QUESTION : Does an end to stimulus mean the start of tightening ? ANSWER : Er, Yes .... or No .....

ref :- "Draghi treads middle path in ending stimulus" , The Financial Times, International Section.

It should be a fairly straightforward question. Put more broadly, if you've been headed in one direction for a while but then stop .... does that automatically mean you've turned around and are heading back in the opposite direction ? Plainly, the obvious answer is "No" ..... but markets may well read it that way if they've become used your longtime direction of travel. Though they're not quite the same thing, much of this has got to do with the Hawkish / Doveish thing ..... and that revolves around expectations and perceptions.

For example, on Wednesday the Fed raised rates by 25 basis points in a move that was entirely expected. But the accompanying policy statement was pretty upbeat in its assessments and the "dot-plot" showed that for the first time a majority of FOMC members foresaw two more hikes in 2018, making a total of four for the year. That wasn't universally expected, and hence the Fed's words and actions were perceived as (mildly) hawkish. So far, so simple ....

It was the ECB's turn yesterday, and in a move that was equally well-signposted president Mario Draghi announced that the central bank's bond-purchasing programme (QE), currently running at a rate of €30bn per month, will finish at the end of 2018 after halving in size for the final quarter. In a literal sense that's an "end to stimulus" for sure, but on this occasion, the market didn't automatically equate that with a "start of tightening" and took the view that despite the announcement of taps being turned off, the package as a whole was doveish. Eurozone bond yields dropped and EUR / US$ has dropped from above $1.1800 to below $1.1600.

Even if we weren't quite sure whether we'd have to wait until next month's ECB meeting to hear the details of the withdrawal from QE, the guts of it were fully expected .... and therefore discounted. The difference between the reception given to Mr Draghi and that given to the Fed's Jay Powell lies in the accompanying statement rather than the headline policy decision .... as it usually does. Mr Draghi made it very clear that the ECB stood ready to reinstate the monetary measures hitherto termed "extraordinary" (QE) should the need arise in the future. Moreover, he told us that rather than being an extraordinary measure, QE was now part of the ECB's regular toolbox.

The statement may have been unanimously endorsed by all members, but we can assume that this particular part of it was privately very difficult for a few of the more hawkish types to accept. The likes of Bundesbank chief Jens Weidmann and Klaas Knot of the Netherlands central bank, both potential successors to Mr Draghi next year, have always been opposed to the strategy. There is a view that the next generation at the top of the ECB will be more hawkish than the current regime, and it may be that Mr Draghi's words serve to counterbalance such thinking.

But the most doveish of Mr Draghi's remarks concerned interest rates and an eventual reduction in the ECB's balance sheet :

Bear in mind that with a refinancing rate of 0.0% and a deposit rate of -0.4%, many would have it that the ECB is still adding stimulus -- that would depend on your definition. But what is much clearer is that it's almost impossible to say that the ECB is actually tightening until it starts to raise these rates that have been negative for so long. Either that, or it starts to reduce the balance sheet by ceasing to reinvest the proceeds of maturing debt acquired through QE back into further purchases in eurozone bond markets. On rates, Mr Draghi said that they will remain where they are until at least September 2019 (many were thinking June), and on reducing the balance sheet he revealed that the ECB had not begun to discuss it. As we say .... doveish.

Nobody really should be too surprised at Mr Draghi's softly, sofly approach ..... caution has always been his watchword , and don't forget that the ECB (under previous leadership) have some very poor form when it comes to tightening too early. There are also reasons why one could take that cautious view. Inflation may be heading in the right direction (back towards the 2% target) but other data is unconvincing and after the strong recovery of 2017 it is yet unproven that recent softness is just a "blip". Then there are geopolitical concerns : the growing trade spate and its potential to disrupt global growth ; the danger posed by a populist Italian government to the eurozone (they are immediately putting a spoke in the wheel of the EU/Canada trade deal).

So, to go back to the original question : it IS an end to one form of stimulus, sure ..... but it's hardly the start of genuine tightening yet and if the ECB was intending to sound more hawkish, then their hearts were not really in it. But the truth is that Mr Draghi is a very adept operator, and we can be pretty sure that he came across exactly as he'd intended to.

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