ECB down. Fed to go.
The biggest economic events of December were/are the Dec 3 ECB announcement and the Fed’s Dec 16 announcements. 1 down. 1 to go.
Yesterday the ECB announced several new policy measures to help prevent inflation from becoming deflationary. As we all know, the delivery fell short of market expectations and risk assets plummeted. Indeed, safe havens like core European sovereign bonds plummeted, as did the USD —pulling the entire U.S. Treasury complex down in a nearly unprecedented fashion.
An hour ago, Draghi gave a follow-on speech in New York wherein he reiterated another threat to do whatever it takes. His credibility is starting to take a bit of a beating. That said, I do not believe the ECB/Draghi miscalculated in their delivery of yesterday’s monetary policy yummyness. The ECB could not announce an expansion of their QE program just yet because German, French, and Dutch sovereign bond yields were dropping to new lows –well into the negative yields– prior to the ECB announcement. Had the ECB delivered a larger QE program (with a larger monthly purchase) this trend would have continued. A considerable portion of this core European bond spectrum would have become out of reach to the ECB’s QE program because of its rule to not buy bonds with a yield under -0.2%. The ECB could have found itself in a position 12 months from now where there weren’t any more sovereign bonds to buy. Yes, they added muni bonds to the QE lunch menu yesterday, but I’m not sure the ECB wants to delve too far into that realm.
The ECB is likely going to be forced into expanding its QE program in May-June next year, and will be forced to drop its -0.2% yield rule to -0.5% if not delete it altogether. It has a few months to lobby the Bundesbank to allow this to happen.
Closing note: I probably should not be surprised Draghi doubled down with more “do whatever it takes” threats an hour ago since I went short the SPX 3.5 hours ago (SPX 2078). The ECB must be seeing the same imminent air pocket in risk assets I am. Draghi!!!! Tight stops will come into play….. Not the first time the ECB/BoJ/PBoC/Fed surprised with more threats of candy after I went short. How about that?
