Recap 2014-11-06


Masterful ECB conference by Draghi. Uncertainty was very high following the leaks earlier this week, with some fears that his leadership will be threatened. In fact, periphery debt has been selling off since rumors of the dissonance surfaced. But Draghi instead got unanimous consent from the governing council for an explicit balance sheet target. In addition, Draghi said a number of things that further confirms that the ECB will be increasingly targeting the balance sheet going forward. These items include:

  • Draghi explicitly listed two prerequisites for further balance sheet expansion – 1) the current purchase programmes are not enough to reach the balance sheet expansion target; 2) further worsening of the inflation outlook.
  • He also indicated that the ECB staff and the relevant committees have been tasked with evaluating other non standard monetary policy options, should they be necessary.
  • “especially the Japanese experience is quite telling, with its consequence on various markets. Another point one would have to look at is the correlation that exists between the balance sheet size and inflation expectations.”
  • I would like to stress here the main message is that our balance sheet will keep expanding in the coming months and will continue expanding while the balance sheets of other central banks are bound to contract because of the different policy and economic cycles. That is the most important message that I can give as far as the future outlook is concerned (this means he is targeting FX)

However, despite the new emphasis on the balance sheet, it is widely expected that the current ABS / Covered Bond purchase program and the TLRTOs will not come close to increasing the ECB’s balance sheet by the ~1Trn needed to get back to the early 2012 levels Draghi noted was the target. The combination of the new emphasis on balance sheet size and the fact that the ECB is likely to miss its target suggest that the ECB is seriously looking at QE, or at least more seriously than they ever have before. Indeed, in my reading of various broker reports today, it appears that ECB QE is becoming more of a consensus view, with expectations centered around the first half of 2015.

It should be noted, however, that the ECB balance sheet expansion thus far is NOT the same as Fed’s or BoJ’s. More specifically, it is not interpreted in the same matter. This is because both the Fed as well as the BoJ’s balance sheets are expected to be maintained over a long period of time – with a fuzzy expectation of a wind down at some point in the future. Another way to interpret that is that it could be maintained forever. The ECB’s balance sheet, on the other hand, is currently composed predominantly of bank financing that is explicitly only 2 years long, with an option to be extended. In other words, not forever. That is a major, major difference with respect to the impact on market psychology, at least with respect to the pricing of long dated assets like periphery bonds or equities. Despite Draghi’s noting that the ECB balance sheet will be growing even as the Fed’s does not, it is likely that it is an apples to pear comparison. Arguably, only the securities on the ECB balance sheet should count for that comparison.


  • ECB kept policy unchanged as exp
  • BoE kept policy unchanged as exp
  • US Jobless Claims declined to 278k vs 285k exp and 287k prev
  • Unit Labor Costs rose 0.3% vs 0.5% exp. However the prior print was revised to -0.5% vs -0.1% prev
  • AU Employment improved to 24.1k vs 20k exp, driven by full time employment. The Unemployment Rate rose to 6.2% as exp vs 6.1% prev, as the participation rate rose to 64.6% vs 64.5% prev
  • In a poll published on Monday by the Tokyo Broadcasting System, a national television network, nine in 10 respondents said they had no “real feeling” that the government initiatives were improving living standards. Instead of the balanced rise in prices and wages that Mr. Abe promised, pay has lagged, in effect making workers poorer.
  • Ukraine accused Russia of sending troops into rebel-held areas of the country as fighting in the east shook a fragile two-month-old truce.


  • Fri: German Trade Balance, US Employment, Canada Employment, Yellen Speaks
  • Mon: Australia Home Loans, China CPI, Trade Balance, Money Supply, Canada Housing Starts, Australia Business Confidence, House Prices
  • Tue: US Holiday, Japan Eco Watchers Survey, US NFIB Survey
  • Wed: UK Employment, BoE Inflation Report, UK RICS House Price Balance