Draghi delivers deft discourse - Westpac
Tim Riddell, Research Analyst at Westpac suggests that Draghi has not left markets disappointed as he managed to avoid pouring fuel on to the market’s appetite for swift gratification.
Key Quotes
“Markets were keenly awaiting the ECB’s Press conference in the hope of gaining affirmation of the moves that have developed since Draghi spoke at the ECB’s conference in Sintra. Although Draghi has not left them disappointed, he managed to avoid pouring fuel on to the market’s appetite for swift gratification.”
“The ECB unanimously left policy unchanged, as universally expected, with wording a cut and paste, of course taking out reference to being in Tallinn, from the 8th June meeting.”
“The Press conference was always going to be the arena for genuine information, especially during Q&A. Although Draghi read from the normal script, he underscored the ECB’s shift in bias as the region’s expansion had “strengthened and broadened”, the underlying tone was that reflation has replaced deflation and that a change in guidance was likely “in the Fall”. In order to balance this, he also restated that “a very substantial degree of monetary accommodation is still needed” due to the subdued levels of underlying inflation.”
“Draghi pushed aside direct questions on market moves but did press the point that further tightening of financial conditions(through higher yields and EUR) would hinder the ECB in meeting their goals: a not particularly veiled means of stating that excessive market moves would be unwelcome.”
“The repeated reference to potential guidance change being discussed in “the Fall” increased the sense that though the ECB’s September meeting, when staff members will update their forecasts and projections, is live, 4Q may be favoured.”
“Market response
Markets are now comfortable with the moves that have been developed since Sintra (26th-28th June). There was little in Draghi’s comments to trigger any unwinds. Even though there was a veiled warning that further moves should not be so aggressive as to “hinder” the ECB’s path towards policy withdrawal, the market is likely to focus upon the positive undertone for the Eurozone against softer growth potential in US and continued highly accommodative policy elsewhere (such as UK, Japan and Switzerland).
Consequently, EUR gains have remained intact and, unless they accelerate, may continue if driven by factors outside of EU. Yields may need to await the next ECB meeting to gain another boost higher whilst US yields appear to be consolidating lower. Further widening of spreads would give succour to EUR strength.”