Euro Sinks as Draghi Sticks to Script

Contrary to the leaks, ECB President Draghi stuck to his intent that the ECB's balance sheet move back toward the 2012 levels.  He clearly confirmed that this was unanimous.  This was the first time, such a reference was made in the introductory remarks, which gives it more gravitas.  

Draghi also indicated that the staff has been instructed to prepare for further measures, if needed. Draghi again reiterated that the council was unanimous on more stimulus, if needed.   At the same time, Draghi warned of the likelihood that staff economic forecasts are cut again, next month. 

The euro sold off on the news.  It briefly traded below $1.24, having been near $1.2520 prior to the start of the press conference.  The prospects of additional measures has spurred a significant bond market rally in the European periphery, with Italian, Spanish and Portuguese benchmark 10-year bond yields have fallen 8-11 bp.  

Draghi did a fair job of playing down talk of disagreements within the ECB.  These are natural and normal.  The BOJ's recent bold moves took place on the basis of 5-4 vote.  There have been dissents at the BOE and FOMC as well.     Talk in some press stories that Draghi or Weidmann were likely to resign seems to be far from the mark.  Claims that the ECB has lost credibility also seems

Many observers reacted to the preparation of additional monetary stimulus as a reference to sovereign bond purchases.  However, this is NOT the most obvious next step.  The most obvious next step is to buy supra-national bonds, like the ESM/EFSF, EU and EIB bonds.  The ECB has bought covered bank bonds, but now that the Asset Quality Review and stress test has been completed, it can buy uncovered bank bonds. 

Separately, but not completely unrelated, German Finance Minister Schaeuble indicated that Germany will increase its infra-structure spending.  He seems to be referring to 10 bln euros in the 2016 budget.