Nowotny on Draghi and negative rates: “purple monkey dishwasher”

From Reuters:

LONDON, May 3 (Reuters) 13.04 – The euro pared gains while German Bund futures edged up on Friday after European Central Bank policymaker Ewald Nowotny said the central bank was open-minded about taking deposit rates into negative territory.
Nowotny said he was “astonished” by the market’s reaction to his comments earlier in the day, when he said negative deposit rates were not relevant in the near term.

That’s all a rather odd follow-up to Draghi’s comment during Thursday’s ECB press conference that he had an “open mind” about cutting the deposit rate into negative territory.

The euro dropped on Draghi’s pronouncement recovered on Nowotny’s suggestion that “”markets have over-interpreted the discussion yesterday” and sagged a bit when he said he hadn’t said what we thought he said about Draghi not having said what we thought he said… or something.

Anyway, here’s Citi’s Steven Englander to put this mess into a first bit of perspective (our emphasis):

There is a debate as to whether the ECB is deliberately using hints at further rate cuts and a negative depo rate as tools to lower the value of the euro and provide stimulus via the export channel. The room for EUR weakness has been enhanced by the lower than expected inflation, and the discussion of negative interest rates is expected by most to generate a weak EUR. Given that the peripheral economies are not as export oriented as the northern economies, and that global growth is slowing, not accelerating, a weaker euro is likely to give marginal growth support, but be far from a game changer. The degree to which the euro would have to fall to generate an export response that moves the needle in terms of overall euro zone growth, would likely be so large that the headline inflation concerns could re-emerge. Hence, it is more likely that the ECB is encouraging moderate euro weakness on the view that it will do no harm, and perhaps a little good, but not on the view that the weakness can substitute for domestic demand.
There is an interesting minority view that negative deposit rates will lead to a large rally in euro area bond and equity markets, particularly in the periphery, and support the euro. This would run off the view that the attractiveness of the euro zone asset market rally, particularly in peripherals would offset impact of lower short term rates. Our EURUSD equation based on yesterday’s moves in asset markets and short term rate differentials between the US and Germany, actually points to EUR weakness rather than strength, based on the EUR’s behavior since August 2012. As we have seen elsewhere, this sort of liquidity injection may make a case for hedged buying of assets but not unhedged.

Nomura’s Jens Nordvig to put into a second:

But the irony is that the ECB news may be of secondary importance to other European news.
Over the last few weeks, we have had a very interesting constellation of news on the fiscal front and market dynamics. The news we have received suggests that a more balanced approach to fiscal consolidation is potentially in the making.
New Italian PM Letta has been aggressively lobbying for a more growth focused policy mix, and has proposed to abolish taxes worth EUR6bn. The quote that was all over the press was: “Europe‟s policy of austerity is no longer sufficient.”
European Commission President Barosso made comments that the austerity push has also reached its limits. The WSJ quoted it this way: “While I think this policy is fundamentally right, I think it has reached its limits,” Mr. Barroso said. “A policy to be successful not only has to be properly designed, it has to have the minimum of political and social support.”
German FM Schauble suggested openness to postponing the French 3% of GDP deficit target: ” “one can be flexible with the question in which year which deficit is possible”, he said to German radio.
Spain has indicated its intent to push its 3% of GDP deficit target to 2016, compared to the previous goal of 2014.
The EC Commissioner for Economic and Monetary Affairs Rehn said today that he sees room to extend deficit targets by two years for both France and Spain, and that there would be flexibility for other countries too.

And finally, Friday’s US jobs number to put into a third: