Mario Draghi Brings Europe No Sunshine

(Bloomberg Opinion) -- In the midst of a record heatwave, Europe was looking for a burst of sunshine from Frankfurt. Instead, Mario Draghi offered a small ray of light and more than a few clouds. The performance of the euro says it all. .Though the forecast was for no change in policy today, investors had recently been building up expectations that an interest-rate cut would result from Thursday’s Governing Council meeting. Certainly the deteriorating economic data justified further stimulus. Policy makers’ forecasts for a pickup in activity in the second half, which served as a justification for ending quantitative easing, looks like another mistake..What was wanted was a new injection of stimulus, right here, right now. Instead, we got a discussion to have another discussion in September, and Draghi pulling his punches. We were told that significant monetary stimulus was needed, and he couldn’t have been more clear that policy makers were all deeply dissatisfied with the outlook for inflation. If the economy needs help, why not give it right away?.All we know about future stimulus is that any rate cut will come with tiering to soften the blow for banks, that there will be some form of new asset purchases and that within this, no instrument has as yet been excluded. That last point is a recipe for wild speculation over the summer..And, by emphasizing that the risk of recession is low, Draghi undercut the force of his stimulus message. He also took other opportunities to muddy the waters. How do you go from saying that the outlook is “worse and worse” to saying that it’s difficult to be gloomy?.The key issue is that all of these remarks are coming ahead of next week's Federal Reserve meeting. The FOMC is widely expected to lower the Fed Funds target by 25 basis points. Signalling is not as effective as acting, and there is no doubting the Fed’s intent. .If Draghi wanted a weaker euro (which he surely does, despite never being drawn on it), this is not the way to do it. Despite being theoretically very dovish, his deliberate avoidance of questions on how or what the stimulus would look like left European bonds and the currency voting with their feet – Italian 10-year yields rose 10 basis points, and the euro is on track to end the day higher. The ECB wanted to buy some time, but the markets are reluctant to give it to them..It wasn’t a complete disaster. The common currency is still down on the week. .But this was the ECB’s one chance to start down a weakening path before the Fed decision. The euro is at risk of rising as the Fed cuts. That’s a surefire way of raising the risk of recession in Europe. .To contact the editor responsible for this story: Jennifer Ryan at jryan13@bloomberg.net.This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners..Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London..©2019 Bloomberg L.P.

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Mario Draghi Brings Europe No Sunshine

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