Home > Uncategorized > 2011/09/08: QuickPost: ECB Press Conference: Trichet Gets It Wrong and Right

2011/09/08: QuickPost: ECB Press Conference: Trichet Gets It Wrong and Right

It was a very animated monthly ECB post-rate decision press conference again today after the central bank left rates unchanged at 1.5%. And that is a a very interesting stance we will discuss further below. Suffice to say for now that Monsieur Trichet was very right on a couple of his views regardless of what his critics might say.

First of all, we maintain our general perspective that the ECB is one of the guys wearing white hats in this whole European sovereign debt crisis. The governments of the successful northern tier states have been talking a good game about the steps to alleviate pressure on the stressed peripheral Euro-zone sovereign debt markets. That goes all the way back to the initial phase of the Greek Sovereign Debt Crisis last May (as in 2010, not this year.) Yet, in fact they have done very little to expand the powers and provide the necessary funding for the European Financial Stability Facility (EFSF), the vehicle set up to stabilize those stressed sovereign debt markets.

And if it weren’t for the ECB’s willingness to step in and at least temporarily cool down the precipitous drop in value for those peripheral Euro-zone bonds, the whole situation would likely have been a lot worse well before this time. That includes the likely failure of some major European banks, and the attendant contagion throughout the international banking system.

And the ECB President was well within his rights today to call on the European governments to finalize expansion of the powers and the purse of EFSF, which he noted was agreed back on July 21st. It is not productive for the ECB take on more of the damaged sovereign debt instruments of the profligate southern sisters; its balance sheet is already bloated with that sort of questionable asset, and any significant further addition could impugn the credibility of the ECB itself. He highlighted the degree to which (consistent with the July 21st agreement) EFSF must be fully empowered to engage in secondary market operations. That would mean it can also purchase some of the distressed bonds the ECB already owns, which would relieve some of the pressure on its balance sheet.

He was also very right to assert the independence of the ECB from political meddling. That went so far as to cite previous examples of the ECB withstanding political pressure to pursue its “single needle” price stability mandate (as opposed to the US Federal Reserve that has a dual mandate which includes healthy employment.)

However, it was most interesting that he was stressing that once again at a time when the ECB staff had downgraded their growth forecast for this year to 1.4%-1.8% (from 1.5%-2.3% previous.) It is also interesting in light of the general ECB monetary policy stance still being characterized as ‘accommodative’. If so, it is only marginally in that category at best. And even though they maintained their growth forecast or next year at a mean of somewhere around 1.7%, it’s all a bit specious to characterize that as ‘accommodative’. Rather more so just plain ‘neutral’.

Especially interesting is how that correlates with German Chancellor Merkel’s current political travails. It is almost ironic that she won the election at a time of much better economic performance, and before all of the reforms necessary to address the Euro-zone sovereign debt crisis became an issue.

She won the office by defeating previous German Chancellor Gerhard Schroeder due to dissatisfaction with a weak economy. And part of the reason the German economy was able to become so dynamic in the second half the past decade was pension reforms, which Schroeder had shown the political courage to put through in that weak economy. However, back at that time as well the ECB refused to lower rates that were around 1.0% because inflation was still slightly above that level. It also spoke of monetary policy still being ‘accommodative’ back then, in spite of GDP growth coming in at no better than 0.2%-0.5% for an extended period of time. Needless to say, much like the US worker of today, the average German worker back then knew it still felt like a recession even if the economy was technically growing.

And in that way, Monsieur Trichet was likely wrong today to put so much stress on the price stability factor, even as the ECB forecast allowed that inflation risks are now ‘balanced’ instead of to the upside. “Balanced” inflation risks are classical ECB code language for the potential for them to head lower; and under current global economic circumstances that likely means it will occur on the back of even more economic weakness than those updated ECB forecasts.

That would seem especially important right now with the dual threats of weakening growth and sovereign debt affecting the European interbank lending market (which the ECB once again committed to providing as much liquidity as necessary for the banks that are having trouble borrowing.) Trichet should have at least allowed that if the trend of growth expectations is weak enough, (much like the Fed) the ECB will be prepared to be ‘more accommodative’ if the situation warrants.

General Market Observations

All of that said, the equity markets have stabilized after a rough patch this morning in the wake of the diminished ECB growth forecasts (which were actually a bit worse than expected.) And as the equities maintained the most important part of the gains from yesterday, it appears that expectation of weaker ECB forecasts buffered any potential for extreme weakness this morning.

It all feels quite a bit like the market response to Mr. Bernanke’s Jackson Hole speech back on August 26th. The September S&P 500 future had backed off from its previous rally to its support in the 1,155-45 area. In spite of the expectations that Mr. Bernanke’s exposition would highlight the weaknesses of the US economy, the lack of any immediate further accommodation commitment left the market temporarily swinging below there in the morning. However, shortly after that it rebounded to push back above the top end of that range on its way to the more prominent 1,216-30 resistance it tested and failed from last week.

It seemed that in spite of the lack of any explicit commitment to further accommodation, the Fed was likely going to step in if economic conditions remained as weak as Mr. Bernanke confirmed was the case. That was consistent with other various Fed forecasts and general economic data; a classic example of “bad news is good news” on the expectation of central bank moves.

One can only wonder if the markets today are reflecting a bit of the same regarding the ECB. The efficient northern tier economies in Europe have indeed fared well through previous downturns. Yet, unless Germany, Inc.’s manufactured goods clients in Asia experience a significant rebound on the other side of the current soft patch, a much more accommodative stance might be necessary from the ECB…

 …even if they always tend to get dragged into that sort of position kicking and screaming (still about the importance of price stability.)


The most critical indications will be for equities and govvies again. The September S&P 500 future has already collapsed from its test of the very important 1,224-1230 congestion and Fibonacci retracement area (the levels it was up to last Tuesday into Wednesday morning.) Yet, it has also surged back above important interim congestion in the 1,192-85 area yesterday. And lo and behold, that’s where it’s held so far today (i.e. into 10:00 CDT.)

More important in direct relationship to the still somewhat hawkish communication at the ECB press conference today, the German DAX stock index managed to hold right at the top of its important 5,312-00 support, which it had recovered back above only yesterday after knocking it out on the way to a new low for the overall selloff on Monday into Tuesday of this week.

Of course, the other very interesting bit is how little the government bond markets have backed off in spite of the recovery in the equities from Tuesday’s lows. September T-note future has pushed back above 130-20, even if admittedly still hung up so far at no better than its previous all-time high at 131-20. Far more impressive was the continued bid at the end of last week in the September German Bund future above the 135.50-.80 oscillator resistance for the push to the top end of its extended 138.00-139.00 oscillator thresholds. And even in spite of the expiration of the September contract leaving the deeply discounted December German Bund future a full 150 points lower, that is still only back down around an old critical resistance (now support) at the 136.26 mid-August previous all-time trading high.

The downbeat outlook for the Euro-zone economy also predictably weakened the euro somewhat further in its current slide. However, at least so far that has been only marginally below the 1.4100-1.4000 support. The 1.3900-1.3837 range remains the ultimate arbiter of whether the euro is indeed Breaking DOWN, or just putting on the same sort of extended test of the lower end of the range as occurred back in mid-July.

Thanks for your interest.

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