ECB to add liquidity “for as long as it takes”

The single currency reacted oddly yesterday to the ECB’s decision to cut interest rates and add additional liquidity to stimulate the economy. Initially, it fell to a low of 1.0926 as traders reacted to a ten basis-point cut in rates and the restarting of quantitative easing with bond purchases of Eur 20 billion per month.

However, it quickly recovered when it became clear that the measures weren’t as dovish as the market had expected. With expectations of a twenty basis-point cut and Eur 30 billion+ of bond purchases, there was surprise and disappointment at the Central Bank’s actions.

After the initial fall, the euro climbed to a high of 1.1087, closing at 1.1063.

In his press conference following the announcement, Mario Draghi, the ECB President, gave a downbeat assessment of the Eurozone economy. He cut the forecast for inflation to 1.2% from 1.3% previously. The ECB believes that inflation will bottom out at 1% sometime next year.

The projection for Eurozone growth was also cut from 1.2% to 1.1% for the rest of this year with further reductions to subsequent year’s forecasts.

This was Draghi’s penultimate meeting of the ECB Council as he leaves his role after eight years in just eight weeks’ time. He will leave with a stinging and barely disguised rebuke to Germany having called upon the larger economies of the region to “loosen the purse strings.”

President Trump was quick to use the loosening of monetary policy to criticise the Federal Reserve (see below).
The only dovish surprise of the announcement that QE will remain in place until just before the ECB sees fit to raise short-term interest rates or inflation is close to the target of 2%. That could be a very long time coming.

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Parliamentary Suspension ruled unlawful

Boris Johnson continues to field criticism from all sides, as the most senior court in Scotland overturned a decision by a lower court last week that the suspension of Parliament was legal. The Government immediately announced that it will appeal the verdict and the “travelling circus” will move the High Court in London for a final decision next week.

Opposition leaders immediately accused Johnson of lying to the Queen about his reasons for asking her to prorogue Parliament and called for the immediate recall of MP’s.

Johnson, meanwhile, remains bullish about the prospect of a deal being agreed with Brussels at the EU summit which takes place in the middle of next month. He also remains adamant that the UK is leaving the EU on 31st October “come what may”.

With Party Conferences starting in the coming days, kicked off by the Liberal Democrats, tomorrow, followed by Labour on September 21st and the Conservatives a week later, the point about Parliament being recalled is moot since MPs will be engaged elsewhere until October 7th.

This is the first date on which Parliament could feasibly be recalled. Meaning that the suspension would be a week shorter than originally proposed.

The pound awaits further evidence on Brexit having traded in a narrow range yesterday between 1.2368 and 1.2283. It closed at 1.2333, six pips higher on the day.

Trump quick to call for the Fed to match the ECB

In a remarkable show of bluster over fact, U.S. President Donald Trump predictably tweeted immediately following the ECB meeting yesterday that the Federal Reserve is allowing other nations to “steal a march” by lowering interest rates and weakening their currencies.

There are three issues with Trump’s comments that illustrate a lack of a grasp of reality: First, the euro actually strengthened against the dollar following the ECB action, second, the U.S. economy is not anywhere close to being in as parlous a state as the Eurozone and finally, the latest economic data, producer prices, show that inflation “down the road”, may be starting to pick up.

The final point will draw the attention of FOMC members prior to their meeting next week with a few of the more hawkish among them pointing to the fact that any further rate cut may need to be quickly reversed if inflation does truly start to rise.

Prices at the factory gate rose from 1.7% in July to 1.8% in August while consumer prices also rose over the same period from 2.3% to 2.4%.

This data could easily create a more hawkish backdrop to next week’s FOMC meeting although should the Fed feel that following weaker than expected employment and activity data seen recently, the “insurance” of a further cut is necessary, their actions would be justifiable.

If the Fed does cut again next week, it is probable that the market will see that as being the end of cuts unless there is a more significant downturn in economic growth. President Trump is unlikely to get his wishes for a weaker dollar fulfilled since the problems on the other side of the Atlantic far outweigh domestic issues in the U.S.

Yesterday, the dollar index fell to a low of 98.19, closing at 98.37.