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    Welcome to the Central Bank Carnival

    Get your seats on the competitive devaluation merry-go-round

    Mario Draghi President of the European Central Bank today all but promised more quantitative easing and perhaps negative rates, noting that the bank will reconsider monetary policy in December.

    Answering questions at the ECB news conference after the bank reported its decision to keep the main refinance rate at 0.5 percent he said, "There are downside risks to growth and inflation....We [the governing board] discussed negative rates and more stimulus measures....There were some on the board who wanted to act [on more stimulus] today." 

    The euro fell more than two figures against the dollar, currently 1.1132 at 12:15 pm EDT, in an overall range of 1.1351-1.1128, and nearly two figures versus the yen at 134.20, 12:17 EDT, in a range of 136.09-134.13. 

    The dollar had gained nearly 1 percent against the yen by early afternoon, trading at 120.67, near the peak of the day's 119.60-120.73 range. The dollar index was 1.4 percent higher at 96.243 at the top of the 94.943-96.251 range. 

    The yield on the generic German 2 year Bund hit an all-time low of -0.316 percent, the 10 year Bund lost 7 basis points to 0.496 percent, its lowest yield since early June. In the U.S. the 10 and 2 year generic Treasuries were essentially unchanged, the 10 year yield gaining 1 basis point to 2.04 percent and the 2 year falling 2 points to 0.601 percent. 

    Commodity prices fell on the stronger dollar and considerations of yet slower European economic growth. The Bloomberg Commodity Index traded as low as 88.0516, its weakest since October 5th. 

    Equities understandably loved the prospect of quantitative easing in Europe. The Dow was 295 points higher at 12:50 pm to 17,463. If Draghi’s stimulus is not quite as effective for U.S. markets as it may be in Europe, some of the money will find its way here and it does make a U.S rate hike less likely.

    After the recent run of poor Japanese data, including declines in industrial production, exports, imports and inflation it is very probable that the Bank of Japan will announce more stimulus measures at its meeting on October 30th. The implications for the faltering Chinese economy and the yuan are seriousespecially if the yen continues to depreciate. If it does expect a currency response from Beijing.

    The Fed will continue its rhetoric to try and convince the markets that it is serious about raising rates. But the FOMC will not raise rates in December because they cannot. If they did they would guarantee a substantially stronger dollar, increasing dis-inflationary pressures in the U.S., heighten the financial and economic turmoil in emerging markets and add to the weight on commodity prices.  With a stronger dollar and falling commodity prices the Fed goal of a 2% inflation rate is a fantasy. 

    Nevertheless, even with the Fed on hold, the ECB and BOJ are going dynamic. Expect a stronger USD, weaker emerging markets currencies and weaker commodities over the next few weeks.

    The trends of the past year have been resuscitated.

    Joseph Trevisani

    Chief Market Strategist

    WorldWideMarkets Online Trading

    Charts: Bloomberg

    eur 3 oct 22

    yen oct 22

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