WEEKLY OUTLOOK 17-21 October 2016

2Y, 5Y and 10Y benchmark bond yields rising from 8.66%, 9.20% and 9.72% a week ago to 8.95%, 9.54% and 9.96% respectively.Domestic markets which felt a relief after Moody’s downgrade has experienced high volatility in the week to October 14, mainly due to increasing expectations of another downgrade from Fitch, operation preparations to Mosul and steep rise in dollar index. Turkey’s 5Y CDS spread picked up from 249.2 in October 7 to 252.9 in October 14, BIST 100 closed the week at 77,554 on a 0.5% loss (1.7% loss in USD terms) compared to previous week, USD/TRY rose 1.7% to 3.053 and yield curve has shifted up within the same period with

Main event of the week domestically will be the CBRT’s Monetary Policy Council meeting to be held in Thursday while unemployment rate and budget will also be closely followed. 

It is a quite heavy week in terms of data releases globally, among which China GDP growth and  US and EU inflation realizations will be the mostly followed. 

MONDAY

Japan – 3:30 Kuroda Speech: Bank of Japan Governor Haruhiko Kuroda is expected to provide more detail about the previously announced monetary policy framework called Yield Curve Controlled QE. No surprise should be expected from the speech.

Japan – 7:30 Industrial Production and Capacity Utilization (Aug): Industrial production in Japan which dropped 4.2% y-o-y in July is expected to recover to 4.5% growth in August. Any realization worse than expectations would pressurize USD/Yen.

Turkey – Short Term External Debt (Aug): Treasury will announce August short term external debt stock on Monday. Increase in short term financing has slowdown last year, signaling a healthier financing structure however it started to increase at an accelerated pace since the beginning of this year. Short term debt stock which stood at 102.7 bln at the end of last year has risen to $105.0 bln as of July. It will be important to see whether it continues or not in August.

Turkey – 10:00 Unemployment Rate (Jul): Unemployment rate in Turkey which will be announced on Monday at 10:00 local time is expected to stay at 10.8% in July. Any realization in line with expectation would be quite higher than %9.8 seen in the same month of last year. It is possible that unemployment rate surpasses expectations should weakness in economic activity in the third quarter of the year is reflected in labor market. Though it has limited market impact, unemployment rate higher than market consensus may lead to a negative market reaction.

Turkey – 11:00 Central Government Budget (Sep): Though it is a second tier data in terms of market impact, budget realizations are important for medium term macro outlook. Ministry of Finance will announce September budget realizations on Monday at 11:00 a.m. local time. Budget balance generated TRY14.1 bln overall and TRY7.7 bln primary deficit in September 2015. Considering the fact that government has revised its end year budget deficit target from 1.3% to 1.6% of GDP, we are likely to see dramatic deterioration in budget balance till the end of this year. Hence, it is reasonable to think that budget realization in September may be worse than last year. This may lead to higher borrowing need and create pressure over borrowing costs.

Turkey 14:30 CBRT Expectation Survey (Oct): Expectation survey held by the CBRT is quite important for the Bank’s monetary policy decisions. October expectation survey will be announced on Monday at 14:30 Turkey time. In September, 12 and 24 month ahead inflation expectations stood at 7.62% and 7.11% respectively. Market will follow whether participants revised their inflation expectations, following better than expected inflation realization in September.

Eurozone 12:00 CPI Inflation (Sep): Eurozone inflation will be announced on Monday at 12:00 Turkey time. Market consensus is 0.4% m/m inflation. Y/Y and core inflations are expected to be 0.4% and 0.8% respectively. Surprisingly higher than expected inflation would support EUR/USD as it would be considered as a positive signal for GDP growth.

US – 15:30 Empire Manufacturing Index (Oct): Empire Manufacturing Index is expected to recover in October like several other growth indicators in US. Market expects the index to stay at 1.0 whereas it was -2.0 in the previous month.

US – 16:15 Industrial Production and Capacity Utilization (Sep): Industrial production which is one of the main growth indicators for US is expected to post 0.2% y/y growth in September. It posted a 0.4% drop in the previous month. Similarly, capacity utilization is also expected to slightly increase to 75.5% in September from 75.4% in August. Production growth stronger than expectations would support the acceleration in dollar index.

TUESDAY

UK – 11:30 CPI Inflation (Sep): UK inflation will be announced on Tuesday at 11:30 Turkey time. Market expects consumer inflation to stay at 0.1% m/m while y/y inflation is expected to pick up from 0.6% to 0.9%. Core inflation in the meantime is also expected to increase to 1.4% from 1.3%. Although inflation is not so high in UK, it would not be considered good in markets as a pick up will point to fragilities in UK economy after Brexit.

Acceleration in headline inflation may prompt investors to price an increase in the possibility of a rate hike in December hence push DXY higher. Conversely, a worse than expected realization would delay Fed rate expectations and support ongoing EM rally.

