Unlike December 3 of last year, when there so much hope just ahead of the ECB's statement and Mario Draghi's press conference, which was all soundly crushed when the European central bank disappointed everyone leading to the biggest surge in the EUR since the announcement of QE1, this time few if anyone harbor any hopes about an upside surprise from not so super Mario.
To be sure, there is little in terms of expectations when reading DB's morning note today, where we find that economists "expect neither a change in policy nor a clear signal of further easing." DB does think that the Council will highlight its capacity to act, the ‘open-ended’ nature of its policies and the flexibility around the asset purchase programme. It concludes that "the ECB will be reactive in addressing the risks to its inflation mandate and will wait for more visibility on the three key fronts."
In other words, nothing, which of course may be just the "reverse psychology" moment Draghi needs to actually surprise markets: if his massive build up was so disappointing last month, why not do the reverse today?
But perhaps an even more important question for Draghi is not how he will manipulate markets higher, but how he will explain the relentless hockeystick in ECB inflation expectations which are based on $52 oil in 2016... or double the current price. One thing is certain: European inflation expectations are crashing with every passing day.
Another preview of the ECB comes from Fasanara Capital which writes the following:
ECB rhetoric likely to focus on collapsing inflation expectations (pictured below), now close to levels where QE1 ECB got announced in Jan 2015. With Oil lower than expected by the ECB for 2016, and oil forward un-anchoring and moving below 50$ (chart below), an higher inflation for the year due to base effects is also harder to see. Rhetoric can include anticipation of deeply negative interest rates and upsized QE, for future meetings.
Little expectations seems to be built into the ECB meeting, so rhetoric can somehow manage to kick-off a relief rally.
Purely tactically, after ECB press conf, we may look at fading such rally, potentially depending on entry points, via a combination of:
- Short DAX or FTSEMib
- Short BTPs, hedged
- Long EURJPY
If Saudis de-pegged, which looks like a real possibility now, oil could take a decisive leg down, and trigger turmoil, however short lived that may be. Today, Oil is weak, but not to a point where it may spoil the ECB moves.
Chart: Eur 5y5y Inflation Forwards
Chart: Brent Crude Spot, Brent Crude 2020 Forwards