Draghi can be anything than relentlessly dovish

Outlook

We don’t exactly have a Goldilocks economy—wage growth is too low for that—but we do have growth, possibly as much as 4.5% in Q2 once the revisions are in, and headline inflation around 2%. In contract, Europe has growth of under 1% and inflation dangerously close to stall speed. It seems impossible that Draghi can be anything than relentlessly dovish, but this is the American perspective. Europeans are either more patient and realistic about normal lags, or disas-trously unresponsive to worsening conditions, depending on your viewpoint. After all, the LTRO doesn’t come into effect until September and will be slow to get measurable results, and the bank re-views are due in October. We still suspect there might be some deep problems to be exposed.

And yet for Italy to have slipped back into recession is an awful development. We can’t expect Draghi to make policy pointed solely toward his home country, but Italy is an important country and poor Mr. Renzi has some tough rows to hoe. A nod might be in order.

As for ending QE leadership from the UK, recent data suggests caution is called for, and central bankers are nothing if not cautious. Next week’s inflation report will be a key release, because a further decline could see the BoE prolong QE and markets push out expectations of the First Rate Hike. As The Econo-mist worries, the likelihood of a “policy error” is actually quite high. Central banks are waiting for wages to catch up to other growth metrics and wages are a lagging indicator, meaning the banks are by definition behind the curve. Inflation could get a grip while the central banks twiddle their thumbs. We don’t actually buy the impending inflation story, but it does have some merit. Strange as it seems, the Russian ban on food exports is good for US inflation—increasing domestic supply and presumably driv-ing prices down. Food and energy are the two biggies in the US inflation equation.

We expect the dollar rally to resume, and as the overnight action shows, it’s high-risk to bet on fading the trend when a corrective pullback seems obvious. The spike in dollar/yen yesterday put us all on no-tice that it doesn’t take much for an impulsive trade to have us jumping to unwarranted deductions. And yet it’s so hard to buy into a rising dollar—our prejudices and preconceptions get in the way. The dollar crashing yesterday against the yen seemed so “normal.”