Home > Uncategorized > 2011/10/06: QuickPost: Trichet Out With a Bang in Spite of No Rate Cut

2011/10/06: QuickPost: Trichet Out With a Bang in Spite of No Rate Cut

It was a very interesting final ECB press conference for John-Claude Trichet. The estimable ECB President is retiring at the end of the month, and used today’s press conference to effectively focus on some themes related to who has been effective and who has been remiss in Europe.

The ECB holding its base rate steady today at 1.5% seems that much less sensible in the wake of his opening statement assessment that second half Euro-zone growth would indeed be lower-than-expected. Reconfirming the recent ECB shifts to presuming intensified risks are on the downside, and the suggestion that banks should retain more earnings as reserves, would all seem to suggest that the central bank should be easing instead of holding steady at what appears to be a premium yield in the face of falling commodity prices.

However, as noted in our analysis earlier this morning, we suppose that he did not want the embarrassment of refuting that anti-inflation stance by actually cutting rates today. He might also figure that another 30 days won’t make much difference as he turns over the reins to Signore Draghi. We shall see.

However, what he had to say about the fact that roughly half of his eight year tenure has been spent addressing markets in turmoil was the far more interesting aspect.

When asked whether there was more the ECB could have done to either bolster depressed peripheral Euro-zone sovereign debt values or to encourage greater growth, he was very pointed on where the ultimate blame should be apportioned. And especially as it regards the recent pressure on the value of the euro, he made it very clear that the blame rests almost entirely with the political class as a whole in Europe.

He made a very interesting point that at his first round of testimony in front of the European Union Parliament eight years ago he strenuously warned against loose fiscal policy as the primary threat to the euro project. And while it seemed to be just so much boilerplate month after month, all of us who have been closely reviewing the ECB interest-rate meeting formal statements know that every single one of them ended with the focus on the urgency of fiscal reform and rebalancing. It’s not like he and the rest of the ECB are recent converts to that perspective.

He also noted the degree to which the ECB had to fight to maintain the stringent requirements of the Stability and Growth Pact over the objections of governments who would like to have used looser criteria to declare victory and go home. The ECB position which seemed strident at times during periods of economic weakness now looks to have been extremely prescient.

And at every point along the way he has been at pains to communicate that the political class needed to come to grips with the requirements of a monetary union that was not also a fiscal union. So it seems very rightful and natural that his pointed bottom line on the various problems of the sovereign debt crisis and current weakness of the euro was

Governance has been insufficient.”

This is very similar to (and certainly very prescient insofar as it was long before) the Fed’s recent aversion to providing extensive further monetary or liquidity actions. Mr. Bernanke and the Fed now seem to be saying that the lack of any real economic benefit from its second round of quantitative easing (QE2) has finally convinced it that it needs to stop. Trying to be the hero on a monetary level which cannot address the weakness of the US economy due to the problems being the Taxulationism (excessive tax, regulation and protectionism) impact of legislative missteps is not productive.

As Dallas Fed President Richard Fisher noted on Monday, any further major attempts by the Fed (which might be futile in any event) are counterproductive insofar as they might distract the political class from feeling the appropriate immediate pressure to fix the mess they have created. It seems that whatever else Monsieur Trichet had right or wrong during his regime, he certainly was way ahead of the curve on that particular front.

General Market Observations

Significantly the same as in Monday’s post, other than the further evolution of the US equities trend reviewed in yesterday’s EXTENDED TREND IMPLICATIONS and below.


While our analysis earlier this morning cited the potential for the December S&P 500 future to range as high as the major downward channel (from the May high) at 1,161.50 today and 1,158 area tomorrow, that does not necessarily mean those specific levels will/must be tested at this point in the near term bear trend recovery.

There has been consistent decisive activity when prices move convincingly out to either side of the 1,155-1,145 range; the resistances noted above are merely the current fine line Tolerance of that resistance range. However, during last week’s activity around that range the Thursday recovery from below it left a daily Close back up at 1,156.30. The lower opening back below it last Friday morning ended up leaving a short-term intraday recovery high for the session only back up to 1,148.50.

As such, rather than necessarily pushing back above the top end of 1,155-45, it is possible that the December S&P 500 future might stall anywhere in that 1,148.50-1,156.30 Area Gap prior to starting back down if it indeed remains truly bearish. As also noted again in this morning’s analysis, Tuesday’s 1,086 area UP Closing Price Reversal (CPR) is now the additional critical Tolerance buffer just below the low end of the key 1,100-1,090 support. Much below that we still suspect the December S&P 500 future can sink to the 1,040 or even the 1,006-00 support; or even much lower if those are violated.

And given the return of classical intermarket relationships (counterpoint out of equities into the US dollar and government bond markets, and direct influence from equities back into most other currencies, commodities and energy markets), the equities decision is going to drive our expectations for all other asset classes at this point.

Thanks for your interest.

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