What Will the ECB Do Tomorrow?

European Central Bank
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European Central Bank

What will the European Central Bank do tomorrow? Here's the likely outcome.

First, forget about an announcement of a bond buying program for Spain or Italy.

The reason is simple. On August 2, Mario Draghi laid down two conditions for such a program. He said: "The adherence of governments to their commitments and the fulfilment by the EFSF/ESM of their role are necessary conditions."

"The adherence of governments to their commitments." There are no commitments. Neither Spain nor Italy have asked for help. (Read more: Fed Watching ECB Just as Closely as Markets)

Second, "the fulfilment by the EFSF/ESM of their role..." The ESM is not in existence yet, and we are awaiting a ruling from the German Constitutional Court on September 12.

Neither condition is in effect yet. Hence, no bond buying program for Spain or Italy will be announced.

What about Portugal and Ireland? Because there are already bailout programs in effect, several traders have opined that it is possible a bond-buying program could be announced with one of those two countries first. This may be possible.

What will be announced tomorrow? There are several possibilities:

1) more detail on the bond buying program. Just because they are not going to announce an active bond buying program doesn't mean they can't provide more details on what such a program will look like.

There have been vague rumors this morning that Draghi will say that a bond buying program will be "unlimited" and "sterilized." (Read more: ECB Chief to Propose Unlimited Bond Buying: Report)

The phrase "unlimited" — if it is actually used — would be a big word. That is the bazooka the market is looking for. If he uses the word "unlimited," markets will go up.

But how can the ECB make an argument for "unlimited" bond buying when the Bundesbank and others have argued that the ECB does not have a mandate to print money? (Read more: ECB Ready to Waive Preferred Creditor Status: Sources)

Draghi has argued that buying short term debt of 3 years or less is not printing money (monetizing the debt). Why? Because there is less risk buying short term debt. I'm not sure I buy this argument. This seems to be monetizing the debt regardless of maturity.

Because of this, there is a group that is arguing Draghi will not make the buying "unlimited" but will say the bond buying program will be "adequate to reach its objective" or some such language. He will avoid being boxed in by a commitment of any set amount.

The word “sterilized” is also a bit tricky. This means they will not be any change in monetary policy, but it is expansion of the money supply that is largely responsible for juicing stocks. Will a “sterilized” policy be a disappointment to the markets?

2) a rate cut. There will likely be a new (lower) economic forecast. Inflation will remain "subdued." This will have little impact on the market.

3) relaxation of collateral rules. This seems likely.

4) new 3-year LTRO to ease funding issues. Possible, but it seems a bit early; the other two LTROs were announced in December and February.

I know, it doesn't sound terribly exciting, but Draghi has played this perfectly: just enough drama to get the markets excited, but also making it clear he is acting within his mandate. So far, the guy is stringing the markets along. Kick-the-can is working.

But Draghi has also warned he can only go so far. Sounding very much like Ben Bernanke, Draghi threw the ball back into the court of the politicians during the last ECB meeting on August 2: "In order to create the fundamental conditions for such risk premia to disappear, policy-makers in the euro area need to push ahead with fiscal consolidation, structural reform and European institution-building with great determination."

—By CNBC’s Bob Pisani

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