Why Draghi Won’t Copy Powell, Even If the Slowdown Gets Worse
- Euro-region growth remains supported by job creation, wages
- ECB likely to tweak in guidance in first response if needed
Don’t expect Mario Draghi to be as quick as his U.S. Federal Reserve counterpart to switch policy stance if the euro region’s slowdown worsens.
Despite a recession in Italy and a significant loss of economic momentum in Germany, the European Central Bank president isn’t showing much urgency to reverse course on a stimulus-withdrawal path that was originally supposed to include an interest-rate increase late this year.
“We struggle to see a quick reaction,” said Oliver Rakau, an economist at Oxford Economics in Frankfurt. “The forward guidance buys them a lot of leeway to have time to assess the data. It doesn’t give us anything specific, but if you have the guidance then you already have an easing option ahead.”
While Draghi and colleagues have acknowledged the slowdown and shifted downward their view of the outlook, they also point to rising wages and job creation as reasons for optimism. For now, they have stopped short of changing their guidance on ultra-low rates, let alone resuming quantitative easing that created a stimulus hoard of 2.6 trillion euros ($3 trillion) in government bonds.
Fed chairman Jerome Powell’s move on Wednesday to halt a rate-raising cycle might give Draghi some pause for thought, though the ECB has rarely been in lockstep with the Fed over the past decade.
The euro-zone central bank attempted to raise interest rates in 2008 and 2011 at times when counterparts were looking to ease, while its own version of quantitative easing only began in 2015, well after that policy had been halted in the U.S.
As ECB officials start work in coming weeks on forecasts for their next decision in March, their mettle is already being tested by repeated bouts of bad news. The government in Germany, the region’s motor, now predicts the weakest growth in six years, while euro-zone economic confidence is in its worst losing streak in a decade. On Thursday, data showed Italy’s economy spent the second half of 2018 in a recession.
While the ECB won’t flinch easily, here’s how its response could play out this year if the region’s economy takes a turn for the worse.
‘But we’re already helping’
Officials from the ECB’s Governing Council are likely to keep repeating their commitment to keep interest rates low at least until through the summer. They’re also reinvesting maturing bonds to ensure the existing stimulus effort doesn’t shrink, and they’re likely to hammer that point. Draghi did so again in the European Parliament this week.
The ECB could also intensify its frequent mantra that governments should enact growth-friendly policies such as structural reforms, in the hope it might actually be heard.
‘Alright, we won’t raise this year’
Before even thinking about further stimulus action, Draghi is likely to look at formally extending the ECB’s commitment to freezing low rates beyond the current projected endpoint of after the summer. He’s already hinted that investors have a point in betting that it’s going to take longer than that.
For the Italian, such a pledge means he might leave office at the end of October without ever having raised borrowing costs.
‘Have some more cheap money’
Even without an economic slowdown, the ECB will soon need to replenish its targeted loans for banks if it wants to avoid too many lenders paying them back, causing a tightening of liquidity in the region. Officials could use that to respond to the worsening data, bolstering and recalibrating that program to attempt to give the economy a shot in the arm.
‘Here we go again’
In December, the ECB concluded its QE program. Officials emphasized this was logical after vanquishing deflation and reinvigorating economic growth. But it’s possible they were also starting to reach the limits of their program, both in its effectiveness and with how many bonds of each country they had allowed themselves to buy.
Draghi’s rhetoric allows for the possibility of restarting QE. On Monday, he told European Parliament lawmakers that “if things go very wrong, we can still resume other instruments in our toolbox.”
Such a move is currently not part of the ECB’s plan, however. And if it were needed, officials might have to be imaginative in its design, including loosening national limits on debt purchases, or exploring other asset classes beyond government bonds.
In any case, Draghi doesn’t plan to be around to see it happen: “At this point in time, we don’t see such a contingency as likely to materialize, certainly not this year.”
GBP/USD testing offers near 1.3100 ahead of UK manufacturing PMI, US NFP
- Bias leaning to the downside amid dollar comeback and increased odds of no deal Brexit
- US-China trade optimism appears to limit the downside heading into the UK PMI and US NFP
The GBP/USD pair trades modestly flat near the 1.31 handle heading towards the London opening, as the upside attempts continue to get sold-off ahead of the last amid broad-based US dollar rebound and looming Brexit uncertainty.
