Much musing — and some shell-shock in financial markets — on Friday over the ECB’s bold new direction, or as its Thursday statement asserts, its “strong vigilance”.
As FT Alphaville noted, the surprise suggestion on Thursday by ECB chief Jean-Claude Trichet of an April rate rise “went down a treat in the foreign exchange markets“, if not elsewhere.
Analysts in response were falling over themselves to forecast short-term rate hikes after Trichet’s remarks. But, as MarketBeat warned, “don’t be surprised if some doubts about ECB vigilance emerge in coming days and weeks”. It explains:
…while the markets have nearly universally proclaimed a rate hike coming soon, . There is the little matter of nasty problems along the periphery of the euro-zone that remains unresolved. And don’t forget that Bundesbank President Axel Weber recently quit his post because he didn’t think his hawkish views had any currency among his fellow ECB members. Hard to believe the ECB has changed its feathers that fast.
Indeed, “while most everyone focused on M. Trichet’s heavy use of le jawbone, there are still some countervailing dregs to sift through”. These include Trichet’s assertion that the ECB would maintain its unlimited refinancing operations for the next three months, not to mention his assurance — which didn’t appear to have convinced markets — that any rate increase would not necessarily signify the start of many increases.
The ECB is “drawing a line in the sand as it relates to exiting emergency measures brought on by the financial crisis”, noted the Wall Street Journal’s Heard on the Street column. But it also suggested a possible political overlay to the ECB’s tough words. For one thing, “the central bank is frustrated that various euro-zone reform proposals have gotten bogged down in the typical Eurocrat Chat”.
For anyone who really wants to get to the bottom of the ECB’s so-called “vigilance” and “monitoring”, meanwhile, TheSource brings us JPMorgan’s well-timed ECB ‘lexicon’.
Still, Trichet’s “Thursday shocker” has left many — including Hong Kong-based research house Gavekal – wondering whether the ECB president is “attempting to appease the hawks within the ECB’s halls”. Gavekal even wonders whether the Bundesbank has “already taken over” at the ECB and makes the following points:
* Economic data in ‘core Europe’ (i.e.: Germany, Benelux, France…) has lately been very strong. For example, German unemployment is at a post-reunification low; German January retail sales were up +1.4% MoM vs. expected +0.5%; Paris real estate is at an all-time high (and Paris now feels to us more expensive than London), EMU equities have bounced back very strongly, etc… In short, animal spirits in Europe (outside of the PIIGS) do not seem that subdued… And this most likely gives the ECB confidence in sounding more hawkish.
* The search is on for Mr. Trichet’s successor. With the ECB president heading for retirement next year, the various ECB directors are likely trying to position themselves for a promotion… and what better way to appear credible in the eyes of ex-bundesbankers then to sound hawkish?
*The ECB has been tightening by stealth for over a month now as European short rates (Euribor) have been drifting back in recent months from their crisis lows of around 0.3% towards the ECB’s target rate of 1%. Obviously, the fact that short rates are now hitting the ECB’s target must give the central bank confidence to start moving that target higher…
The ECB’s supposed newfound hawkishness might makes sense for various reasons, but it raises some interesting questions, in Gavekal’s view.
First, it notes, with the ECB following closely in the footsteps of the BoE, it leaves just three major central banks with “no apparent desire to normalise their interest rates”: the Fed, the Swiss National Bank and the Bank of Japan.
While the dollar is bearing the brunt of the Fed’s unwillingness to talk rate hikes, the Swiss franc and the yen are near all time highs against the dollar — how long can that last, and what exactly is the Fed waiting for in order to tighten policy?, it asks. The key question, in its view, is:
Since its inception, the ECB has typically been slow to cut rates (famously rising them in July 2008!) and slow to raise them. So is the fact that the ECB is now considering a tighter monetary policy before the Fed a sign that the ECB is making a mistake? Or a sign that the Fed is starting to really fall behind the curve?
A big question indeed. But perhaps the neatest — and possibly sharpest — take on ECB machinations comes from BofA’s FX strategist Athanasios Varnvakidis, relayed by BusinessInsider’s Joe Weisenthal. Varnvakidis gives us three scenarios that give cause for scepticism about Trichet’s comments:
The ECB is likely to wait for the dust to settle in the periphery, particularly if Portugal asks for official financing; Ireland insists on haircuts for senior bank debt holders; and the March Eurogroup meetings disappoint markets.
Despite statements to the contrary, the ECB cannot ignore a deterioration of the periphery crisis, because of contagion risks. It may also wait for the current Middle East turmoil to play out before aggressive tightening. Beyond that, he warns, if a hike exacerbated the sovereign debt crisis, “it could easily make the euro weaker”.
In the view of SocGen’s ‘permabear’ Albert Edwards, highlighted in Friday’s Telegraph, “all we need now to push the world back into the recession is an ECB rate rise.”
Club Med will face a double blow from credit tightening and a stronger euro, in Edwards’ view. “They are going to pull the rug away from under the feet of the eurozone. Do they want it to break apart?”
Surely, nothing could be further from the ever-vigilant Trichet’s mind.
Related links:
ECB feeds the funding addiction, for now – MoneySupply
Why debt investors are taking leave of their senses – FT Alphaville
European liquidity and Irish handcuffs - FT Alphaville
Times Topics: ECB – NYT