Download ECB Fumbles the Stimulus-Baton Hand

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December 4, 2015, 4:04 AM ET
ECB Fumbles the Stimulus-Baton Hand-off,
Mussing Up Fed’s Plans
ByPaul Vigna
European Central Bank president Mario Draghi
ralph orlowski/Reuters
Mario Draghi didn’t deliver on his bazooka-sized promise on Thursday, and that sent the risk-on
crowd into a tailspin. Don’t look now, but that turn of events may greatly complicate the Fed’s
plans to raise interest rates later this month.
The market had geared itself up for something really big out of the ECB and Mr. Draghi, and the
euro selloff – it skyrocketed more than 3% against the dollar – was mainly an unwinding of those
big bets. European and U.S. stocks took it on the chin, too. The STOXX Europe 600 lost more
than 3%, as did the CAC-40. Stocks fell in Italy, Spain, Ireland, and Germany, though they rose
in the U.K. In the U.S., the Dow and S&P 500 both lost about 1.5%, and both fell back into the
red for the year.
In the short term, the ECB made life a bit easier for the Federal Reserve and Chairwoman Janet
Yellen. A stronger euro equals a weaker dollar (the Dollar Index was down 1.9%). “With respect
to the dollar, Mario gave Janet some breathing room in two weeks unintentionally,” said Lindsey
Group chief market analyst Peter Boockvar.
In the longer term, though, the ECB not meeting the market’s expectations may become a big
problem. There is a lot of chatter in the market that Mr. Draghi lost a battle with the ECB’s
hawks, primarily the Germans, and that’s why the stimulus package unveiled was
underwhelming. This idea was amplified by Jens Weidmann, the German central bank president
and outspoken hawk on the ECB’s Governing Council. Mr Weidmann spoke publicly on
Thursday in opposition to loosening monetary policy any further.
“We think the implication of today’s ECB communication is that further easing is unlikely unless
the inflation and growth outlook suffers unexpected downside shocks,” said UBS economist
Reinhard Cluse.
Meanwhile, Ms. Yellen may have more a fight on her hands with the Fed’s doves than expected.
During the Q&A of her speech on Wednesday, she noted that they may have to “tolerate some
dissent.” In recent days, two Fed governors have made dovish public statements. “The way she
talked about expecting dissent, especially at important turning points, suggests the doves may dig
in their heels and object when rates rise,” noted FTN Financial’s Chris Low.
The doves have this on their side: a weak economy. Economists polled by the WSJ expect
fourth-quarter GDP to come in at 2.7%, the weakest pace of growth since 2010. The Atlanta
Fed’s GDPNow tracker is even more pessimistic; it currently pegs fourth-quarter GDP at just
1.4%. Indeed, the economy may be Janet Yellen’s biggest obstacle, no matter how optimistic a
picture she painted this week.
There may be an even larger consideration as well. There’s been a theme running through the
market for months now, that the ECB was going to pick up the mantle from the Fed of the
world’s big stimulating central bank.”The ECB is about to take on the task and replace the Fed as
the world’s spigot,” Michael Oliver at Momentum Structural Analysis wrote early Thursday
morning, before the ECB released its statement. He wasn’t alone in that sentiment. A Bloomberg
story on the topic called this a “seminal shift” from the Fed to the ECB.
Only, it wasn’t so seminal. “The market wanted a tit-for-tat,” said Danielle DiMartino Booth,
who runs the consulting firm Money Strong and was previously an adviser to former Dallas Fed
President Richard Fisher. As long as the ECB delivered on its end, she said, the market would
swallow a Fed hike. But it didn’t get that, and now it’s “taking a hissy fit because they didn’t get
what they wanted.”
This is the situation Ms. Yellen now faces as she attempts to raise rates: dissent in her ranks, a
weakening economy, an ECB that can’t take over the easing-baton, and another possible taper
tantrum. “Janet Yellen is already experiencing an economic out-of-body experience,” Ms.
DiMartino Booth said.
The market is still betting on a rate hike in two week. The CME’s FedWatch page still has the
odds high at 79%. That may change quickly, though. A lot depends on how the markets respond
over the next few days, Ms. DiMartino Booth said. “If the market throws up over the next few
days, that’s a whole different story.”
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