Macro Wrap – Super Mario and the ECB

by Enis April 29, 2013 7:47 am • Commentary

Dan has a good outline of the data-packed week ahead.  It’s a heavy earnings and macro calendar as we turn the calendar from April to May.

On a macro basis, I’m most curious what Super Mario Draghi and the ECB announce on Thursday.  Traders are clearly expecting more action from the ECB this Thursday.  European equity markets moved from negative territory to positive territory on the whole last week, with many traders speculating that the ECB was finally going to get more aggressive at this week’s meeting after a long run of dismal economic indicators.  Just how dismal?  Check out this chart of the EuroStoxx 50 Index (black) vs. the Citigroup Economic Surprise Index for the Eurozone (red) over the last 4 years:

Screen Shot 2013-04-29 at 7.33.56 AM
Courtesy of Bloomberg

The economic data in the Eurozone has fallen off a cliff in the past month.  But the new theme for European traders is that bad economic news is good news for the market.  In other words, Super Mario to the rescue.

While the consensus is for a rate cut on Thursday from 0.75% to 0.5%, the real key will be whether the ECB announces aggressive new non-standard measures.  More specifically, since the Fed and the BoJ have the monetary spigot turned on full blast, many market players think the ECB will finally use the recent data downturn as its opportunity to get involved in the bond buying party.

Personally, I view Draghi’s recent statements as more nuanced.  I expect that the ECB will eventually join that party, but for now, it needs more time to gradually move expectations in that direction without upsetting too many Northerners.  The war of words last week on austerity among the Eurozone politicians might provide Draghi and the ECB with the necessary cover to offer an alternative method of help that does not throw prior reform plans by the wayside.  That’s what Draghi’s “do anything” comments did last July.  But I expect that this meeting will likely be more about the simple rate cut and some potential dovish intentions.  If conditions don’t improve, then the next ECB meeting would be more likely to result in the real ACTION that follows those words.