Draghi's Worth knowing words.

hello,

Draghi disappointed in February many economists, who were counting on a further reduction of the interest rates, or at least another form of monetary easing. The message which flows from the ECB, however, has not changed significantly.

The situation before the meeting of the ECB was unusual. On the one hand, the official consensus is not assumed changes of interest rates, on the other hand, market voices said that some form of easing is expected and a reduction of the reference rate (currently 0.25%) was in a sense expected that the Bank Council had to choice. Why? For a long period of time, the market rates in the euro zone were close to zero, even when the reference rate (basic) was 0.75%. At the same time, however, the deposit rate was already at 0%, and a large excess liquidity in the market caused that market rates were close to the deposit rate. However, in recent weeks, liquidity has decreased considerably, to a large extent by the stress tests, which are carried by ECB. So we can say that the Bank inadvertently led to monetary tightening. Now, to make loosening, does not have to lower the deposit rate to the controversial negative levels, but enough that lowered the reference rate to 0.1 or 0.15%. However, the ECB did not.

Initially the message of the President seemed to be firmly hawks and positive for the euro. Draghi ignored lower inflation in January, indicating that "this is the effect of energy prices and does not affect the expectations of the ECB in the medium term." The market reacted big jump quotation of EUR/USD  pair from the area of ​​1.3480 to 1.3615. In contrast to the January conference, Draghi did not refer also to market interest rates in the euro, which would suggest that at this moment it is not very worrying for the Bank. However, it is worth noting what the president said in the second part of the conference. Answering questions repeatedly emphasized that the Council needs more information and indicated that the next meeting will have new ECB projections of economists, including already containing indications for 2016. He added that the ECB is willing and ready to act. Therefore, investors should not be deceived hawkish tone from the beginning of the conference - he justified the lack of activities with a high level of expectations. But this is not the beginning of a bull market for the euro.

Non-Farm Employment Change:

Next low growth in the number of jobs and a further decline in the unemployment rate. If this keeps up, you may find that at the March FOMC meeting Jannet Yellen will formally consider a raise key interest rate (because the objective will be realized in the unemployment rate), and will not reduce even QE (because the pace of job growth will be too slow).

Let me remind, the change in employment is assessed among entrepreneurs: the report showed employment increased by only 189 thousand. in the past two months. The unemployment rate is calculated based on a survey of households. This study showed at the same time a decrease in unemployment of 605 thousand., Which resulted in a decrease in the unemployment rate from 7 to 6.6%. It is of course impossible, either examination shows the statistical error, the only question is which one? Or maybe both?

Foreign Exchange Market:

Low interest rates in the U.S., Eurozone and other developed markets have consequences for the global economy. Easy access to the money in the world markets meant that corporations from emerging markets willing to emit Eurobonds and into debt in foreign currency. In 2010, the value of the issue of such securities amounted to 151.5 billion USD, and already in 2013 was carried out bond issues with a value exceeding 335 billion USD. According to the BIS, the increased issuance of bonds has no positive correlation with the increase in exports. Enterprises use from cheaper financing only, do not make international expansion. Data presented in the table below, indicates that access to cheap money using mainly the Asian countries.  Data relate to bonds, and Asian countries such as Korea and Singapore have a higher rating than for example Turkey, is why corporations of these economies is easier to issue bonds. The increase in foreign debt makes the companies and countries are more vulnerable to changes in the exchange rate and capital outflows. This can quickly lead to financial crisis the economy.

The second consequence is the inflow of corporate deposits to local banks. Deposit funds by corporations are more pro-cyclical than other types of deposits, is why in times of distress market or economic downturn, commercial banks will have to deal with the sudden outflow of capital, which can lead to liquidity problems. 

chart 1. Issue of bonds by emerging markets according to the countries

chart 2. Yields of local EM gov. bonds and the exchange rates

best regards,
oscarjp