DEUTSCHE BANK TO ELIMINATE 2015, 2016 DIVIDENDS TO MEET TARGETS
Draghi's compromise with doves heralds ECB policy easing in December
With some rate-setters advocating immediate policy easing last week, European Central Bank President Mario Draghi struck a compromise to keep the doves on side and set up expectations for action in December, central banking sources said.
Several influential Governing Council members argued that the ECB's balance sheet was still relatively small, especially compared to the U.S. Federal Reserve while Denmark's deeply negative deposit rate illustrated that there was still room to reduce rates, one source with knowledge of the discussion said.
Instead of delivering the wait and see message the market expected, Draghi opted for one that was more dovish and crystal clear, keeping with the ECB's tradition of building a consensus and putting to shame the Fed, which has fumbled with its communication at a critical juncture.
"It needs to be understood: there is consensus at the ECB Governing Council," a rate-setter, who asked not to be named, said. "A move in December is likely."
"Inflation is just not moving higher, there is a risk of falling into a Japanese-style liquidity trap," the Governing Council member said.
With inflation in negative territory, the ECB is far from its target of getting price growth to near 2 percent and its 60 billion euros (43 billion pounds) a month asset buys have proven insufficient as lower energy prices and slower growth in emerging economies have worked against it.
Meeting in Malta, the Governing Council discussed a wide range of possible measures and the general view was that instead of one or the other, a combination may be effective, the sources said.
With the Fed postponing its rate hike, Draghi's comments also had the desired effect of weakening the euro, a key result as the exchange rate is an important channel for policy transmission, another Governing Council member said.
Although increased asset buys could further squeeze liquidity in the market, one source with direct knowledge said concerns over market supplies were overdone as the ECB could move into new instruments and had plenty of room to manoeuvre even with government bonds.
The ECB could consider corporate debt or equities while there was also room to buy more supranational instruments. Sovereign debt was plentiful due to high net issuance and the ECB could always release debt to be held until maturity, the source said.
There is a constraint about having to buy national instruments in proportion to how much share each country has in the ECB, but substitution rules also provide some flexibility.
Still, another insider warned that the market may have overreacted to Draghi's words and waiting until December, when the ECB releases fresh inflation forecasts, was normal.
And with monetary policy already ultra-accommodative, room to do more may be limited.
"It’s hard to do much more monetary stimulus than this," said French Finance Minister Michel Sapin, who has no direct say in policy but who less than a year ago was one of the loudest voices urging the bank to do more.
"Draghi said there is still scope to respond to certain situations if needed, so there is still a possibility to do more but we’ve already come a long way."
The consensus from almost 60 economists in a poll conducted by Reuters after Thursday's meeting shows there is an 80 percent probability of the ECB easing at the next policy review on Dec. 3.
COMMUNICATOR
Draghi has been a masterful communicator, repairing the reputation of the ECB, which is run by a 25-member Governing Council that sometimes speaks with as many different voices, leaving the market guessing.
From promising to do "whatever it takes" to save the euro at the height of the bloc's crisis in 2012 to delivering an unexpectedly large 1 trillion euro plus quantitative easing (QE) programme this year, Draghi has become an expert in understanding what the market needs to hear and delivering more.
"The ECB really has become masters of communication: leading the market along, and then over-delivering," UniCredit chief economist Erik Nielsen said in a note. "I think Draghi more or less gave it away on Thursday: QE2 (in size, composition, duration) and (unfortunately) a rate cut. Remember, they are not in the habit of under-delivering."
Draghi's clear stance is now in stark contrast to the Fed, which meets on Tuesday and Wednesday.
Markets have been confused by top Fed officials sending conflicting signals and rate hike expectations have been pushed into next year even as Fed Chair Janet Yellen said she expects that a hike will be needed by the end of this year.
"It is never a good thing when the vice chairman of the FOMC and the vice chairman of the board are saying two different things at a critical juncture for policy," former Fed research director David Stockton said.
"When comparing the communications of Draghi and Yellen, it is important to remember that Draghi has been dealing with a crisis," said Stockton, now with the Peterson Institute for International Economics and Macroeconomic Advisers. "Yellen has been in a much different environment, one in which careful nuance has been more important than dramatic statements."
WORDS NOT ENOUGH
Draghi's problem now is that he must deliver and the entire world will be watching as market moves induced by the ECB reverberate across the globe.
"If you don’t meet words with action, the market backlash could be quite big,” said one Japanese policymaker on condition of anonymity.
The second round of quantitative easing is always less effective than the first one while the consensus in the Governing Council may also be at risk as more easing means lower borrowing costs for governments, which some central bankers see as de facto monetary financing since the ECB is making it cheaper for governments to borrow.
