Rare flash of decisiveness in Europe

Few predicted a rate cut from the European Central Bank, but that's just what happened at Thursday's meeting.

By Jim J. Jubak Nov 3, 2011 3:35PM
Surprise! Just when everybody assumed that the European Central Bank would do nothing, it cut interest rates by 0.25 percentage points at new President Mario Draghi's first meeting Thursday.

The cut brings the bank’s benchmark interest rate down to 1.25%. Only four of the 55 economists surveyed by Bloomberg before the meeting predicted a rate cut.

The thinking was that with inflation climbing to an annual rate of 3% in October -- well above the bank’s target of just below 2% -- Draghi would be reluctant to move at his first meeting.

But in the days before the bank’s board of governors met in Frankfurt, data had increasingly pointed to a deepening of the current crisis. Yields on Italian ten-year bonds had jumped to 6.39%, a record for the euro era. (After the bank’s decision, yields fell to 6.14%.) Unemployment in Germany climbed in October for the first time in two years. Indexes showed manufacturing in Europe contracting for the third month in a row.

Post continues below.
The Eurozone looked increasingly like it was headed for a recession: On Oct. 31, the Organization for Economic Cooperation and Development cut its forecast for growth in the region to just 0.3% in 2012. (Growth will come in at 1.6% for all of 2011, the group projected.)

And, of course, in the background there’s the little matter of the proposed Greek referendum on the recently announced grand plan to end the euro crisis. Overnight, Eurozone leaders had warned that they would treat the vote, if it were held, as a referendum on Greek membership in the euro.

The next act for Draghi and the bank was today’s post-meeting press conference in Frankfurt, which started at 9:30 a.m. ET. In his prepared remarks, Draghi didn’t directly address the bank’s willingness to extend its current program of buying Greek, Spanish, and especially Italian debt in the market in order to support prices and drive down yields.

The European Central Bank has already purchased $240 billion in bonds, and there’s opposition at the bank and from some Eurozone governments (Germany, for example) to further expansion of the central bank’s balance sheet.

Markets had been hoping that Draghi today might commit the bank to continue its current course, or give some guidance on how far bank support might extend. Nothing in the press conference addressed that point, so I guess Draghi’s boldness does have a limit.

But markets are still up in the United States and Europe on this unexpected instance of decisive action from the Eurozone. As of 1:30 p.m. ET, the S&P 500 was up 1.3% and the German Dax was up 2.8%.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 
7Comments
Nov 3, 2011 4:45PM
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You have to believe that Germany's resistance to further bond buying will grow stronger, especially if they are finally experiencing rising unemployment.  Unless perhaps there is a caveat in the Central Bank's continued support that Greece is not to be included in future bond buying.  Harsh words, but European leaders already stated they would treat the referendum vote as Greece voting on leaving the European Union.  (I suspect that decision has already been made.)

 

They seem to be getting a bit impatient and short-tempered across the pond.

Nov 3, 2011 5:17PM
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We are in for quite a ride.  Hope it is not too rough.  Hang on tight.
Nov 3, 2011 4:55PM
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Rare flash of decisiveness in Europe

We heard this last week,

and the week before,

and the week before,

and the week before,

and the week before,

and the week before,

and the week before,

and the week before,

and the week before,

and the week before,

Nov 3, 2011 5:15PM
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The problem of sovereign debt is not solved.  Sovereign debt will contiue to grow until sovereing appetite for spending is lessened.  
Nov 3, 2011 5:13PM
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Jubak you old geezer, why don't you do a comprehensive peice about how the dept/prinicipal owed is unsustainable instead of this trickle down BS. Trillions of dollars are at stake if the Euro collapses.  C'mon we are not kindergarteners
Nov 3, 2011 5:48PM
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I second Endeavor! Lets get together with family, friends, and neighbors and share a meal!!!!
Nov 3, 2011 7:53PM
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I for one could care less about these Med countries and their age-old crime systems.  The Med is the place rich kids go to chase girls.  Old geezers drink wine and eat cheese.  Theirs is one of centuries of gluttons.
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