Something changed yesterday. ECB chief Mario Draghi dramatically reversed his monetary stance in every way and dramatically downgraded his economic and inflationary outlooks - but instead of the market taking its cue from the former, it was the latter, real economy, that sparked chaotic concerns in markets as traders realized the central bankers are clueless (how did they not see this coming again?) and are practically out of ammo to do anything that could be spun as stimulating the economy to juice stocks even higher.
Overnight headlines from China confirmed the global economic slump as exports crashed, and while excuse-makers are out in force this morning already (as US and Chinese stocks tumble), former fund manager and FX trader Richard Breslow warns, "don't blame the weather for the market gloom." Simply put, it's the economy stupid (and the deluded stock market's gap to reality).
The world has a decidedly downbeat feeling about it. And it’s not because equities have given back some of this year’s extraordinary gains. Nor does it have to do with the dovish actions from the ECB. Which weren’t nearly as radical as is being portrayed. It was the hapless messaging from President Mario Draghi, as well as from Fed Governor Lael Brainard and the Bank of Canada’s Deputy Governor Lynn Patterson. These three only get special mention because they were the latest messengers conveying an unpleasant reality.
It isn’t that we suddenly learned that the global economy has slowed and is continuing to do so. It was the clear implication that there is no reason to put much faith in official economic forecasts and they are making it up as they go along. It felt like we were airline passengers overhearing the pilot ask which one is the go pedal and which the brake.
The ECB cut growth forecasts, largely catching up to what others have already been saying. The ink wasn’t dry on the press conference handouts before we were getting inundated with reports that some ECB officials didn’t think they went far enough. Draghi himself, in what was the most important comment of the entire event, said the risks are still to the downside despite the greater accommodation. He went on to make it clear, as if we didn’t already know, that the central bank remains the only game in town. It would appear that they have little choice but to do more of what hasn’t worked nearly as well as promised.
Today’s German factory orders miss will be blamed on weak demand from outside the euro area. Slim consolation.
Patterson, a day after the Bank of Canada “toned down its convictions over future rates hikes,” said that the economy will “probably” be weaker in the first half than they were anticipating “as recently as January.” And then, like Draghi she threw in the obligatory, “We still expect Canadian economic growth to pick up later this year.” Which sounds nice except she also pointed out they need more data and time to assess the situation. The BOC post-meeting statement was described as having tempered the hiking bias. Swaps traders, on the other hand, already place a higher probability of a rate cut than a hike.
Brainard delivered another dovish speech arguing the necessity based on “basic principles of risk management.” The Fed’s updated forecasts are due on March 20. I wonder what their shelf life will be? Monday’s retail sales report will do a lot to set the tone. The Fed is said to have signaled they’re undecided about whether any additional rate hikes are needed. That’s being diplomatic.
But what else can you say when the plain-speaking policy which Chairman Jerome Powell said last month was meant to reach people who are losing faith in big institutions resulted in a description of the softer spending data and slowdown abroad as having the effect of, “weighing on the modal outlook and might in turn warrant a softening in the modal path for policy.” “Modal” is one of those wonderful words with many definitions. Depending on which you pick, there is an awful lot of fun you can have with that sentence.
Meanwhile, I continue to hear much more speculation about when the “puts” will kick in than how far the market will fall. Which at the end of the day, is probably exactly where the central banks are hoping the conversation will be focused.
Just quickly, some attention should be paid to the potential key week reversal for the S&P 500. It has worked in recent months. And the important pivot for the day in the Dollar Index is 97.26. On the upside, Thursday’s high was a triple top that can’t be ignored.