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Draghi in the spotlight again

20 July 2017 by Gary Kirk

At lunchtime today Mario Draghi will host a press conference following the ECB Governing Council Meeting in Frankfurt. Yes, we have the FOMC meeting next week and the MPC meeting on 3rd August, but neither of these are expected to announce any market moving news; it is today’s ECB meeting that is the key central bank address before the markets enter the typical slowdown period, and politicians head off to enjoy their summer recess. We will see a lot in the press about the Jackson Hole Symposium on August 24-25th with market commentators getting excited that Draghi will be speaking at this year’s event, titled ‘Fostering a Dynamic Global Economy’. Whilst it is always of interest to listen to the rhetoric from a key central bank leader such as Draghi, we doubt he will say anything new about ECB monetary policy that he hadn’t already intimated at today’s meeting. For us, today will be the key meeting which should set the record straight on how the ECB view the economic recovery in the Eurozone and give guidance to the market, which has become a bit more skittish over the past month.

So what do we expect today from Mr Draghi? Well we would be surprised if there was any change in monetary policy announced. However, Draghi’s hawkish rhetoric at the recent Central Bank Forum in Sintra is certain to come up in the press conference Q&A and it will be most interesting to hear his response and his rationale for the bullish tone at that address on 27th June, that certainly impacted € market rates.

Aside from this it will be interesting to see if Draghi guides the market towards an easing of the asset purchase program, which we believe he will formally announce at the 7th September meeting. The obvious way to give market forward guidance would be to remove certain set passages of text that have been consistent in the ECB address, such as “the Governing Council stands ready to increase the programme in terms of size and/or duration”. However, Draghi will be aware that the market is on tenterhooks and he will have to be guarded in order to avoid unnecessary nervousness over the summer when market volumes are notoriously thin.

It is going to be an important meeting for the ECB Governing Council and Draghi will need to be at his eloquent best during the Q&A. We go into the meeting, and the summer, with a relatively balanced portfolio and maintain a relatively short duration; we don’t feel the time is right to stretch out for yield. If Mario strikes the right chord it is likely to be a fairly benign summer period for fixed income – and we can all enjoy a restful vacation, like the politicians.

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