Central Banks Do Nothing, Promise More

The ECB has disappointed the market who expected some action after Draghi's strong comments last week.  In anticipation the euro was briefly taken through the $1.24 level only to be sold down to new lows for the week, below $1.22.         

Draghi did not break new ground.  He reiterated what was already known.  Countries need to formally request EFSF support to activate it.   The ECB cannot and replace government action.  Spain is understandably reluctant to ask due to potential conditionality and stigma associated.  Draghi did suggest the subordination/seniority issue will be addressed. 

                                  
Draghi tried to deliver a fait accompli to the ECB board, seeming to promise action, which he was not authorized to do.  It appears he simply did not have his ducks lined up. 

Draghi did seem to suggest that the ECB may act more on the short-end of the coupon curve and by acknowledging that a negative deposit rate was uncharted water, it suggests that the ECB is reluctant to do that.   A rate cut was discussed, he said, but the fact that it was not delivered reveals the lack of support.

The take away from the ECB and FOMC meetings is no immediate action but next month will likely be different.  The door is more than ajar.   Many issues comes to a head in September.  The German Constitutional Court makes its ruling.  The Dutch hold national elections.  A decision is likely on Greece and Cyprus.  The mid-Sept FOMC meeting is seen as the last opportunity for the Fed to take action ahead of the US election as the Oct 24 meeting is seen as too close to it. 

The lack of action from either the Fed or the ECB this week stands in stark contrast with their dour economic assessments.  The assessment and action will be brought into line, but not as soon as investors want.