The Day Ahead: After Weeks Of Waiting, Things Get Serious

In case you missed it, the ECB has been doing everything it can to telegraph today's policy changes.  This began as early as late July's "London speech" from ECB President Mario Draghi in which he promised to do whatever was necessary "to preserve the euro," further adding, "and believe me, it will be enough!" 

While Draghi may have jumped the gun with the London speech, in that the next policy announcement was scarcely sufficient to back up the incrementally more passionate claims, he may have had today's policy announcement in mind.  Perhaps he was focused on the prospect of impending bond buying, and wasn't thinking as much about the level of expectations being created in markets.  He took flak for the London Speech--particularly when the ECB Announcement failed to deliver on the London Speech's promises, and with a little deductive reasoning, we can infer he's eager to avoid a similar response to today's announcement.

First, we saw a series of newspaper leaks suggesting that the ECB would be targeting peripheral debt yields.  By the time this made it to a third news outlet, it no longer seemed to be the over-hyped rumor, but rather was assumed to be some version of the truth. 

As we've seen, what's true in terms of goals isn't necessarily true in terms of execution.  It's likely, or at least possible that the ECB wanted to target yields (i.e. explicitly or implicitly saying "we won't let the Spanish 10yr go over 7%") but ran into stern enough opposition to table that goal, or at least revise it.  Several meetings with the ECB's biggest constituent, the German central bank or Bundesbank (or "BUBA"), continued to paint a picture that BUBA president Jens Weidmann and ECB Pres Draghi were at odds over what Draghi wanted to do.

A German parliamentary court vote on the constitutionality of Germany's participation in the new Euro zone bailout mechanism is set for the middle of next week.  Even though we're not expecting Germany to simply say "no thanks" to the European Stability Mechanism (ESM), the conditions they place on their involvement are important.  Simply put, without Germany, the ESM lacks teeth, and because Draghi et. al. are relying on the ESM to play a role in supporting the European periphery (and take direct pressure off the ECB to buy, well... directly), Draghi has a vested interest in making sure he doesn't throw out a policy statement today that makes things harder for him next week.

To that end, Draghi has executed an almost comical plan of full disclosure ahead of today's ECB Announcement.  Most recently, he was "accidentally recorded" saying that ECB bond buying of up to 3yr maturities did not and would not violate the Euro zone treaty.  Much in the same way proposed rules are opened up for comment, Draghi was essentially flying the proposed ECB changes up Germany's flagpole.  But it didn't stop there.

Yesterday morning, a day ahead of the ECB Announcement, a remarkably detailed "leak" of the ECB's bond-buying plans made its way to major news outlets.  The news said the following:

- ECB will buy bonds in a 0-3 year maturity range

- ECB will not target specific peripheral debt yields

- Bond buying will be balance-sheet-neutral (aka "sterilized"), thus hopefully easing inflation concerns

- An interest rate cut won't be part of the discussion, let alone the announcement

- The ECB will waive it's preferred creditor status for these bond buys (a move designed to ease concerns of future private sector haircuts)

That's a fairly detailed leak.  But we're not laboring under the misapprehension that this is actually a "leak," nor do we think anyone else is--especially given the circumstances and the multiple sources saying relatively the same stuff.  Rather, it's part of the ongoing effort to communicate the policy changes ahead of time so Draghi knows exactly how big of a bazooka he can flaunt without ticking off 'ze Germans.'  If after all this, the ECB is STILL UNABLE TO DELIVER on the explicit promises, it'll be a much bigger deal than last time. 

So even though today's ECB Announcement is theoretically already a known quantity and overlooking for a moment the question of whether or not ECB Bond Buying actually marks a turning point in the Euro zone recovery (hint: they've done it before and the Euro didn't recover), Draghi and friends now have to deliver.  In other words, the question is not whether or not markets knew about this ahead of time, and it's not about speculation that the ECB will DO MORE than needed, but rather, will they essentially live up to the leaks?  Will they do enough?  In light of Draghi's London Speech rhetoric "believe me, it will be enough," the ECB is running out of chances.

More of a footnote than anything, there's also a slew of European and domestic economic data set for release today.  To whatever extent the ECB news is "boring" and "as-expected," this other data is invited to step up and help shape the trade heading into tomorrow's important Employment Situation numbers.  Challenger Layoffs actually precede the ECB by 15 minutes, arriving at 7:30am.  Then the ECB is up at 7:45am.  ADP Private Payrolls hit at 8:15am with Jobless Claims at 8:30am as well as the beginning of the ECB press conference.  ISM Non-Manufacturing prints at at 10am.