US – 15:30 Real Average Weekly Earnings (Sep): As another widely followed inflation indicator, real average weekly earnings in September will also shape market expectations about Fed’s next move. There is no consensus about the data but market will follow whether September realization will exceed August outcome of 0.4%. A slowdown in earnings growth would lead to a drop in US bond yields and dollar index.

US – 23:00 Net Treasury International Capital Flows (Aug): Net TIC flows which will be announced on Tuesday at 23.00 Turkish time is quite crucial for the fate of US exchange rate and bond markets. Data shows the foreign inflows to US equity, Treasury bond and private corporate bond markets. Flight to secure assets amid global financial volatility keeps US bonds attractive for investors. There is no consensus estimate for the data however net foreign inflows to US assets in July have been $140.6 bln while long term net inflows were 103.9 bln. Acceleration in inflows would put upward pressure over dollar and hence support depreciation in EM currencies.

WEDNESDAY

China – 5:00 GDP Growth (3Q16): China GDP growth which will be announced on Wednesday at 5:00 a.m. Turkish time is expected to remain flat at 6.7%. It will be crucial to see Chinese growth which met expectations in the first half of the year with 6.7% will be able to preserve that level in the second half as well. Otherwise global growth concerns would aggravate and affect markets negatively starting from Asia.

China – 5:00 Industrial Production (Sep): Indicators providing hint over the growth performance in China in the second half of the year is of utmost importance for global financial markets. Industrial production to be announced at 5:00 a.m. Turkish time is one of those. Market expects industrial production in September to post 6.4% growth over a year ago, following 6.3% y-o-y in August. Market will welcome the acceleration in production performance in China.

China – 5:00 Retail Sales (Sep): Another important indicator regarding Chinese economy is retail sales. Market expects September retail sales to remain constant at 10.6% y/y compared to August. Data may remain secondary as market would focus on industrial production to be announced at the same time however should both industrial production and retail sales comes better than market consensus, then they may lead to a positive sentiment in Asian financial markets.

US – 15:30 Housing Starts and Building Permits (Sep): Housing starts as a critical indicator of economic strength which reflects the number of privately owned new houses on which construction has been started is an important ingredient in market players’ expectation of next Fed move. In September, market expects housing starts to post 2.9% rise over previous month to 1175K while there was 5.2% drop in the previous month. Building permits as another key indicator of demand in the housing market measures the change in the number of new building permits issued by the government. It is expected to post m/m increase of 1.1% in September to 1165K, following 0.4% drop in August. Market impact would be negative for EMs but positive for US should indicators point to further recovery in US housing market. This would support dollar index and lead to a sell off in bond market.

THURSDAY

Turkey – 14:00 Monetary Policy Council Meeting (Oct): Policy rate decision by Central Bank of Turkey will be announced on Thursday at 14:00 local time. Market consensus is another 25bps cut in the upper bound of interest rate corridor which will bring the O/N lending rate to 8.0%. Accordingly, total amount of rate cuts in the O/N lending rate since March, when the Bank started simplification, will reach 275 bps. Market does not expect any change in O/N borrowing rate at 7.25% or one week repo rate at 7.5%. Rate cut may bring further sell off in lira and bond market.

Eurozone – 14:45 ECB Governing Council Meeting (ECB): No change by the ECB is expected in either the policy rate at 0.0% or deposit rate at -0.4% in the meeting. Additionally monthly purchases are expected to be kept constant at €80 bln per month.

Eurozone – 15:30 Press Meeting of ECB Governor Mario Draghi: In the press meeting organized after the ECB decision, Mario Draghi’s statements regarding European economy after Brexit amid banking sector fragilities will be quite important. No surprising decision or statement is expected from the Governor’s speech however any hint regarding the fate of QE will aggressively be priced. Recall that ECB Governor Draghi previously announced that Brexit will drag down European growth by 0.5 pps over three years. Hence, whether the Bank will increase its corporate bonds from €7 bln will be widely followed. Any surprising move to extend QE would drag down EUR/USD which is hovering above 1.10.

eurusd

US – 15:30 Philadelphia Fed Business Outlook (Oct): Though it is somewhat a second tier data, Philadelphia Fed shows the sentiment of business environment. Market expects the Philly Fed index to decline to 5.0 in October from 12.8 in the previous month. One should not expect a dramatic market impact even though data deviates from expectation.

US – 15:30 Jobless Claims (Oct 8): Initial jobless claims which dropped to 246K in the week to Oct 8, lowest level in its history is expected to be 250K in the week to Oct 15. Data remaining below 250K will convince investors that initial claims have dropped to a lower level permanently. This may push both dollar index and US 10Y bond yields higher. Recall that initial jobless claims stay below 300K for 84 weeks and constitutes the longest trend since 1970.

03 Jul 18 (Tue)

11:08 am


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