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Kind of a Draghi - Analyst Blog

Posted
6/6/2012 9:52:00 AM
By: Zacks.com
Referenced Stocks:BOBE;HOV

Investors are looking to central banks help ease concerns about global growth. The European Central Bank (ECB) did not oblige today by cutting interest rates, but the markets will still be looking for clues to the central bank's future course of action in Mario Draghi's press conference.

The ECB is no doubt in the spotlight today, but investors are also pinning hopes on the Fed to do its bit following the recent run of soft economic readings. Bernanke's testimony to a congressional panel on Thursday could potentially provide some clues to his thinking ahead of the Fed's meeting on June 19th and 20th.

The ECB's decision today to keep rates unchanged despite compelling economic rationale for action otherwise is disappointing. All key economic indicators are pointing towards a deceleration in activity levels, with even Germany now showing signs of loss of momentum. And while Inflation readings remain above the central bank's 2% target level, they are trending lower.

Readings of purchasing managers and business confidence across the region shows a particularly soft start to the second quarter and retail sales are declining. There is still a pronounced divergence among the economic profiles of nations such as Spain and Italy on the one hand and Germany on the other. But the persistent region-wide air of crisis may be having an impact in Germany as well.

The tools at the disposal of the ECB include direct interest rate cuts like the one on the docket today or other indirect but potentially more beneficial actions like further funding for the region's banks or direct purchases of government bonds. The central bank has not done enough bond purchases given constraints on its ability to lend directly to member governments, though it has done some purchases over the past year or so.

The central bank's LTRO program, where it pumped €1 trillion in the region's banks through installments appeared to be the most beneficial as it helped improve confidence in the financial system and had a pronounced impact on member countries' borrowing costs, but the impact has not proven enduring enough.

But it's perhaps unfair to expect only the ECB to provide a path out of the current Euro-zone problems when the region's leaders themselves have proven unable to find common ground. The ECB interest rate decision today could be read as asking the region's politicians to take the lead.

With crucial elections in Greece coming up and another supposedly major summit meeting later this month, the markets are desperate for direction from the region's political leadership. They have been wanting thus far in showing any level of urgency, but many feel that the window of opportunity may not be available for long.

In corporate news, Brown Foreman ( BF.B ), the maker of Jack Daniels and other alcoholic beverage brands, came short of earnings expectations. Bob Evans Farms ( BOBE ) came out with better-than-expected earnings after the close on Tuesday, but missed revenue expectations and provide weak guidance. We also have results from homebuilder Hovnanian Enterprises ( HOV ) coming out today.


 
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