ECB unlikely to deliver anything new on Thursday

Outlook:

Amid all the data noise, we see a slowdown in Europe that might turn out to bode ill for Mr. Draghi’s plans. Last week the German research institutes cut their growth forecasts for this year from 1.8% to 1.6%, led by falling growth abroad and thus exports. Growth was a 4-year high of 1.7% in 2015. Next year will see only 1.5%. We get the newest German forecasts tomorrow.

Today Spain announced this year’s revision from 3% to 2.7% and 2.4% next year, revised from 2.9%. This is the justification for not meeting the EU budget target of under 3%.

No amount of free money can get enterprises to boost production if demand is not there. The ECB Lending Survey today confirms that banks did indeed ease lending standards for firms in Q1, although it tightened standards for mortgages. The banks say the negative deposit rate did goose lending volume, but at the expense of “a negative impact on their profitability.”

The ECB policy meeting on Thursday is not likely to deliver anything new and certainly not “helicopter money,” according to the FT—it’s too soon to panic. But as usual, Draghi’s every word will be parsed for meaning, including some meanings he doesn’t intend, with an eye on whether the brave talk of “plenty of additional tools” has any validity. The sentiment is growing that central banks have pretty much run out of ammunition. Europe has caught the Japanese disease and economists honestly don’t know the cure. Deflation in Europe may have been halted so that inflation is zero to slightly positive, but negative rates can’t be ended any time soon and in the meanwhile, savers are screwed. The long-term effects of negative rates are yet to be imagined.

Weirdly, higher inflation does bring higher growth. And slower growth does bring lower inflation. And deflation can still come back, especially if the Saudis decide to hold a price war with Iran. This is not getting much attention but we wonder if it’s not a very real possibility.

The FT affirms the story that the deputy crown prince is the one who scuppered the Doha deal, which was being firmed up (without Iran) up to the last moment. “Around 3am on Sunday morning — just hours before the talks were due to begin — Prince Mohammed called the Saudi delegation, according to people briefed on the matter, and ordered them to come home. The Saudis ultimately remained, but the talks were effectively dead.

“The episode has left Ali al Naimi, the kingdom’s technocratic oil minister for the past 21 years, looking increasingly sidelined. While the Saudi royal family has always had the final say on oil policy, rarely has a member spoken so publicly — or freely — on its direction. Delegates from other countries had been assured Mr Naimi was there to deliver a deal. ‘Saudi Arabia’s oil policy is now firmly in the hands of Deputy Crown Prince Mohammed bin Salman,’ said Sean Evers, managing partner of Gulf Intelligence in Doha.” An arbitrary last minute policy switch shows power, but it also shows instability. Too bad instability doesn’t lose respect in this region.

Bloomberg emphasizes that the prince threatened an increase in Saudi production if Iran keeps raising output. Well, that’s just about a done deal. Iran said it won’t stop until it restore output to pre-embargo levels, about 4 million bpd (actually, 3.8 million). Saudi Arabia could raise output by 1 million bpd, according to the prince, or about 10 percent, to 11.5 million. It could increase further to 12.5 million in six to nine months. Current output (March) us 10.2 million bpd, according to Bloomberg. This sure sounds like the prince wants to start an output war with Iran.

There’s another chapter here, too--a rift between the US and the Saudis. Over the weekend, CNN reported the Saudis threatened to sell billions in US assets if Congress passes a bill allowing US citizens to sue foreign governments, specifically 9/11 victims. Pres Obama has not said he would veto such a bill but obviously it would open the US to similar suits by citizens of other countries—a nightmare. Sovereign immunity has been around for centuries, if a little frayed around the edges, but this could be a whole new chapter. For what it’s worth, the bill is sponsored by Dems and supported by both Dem presidential candidates Sanders and Clinton.

At the heart of the sovereign immunity bill are the 28 redacted pages of the 9/11 Commission Report which purportedly show Saudi officials supported some of the 9/11 terrorists, or so asserted former senator Graham twice on TV this past weekend. Back in 2003 the Saudis declared they wanted the 28 pages published in order to clear their name, but Graham and others assert the Saudis were clearly complicit. Pres Obama visits Saudi Arabia on Wednesday. Is there something here, like a backroom deal? In fact, were the 28 pages what was really behind the Saudis declining to go forward with the output freeze on the pretext that Iran was not in the deal? In one of the reports we find a whisper of a hint that the Obama Administration wants to have the Joint Congressional Inquiry regarding the 9/11 attacks completed before Obama leaves office (NBC). Obama has visited Saudi Arabia four times, more than any other president. So what? We dunno, and neither does anyone else. One bet we’d take—Craig Unger’s book House of Bush, House of Saud (2004) is about get a sales boost.

Bottom line, we are not going to escape oil’s influence easily. Various correlations may be weakening, but nobody should doubt that a price war will cut into rising inflation and possibly reverse it, leaving big central banks in the soup. This is not, probably, why the euro’s rise is so tepid, but it may become a factor soon. We still like a rising euro overall, but would not be surprised to see a shock collapse as some point. And finally, an oil price war almost certainly puts the Fed on hold through to year-end, if not longer. Note we are not predicting a price war, just the hint of one. Stay tuned.