What now, Dr. Aghi?

Hard as it is to believe, it's already been three months since the latest of Mario Draghi's game-changing announcements.  Say what you will about the man, but he's not afraid to move the needle.  (Of course, the fact that a repeated series of game-changers has been required says something that's perhaps a bit less flattering.....)

In the interim, financial markets have performed more or less as Signor Draghi might have hoped.  The euro is lower more or less across the board, which must come as a relief given  his recent concerns over the exchange rate.   Government bonds have of course ripped, with Bunds at one point tacking on a full 10 points in futures terms; German cash ten year yields are now less than half of what they were a year ago.  The only disappointing asset class has been equities, though between the Ukraine conflict and Espirito Santo they've faced headwinds that the other asset classes have not.

So what now, Dr. Aghi?  You have James Bond (or at least his German cousin, Jakob Bund) right where you want him.   Will you press the button that buries him forever, or give us a lot of pretty words to describe your unnecessarily complicated scheme, thereby giving him time to escape from your clutches when your back is turned?

Past form certainly indicates the latter.   To be sure, the growth and inflation forecasts look likely to be nudged lower yet again.  All else being equal, this would provide cover for a further policy shift.     However, it's not clear to Macro Man what another deposit rate cut would accomplish; after all, money market rates have plummeted over the last few months, and it is not in any way certain that trying to shunt EONIA solidly into negative territory is going to have a positive impact on the banking system.   Indeed, it's easy to construct an argument that it would be a net negative..   At the same time, with the first TLTRO just around the corner, there is a jolt of liquidity stimulus coming down the pipeline.

While it is possible that the work on an ABS program has been progressing more quickly than expected behind the scenes, the realpolitik  of European policymaking is such that we almost certainly would have had some major leaks if such a program were around the corner.  As such, Macro Man expects Draghi to live up to his alter ego's Bond-villain stereotype and do a lot of talking but not much doing today.

What will it mean for markets?   According to Macro Man's little EUR/USD model, the euro has overshot modestly to the downside.   A correction of a couple of cents wouldn't go amiss, though it would probably need a weak payroll number to return the pair to its "fair value" of 1.3400.  (Macro Man is still trying to get the full dataset to populate his charts.)  If it gets there, one might credibly expect an orderly queue of sellers looking to establish/add to shorts.  Macro Man has to admit that he'd be tempted to join them.....
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Nico G
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September 4, 2014 at 1:07 PM ×

the bones he (has to) throws to the financial markets are increasingly meagre..

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Macro Man
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September 4, 2014 at 2:00 PM ×

Well, I got that about as wrong as I could have. Good luck on the last 10 beeps making a difference, Mario!

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Leftback
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September 4, 2014 at 2:06 PM ×

Every time the magician reached in to his hat, there was one less chicken there to be pulled out......

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Mangler
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September 4, 2014 at 2:08 PM ×

"Oh, Mario. That was heavenly. But it seems to me that your bazooka has become, ah, quite a lot smaller since we first discussed it, dahling..."

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amplitudeinthehouse
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September 4, 2014 at 3:00 PM ×

What now for Dr. Aghi?..his created a vicious circle that started about a month ago as knowledge of ABS was leaked within the financial grape vine.
The more he fought and threw easy money at the situation the more it lead to the conservative punters at Bundesbank to to push back against it , this created the third leg on the cycle with shadow banks and money lenders knowing exactly where the next allotment liquidity was coming from , thereby , money lenders established quickly enough that if the ABS comes through it won't matter what the Bundesbank has to say.
Draghi created a false sense of confidence in the money lenders at a time when the Bundesbank is trying to implement and in-the-middle of the road agreement in respect to the concessions that financial institutions should receive.
In retrospect ,can you picture the money lenders and shadows banks disapproval if the Bundesbank were to actually discontinue all lines cheap, no ,make that very cheap lines of liquidity even for the overnight rate. You just did.

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CV
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September 4, 2014 at 3:13 PM ×

Well yes, but Draghi will feel as a BSD on crack today, look the market. Yields down to new lows in the periphery, euro down, equities up ... this is the market endorsing the ECB all the way ... for now at least, it will all end in tears when something snaps of course. But for now, the ECB's smugness rating will be off the charts.

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Gnome of Zurich
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September 4, 2014 at 3:38 PM ×

As they are fiat chickens, the magician will never run out.

And the PIGS are flying again. Mario is rigging the game in their favor. The interesting thing is: The PIGS bank stocks are not priced this way.

So the magician running out of tricks is the consensus bet in the banks. I am willing to take the other side.

