Today it's all Draghi, all day

Outlook:

Today it’s all Draghi, all day, at least until we all start obsessing about tomor-row’s payrolls. The ECB policy decision will be made at 7:45 am ET and the Draghi press conference follows at 8:30 am ET—an inconvenient time for us since we promise to publish by 8:30-8:45 am ET. We can’t wait for Draghi.

The Draghi moment of truth will almost certainly take the form of delivering all the changes already speculated about and maybe more. As long reported, the ECB will increase the monthly asset pur-chases, extend the deadline beyond Sept 2016 and cut the rate at which various paper qualifies, possibly in tiers. To some extent, the euro’s repeated efforts to rally are built on the idea that we are all overesti-mating the degree of Draghi dovishness, i.e., maybe the ECB does less.

But we perceive Draghi as in the habit of being as forceful and clear as he can be. He started with “whatever it takes” a few years ago and has never let us down since. We are pleased to see the Bloom-berg story today reporting that Goldman’s chief currency strategist Brooks says the same thing. In fact, Brooks says the announcement today will be designed to exceed expectations and deliver a surprise that will shake economic and market players out of their cautiousness. How do you say “full steam ahead” in Italian?

Assuming an aggressive ECB stance, we fully expect a new lower low under what we have so far to-day (1.0538 at 7:16 am ET), presumably to a test of the April 13 low at 1.0532 and then the obvious round number 1.0500, if not all the way to the March 16 low at 1.0458. As noted many times before, several big players expect parity by year-end or shortly thereafter. The logic of the forecast has been in place for months and we see no reason to change it, at least not unless and until we get a Shock. The spike high after the ECB statement is probably going to be an aberration. But stay tuned.

One all-too-likely Shock is oil. We hate to admit it, but the oil gang are not always flibbertigibbets. They seem to smell a possible policy change at the OPEC meeting tomorrow and for all we know, they may be right. Usually, however, they are not. They quite often trade in defiance of obvious supply-demand factors, and to make matters worse, the API numbers are often at odds with the EIA numbers and future demand estimates from the IEA and OPEC do not agree.

Sometimes the oil market gets into a selling frenzy in contemplation of new Iranian supply and other times it just ignores the Iranian factor. The same thing applies to estimates of when US producers are going to throw in the towel. But the biggest factor supporting oil prices is the Saudi strategy of maintain-ing market share whatever the price. Other OPEC members plead for production cuts but in typical inef-ficient-cartel manner, can’t name exactly who is going to cut and by how much and for how long. Today it’s front page news in the FT that the Saudis will agree to cuts “as long as they were supported by coun-tries both inside and outside the cartel.” Well, that’s not going to happen. Other producers include Iran, Iraq and Russia. Still, the FT perceives a change in tone.

We have no hard evidence the Saudis are going to change their mind and arguably the emergence of ro-bust and resilient US and Canadian production has permanently removed cartel power—in other words, OPEC can decide anything it likes and it won’t cut non-OPEC production by a single barrel. The Saudis are leaders in only one thing—OPEC—and it’s logical to assume they would prefer the world not to see the emperor has no clothes. That doesn’t mean they won’t risk it out of self-interest, but that self-interest would be short-lived, and the Saudis have demonstrated that they have a long game. Besides, we should assume a geo-political connection to the US, which is a military ally. Annoying the US with an oil price rise right now might not be the best diplomatic move. Or maybe it doesn’t matter. The US is not going to abandon the Saudis to ISIS over oil—is it?

Or maybe a Saudi strategy change would be beneficial to the US and Europe. After all, it can be the source of actual inflation, the very thing central banks wish they had. We could be looking at $80 in-stead of $20.

Fun Tidbit: This ought to cheer you up: Nate Silver, the statistics guy who got the last elections dead right, says yes, the political polls are awful in many ways and certainly not to be trusted. Trumps chances are higher than zero but “(considerably) less than 20 percent.” Not only does voter behavior change radically at the real moment (the primary), Trump’s backers are a pretty small bunch to begin with. Trump has 25-30% of the vote among the 25% of voters who name themselves as Republicans. ”That’s something like 6 to 8 percent of the electorate overall, or about the same share of people who think the Apollo moon landings were faked.” (Nov. 23, 2015) and reprinted in the Mauldin Economics newsletter.)