ECB Notes: Message is economic uncertainty at the global level

Below we highlight some of the major call-outs from ECB President Jean-Claude Trichet’s press conference following the Bank’s unanimous decision to leave the ECB’s Main refinancing rate UNCH at 1.50%. In short, he warned of the uncertain global outlook on the horizon, with risks weighing to the downside, including revisions to GDP. In typical Trichet form, he was tight-lipped about future interest rate moves, yet should the global conditions he presented materialize, logic would follow that a cut may be warranted. And we’re calling for global growth slowing!


GDP: according to ECB staff projections, which the Governing Council reviews in making its monetary policy decisions, annual  Eurozone GDP for 2011 was downwardly revised to 1.4% - 1.8% vs. the previous forecast band of 1.5% - 2.3%.  2012 annual GDP was also revised down to 0.4% - 2%.


Inflation: as measured by CPI, inflation is expected at 2.5% - 2.7% (Y/Y) for 2011 and 1.2% - 2.2% in 2012, based on ECB staff projections.  [or UNCH vs previous estimate for 2011 and narrower for 2012 projection].  With the mandate of 2% CPI as the target rate, Trichet remained confident that this level will be achieved in 2012, while CPI should remain elevated in 2011. 


M3: Trends in money growth have stabilized over the last months, with expansion at a modest pace.


Economic Analysis and Risks: Trichet cites the Japanese earthquake; dampening factors of slowing global growth; elevated energy prices; deteriorating global equity markets and business confidence; and remaining tensions due to Europe’s sovereign debt contagion as key factors weigh on the Council’s monetary policy decision.


QA: As is typical, the questions posed at Trichet in the press conference were far more interesting than his prepared remarks for they cut to the heart of many issues plaguing the region, yet little response was given.

On fiscal policy: as usual, Trichet had no comment on fiscal policy, returning to the Bank’s sole mandate of price stability. He mentioned the need of countries issuing fiscal consolidation packages to front-load them. He had no specific comments on the size and scope of Italy’s austerity package, which passed a confidence vote in the Senate yesterday and must clear the lower house of Parliament in the coming days.


On Liquidity Measures: Trichet stressed the fixed rate non-standard measures of the ECB with full allotment on the 1w, 1m, and 3m will be extended into the end of Q4. Here he defiantly states that there are no liquidity issues for Euro area banks on the whole. Among further comments in which he insistence on the health of Euroarea banks, Trichet is in opposition  to IMF head Christine Lagarde who recently said that Euro area banks are undercapitalized and a statement from Deutsche Bank’s Josef Ackermann that the current climate “reminds one of the autumn of 2008”.


On SMP facility: Trichet did not comment on the future size and scope of the Bank’s bond purchasing program, which resumed in early August. He reiterated that the Bank will provide weekly totals of its secondary buying, which has included:  €22B for the week ended Aug. 12; €14.3 for 8/19; €5.3B for 8/26; and €13.3B for 9/2.


In his closing remarks Trichet noted his respect for the founding principles of the Stability and Growth Pact. In short, it’s clear how politically motivated Trichet is to keep the Eurozone intact, including support of the common currency. Our call remains that should Germany not give the necessary backing to the EFSF, or should a unanimous vote to pass the facility not be met (the timing of which should be late September and early October), the ECB, against its mandate, will likely have to step in to directly and play a larger role to support the sovereign and banking issues across the region. Should this be the case, we could see massive inflation risks in the common currency.


For now, we are not invested in Europe, having covered our short position in the UK (EWU) on 9/6. We continue to see slowing fundamentals not only in the periphery but in the core as well. Additionally, France’s AAA credit rating hangs in the balance. The EUR-USD fell sub $1.39 during Trichet’s remarks and is settling just north of $1.40 intraday. Our immediate term trade levels on the cross are $1.39-1.43, with a broken intermediate term TREND level of $1.43.


In other news, the BOE left its main interest rate unchanged at 0.50% and kept its asset purchasing program unchanged at 200B GBP. We continue to highlight the nation’s sticky stagflation, which should dampen its economic outlook over the coming quarters.  While the BOE too could cut rates, the ECB has more room to play with on the downside given its interest rate differential, which is positive on the margin.


Matthew Hedrick

Senior Analyst


ECB Notes: Message is economic uncertainty at the global level - B. ECB

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