The European Central Bank looks to be getting closer and closer to finally admitting that it cannot stick its head in the sand and make silly comments about worrying over inflation and looking for mysterious growth. The time has arrived that the ECB adopts a low-rate policy like the rest of the lower growth world of established markets.
We are now getting predictions that the ECB Rate Cut will come during the week of the 4th of July. Bank of America/Merrill Lynch is now telegraphing that the ECB and Draghi could very soon be adopting a zero-rate policy as well within the coming few months. BofA/ML also telegraphed that it is too soon for the stock and bond markets to be factoring in the fiscal cliff but it expects that to come up in August to October before the election.
Goldman Sachs now expects a 0.25% rate cut to 0.75% from the ECB for its refi-rate, but the timing is not limited to July.
The timing makes us wonder one thing about the overall impact. July 4th is on Wednesday, so many employees are taking off Monday and Tuesday and many others are taking off Thursday and Friday. More senior staff may take off the whole week. That being said, will anyone in America be there to see a rate cut in Europe?
A recent Financial Times Deutschland interview with a senior ECB economist hints at a rate cut possibly coming as well, with this hint being as soon as next week, but without a pre-commitment.
The ECB has a roughly 2.0% inflation target and the drop in commodity prices is making this target well above the real inflation rates today. Recent inflation in Germany was said to be well under that 2% threshold. That leaves room for a rate cut (or even more cuts).
Our take here is that the market wants more than the powers that be are willing to commit to at this point. Even if the ECB steps in with a rate cut it may only be viewed as “OK, are more cuts coming now?”
Europe’s woes are not rate-driven at all. They are structural, and they are cultural. It is growing more evident each day now that the woes of Europe are going to be leading the headlines for quite some time. If the U.S. enters recession, let’s just say that the woes in Europe are going to get even worse.
A rate cut from the ECB is coming. The question is if it is in July or if Draghi and friends will wait another month or two. If it waits, it might not even matter.
JON C. OGG
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