Get your seats on the devaluation merry-go-round
Mario Draghi, President of the European Central Bank all but promised more quantitative easing and perhaps negative interest rates today, noting that the bank will reconsider monetary policy in December—a fact that is news to no one.Answering questions at the ECB press conference after the bank reported its decision to keep the main refinance rate at 0.5 percent he said, "There are downside risks to growth and inflation....We [the governing board] discussed negative rates and more stimulus measures....There were some on the board who wanted to act [on more stimulus] today."
The euro fell more than two figures against the dollar, currently 1.1122 at 2:00 pm EDT, in an overall range of 1.1351-1.1117, and nearly two figures versus the yen at 134.18, 2:02 EDT, in a range of 136.09-134.11.
The dollar had gained nearly one percent against the yen by early afternoon, trading at 120.67, at the top of the day's 119.60-120.77 range. The dollar index was 1.4 percent higher at 96.243 at the top of the 94.943-96.338 range.
The yield on the generic German 2 year Bund hit an all-time low of -0.316 percent. The 10 year Bund lost seven basis points to 0.496 percent, its lowest yield since early June. In the U.S. the yields on the 10 and 2 year generic Treasuries were also lower. The 10 year losing two basis points to 2.0122 percent and the 2 year falling three points to 0.5925 percent at 2:57 pm EDT.
Commodity prices sank on the stronger dollar and considerations of yet weaker European economic growth. The Bloomberg Commodity Index traded as low as 88.0316, its weakest since October 5th.
Equities understandably loved the prospect of quantitative easing in Europe. The Dow was 290 points higher at 3:12 pm to 17,460, having been up as much as 316 points from yesterdays close.
If Draghi’s stimulus will not be quite as effective for U.S. markets as it may be in Europe, some of the money will find its way here to boost equities and it does make a U.S rate hike less likely.
After the recent run of poor Japanese data, including declines in industrial production, exports, imports and inflation it is very probable that the Bank of Japan will announce more stimulus measures at its meeting on October 30th. The implications for the faltering Chinese economy and the yuan are serious, especially if the yen continues to depreciate. If it does expect a response from Beijing.
Inertia may, for a time, lead the Fed continue its rhetoric of trying to convince the markets that it is serious about raising rates. But the chance that global economic conditions or American inflation will have improved enough to permit a hike at the December FOMC meeting, it is only eight weeks away, is vanishingly small.
A rate increase would guarantee a substantially stronger dollar, exacerbating the very problems the FOMC cited as the reasons that prevented an increase in September-- weak U.S. inflation and financial and economic turmoil in emerging markets from a rising dollar and the prospect of higher rates in the States. A stronger dollar and falling commodity prices would add to the dis-inflationary pressures in the U.S., moving the central bank’s goal of 2% inflation further from reality.
Even if the Fed eschews its rhetoric, and the markets already accept that it is on hold, the ECB and BOJ are going dynamic. Expect a stronger dollar, weaker emerging markets and falling commodities into December.
The trends of the past year have been resuscitated.
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