As expected, this morning the ECB announced no change to its main interest rates.
ECB President Mario Draghi reiterated much of the same policy stance and outlook since his December meeting of last year. The EUR/USD rallied throughout the conference.
Draghi again stressed that the Eurozone may experience a “prolonged period of low inflation”, that the Bank would maintain accommodative monetary policy for “as long as is necessary”, and to expect that key rates would remain “at present or lower levels for an extended period of time.”
What was not spoken? Draghi did not include measures to suspend sterilization of the SMP, leaving it as an instrument for future consideration. He also spoke of no concrete plans to free up credit to the “real” economy (SMEs in particular). Draghi gave the following reasons on why the ECB took no action today:
- Baseline forecast confirmed, with modest economic recovery
- News out since last meeting, by in large on the positive side
- PMI data is strongest in 2.5 years
- PMI services a huge component of job in the region, very positive
- Metric gaps between Germany and Spain &Italy narrowing
- Unemployment high, but stabilized
Updated Staff Projections for March versus December moved ever so slightly on the 2014 outlook, boosting GDP 10bps higher, and inflation 10bps lower:
GDP Staff Projections: 1.2% in 2014 (+10bps vs DEC); 1.5% in 2015; 1.8% in 2016
CPI Staff Projections: 1.0% in 2014 (-10bps vs DEC); 1.3% in 2015, 1.5% in 2016
Other Key Takeaways from Draghi:
- Eurozone government deficit is expected to have declined to 3.2% of GDP in 2013 and is projected to be reduced to 2.7% of GDP in 2014
- Eurozone government debt is projected to peak at 93.5% of GDP in 2014
- Emerging Market impact on Eurozone has so far been muted. In fact there have been flows into Europe that have helped to narrow the spreads between countries
- On Ukraine: Draghi said he does not suggest strong contagion. But geopolitical risks could become substantial and generate significant consequences. The Bank has not assessed scenarios.
- On the Eurozone slipping into Japan-like Deflation: Draghi said ECB has taken early and decisive action on monetary policy to prevent anything like Japan’s situation. He remains confident in the 2% inflation anchor.
- To read a copy of Draghi’s prepared remarks click here.
Investment Positioning:
- We remain marginal European equity bulls of US equities. Our preferred investment in the region is long German and UK equities (EWG and EWU) and long the Pound/USD (FXB) – note that today the BOE also left the main interest rate unchanged (at 0.50%) and maintained the asset purchase target (as expected), which is supportive of our long call. The GBP/USD is up +2.4% in the last month.
- Broadly, we believe Draghi’s continued posture of “ready and willing to act” (to ensure the survival of the Eurozone at any cost and keep financial conditions accommodative) will continue to support the common currency and strengthen investor confidence in the equity market.
- EUR/USD: we expect Yellen to likely pull back on the tapering program to a more dovish position that should weigh on the USD to the downside. See our levels below.
Matthew Hedrick
Associate
