reluctance to taking bolder measures evidence that this is the end monetary easing.  Just like many see the Federal Reserve about to raise rates in a dovish fashion, the ECB signaled a hawkish cut. However, unlike in September 2014, when the deposit rate was brought down to minus 20 bp, Draghi gave no assurances that the 10 bp cut exhausts scope on interest rates. Nevertheless, the ECB is out of the picture; it appears until closer to the middle of next year. One of the implications is that ti takes pressure off of some of the small countries in the euro’s orbit to ease policy further, like Switzerland, Denmark, and arguably Sweden and Norway.