Closed Mario Draghi gives market hint of ECB stimulus in September – as it happened

ECB_master

A live blog from FT.com

Turbulence expected

Traders are standing by for volatility in the common currency.

A measure of euro/dollar volatility expectations has risen to its highest level in more than a year ahead of the meeting.

Implied volatility measures demand for options to hedge against big currency swings, with a higher percentage reflecting greater expectations of currency movements over a given period.

Euro-dollar overnight implied volatility rose to above 14 on Thursday, its highest reading since June 2018 according to Bloomberg data.

Picture credit: Bloomberg

Markets trained on Draghi

Market expectations for ECB action could hardly be running higher. Bond yields across the eurozone have hit all-time lows in recent weeks as investors bet the central bank is set to cut interest rates and reignite its bond-buying quantitative easing programme only seven months after it ended.

On the face of it, there’s plenty of room for disappointment. Markets have been pricing in a roughly 50 per cent chance of a deposit rate cut from minus 0.4 percent to minus 0.5 per cent today – but most economists expect the ECB to wait until September. Assuming Mario Draghi holds fire today, his forward guidance will be crucial.

At the bare minimum, markets are expecting the ECB president to add the words “or lower” to his forecast for rates to stay at their current level until next summer. Some sort of firm hint that the governing council is actively preparing for more QE would also go down well. If we get none of that, expect a market tantrum, with bonds selling off sharply and the euro surging.

Brace, brace

Welcome to the FT’s live blog of a key European Central Bank meeting. Investor expectations are high – so get ready for some potential fireworks.

After you’ve gotten some popcorn, make sure to check out Claire Jones’ excellent preview. We’ve put some other opening thoughts below.

Statement in full

Statement is hot off the presses

At today’s meeting the Governing Council of the European Central Bank (ECB) decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council expects the key ECB interest rates to remain at their present or lower levels at least through the first half of 2020, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to its aim over the medium term.

The Governing Council intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the asset purchase programme for an extended period of time past the date when it starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.

The Governing Council also underlined the need for a highly accommodative stance of monetary policy for a prolonged period of time, as inflation rates, both realised and projected, have been persistently below levels that are in line with its aim. Accordingly, if the medium-term inflation outlook continues to fall short of its aim, the Governing Council is determined to act, in line with its commitment to symmetry in the inflation aim. It therefore stands ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner.

In this context, the Governing Council has tasked the relevant Eurosystem Committees with examining options, including ways to reinforce its forward guidance on policy rates, mitigating measures, such as the design of a tiered system for reserve remuneration, and options for the size and composition of potential new net asset purchases.

The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:30 CET today.

Big stimulus hint

The ECB left its benchmark rates unchanged on Thursday, but hinted at future action.

Investors have been closely watching for the central bank’s reaction to slowing eurozone growth, and ECB president Mario Draghi has indicated in recent weeks that the central bank could revive its €2.6tn quantitative easing programme in the coming months.

Eyes will shortly switch to president Mr Draghi’s news conference, due at 13.30 London time.

Sunlit uplands for investors

It looks like there’s enough in the statement to keep investors happy, for now. The expected guidance that rates could go lower is in there. More importantly, the governing council has “tasked the relevant Eurosystem Committees with examining options.” In central bank speak, that sounds like the ECB already making preparations for more QE, rather than waiting to see how the economy develops between now and September.

Euro shrugs

The euro has largely shrugged off that statement from the ECB. It is slightly down on the day, and was 0.2 per cent lower against the US dollar a few moments ago.

Investors snap up European governments’ debt

Government bonds have extended their recent rally. Germany’s 10-year yield is down a touch to minus 0.408 per cent. That’s below the ECB’s current deposit rate – a pretty clear sign the market is fully pricing in rate cuts at the next meeting. Italian 10-year yields have fallen to 1.405 per cent.

Action time

Pantheon Macroeconomics economist Claus Vistesen says the statement leaves the ECB committed to action.

And we have lift-off?

Hetal Mehta, senior European economist at Legal & General Investment Management, says “easing is coming, and soon”.

The ECB might have disappointed those looking for an immediate rate cut after the spate of weak sentiment data, but their statement of intent is clear: easing is coming, and soon. A tiered deposit rate, more QE and rate cuts are all options on the menu; Draghi and the rest of the Governing Council are trying to show that they have not run out of tools. Shoring up their credibility is clearly a key priority and they cannot deny any longer that inflation expectations are deanchored.

‘Prepare for stimulus’

Jacqui Douglas, chief European macro strategist at TD Securities, says the ECB is “clearly preparing for a package of policy easing in September”.

We look for a dovish press conference now, as the ECB is clearly concerned about the trajectory for inflation. We think that the reference to “symmetry” in the inflation aim is key, as that signals more comfort than we’ve seen in the past with a temporary overshoot in inflation.

Market expectations for a European Central Bank rate cut in September have risen to 84 per cent, up 14 percentage points from Wednesday, based on trade in overnight index swaps.

The move reinforces the view that policymakers are priming investors for new easing measures.

All change

In case you missed it earlier, the ECB’s governing council has also given its backing to Christine Lagarde to take over from Mario Draghi as the bank’s president.

“The governing council has no objection to the proposed candidate, Christine Lagarde, who is a person of recognised standing and professional experience in monetary or banking matters,” the central bank said.

Image source: Reuters

Southern European bonds cheer up

As government bonds rally, Italy, Spain and Portugal are leading the way. The gap between those countries’ yields and Germany’s continues to narrow – another sign that the market is gearing up for more ECB bond buying alongside rate cuts.

Euro slips

The euro hit a fresh low for 2019 after the announcement, down 0.3 per cent for the day to $1.1105, a level last touched in May 2017, markets reporter Michael Hunter says.

New tie?

