There wasn’t much “new” news revealed in today’s ECB press conference; however Draghi underlined the significant progress that the region has made over the last six months and even referred to a “positive contagion” that can take place.
In the Q&A session Draghi said that the council was unanimous in its interest rate decision (and only 5 of 55 surveyed economists expected a change): the interest rate on the main refinancing operations was unchanged at 0.75% along with the interest rates on the marginal lending facility and the deposit facility at 1.50% and 0.00%, respectively.
Of the economic indicators there was no great change over December’s statements. The Bank believes that CPI should moderate over the medium term and fall below 2% in 2013. GDP is expected to see a gradual recovery in late 2013, however risk remains to the downside mainly due to the slow implementation of structural reforms, geopolitical issues and imbalances in major industrialized countries. Further, GDP projections remain in line with December’s 2013 guidance of -0.9% and 0.3%.
You can find Draghi’s Introductory Statements here.
In a question related to signs of regional improvement Draghi very specifically stated the financial market improvements over the last six months:
- Bond yields and country CDS much lower
- Stock markets have increased
- Volatility is at historical lows
- Lower redemptions are now much lower
- Strong capital inflow to the Eurozone
- Deposits in peripheral banks are up
- Target 2 balances are broadly down
- The ECB balance sheet size (seen as a risk) continues to shrink
When returning to the broader economy, and not financial markets, Draghi was less positive, stating that there is really no end in sight and that the Bank had no plan to exit its non-standard measures and that regional economies still remain fragmented.
We too wrestle with the mismatch between the broader economy and market conditions. Below are a couple of signals we’re watching. Broader Eurozone confidence figures are flattening out to showing slight signs of improvement while ECB loans to households and non-financial corporations have yet to arrest their decline/show a meaningful inflection.
With respect to our view on the EUR/USD we continue to expect the cross to be range bound, especially given the OMT (bond purchasing program) that is in Draghi’s back pocket, the favorable financial market conditions exhibited since last summer, and commitment of Eurocrats to keep the union together at all costs.
Another bullish data point comes from the CFTC data we follow for net non-commercial positions in the EUR/USD. The latest data point (1/1/2013) turned positive for the first time since August 2011 and is confirming a strong trend-line breakout!
We do not currently have a real-time position in the EUR/USD, however we’d trade the range of $1.29 to 1.31.
On balance we think that there is still much political risk in the Eurozone on the backdrop of a very slowly improving economy (#GrowthStabilizing). Fiscal consolidation is clearly a long road and we still expect the periphery to underperform as it mismanages its consolidation targets. The Italian election towards the end of February will be one key political test, as is the feedback loop between imbalances across sovereigns and banks, especially without a fiscal union in place. Stay tuned.