The greenback staged a solid comeback and traded near two-day tops vs. its main rivals in Asia, in the wake of upbeat US housing data and the risk-on rally in the US equities amid fresh progress made on the US-China trade talks. Further, a round of profit-taking on the USD shorts amid dovish Fed is also another reason for limited upside in the Cable.
On the GBP-side of the equation, the bulls remain cautious, as markets are already pricing-in a no-Brexit deal, as the UK PM May is likely to return to the negotiation table on the backstop issue with the European Union (EU). In the view of Valeria Bednarik, FXStreet’s Chief Analyst, “yet unless she has a material alternative to offer to the Union, the trip will be to no avail.”
Attention now turns towards the UK manufacturing PMI data and the US payrolls for further trading impetus on the spot. “This Friday, the UK January Markit Manufacturing PMI is expected to come at 53.5 vs. 54.2 previously, adding to Sterling negative tone”, Valeria adds.
Stock Market News
Stocks Drift as Earnings, Trade Talks Wear On: Markets Wrap
Stocks were mixed on Friday following the best month for global equities in more than seven years, as earnings continue rolling in and investors watch for the resumption of U.S.-China trade talks. The dollar was steady.
European shares climbed, with contracts on the Dow and S&P 500 nudging higher while those on the Nasdaq slipped as Washington trade negotiations, that had been tipped as “determinative”, in the end broke up with an agreement to keep talking. News that China plans to buy substantially more American agricultural and energy goods failed to light much fire under Asian shares already heading for a fourth straight weekly advance. Treasuries retained most of their gains since the Federal Reserve’s pivot Wednesday toward a more neutral stance on monetary tightening.
Traders now turn their attention to Friday’s monthly American labor report amid an ongoing earnings season that’s given investors mixed signals. Technology shares gained in the U.S. on Thursday thanks to solid corporate reports, though a disappointing sales forecast from Amazon.com Inc. has now curbed optimism. On the trade front, Treasury Secretary Steven Mnuchin and U.S. Trade Representative Robert Lighthizer head to China in mid-February.
“The outlook is pretty good and markets can go a lot further,” Homin Lee, a macro strategist at Lombard Odier, told Bloomberg TV in Hong Kong. “Assuming there’s no further hiccups in the Fed communication, we can really see the rally continue for the remainder of the year.”
Elsewhere, the pound was steady as Prime Minister Theresa May sets out to woo members of the opposition Labour Party to support her Brexit deal. Oil was around $54 a barrel in New York.
Tesla starts selling cheaper Model 3 car in China
U.S. electric carmaker Tesla Inc said it will start taking orders in China on Friday for a lower-priced version of its Model 3 vehicle, whose price will start at 433,000 yuan ($64,300.56).
Tesla, which is building a factory in Shanghai, said in a statement that it will start selling a long range, rear-wheel-drive Model 3 variant in China. Previously, the starting price for a Model 3 in China was 499,000 yuan.
Bitcoin Hovers Under $3,450 as All Top Cryptos See Moderate Losses
All of the top 20 cryptocurrencies are reporting moderate to heavy losses on the day by press time. Bitcoin (BTC) is hovering under $3,450 again, according to Coin360 data.
At press time, Bitcoin is down just 1 percent on the day, trading at around $3,449, according to CoinMarketCap. Looking at its weekly chart, the current price is lower than $3,593, the price at which Bitcoin started the week.
Ripple (XRP) has lost nearly 3.4 percent in the 24 hours to press time and is currently trading at around $0.308. On its weekly chart, the current price is lower than $0.316, the price at which XRP started the week. The current price is also lower than $0.333, the mid-week high reported earlier today.
Ethereum (ETH), the second-largest altcoin by market cap, has also seen its value decrease by over 2 percent over the last 24 hours. At press time, ETH is trading around $106, having started the 24-hour period about 3 dollars higher. On the weekly chart, Ethereum’s current value has dropped from $116, the price at which the coin started the week.
Among the top 20 cryptocurrencies, the coins experiencing the most notable losses are Nem (XEM) — which is down over 11 percent — and Tron (TRX) and Bitcoin SV (BSV), which have both shed about 5 percent in the past 24 hours.
The combined market capitalization of all cryptocurrencies — currently equivalent to $113.4 billion — is about 6 billion lower than $119.8 billion, the value it reported a week ago. On Jan. 29, total market cap hit an intra-month low of about $111 billion.
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