ECB chief Mario Draghi has just taken his chair. For those keeping score at home, he’s sporting a red-ish tie (we think).

Glass half empty

Mr Draghi warned “the risks in the euro area growth outlook remain tilted to the downside”.

The prolonged presence of uncertainties related to geopolitical factors, the rising threat of protection and vulnerabilities in emerging markets is dampening economic sentiment, notably in the manufacturing sector.

Euro finds support

The euro found support as Mr Draghi was speaking to fight its way back to the flatline for the session, bouncing up off its new 2019 lows, markets reporter Michael Hunter says.

As the press conference continued, the shared currency rose overall, by 0.1 per cent for the day, to $1.1148.

Here are the key numbers for the euro’s somewhat volatile day — it started at $1.1140, fell as low as $1.1100, while reaching as high as $1.1161

No bounce-back likely

Mr Draghi said the eurozone economy is now unlikely to bounce back in the second half of the year:

Incoming signs show weakness of growth in the third quarter as well, so this rebound becomes less likely now.

Worse and worse

How worried is Mario Draghi about the outlook? This nugget from his answer to the first of the questions from the journalists in the room is quite revealing, writes capital markets editor Katie Martin.

He said:

Generally speaking, you have resilience in the services sector and in the construction sector. At the same time, this outlook is getting worse and worse. And it’s getting worse and worse in manufacturing especially. And it’s getting worse and worse in those countries where manufacturing is very important. But because of value chains, this propagates all over the eurozone. And this must be taken into account.

It’s not often you see so many uses of the word ‘worse’ in just a few sentences from a central banker. Clearly, the trajectory of the economic data (see today’s nasty German manufacturing report for details) is bothering him.

U-turn for German stocks

Germany’s main stock barometer initially bounced on what was viewed as a dovish-leaning policy statement from the ECB. But it’s since headed the other way as Mario Draghi answers questions from journalists.

Investors sell haven Swiss franc

The euro’s move against the Swiss franc might prove key to its near-term fortunes as investors refine their impressions of Mr Draghi’s words. As the FT’s currencies correspondent Eva Szalay notes, the shared currency strengthened 0.4 per cent against its Alpine neighbour as investors abandoned their haven bets in the franc following indications for further easing from Mr Draghi.

Draghi coy on asset purchase plans

So what will move up in price? Mr Draghi said there was no discussion of the types of assets the central bank could buy if it restarts its quantitative easing programme. Assets the ECB hasn’t bought before include debt issued by banks and equities, although it has bought debt issued by companies.

The central bank halted its bond-buying last December amid mounting evidence of an improvement in the eurozone economy.

Markets change direction

European markets have changed course as investors assess what comments from Mario Draghi suggest about the prospect of new stimulus measures from the ECB.

The euro has made perhaps the sharpest U-turn: it has bounced 0.7 per cent from its trough in just 32 minutes, according to Refinitiv data. Europe’s Stoxx 600 index, meanwhile, has given up its gains, with German shares in particular pulling back.

In his press conference, Mr Draghi once again emphasised how fiscal policymakers needed to act given the deteriorating economic outlook. He noted that there was only so much monetary policymakers can do to stimulate the bloc’s economy.

To that point, Gareth Isaac of Invesco notes:

Despite the extensive package of measures the ECB are unlikely to get the response that they hope for. The current weakness in manufacturing is down to trade tensions and rate cuts will have little impact on trade.Monetary policy is not the issue, Mr Draghi has promised to do all he can again, unfortunately it’s unlikely to be enough this time.

The changing of Lagarde

Mario Draghi’s conferences have become a regular feature for investors, but he won’t be doing this much longer. Indeed, he had a word of support for his successor Christine Lagarde (pictured), the former managing director of the IMF, who takes over in the autumn.

He said:

I think she will be an outstanding president of the ECB. I am saying this with the knowledge that comes from having known her for longer than she and I may like to remember.

He added that her experience of collegiate decision making with staff and economists at the IMF will mean she is well-prepared for the job. “It isn’t much different from what we do at the ECB,” he said.

While Mr Draghi continues to take questions, here are some further thoughts from market analysts.

“The exact size and timing of the next easing round is uncertain, but the September meeting seems to provide a good occasion, as the ECB will produce a new set of economic forecasts taking stock of new developments,” said Silvia Dall’Angelo, senior economist at Hermes Investment Management. “In addition, that is the last meeting for Draghi. Despite all the institutional constraints and shortcomings, it looks like he will not leave the stage without trying a memorable final act.

Oliver Blackbourn, portfolio manager at Janus Henderson Investors, said: “There is also broad anticipation of renewed quantitative easing, though the make-up of any purchases is less certain. With liquidity disappearing in the higher-rated euro-denominated sovereign bonds, buying more government debt is becoming trickier, both in terms of the politics and practicalities.”

Crypto concerns

Mr Draghi had some strong words for Libra, Facebook’s planned cryptocurrency.

He said that a range of concerns have emerged following discussions with G7 members. They included: cyber security, money laundering, terrorism financing, funding crime, privacy, tax evasion and financial stability.

He said:

All these concerns are substantial, and they need to be addressed before the regulators can look at this with genuine positive interest.

Draghi ‘not available’ for top IMF job

Mario Draghi threw cold water on speculation that he might be in the running to take over as the head of the IMF.

When asked by a reporter if he was interested in the job, he responded that he was “not available”.

Earlier on Thursday, the ECB’s governing council backed the appointment of Christine Lagarde, the institution’s former director, for the top ECB job.

“Christine Lagarde will be an outstanding president of the ECB,” said Mr Draghi.

Until September…

In typical style, Mario Draghi has promised markets just enough to keep them happy. Investors will wait for September’s meeting for a package including rate cuts and a revival of the ECB’s bond buying programme.