Governments are also not always doing their fair share to boost growth and accommodative policies by the ECB take pressure off governments to enact long-term measures that may be politically costly now but would support growth over the long term.
ECB's Constancio (Portugal): Asset purchase program will continue to grow until we see an adjustment in the inflation path - comments from Berlin
- lack of demand holding back recovery
- policy rate to remain low for prolonged period; reiterates ready to act to deliver on mandate
- would be a mistake to divert monetary policy from its objective of maintaining price stability to more directly address asset price misalignments and financial stability risks.
- in the past months, downside risks to the global economy have increased, due notably to the increasing weakness in emerging markets.
- There are several reasons why excessively low inflation generates relevant risks for the economy. First, with monetary policy rates at their lower bound, lower inflation rates imply higher real interest rates; in particular the real interest rate may end up above the equilibrium value needed to match savings and investment at the full employment level. Second, very low inflation may lead to an un-anchoring of inflation expectations. This would imply second-round effects on price and wage setting protracting the subdued price developments into the future. Third, low inflation increases the debt burden of borrowers, obstructing the needed balance sheet adjustment of highly indebted households, firms and governments. Fourth, should a generalised deflation pressure prevail, nominal rigidities in the economy, and particularly in labour markets, could inhibit the needed relative price adjustments. Finally, all empirical studies show that there is a positive measurement bias in the measurement of price developments, which implies that a zero inflation rate would mask actually declining prices.
Hyatt in advanced talks to buy Starwood; deal could be announced within a week - CNBC's Faber
- Deal could involve cash and stock
- HOT had held talks with a number of possible partners, the most recent of which before the Hyatt talks was with Intercontinental Group
- Notes that Hyatt's market cap ($1.7B) is significantly smaller than Starwood's ($12.7B)
**NOTE: yesterday HOT and other hotels traded higher on a report that three large Chinese firms eyeing Starwood have requested approval from China govt to make bids - press
- 04/29: HOT: To Explore Strategic and Financial Alternatives
Carl Icahn sends letter to CEO; calls on the company to be split; discloses large stake - Icahn:
AIG should immediately:Pursue tax free separations of both its life and mortgage insurance subsidiaries to create three independent public companies. Each would be small enough to mitigate and avert the Systemically Important Financial Institution (SIFI) designation.
Embark on a much needed cost control program to close the gap with peers.
GE and Alstom emerge as frontrunners for India rail contracts
GE Transportation, a division of General Electric of the US, and Alstom, the French engineering company, are frontrunners to win multibillion-dollar contracts to build and sell train locomotives as part of India’s ambitious railway modernisation programme, officials familiar with the bidding process said.
The two companies have been selected from a shortlist of seven — which included Bombardier, Siemens and Electro-Motive Diesel — to supply at least 1,800 diesel and electric locomotives over 11 years from two factories that are due to be built in the Indian state of Bihar, the officials said.
They declined to give financial details of the bids, which remain subject to final confirmation. Nevertheless, executives at Indian Railways, the state-owned rail authority, estimated that the total investment needed to build the factories could be as much as $3.4bn for an electric locomotive plant and $3.1bn for a diesel locomotive plant.
The initiative to lure multinational engineering companies to India to make advanced locomotives is part of a broader initiative to modernise the country’s congested and creaking railway system.
“This is the most ambitious rail modernisation project in decades,” said Suresh Prabhu, India’s minister of railways, in an interview. “These [manufacturing] projects will bring the best rail technology to India and show that our ‘make in India’ programme is not a dream,” he added, referring to a national policy to boost manufacturing investment.
The two factories are due to be built as public private partnerships, with Indian Railways contributing land and some facilities for a 26 per cent share in each plant; GE Transportation and Alstom will take the remaining 74 per cent stakes. Indian Railways is set to buy locomotives produced at each of the plants.
The diesel locomotive factory, likely to be operated by GE Transportation, is expected to supply 1,000 locomotives, Indian Railways executives said. The electric locomotive plant, expected to be run by Alstom, is to manufacture 800 train engines.
In addition to the plan to manufacture advanced locomotives, India also intends to commercialise roughly 400 of its 8,000 or so railway stations, selling long-term leases to companies to operate shopping malls, restaurants, offices and other businesses on station premises, Mr Prabhu said.
“About 27m people travel by train every day so you have a lot of people passing through the station ready to buy things,” he said. “In Japan, more than 30 per cent of the income of railways comes from the non-rail business, but in India this is only 2 per cent at the moment.”
Mr Prabhu also reiterated that the “dedicated freight corridor” project, under which India plans to build two new rail lines for freight from Delhi to Mumbai and Delhi to Kolkata at a total cost of $12.5bn, would be finished by 2019.