ECB And More

There are four central bank meetings today, and the US ADP estimate steals much of the thunder from tomorrow’s jobs report.  Yet the focus is squarely on the ECB meeting and Draghi’s press conference.  Ahead of it, the capital markets are quiet.  The euro and sterling have been confined to less than 20 tick range through the European morning.  The yen and the Canadian and Australian dollars have a slightly wider range, but the net effect is the same:  little changed.   

Equity markets are a bit heavier, while bond markets are mixed.  In Europe, the core bond markets (German, France, Netherlands and UK) are firmer, while the periphery is trading a touch heavier.  

The significance of the ECB meeting has increased proportionately with the soft inflation reports and Draghi’s comments, both from his prepared remarks at Jackson Hole and his impromptu comments.  Most observers appear to argue that a small repo rate cut would be inconsequential, but they do not draw a link between that and increasing the odds of a successful TLTRO launch in a couple of weeks.  That said, we recognize that as was the case in June, when the last rate cuts were announced, which included the negative deposit rate, the euro rallied.  

We think that improving the likelihood of strong participation at the TLTRO is a key goal of today’s ECB meeting.  A small repo rate cut could help, as well as tweaking some of the “modalilties” or rules of engagement.  Draghi will also likely reinforce ideas that an ABS purchase program is highly likely, and there are other measures the ECB can take within its mandate.  The new staff forecasts are likely to shave both inflation and growth.  

We suspect that some of the pressure on EONIA and decline in yields, which include negative rates in Germany and Netherlands (with a French flirtation to boot) is partly a reflection of anticipation of the ECB meeting.  Given market positioning, we warn that the market is vulnerable to either disappointment with the ECB and/or a sell the rumor (of ECB action) and the buying of the fact type of behavior.  While the $1.3170 area offers initial resistance, it probably takes a move through the $1.3220 area squeeze the late shorts.