Draghi’s Gambit

My pal Peter Boockvar with a plain-English summation of what Draghi did today during the ECB’s policy meeting – and why The Street is not terribly surprised…

As should have been fully expected, Draghi is confirming that the ECB will start buying ABS in which details will be announced after the October meeting. They will also resume purchasing covered bonds which was not expected. The covered bond program was last seen from July ’09 to June ’10 where they bought 60b euros worth and again between November ’11 thru October ’12 where they purchased another 40b euros. A total euro figure for both programs was not given today but Reuters earlier today speculated it could be as much as 500b euros. This would also follow the beginning of the TLTRO program which could total 1T euros over the next year. Combining these moves with another round of interest rate cuts and Mario Draghi is certainly not being shy and the euro continues its downward path. Bottom line, the interest rate moves were a modest surprise as was the covered bond purchase program but the main crux of the ECB’s easing news today, that of ABS purchases, was widely expected. The ECB only modestly cut its ’14 and ’15 GDP forecasts by one tenth from the June meeting and did the same for inflation. Draghi also admitted that the main factor in lower inflation was a decline in energy prices as core inflation is near 1%, not zero. This fact points to the main goal of Draghi’s moves, weaken the euro and cross fingers that it will be the main transmission mechanism for a pickup in growth and inflation.

Source:

Peter Boockvar
Managing Director, Chief Market Analyst
The Lindsey Group LLC