Notes From Underground: The Odious Designs of ECB Policy

I’m posting this week’s podcast with the highly respected Peter Boockvar. This is one of the best interviews we’ve done with Richard Bonugli as we get into foreign currency, yield curves, energy policy surrounding nuclear power plants, and as usual, an in-depth discussion on precious metals.

The podcast was recorded Tuesday, prior to the interest rate decisions from the Bank of Canada, the Bank of Japan and the European Central Bank.

Click here to listen to the podcast. 


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The BOC rocked the global interest rate markets when it announced it was immediately ending its QE program because further tapering was expected. Canadian interest rates rose dramatically as the two-year NOTE increased 25 basis points. The impact was felt in the U.S. yield curve as two- and five-year yields backed up while the 30-year bond yield FELL. As a result, the 5/30 curve flattened by 15 basis points during the week. The Canadian decision increased speculation that the FED and ECB would be under more pressure to begin tapering their asset purchases.

As expected, the BOJ maintained their current policy since Japan is in the middle of a national election with the outcome to be determined Sunday. (NOTE: The Liberal Democratic Party held on to a stable majority in the parliamentary elections.) On Thursday, the ECB announced it was holding firm to its current commitment of asset purchases although the calibration of extraordinary pandemic bond purchases would depend on economic data.

The most important revelation from the ECB was not in its official statement but in questions posed during President Christine Lagrade’s press conference. She was asked whether the ECB would be following the lead of other central banks in curbing QE. Lagarde’s answer, in my opinion, was astounding: “Comparisons, for good reasons, are odious, simply because we are not talking about the same economies.”

This is an incredibly harsh statement from a woman who, as a trained global lawyer, is very measured in her words. Odious is very strong in reference to this credible question in a time of changing economic outlook. The market wasn’t paying attention to this incendiary outlook and sent European rates higher in direct contravention to the policy outcomes Lagarde was proposing.

The ECB will be bound by its FORWARD GUIDANCE on inflation. This will determine when the central bank begins tapering, not the decisions of other central banks. If this is the ECB’s hard stance it puts the FED in a difficult situation as it relates to the DOLLAR. If the U.S. central bank moves before the ECB it will initially put upward pressure on the DOLLAR causing great hardships for those borrowers using the world’s reserve currency for their funding operations. So, Lagarde’s obduracy has once again put Jerome Powell in a difficult position in maintaining ECB asset purchases in the face of elevated inflation. What an odious policy.

So on Thursday there was a sizable rally in the EURO as the market focused on the rise in European bond yields, even as their nominal rates hover around ZERO.

By Friday, the markets had finally begun to process Lagarde’s statement. The Canadian two-year yield climbed to 1.15% following the central bank’s rate decision. Meanwhile, German, Spanish, French, Austrian and Dutch yields remained below MINUS 50 BASIS POINTS, even as inflation has risen to persistently higher levels than the U.K., Canada, Japan (though it’s roughly the same in the U.S.). In fact, the EURO retraced its entire rally by the close of the week, losing about 1%.

On Saturday, the German tabloid Bild, attacked Lagarde with the headline,”Madam Inflation” and accusing her “of destroying the earnings and savings of ordinary people by tolerating a rise in inflation.”

We at Notes From Underground have been in the vanguard of noting that German savers are the most financial repressed financial class in the world. The ECB appears to desire a weaker EURO to sustain German trade and secure a higher level of inflation to meets its target. If investors grow weary of Lagrade it will be reflected in the Gold/EURO cross going forward. It will be difficult to fight a determined ECB in its effort to keep sovereign bond yields at the zero/negative rates for a long duration.

The coordination of central bank policies for the last decade is what is truly ODIOUS but its continuation provides trading and investment opportunities. Our job is to find those and put the lowest risk strategies to work. Now onto the FOMC meeting this week.

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