— This is the script of CNBC's news report for China's CCTV on July 26, 2019, Friday.
The outcome of the ECB's decision, and in particular Draghi 's speech, disappointed markets somewhat, as the whole was less aggressive than expected.
First, the European central bank left its three main Eurozone interest rates unchanged, as most analysts had expected, while also raising the prospect of further easing. It adjusts forward guidance; key interest rates are expected to remain at or below current levels at least through the first half of next year. It is the first time since June 2017 that the ECB has given a clear signal of a possible rate cut in its monetary policy statement. The statement also stressed the need to extend highly accommodative monetary policy for an extended period, given the continued undershooting of real inflation and inflation expectations in the Eurozone.
This outlook is getting worse and worse, and it is getting worse and worse in manufacturing especially
But in Draghi's speech, the markets had not heard any specifics about possible action. In response to a question from CNBC, Draghi said all ECB members agree that more stimuli is needed, but there is no consensus on what exactly to do.
Draghi sent mixed signals in his remarks, which led some analysts to complain that he was all bark and no bite. After all, there was already a certain consensus of expectations that the ECB would ease further, or even cut interest rates directly.
Against this expectation we've seen the Euro-Dollar exchange rate fall to two-year low, European stocks have also risen in recent days. But Draghi's comments led directly to a reversal in sentiment, this has been intuitively reflected in financial markets. On Thursday, we saw a clear v-shaped move in the Euro-Dollar exchange rates, and all three major European stock indexes closed down.
In addition to the European central bank, Turkey's central bank announced Thursday that it would slash its benchmark interest rate by 425 basis points to 19.75 percent, the first time the central bank has changed its monetary policy stance since last year's currency crisis. After that, the fed's decision on interest rates is crucial.
The market now thinks there is an 80 percent chance the fed will cut interest rates by 25 basis points and a 20 percent chance it will cut rates by 50 basis points at its meeting later this month, according to federal funds futures trading.
But markets are holding too much expectations to rate cuts, so we should be alert to the possibility of disappointing these expectations. That possibility, though, is now extremely unlikely. We will keep an eye on this issue.