Seeking Alpha

Poor Draghi

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Includes: ADRU, DBEU, DBEZ, DEZU, EEA, EPV, EURL, EZU, FEP, FEUZ, FEZ, FIEE, FXE, GSEU, HEDJ, HEZU, HFXE, IEUR, IEV, PTEU, RFEU, SPEU, UPV, VGK
by: Michael A. Gayed, CFA
Summary

Seven years have passed since the famous “whatever it takes” speech held by Draghi in London.

Fast-forward to current times, and on September 12, 2019, the ECB faces another crisis.

For the next few days, financial media will spend a lot of time debating if the ECB will ease the monetary policy.

Within our mandate, the ECB is ready to do whatever it takes for the euro. Believe me, it will be enough. – Mario Draghi

Seven years have passed since the famous “whatever it takes” speech held by Draghi in London. The Euro (FXE) and the Eurozone were in a death spiral. As it turned out, it was enough to restore confidence in the ECB’s ability to handle a crisis.

Fast-forward to current times, and on September 12, 2019, the ECB faces another crisis. Forced to fight low growth, relatively high unemployment, a change of President and stubbornly low inflation expectations, the ECB is on course to ease monetary policy. Again.

On the bright side, there is recent evidence that domestic demand is doing fine. Retail sales (XRT) sit above trend, and the PMI Services print exceeded expectations. Even real disposable income rose at the strongest pace since the second quarter of 2016, stimulating growth and private consumption.

The bad part is that all these seven years, the United States outperformed other economies. As mentioned in a previous Lead-Lag Report, The U.S. Q3 GDP estimate for 2019 was revised higher after the strong retail sales report. Consumers are the largest driver of the U.S. economy (70%).

The Fed took advantage of the U.S growth and hiked the rates. Not only that it moved them above 2%, but it also managed to shrink the balance sheet a bit. The ECB didn’t have that luxury. It ran a QE program way beyond the Fed stopped its four rounds, but the GDP kept falling.

A quick look at where the interest rates stay is enough to understand the dramatism of the upcoming ECB meeting. Effective from March 2016, the marginal lending facility is set to 0.25%, the fixed refi rate at 0% and the deposit facility at an incredible -0.4%.

Moreover, July 2019 inflation sits at 1%, well below the 2% ECB target. Furthermore, inflation expectations fall like a rock, way below the desired level.

For the next few days, financial media will spend a lot of time debating if the ECB will ease the monetary policy. As it turns out, it seems to have no other choice, Draghi leaving the Presidency known as the first ECB President that didn’t hike rates once.

Let that sink in when comparing the United States' economy with Eurozone's!

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