As we may have said before, generally speaking central bankers do not belong to the subsection of civil servants that elicits the most public sympathy. No doubt the fact that the pervasive hangover from the financial crisis that still taints the banking sector in the court of public opinion has a good deal to do with it. It's is a shame, really ..... on the whole, and whether you always agree with all their actions or not, these are fairly decent people doing a difficult and highly pressurised job.
To say that we're feeling hugely sympathetic towards Mario Draghi might be overstating it a bit, but we can certainly understand any frustration he might be feeling at the market reaction to his post-ECB meeting statement. No doubt still a little shocked by the sharp rise in Eurozone bond yields and the appreciation of the Euro that were the result of his comments in late June, Mr Draghi tried to disavow the market of the impression that both he, and ECB policy, had taken a hawkish turn.
Contrary to some expectations, Mr Draghi reasserted that he would keep a commitment to increase the pace of central bank bond buying should the Eurozone's recovery, still a fragile beast, show signs of faltering. He certainly did not give the impression of a man desperate to get the process of reining back the QE bond purchasing (tapering, in modern market parlance) under way -- an ECB decision on the subject could now wait until October, with its implementation unlikely to start before some time well into 2018.
All pretty dovish, on the face of it .... though the market plainly wasn't having any of it. Since June 26th, it has plainly convinced itself of the ECB's new-found hawkishness and Mr Draghi would have had to come out with something a lot more aggressively dovish (if that's not a contradiction in terms) to change anyone's mind. The Euro , the strength of which is surely going to become an issue for the ECB, jumped again to near 2yr highs against the dollar -- which of course is not the reaction one would normally expect after outwardly dovish comments from the boss of the ECB.
Overshadowing all central bankers, and their wariness in communicating to markets, is of course the 2013 Taper Tantrum. With the wisdom of hindsight, everybody now knows that then Fed Chairman Ben Bernanke was more than a bit naive when he rather bluntly (by modern standards) let it be known that the Fed might soon start to slow (or taper) their own QE programme. The scars from the resulting sell-off are still raw, particularly for central banks. Today's market seems to be of the opinion that Mr Draghi's soothing words are an attempt to achieve the oh-so-delicate balance of gradually unwinding the stimulus programme without provoking a sudden market meltdown and panic among investors who have become used to (reliant upon ?) cheap money.
Two thoughts occur :
Firstly, this game of nuance and semantics must be a nightmare for central banks ...... although in large part it's one of their making. Those who oversee markets HATE the kind of massive overreactions and market distortions brought on by surprises, and they're never more violent than when it's a central bank that does the surprising. Consequently, a policy of communicating the central bank's thinking is the modus operandi. Guidance, and the avoidance of shocks, is on balance a far preferable alternative. But it does mean that every statement is analysed to death. A single word, or the omission of a word, can have huge significance to the market, even if it wasn't intended to. Investors must beware of reading things into statements that aren't there ...... or worse, screwing bland and non-committal statements to suit their own book.
Secondly, you might wonder just why everyone is so panicky. QE and ultra-low rates were devised to stimulate growth and stave off deflation, weren't they ?. Surely, as the policies begin to work it is only logical that these policies should, ever so gradually, be withdrawn -- not only logical, but healthy. Just exactly who are these seasoned traders and investors likely to be thrown into a blind panic by the natural and broadly predictable course of things ? Good questions, and all we can say in response is :
1. For short-term traders, timing is everything
2. Whether a natural end is predictable or not, years of cheap money has hugely inflated asset valuations (and levels of debt)
3. Markets have always had more than their fair share of prospective "headless chickens".
Don't expect markets to get any less fixated about central bank pronouncements anytime soon ...... and don't expect them to take everything at face value, either.