ECB will "prepare" us for its next initiatives but not actually announce anything

Outlook:

Today we are all preparing for Event risks of various types. Not particularly high on the list is US leadership in the international effort against the barbaric ISIL. Obama said “Our objective is clear, to degrade Isil so that it’s no longer a threat to Iraq, to the region and the US . . . so that it’s no longer the factor that it’s been over the last several months…. It’s going to take time for us to roll them back and forge the regional coalition that’s going to be required.” Coalition? In this region? Turkey and the Saudis are about to be tested.

The more immediate Event is tomorrow’s ECB policy meeting. The consensus has it that the ECB will “prepare” us for its next initiatives but not actually announce anything. Chatter around the edges has so far brought us only the idea that Draghi’s comments at Jackson Hole were not supportive of breaking Stability Pact rules but rather a new focus on structural reform. Nobody knows… but the market notices that the overnight interbank rate Eonia went below zero last week and is -0.013% this morning, meaning banks just don’t want to lend and don’t have anywhere to park cash (negative returns at the ECB, too). Ahead of the bank reviews, for both credit quality and stress capability, there are no tools in the central bank toolkit to goose lending. Just about the only action Draghi can take until November is introduce an asset-buying program (which might conveniently dovetail into the bank credit-quality exam).

The Big Picture is still one of rising rates in the US and falling rates in the eurozone, with Japan un-changed (until the pension fund starts diversifying) and the UK in a tug-of-war over the real extent of the recovery and the unknown unknowns about Scottish independence (for which the UK has evidently made no plans).

As for the Fed, several analysts think a really good payrolls number on Friday—over the 225,000 con-sensus—will bring forward the First Rate Hike. Market News reports Toronto Dominion calls for 238,000 and a diagnosis of growth sustainability, hence an earlier start to hikes. Deutsche Bank is wait-ing for the “updated exit principles” at the Sept. 16-17 FOMC meeting, for which the Aug payrolls will be critical. We say it doesn’t actually matter what the number is on Friday as long as it’s not below 200,000. Even if it’s 300,000, the Fed is not going to act any earlier. But never mind—if traders imagine an earlier start, they will buy (or sell) well in advance.