The ECB has added yet another positive data sample to support the theory that the most profitable trade of 2015 is to fade market expectations into central bank announcements. I have produced this simple representation using the Fed as an example before, but it is just as aptly applied to the ECB and their announcements. For the ECB we should replace 'hawkish' and 'dovish' with 'less dovish and very dovish' and apply a slight downward gradient on the black line, but you get the picture
I have seen comments this morning that the market was shocked by the ECB's hawkish tone. It's a funny old world where a central bank moves rates from negative to more negative and can be accused of being hawkish. Dorkish maybe, but not hawkish.
As I keep stressing, the thing that we should have learned over the past few years is that that expecting central banks to follow market expectations is like expecting the Spanish Inquisition. No one should expect it.
The element of surprise that the ECB has once again induced in the market has lead me to shamelessly rehash the post from October when the market was surprised by the ECBs dovish tone.
The latest ECB press conference Monty Python Style - No one expects such little ECB action.
Market - I didn't expect such little ECB action.
Jarring chord. The door flies open and Cardinal Draghi of the ECB enters, flanked by two junior cardinals. Cardinal Vítor Constâncio and Cardinal errr the other one at the press conference who never says anything.
Draghi - Nobody expects such little ECB action! Our chief weapon is surprise...surprise and fear...fear and surprise.... our two weapons are fear and surprise...and obscure communication.. Our three weapons are fear, surprise, and obscure communication...and an almost fanatical devotion to inflation targeting.... Our four...no... amongst our weapons.... amongst our weaponry...are such elements as fear, surprise.... I'll come in again. (exit and exeunt)
Market - I didn't expect such little ECB action.
Jarring chord. They burst in.
Draghi Nobody expects such little ECB action! Amongst our weaponry are such diverse elements as fear, surprise, obscure communication and an almost fanatical devotion to inflation targeting, and doing everything it takes, - oh damn! (to Constâncio) I can't say it, you'll have to say it.
Constâncio - What?
Draghi - You'll have to say the bit about 'Our chief weapons are ...'
Constâncio - I couldn't do that...
Draghi bundles the cardinals outside.
Market - I didn't expect so little ECB action .
They all enter.
Constâncio - Er.... Nobody...um....
Draghi - Expects.
Constâncio - Expects... Nobody expects the...um…such little ECB ...um...
Draghi - ACTION!.
Constâncio - I know...I know! Nobody expects such little ECB action. In fact, those who do expect...
Draghi - Our chief weapons are...
Constâncio - Our chief weapons are...um...er...
Draghi - Surprise.
Constância - Surprise and...
Draghi - Stop. Stop there! Stop there. Whew! Our chief weapon is surprise, blah, blah, blah, blah. Read the charge!
The other one - You are hereby charged that you did on diverse dates commit heresy against the Holy ECB. My old man said you didn't follow the curve.
Constâncio -That's enough. (to Markets) - Now, how do you plead?
Market - We're innocent.
Draghi - Ha! Ha! Ha! Ha! Ha!
SUPERIMPOSED CAPTION: 'DIABOLICAL LAUGHTER'
Constâncio - We'll soon change your mind about that!
SUPERIMPOSED CAPTION: 'DIABOLICAL OBFUSCATION'
Draghi - Fear, surprise, and a most ruthless... (controls himself with a supreme effort) ooooh! Now, Constâncio, their expectations!
Constâncio cites obscure inflation indicators in support of the ECBs lack of action. Draghi looks at him and clenches his teeth in an effort not to lose control. He hums heavily to cover his anger.
Draghi - You....Right! Tie the market down. (the other ECB officials make a pathetic attempt to adjust the market expectations) Right! How do you trade?
Market - Still long Bunds, short Eur/Usd and running long Dax.
Draghi - Ha! Right! Not for long! Cardinal, give their expectations (oh dear) give their expectations a vicious twist.
Constâncio stands there and awkwardly and shrugs.
Constâncio - I....
Draghi - (gritting his teeth) I know. I know you can't. I didn't want to say anything. I just wanted to try and ignore your crass mistake in leading the market to believe in October that we were going to follow Switzerland
Constâncio - MY mistake?
Draghi - It makes it all seem so stupid.
Constâncio - Shall I, um... Tell them that we'll continue QE until March 2017?
Draghi - Oh, go on, just pretend for God's sake
Constâncio mumbles about the effectiveness of QE and need for its extension. The market looks decidedly bored with this pathetic attempt.
The doorbell rings. The market detaches itself from the ECB and answers it. Outside there is a dapper Fed official with a suit, slightly detached from reality.
Fed Official - Ah, hello, you don't know me, but I'm from the Fed. We were wondering if you'd come across the pond and do a sketch over there, in that sort of direction... You wouldn't have to do anything - just look as though you expect the Fed to raise rates
Market - Oh, well all right, yes.
Fed Official - Jolly good. Come this way.