The ECB tapering: a trial balloon?

Outlook:

Bloomberg is sticking to its story that the ECB will be tapering—and by a specific amount, €10 billion per month from the current pace of €80 billion per month—when the QE program is ended, either at end-March as scheduled or after an extension, which would proba-bly be for 6 months.

It's not only the economic prospects that will contribute to the decision, but also the increasing shortage of eligible paper. The Governing Council has already formed a committee to look into changing the eli-gibility requirements. It's likely Draghi will again call for fiscal measures from member states in a speech on Oct 8 at the IMF in Washington. It's probably premature to hope he mentions extending or ending. Janus Funds Bill Gross called the story a "scoop" and said he had traded accordingly. He also said perhaps central banks are waking up to the misallocations that result from letting traders indulge their addiction to free money. Well, that's Gross' hobbyhorse and while we think he is right, it doesn't mean the story is true or useful today.

We thought the tapering story was bogus or at least an exaggeration. Marc Chandler at Brown Brothers was another analyst who (more politely) said the story was "dubious." Reuters quotes a Nomura analyst as saying "We do not think the ECB is anywhere close to tapering its asset purchase programme, but in the near term momentum is towards euro upside."

Other analysts agree that while Draghi and the Governing Council were already thinking of how to end QE when they started it, having seen the taper tantrum in the US, the timing is far, far away. Market Watch reports a Pictet Wealth Management economist saying perhaps the taper story was a trial bal-loon. Well, that would imply the story was leaked to Bloomberg on purpose, and the official spokes-man denies it (well, the official spokesman would). The ECB could have been sending up a trial bal-loon and an effort to manage expectations ahead of the Dec 8 meeting, when the ECB will likely extend QE to next September, basically another year, and tapering won't start until the end of next year.

The FT takes a clever approach, letting each Big Bank analyst speak for himself as to whether the story is authentic. The funniest one is from Citibank, which says tapering would be a policy mistake given the economic outlook. The ECB's own forecasts on inflation are not consistent with tapering. Besides, judging from the sell-off that occurred when the story came out, tapering would tighten conditions, not what the ECB is seeking. The sell-off responses "suggest this tapering story, regardless of its veracity, could quicken the recent sell-off that has driven up bond yields, particularly at longer maturities. Whether true or untrue, we think the markets will be bothered further by comments like these. It could be much more than a pure change of speed. It might feel like a sudden stop."

Others are equally dismissive. Nordea Bank says it's premature to speak of tapering as just around the corner. It took the US 18 months to go from first mention to the deed itself. Barclays tries to square the circle by saying that purchases well under the current €80/billion/month would do. The "ECB could start with average monthly purchases of €70-60bn in 2017 and reduce purchases gradually towards c. €20bn per month." The bank still needs to work hard to avoid a taper tantrum and the bigger hit to risk appetite generally.

It's somewhat soothing to know we are not alone in doubting the story. It's likely that Bloomberg did actually have authentic sources who spoke of trying to form a consensus about tapering—getting ready for the end of QE—but it's an exaggeration to imply that the Governing Council itself has gotten that far, especially when the decision whether to extend QE past March will not be taken, probably, until December.

So, two guys had a beer.

The peculiar thing about markets is that they don't care if a story is true. It might be true, or it will be true someday, and since it's new and shiny, they want to trade on it as though it were true. This is why the smart Nomura guy said the ECB is nowhere close to tapering, but the euro has upward momentum anyway, or did yesterday morning. That may have been a fleeting effect. Judging from the euro action today, perhaps the shine has already worn off.

The euro dip is interesting also in light of Merkel's strong stance on Brexit. Follow all the rules or you get none of them. "If we don't say that full access to the single market is linked to full acceptance of freedom of movement, then everyone in Europe will start doing what they want." Merkel said negotia-tions will not be easy and every single blessed thing has to be addressed. This gives MP May a real problem at the same time as she tries to rebrand the Tories as seeking to nurture the working class. The prospect of interfering with financial markets to get populist effects is a big worry. Then there is the peculiar statement from the top bond guy at BlackRock, Thiel, who said the BoE could pause in the easing cycle given good recent data.

Sterling may be heading for another rout (and then a partial pullback). As for the euro, we are surprised the taper story faded so fast. We thought it would have legs, despite being silly. But wait for payrolls. Whether we like it or not, the Friday data will be the decisive factor.

Tidbit: See the chart of the dollar/peso in the Chart Package. Are we to deduce from the falling dollar/rising peso that this is a judgment on Trump's chances on Nov 8? It's true that VP candidate Pence performed exceptionally well in the debate, at least with respect to a calm and unflappable de-meanor. He also, however, expressed opinions on many matters the exact opposite of Trump's, notably on Putin and Russia. That will be fun the next time Putin invades someplace. Trump will cheer Putin's "strong leadership" while Pence will want to bomb the bully back into place.

Pence didn't even try to rebut the most obnoxious Trump assertions. So Trump has his own fantasy world where what he makes up on the spot is by definition true, while Pence has another fantasy world in which Trump is "thoughtful and caring." Everyone in the Trump camp wants Trump to behave like Pence did. But the carnival barker is not likely to morph into Kenneth Clarke overnight. One pundit pointed out that Trump questioned whether Clinton's looks are presidential. What about whether man-ner of speaking and the content of the speech are presidential?

The NYT is going after Trump's supposed business acumen. Of 27 Trump business projects, 12 failed or nearly half. Eight had problems and only 7 succeeded.

Pundits say vice presidents don't add voters to the top of the ticket although they can certainly subtract voters, as in the case of Sarah Palin--McCain had a real chance but his choice of running mate was met with (well-justified) scorn. That Trump picked a seemingly decent VP candidate is not improving his odds.
The latest NYT estimate has Clinton with a 81% chance of winning, from 66% less than a week ago. The RealClear Politics polls as reported by the Washington Post shows Clinton with 323 electoral votes vs. 215 for Trump. Both newspapers are Dem-leaning, so grain of salt. The FT cites something named RCP to get 205 votes for Clinton and 165 for Trump. It takes 270 to win. A Reuters poll on Monday got 42% for Clinton and 36% for Trump. There are 33 days left to the election. The dollar may not rise on a Clinton win but it will certainly fall on a Trump win. The FT reports the cost of option hedging against Trump is already rising to scary levels. The market speaks and we must listen.

		Current	Signal	Signal	Signal
Currency	Spot	Position	Strength	Date	Rate	Gain/Loss
USD/JPY	103.50	LONG USD	NEW*STRONG	10/06/16	103.50	0.00%
GBP/USD	1.2717	SHORT GBP	STRONG	09/10/16	1.3041	2.48%
EUR/USD	1.1186	SHORT EUR	WEAK	09/19/16	1.1168	-0.16%
EUR/JPY	115.78	LONG EURO	NEW*WEAK	10/06/16	115.78	0.00%
EUR/GBP	0.8795	LONG EURO	WEAK	09/19/16	0.8564	2.70%
USD/CHF	0.9775	LONG USD	WEAK	09/19/16	0.9804	-0.30%
USD/CAD	1.3200	LONG USD	WEAK	09/15/16	1.3203	-0.02%
NZD/USD	0.7153	SHORT NZD	WEAK	09/19/16	0.7305	2.08%
AUD/USD	0.7583	SHORT AUD	WEAK	10/06/16	0.7618	0.46%
AUD/JPY	78.48	LONG AUD	NEW*STRONG	09/05/16	78.48	0.00%
USD/MXN	19.2651	LONG USD	STRONG	05/06/16	17.9418	7.38%