Again we repeat our familiar mantra:  Is the ECB worried about the low inflation environment?  YES!  Does it know what else to do from a policy perspective to spur real growth and inflation?  NO! 

In today’s ECB monetary policy decision meeting, the ECB kept all rates and the asset purchase program unchanged versus last month.

President Draghi underlined a few main points:

  • Rates are expected to stay at present or lower levels for an extended period of time, well past the horizon of asset purchases.
  • Draghi said: “Low rates work!” , adding that there’s no evidence that low rates hinder the monetary transmission mechanism.
  • Monthly asset purchases of €80 billion are intended to run until the end of March 2017, and beyond, if necessary, until the Governing Council sees a sustained adjustment in the path of inflation.
  • Eventually there will be a tapering period to its asset purchase program (versus a hard stop).
  • Draghi expects inflation to pick up in the next months (currently at 0.4% Y/Y), “mostly due to base effects”.
  • Continued messaging that if warranted, the ECB will act to use all instruments in its tool belt to support economic conditions.

Hedgeye’s Read-Through:

  1. It appears that Draghi will maintain the “status quo” monetary policy until at least the December 8th meeting when it can anchor its decision making around the release of the ECB Staff’s updated growth and inflation forecasts. #HolidayStimulus
  2. We expect growth and inflation will remain lower and slower for longer than the previous time horizon. #EuropeSlowing & #EuropeImploding
  3. We expect the ECB will have to extend the scope of its Asset Purchase Program. #HelicopterMoney!

GIP Flashes Quad 3:

Our proprietary GIP (growth, inflation, policy) model shows the Eurozone stuck in Quad 3 - growth slowing as inflation accelerates - for the remainder of 2H 2016 and into early 2017. 

ECB OCT Meeting – Eyes on December Stimulus? - EUROZONE

Weighing the Euro.  We’re playing our trading risk range of $1.08 to $1.11 on the EUR/USD and have a bearish intermediate term TREND bias on the cross.

ECB OCT Meeting – Eyes on December Stimulus? - EURUSD 1020