The ECB to act this week?

We are in the 10 days of the Federal Reserve black out period leading to the July 31st FOMC rate decision. Where the Federal Reserve is expected to cut rates by at least 25 basis points.

However, the European Central Bank (ECB) is up this week.

With Draghi stepping down at the end of September, with Christine Lagarde set to take his place, it was widely expected that Draghi would just maintain the course and not really do anything.

However, this has proven not to be the case. Last month, the day before Fed chair Jerome Powell was to deliver an FOMC Rate decision, Draghi beat Powell to the punch and delivered a more dovish tone. He promised to support the markets. He would support stimulus and would even consider lowering rates even more negative! The markets loved it and had a pop… he did the work for the Federal Reserve in keeping equities propped up.

It is now expected that the ECB will in fact act this week!

That the ECB will cut rates further negative, and also promise more cheap money and stimulus. Essentially telling investors/traders that we have your back. Again, I have mentioned many times that I believe the new central bank mandate is to keep assets propped! They are taking their clues from the market and then acting on them.

On the note of negative rates…we know they do not work. However, the Keynesians cannot admit this. They say the reason why it is not working is because they have not cut negative deep enough. More cuts further negative will solve this! More money printing will solve this! We just did not print enough!

The Federal Reserve will follow up next week with rates expected to be cut…the question is by how much? And how many times?

We had quite the drama just before the black out period with New York Fed Chair John Williams hinting at aggressive rate cuts and keeping rates lower more longer…comments he quickly added the disclaimer claiming this was not suggestions for current monetary policy. The market liked it though.

The markets have priced in a rate cut and expect them. However, there is the chance that a 25 basis rate cut may cause the markets to actually fall since already priced in. This has lead many to claim that the Federal Reserve will have to cut by 50 just to keep the market happy. We know the bond rates and the Fed Funds rate are telling us cuts are coming.

Expect more central banks worldwide to cut rates. Australia has already cut 50 basis points to their lowest ever in the past two months. Canada will likely follow next month, and you will see other central banks doing the same.

Cutting rates is necessary to help servicing the debt that governments have as well as helping the consumer service their debt as well. However, the downfall is that pension funds are forced to take more riskier bets because they have to chase yield…this will eventually lead to a problem when markets do sell off and lead to a pension crisis.

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