ECB holds policy … for now
A quick recap of yesterday’s roller-coaster ECB rate decision and press conference. After a bit of back and forth, Euro and European yields rallied as ECB announced to hold policy steady and press conference. The key take-away raised doubt over prospect of further easing in September. The debate of the ECB policy path is raging, we don’t believe that the probability of easing has diminished. Repeated reference to ECB governors that “do not like what they’re seeing in the inflation data” indicates that the central bank is ready to act. Draghi has a long history of injecting doubt into the markets to remove the directional risk. Yet the incoming data (fact, ECB is lost its inflation target), macro environment and cues from other central banks suggest that ECB will ease. Market are pricing in 20bp cut to deposit rate in September. There is also a high likelihood that tiered interest rates on reserves will be engaged. The threshold for asset purchases is high in our view and currently, don’t have a solution as part of the mix right now. We could see a recovery in EURUSD in the short term as a market position for Fed easing.
In regards to next week’s FOMC, our view is for 25bp easing. 50bp is unnecessary (solid GDP read of 1.8% 2Q expected today) and would signal a level of panic at the Fed. The market will be watching today’s GDP print as is the key data ahead of critical Fed decision next week. The Fed is likely to sell this first-rate cut in ten years as insurance against slowing economic weakness. Broad de-risking is the theme of the day with S&P 500 falling from all-time high yesterday. There is worries that major central banks will ease but not enough to justify elevated valuations in key areas. To keep the goods times rolling, central banks will have to keep the dovish narrative alive.