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Leftback
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September 4, 2014 at 3:53 PM ×

Another great week for not punting and waiting for CBs to finish playing silly buggers. Now that Dr Aghi is over with for the time being, we can sit back and await the latest release from The Bureau of Lies and Simulation, and then realize we are all of us now one week closer to the day when we awake and realize that there will be no POMO...

My advice to BLS watchers is to totally ignore the headline number and focus on hourly wages and hours worked. These numbers are less easily manipulated, less noisy and more meaningful.

Looking at today's trade in rates, one might make the reasonable assumption that someone out there already knows that tomorrow's NFP number is slightly hotter than the ADP would lead one to believe. Be ready for 225-250k, perhaps. Another fixed income buying opportunity coming up.

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Leftback
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September 4, 2014 at 3:53 PM ×

Claus,

+1 for "BSD on crack".

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Mr. T
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September 4, 2014 at 4:29 PM ×

Really? 5 years in and we are still playing this CB game? Honestly, I'm surprised. The potential for unintended consequences from negative rates is high. I bet EURUSD is still a short here @ 1.297 but I don't have a position (yet). I don't know what rate ECB would like the EUR at, but it better get there quick or the drip-drip against zero yields is going to make it unbearable to hold euro bonds.

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Macro Man
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September 4, 2014 at 5:02 PM ×

For real money investors that might be true, but for leveraged guys who buy on repo (hint: the liability is denominated in the same currency as the asset), it shouldn't matter, a fact that David Stockman conveniently ignored in his piece linked by Nico G earlier in the week.

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Leftback
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September 4, 2014 at 5:03 PM ×

The game of competitive devaluation has been on for years, but it went into overdrive with Abenomics and QE3/4. It was Europe's turn to try to prevent recession by shoving the € back underwater again, and Dr Aghi has delivered.

DX 85 is about the level where the US starts to slip into recession again (DX was 85 last August and Q1 was a contraction), so we have a bit of room for the buck to strengthen before we get there. In the meantime, we now have more peripheral debt arbitrage, and we get to guess what silly levels OATs, BTPs and ODEs can sink to.

Opportunity is now arriving in US Treasuries, as we are rapidly running out of rah-rah in the US housing and employment data.

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Mr. T
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September 4, 2014 at 5:42 PM ×

Looks like this might be the first time EURCHF 1.20 has to get defended since 2012.

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Anonymous
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September 4, 2014 at 6:05 PM ×

Is there a limit to the size of the BOJ balance? If so, what could it be?

"...the Bank of Japan is buying around 70% of all newly issued Japanese government bonds (JGBs)."
"The BoJ is buying ¥7 trillion ($67 billion) of JGBs a month. It now owns a fifth of the government’s outstanding debt."
http://econ.st/1teZbDR

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Anonymous
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September 4, 2014 at 6:07 PM ×

Bloomberg,

"Almost half of all the government bonds in the world yield less than 1%. "

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Leftback
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September 4, 2014 at 6:09 PM ×

Japan would have blown up long ago if everyone else hadn't joined in the international QEasing game.

Looking ahead to October, it appears that the very last POMO of the current program will be conducted around Thursday 30th October.

Happy Halloween, punters!

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Anonymous
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September 4, 2014 at 6:22 PM ×

So Draghi is going to buy up blllions of bonds forcing cash back into system that needs to buy new debt & Tepper says UST are dead ?

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Leftback
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September 4, 2014 at 7:24 PM ×

Tepper isn't a bond guy, so who knows what the heck he is talking about. Junk bonds, perhaps?

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River
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September 5, 2014 at 12:57 AM ×

Congratulation to Lb for an awesome Ytd return..over 14%

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River
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September 5, 2014 at 1:09 AM ×

I've followed Lb since 2008(Ritholtz blog)..he's the bond guy!

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River
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September 5, 2014 at 2:30 AM ×

I am an Indo-Canadian(immigrated to Canada at a young age in early 1980s. So I have never really experienced or understood deflation.I have heard about 30% int rates in India(around yr.2000)! Lb helped me understand(really get it) the concept of deflation and help decode Carney!Many of my family members are heavily invested in real-estate(Indian thing I guess..gold, bonds and real estate)

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River
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September 5, 2014 at 2:38 AM ×

Lot of people were nervous about r/e bust in Canada like the U.S. 2008/2009 scenario..and the newspapers and the comments sections were full of fear mongering too.It could still happen..who knows!Mean while, it has been a good trade. Who knows this may be the top!

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Nico G
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September 5, 2014 at 7:06 AM ×

i've never traded bonds - is there a limit to front running CB purchases? it seems to have been the game since the early POMO POM days

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Nico G
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September 5, 2014 at 10:04 AM ×

by limit i don't mean negative rates, for such anomaly does not seem to scare anyone anymore. I meant more in terms of risk/reward considering current levels of compression across the board

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