Some final thoughts on the imminent ECB announcement from Richard Breslow, former FX trader and fund manager who writes for Bloomberg
There are going to be two outcomes today stemming from the ECB meeting. We’ll learn what President Draghi has to say. And then what the market wants to hear. Not in terms of expectations, a la analyst previews, versus actual comments. But how portfolio managers choose to interpret his answers, no matter what he says. And it makes his task all the more tricky.
This isn’t about his wanting to avoid a short-term misunderstanding of his ultimate intentions. Nor his desire to placate, or indeed disappoint, traders, demanding he delivers to suit their last few positions of the year. Remember he had disdain, not remorse, for people who got the 3% solution horribly wrong this time last year.
Rather, and much more importantly, he needs to avoid a frenzy of shrieking analysts extrapolating the speed and extent of the retreat of global bond yields into infinity. And using the solely derivative inflation expectation measures to make the case.
His greatest risk is the inflation overshoot mill cranks into high gear if they don’t think he has delivered everything they want in their Christmas stocking.
Slowly steepening yield curves is one thing. Get me out of everything no matter if it blows out periphery yield spreads is quite another. Especially if it drives them to levels which will re-apply a boot to the neck of their slowly healing economies.
All major sovereign curves reacted to the U.K. referendum and yields plunged. How’d that work out for you? They bottomed, as if on cue and in tandem, over the summer. And have been rising ever since. Picking up pace since the U.S. election. Divergence, where art thou?
But therefore, so have inflation expectations. There’s only one problem. If it takes a leap of faith to place a higher discount rate on U.S. assets because of the U.S. election, it takes an even greater suspension of disbelief to apply this to Europe and beyond.
This week, we’ve heard central bankers line up to try to remind markets that economies and rate trajectories differ. It’s a difficult task in this hyper-correlated world. And so far hasn’t worked out so well.