MBS Live Recap: Markets Had ECB Almost Perfectly Pegged

Talk about your anticlimactic conclusions!  It's not that the European Central Bank (ECB) was likely to make any meaningful changes in its policy stance today, but it nonetheless served as an important opportunity to confirm or deny the notion that Draghi's late June comments were a step in the direction of a tapering announcement--perhaps later this year.  Draghi essentially denied it--saying they hadn't even discussed the September meeting as a tapering announcement target, nor had they discussed it at all.  

That may or may not be factual.  Certainly, we've seen newswires that suggest quite the opposite, such as this one from July 13th that did noticeable damage to bond markets: 

 ECB COULD ANNOUNCE PLANS TO WIND DOWN QE AT ITS SEPT. 7 POLICY MEETING--ECB OFFICIALS

Technically though, that newswire doesn't mean Draghi lied today.  Indeed the ECB COULD do whatever it wants in September, and saying so to a reporter doesn't mean that it was ever discussed.  All I would point out (and perhaps I'm just imagining things) is that the one question that really seemed to trip Draghi up today--and the one question where he seemed to be alluding to something that wasn't directly asked--concerned hiring practices and recent recalls of ECB staff.  I've painstakingly transcribed the answer as follows:

"The problem is that it's very difficult to have, uh, you know trust is a two way-eh-two way route where um, where it's very difficult to trust someone who discussed things in the press and the newswires and so on at each and every time. And frankly also for the staff--which is a staff of world class quality--to be seen in the press as, uh, as being sort of continuously discussed is--is, must be--is a little sad."

We know the underlying accusation was one of favoritism in filling high level positions.  Draghi wasn't likely thinking about the "ECB OFFICIALS" newswire above, but it's nonetheless interesting to get his take on "trust" with respect to the potentially unwanted airing of the ECB's laundry--dirty or otherwise.

As it turns out, all of this is rather beside the point.  To be sure, markets definitely traded this news in a big way, but they did so well in advance of the ECB announcement--mostly on Tuesday of this week.  In other words, traders bet heavily that they'd see this more dovish Draghi today--the Draghi that disavows any tapering discussions and who continues to beat the familiar ECB drum of "whatever it takes..."

Bonds still had some energy left to rally, however.  And things were actually looking pretty good until Europe closed for the day and until an exceptionally weak 10yr TIPS (Treasury Inflation Protected Securities) auction.  Whether the auction was the source of the reversal, or simply fell at an unfortunate time of the week (there's no significant economic data tomorrow, so liquidity is expected to suffer) is hard to say, and isn't ultimately consequential.  Today's trading tells us that markets were already prepared for the Draghi they saw today.  Further momentum will have to come from econ data or domestic policy developments in the near term.