In a decade of ECB watching, we haven’t seen many days like this one. Most ECB press conferences cause financial fireworks. A casual answer from Mario Draghi or Vitor Constancio can send equity indices flying or crush global bond markets. For traders, the hour long press conference can seem like an eternity. Usually the show ends around 9:30am New York time — today we got a surprise encore in the form of two anonymous leakers within the central bank itself.
They said that a broad based program of Quantitative Easing was in the works for the January 2015 meeting. Stock markets exploded immediately on the news, erasing earlier losses. Traders were right to be confused: only hours earlier the president of the ECB, Mario Draghi, had told the market explicitly not to expect QE in January.
ECB press conferences are broken into two parts. In the first, the president of the ECB reads off a prepared introductory statement. This is similar to the FOMC statements issued by the Fed after interest rate decisions. The statement is carefully choreographed in advance and usually contains unsurprising language that summarizes the bank’s current outlook. The real fun begins during the second part, the Q&A session. This is where reporters get to ask the ECB president questions and get an impromptu response. This is where unexpected announcements and mis-spoken sentences can send the market careening in all directions.
The first question asked during the most recent Q&A session was from Brian Blackstone of the Wall Street Journal, who asked “…you mentioned a couple of times early 2015 is a time when u would be reassessing monetary policies are you comfortable that u have enough information in 7 weeks when you meet again… whether or not you will be able to make this kind of decision, buying government bonds?”
To which Draghi replied:
“Early means early. It doesn’t mean January”
Markets were immediately disappointed, and during the press conference stock futures began a sell-off. After weeks of being positively correlated with stocks, bonds began to rally just as hard as stocks declined. It seemed the ECB was withholding the punch bowl, and the market was beginning to feel a hangover.
Three hours later, however, a headline streaked across the monitors of traders saying the opposite: QE would be forthcoming in January. Stock futures leapt and traders were left scratching their heads, wondering: “Who is really in charge at the ECB?”
It is hard not to find this suspicious. Granted, the ECB has never run a tight ship when it comes to news embargoes. It makes sense given the structure of the bank: many different national central banks form a mutual monetary system. There are 24 members of the ECB governing council representing 18 countries. There are lots of people privy to inside information, and thus more information gets leaked to the outside world.
That being said we have to analyze the content of the leak considering two scenarios:
- The leak is bullshit, or simply not true; maybe it gave someone the liquidity they needed to exit a big position, or it was just the media blowing something out of proportion.
- The leak is real, and there is a power struggle within the ECB
Neither path can be discounted at this point. Stock markets have given back most of their post leak gains as of pixeltime; it is clear some traders have their own doubts about the authenticity of the leak.
On the other hand, news came out of Reuters earlier today reporting that two members of the ECB governing council dissented at this latest meeting. They were Jens Weidman and Sabine Lautenschlager, two German members of the council. They opposed returning balance sheet targets to 2012 levels. They would certainly oppose QE in the January meeting. Some commentators, MKTSTK included, believe that the ECB has expanded its balance sheet less aggressively than other banks because of German fears of hyper-inflation and monetary experimentation.
If the leak is true, it means dovish members of the ECB are trying to force the hawk’s to begin QE. By leaking the rumor that QE is imminent in the January meeting, the governing council’s doves can embed that expectation in the collective mind of the market. If they can cause markets to rally because of an expected increase in future asset purchases, the doves can exploit the agency problem at the heart of central banking: no central banker wants to be perceived as the one who caused the crash. Hawks will thus be forced to endorse further QE so as to not cause a general panic.
The Vice President of the ECB, Vitor Constancio, ran Portugal’s central bank from 2000-2010, moving to the ECB just as the European crisis was erupting. He is a known dove, more concerned with stoking growth than fighting inflation. Could he be one of the leakers? Constancio proposed QE during the meeting. A curious comment during the Q&A session seems to implicate him: when asked to clarify the form of QE he had proposed, Constancio replied “I didn’t describe any decision that had been taken of course. I just expressed my views as is normal in our individual speeches.” Why would you say that when Draghi just communicated there was no decision on QE? Could be a problem of translation, but it just seems like an odd remark, given the subsequent leakage.
Only time will tell which scenario is correct. Keep a close eye on the correlation between stocks and bonds, as that usually gives away the presence of central bank intervention (or at least the expectation of it).
Summary of today’s market action: