Draghi to the rescue?! The ECB cut the Main Refinancing Rate 5bps to 0.00%, cut the Deposit Rate 10bps to -0.40%, and cut the Marginal Lending Facility by 5bps to 0.30%. It also increased the “drugs” through its asset purchasing program (QE), now delivering €80 billion/month of purchases (from €60 billion prior) and expanding its purchasing mandate to bonds of non-bank corporations (specifically investment grade financial companies).
And the markets rejoiced! European indices bounced +2 to +3% and the EUR/USD first fell (~ -1.5%) on the annoucement but has currently rallied +1.1% in line with our Big Bang Theory call that today’s ECB QE announcement would perversely strengthen the common currency.
Is all good under the Eurozone hood? Far from! Our call of #EuropeSlowing remains firmly planted. Below we show our proprietary Eurozone GIP (growth, inflation, policy) model, charting our outlook for the coming quarters –the Eurozone finds itself in the ugly Quad 4 equating to growth slowing as inflation decelerates.
It therefore came as no surprise that the ECB’s staff downgraded the region’s growth and inflation projections vs its prior projections in December of last year:
- Eurozone GDP Projections at 1.4% Y/Y in 2016 (vs December projection of 1.7%), 1.7% in 2017 (vs 1.9% prior) and 1.8% in 2018
- Eurozone CPI Projections at 0.1% Y/Y in 2016 (vs December projection of 1.0% in Sept), 1.3% in 2017 (vs 1.6% prior) and 1.6% in 2018.
As we discussed in Friday’s note titled Top 7 Reasons Why the ECB Will Act on March 10th, we do not see Draghi (nor other global central bankers) arresting Economic Gravity with policy like QE and rates at and below the zero bound. To us, Draghi’s belief that his policy tool kit is a “transmission mechanisms” to the real economy is a pipe dream.
In this light, Keith coined the term Big Bang Theory, to underline that after 600 rate cuts globally, there’s a new regime of investors that has given up on the belief that central bankers can artificially produce stimulus and weaken their currency for economic benefit. This policy hasn’t worked in Japan, and it isn’t going to work in the Eurozone.
Euro strength! Specifically heading into today’s meeting we signaled that Draghi’s “simulative measures” would strengthen the EUR/USD rather than weaken the common currency, and suggested trading the band of $1.08 to $1.12. #PlayBook
How long will Draghi’s policy QE juice last? All we know is that we don’t want to be on the merry-go-round when the music stops, and will continue to outline our risk tolerance and risk ranges across European securities. Feel free to email us if there are specific tickers you’d like levels for.