The first ECB meeting this year is taking place today and markets have been quite quick to price in additional hawkishness coming from Frankfurt. Could it be that the tide might start turning starting from today? Hawkish in Davos, but dovish in Frankfurt? Read out in this brief research piece.
Thoughtful central bank watchers are under the impression that Davos was as a de facto January ECB meeting because everything importan has already been said. Christine Lagarde reiterated data dependence, emphasized focus on wages because wage growth is at the driver’s seat of recent bout in services’ inflation and briefly mentioned summer rate cut as a hypothetical possibility. Financial markets that have been hooked on monetary stimulus since at least 2015 turned this hypothesis into a wet dream. Right after her Davos statement, Lagarde’s comments were overruled by Joachim Nagel who again emphasized data dependence and that at this time it’s too soon to talk about rate cuts. If two of the core ECB members distribute such hawkish statements, why are markets still pricing a 66.4% probability of an April cut (as per the WIRP EZ BBG function submitted below)? Could it be that the markets are again ahead of themselves?
A string of leading indicators such as seasonally adjusted EA manufacturing PMI have been hoovering below neutral 50.00 since summer of 2022. This means a year and a half of manufacturing malaise and the show goes on! With recent general strikes in Germany which have so far included all the economic sectors from agriculture to transportation by alphabetical order, it’s quite likely that eurozone GDP will continue to decline. The problem for the ECB is that wages will continue growing, fuelling the vicious circle of strong inflation prints. Nevertheless, the way companies operate in the recession is that they start cutting margins first and lay off workers second. According to some anecdotal evidence, this process has already been brewing in construction and could gain momentum in the first quarter of the current year. That might force the ECB’s hand at frontloading the first cut while at the same time keeping QT in play and reminding the market of the existence of TPI.
So could it be that soft data malaise (PMIs) transfers into hard data weakness and forces the ECB’s hand earlier than communicated on Davos? We beg to differ, based on two considerations. First of all, ECB staff would emphasize the importance of wage data and dismiss the weakness of economic activity as a direct consequence of general strikes. Monetary policy deals with economic climate, not economic weather. And second of all, IMF’s Gita Gopinath who was handpicked by Madam Lagarde back in the days warned about cutting rates too soon. Gopinath stated that early cuts meant that all the ground gained in a pricey fight against inflation (which ended up transitory after all) would be forfeited for nothing. Wisdom of her words is further amplified by the notion that if the ECB cuts ahead of the FED, EURUSD would weaken and euro area inflation could exhibit another spike higher.
But enough about macroeconomic musings, what’s going on with financial markets? End of the longest month of the year was marked by record-breaking IG issuance in size of 294.97bn EUR (13.7% higher than in 2023). Thoughtful analysts point out that SSA activity took the main stage. Also, Poland, Slovenia, Spain, Portugal, Latvia, Estonia… all went to the markets to lock in cheap funding, despite rates giving back all the gains post-Christmas rally. Some sovereigns decided to skip international funding and decided to turn instead to domestic resources. Croatia is a case in point. This Friday (26th January) CROATI 6 01/26/2024$ will mature – this is 1.75bn USD before the hedge or about 1.4bn EUR after FX swap. According to CNB data, Croatian banks would receive about 140mm EUR in dollar equivalents and start reinvesting the proceeds into other CEE$ bonds. More importantly, the Ministry of Finance would pay off the international bond from the cash it has at hand at the central bank and wait for retail treasury placement in the first weeks of February. International bond placement is still at play, but we’re looking at early summer when CROATE 5.75 07/10/2024€ becomes due. So stay tuned.
Today, Cinkarna Celje published that it had received two counterproposals to its dividends, one from SDH, which proposes EUR 3.2 per share, DY of 15.3% (based on the initial price before the Cinkarna Celje’s proposal, to provide a like-for-like comparison), while VZMD proposed that the dividend proposal remains the same (EUR 2.77 DPS, DY of 13.3%). Since this is the dividend that was supposed to be paid out last year, from the 2022 net profit, VZMD proposes that it be paid out combined with the dividend that is to be paid out from the 2023 profit, which is still to be announced at the GSM meeting to be held later in the year.
Starting off with the SDH proposal, they propose a distribution of profit in the amount of EUR 25m, out of the balance sheet profit, which would imply a dividend of EUR 3.20 per share. As the initial proposal already increased the price of the Company’s shares, to provide a like-for-like comparison, the DY amounts to 15.3%, based on the price before Cinkarna Celje’s initial proposal. SDH believes that Cinkarna Celje can make this payment without negative consequences for its operations, as 2022 was extremely successful. Furthermore, the Company is debt free and its financial situation is good and stable. Also, SDH announced that they will object to the initial dividend proposal by Cinkarna Celje and that they will get the other shareholders to favor his vote.
Moving on to VZMD, they propose that the dividend payment from the 2022 profit would remain the same as the one Cinkarna Celje proposed (EUR 2.77, DY of 13.3%). However, to avoid the higher costs of two dividend payments, they propose that this dividend be paid out in combination with the dividend from the 2023 net profit. To understand this, we have to go back to 2023. Cinkarna Celje decided not to pay out the dividend in 2023, from the 2022 net profit during 2023, as it received Government support in the amount of EUR 5-7m. As such, if it did pay out the dividend during 2023, it would have to pay back this support, thus increasing costs significantly. Due to this, the Company decided to pay out the dividend at the beginning of 2024, thus the proposal Cinkarna made during the Convocation of the GSM a couple of weeks ago.
The difference here then is the fact that VZMD is requesting that this dividend be paid out in combination with the 2nd dividend they expect will be paid out in 2024, from the 2023 net profit. Furthermore, they propose that these 2 dividends be paid out together and that the ex-date and payment date be the one from the 2nd dividend.
We would like to emphasize, however, that according to the financial calendar, the GSM meeting is planned to be held on 19 June 2024. Initially, it was planned that the 2023 dividend would be paid on 28 June 2024, as this data stands in Cinkarna’s financial calendar. As such, if beforehand the 2nd dividend is proposed, and afterward accepted, if this counterproposal is accepted, shareholders would see the combined dividend payment somewhere at the end of June.
Here you can find the dates for the upcoming events of the regional companies
| wdt_ID | Date | Ticker | Announcement | Country |
|---|---|---|---|---|
| 5 | 25.1.2024 | KRKG | Krka Preliminary 2023 Results, Press Conference | Slovenia |
Due to the nature of these events, they are subject to change (might be postponed or canceled).