A QUICK LOOK AT GLOBAL FINANCIAL MARKETS
Though higher than expected GDP growth in China last week triggered a wave of optimism exacerbated by upward revision in IMF’s global growth estimates after 6 years, markets tend to move in a cautious way. Higher growth in China seems to have frightened investors in the sense that growth might have peaked and slowdown might start from now on. Tension with US over North Korea prevails in the meantime with US’s pressure over China about using its trade ties to curb North Korea’s efforts to develop nuclear missiles. Market will be following geopolitical tension closely while there is no important data release or event worth mentioning in China this week.
Singapore inflation and industrial production will be among important releases in Asia this week. Inflation to be announced on Monday at 1:00 p.m. (GMT+8) is expected to slightly pick up to remain flat at 0.7% in March compared to a month ago. Core inflation in the meantime is expected to slightly pick up to 1.3% from 1.2% in February. There is no market consensus for March industrial production to be announced Wednesday at 1:00 p.m. while y/y production growth in February was quite strong at 12.6% and market will follow whether there will be further acceleration in March.
February GDP growth and interest rate decision will be announced this week in Russia. GDP to be announced on Friday is expected to be 0.9% whereas it was -0.6% in December. Any sort of acceleration will be good news for Ruble but market may focus more on rate decision to be announced at the same day. Market consensus is a rate cut to 9.5% from 9.75% mainly due to the fact that inflation is decelerating and economy is recovering.
In Turkey, main event of the week will be the CBRT’s Monetary Policy Council meeting to be held on Wednesday. The Bank’s rate decision will be out at 14:00 local time. The CBRT almost for the last three months has been cancelling daily one week repo auctions and pushing banking sector to late liquidity window (LLW) by reducing borrowing limits in O/N repo markets. Currently, the CBRT’s O/N lending rate is 9.25% and banks’ borrowing rate in LLW is 11.75%. Hence the CBRT’s actions are considered as implicit rate hike as average funding cost has increased from 8.31% before the cancellation of one week repo auctions to 11.5% as of April 21. Expectations on the Bank’s action this week are diversified with most number of economists expect the Bank to remain on hold. Neither of the economists expect a change in marginal lending rate at 9.25% but three economists expect 25bps, 4 expect 50bps, and two including us expect 75 bps increase in O/N lending rate. Although current exchange rate volatility has diminished and global optimism spreads over markets, inflation outlook and expectations signal that pricing behavior is about to deteriorate unless the CBRT curbs demand pressure. No change would hurt USD/TRY which hardly stays below 3.65.
Another important event of the week will be April Inflation Report to be announced on Friday. The CBRT will announce its revised estimates of inflation together with underlying assumptions. Recall that the CBRT’s projections for end 2017 and 2018 were 8.0% and 6.5% respectively in January report.
Apart from the CBRT actions, April capacity utilization and real sector confidence to be announced on Monday will also be important week as we will see how the real sector’s tendency to produce and orders evolved in the second quarter of the year. There is no market expectation for capacity utilization but it stood at 75.3% in last year April. Seasonally adjusted capacity utilization was 74.6% in March 2017. A better than previous realization will hint that slight recovery in economic activity is in the making in the new year thanks to government support to consumer demand. Seasonally adjusted real sector confidence in the meantime was 106.7 in March while headline RSC stood at 110.1 in last year April. Any sort of recovery in real sector confidence stemming from export or total orders as well as recovery in fixed investment expenditure will be positive for the needed recovery in economic activity, following a quite weak performance in 2H16.
Data agenda is quite heavy this week in US, while first estimate of 1Q17 GDP growth in US and UK as well as durable goods orders in US and inflation in Japan will be the main releases of the week. Durable goods orders for March will be announced on Thursday at 8:30 a.m. (GMT-4) Core data excluding transportation is expected to rise 0.5% over previous month according to preliminary numbers whereas it was 0.4% in the previous month. Data may create positive reaction on dollar should it comes better than expectation. First estimate for GDP growth in 1Q17 in US to be released on Friday is expected to be 1.1%, lower than 2.1% registered in 4Q16. A stronger than expected outcome would support dollar index and lead to further rise in US bond yields.
There are two other important releases in US which will give a hint over housing markets. New home sales to be announced on Tuesday is expected to show a weaker standing in March with 1.5% contraction over previous month following 6.1% rise recorded in February. This may lead to a drop in dollar index and US bond yields. MoM increase in pending home sales to be released on Thursday is expected to decelerate to -0.2% m/m in March from 5.5% rise a month ago. Though it is a second tier data in terms of predictive power, it would be considered positive for US negative for EMs in case it posts a weak performance as indicated by consensus estimate.
In Eurozone, ECB Governing Council meeting together with flash inflation for April will be the main releases of the week. PMI data will be the main release to be followed this week. There is no rate change expectation in this Thursday’s rate setting meeting in Eurozone however ECB Governor Draghi’s statements after the French election will be quite important and will determine the fate of Euro hovering above 1.07. On Friday, preliminary inflation numbers for April will be released where market consensus is a rise to 1.8% from 1.5% in March. Such realization would support EUR/USD.
In UK, weekend summit in EU on Brexit will closely be followed. Note that Eurogroup members in their previous gathering hinted that it will not be an easy exit.
Data agenda is quite heavy in Japan this week. Inflation and unemployment will be announced on Friday at 8:30 a.m. local time while industrial production, retail sales for March will be announced at 8:50 a.m. Consensus estimate for core inflation in March is a rise to 0.3%, from 0.2% y/y while any pick up in headline inflation from 0.3% will lead further drop in USD/Yen parity. Unemployment rate in the meantime in March is expected to rise to 2.9% from 2.8% a month ago. Better than expected unemployment rate would encourage markets about further recovery in Japan economic activity. Retail sales growth is expected to rise to 1.5% from 0.1% y/y a month ago while industrial production growth is expected to come down to -0.8% from 3.2% m/m a month ago, according to preliminary numbers, which is no good news for growth performance.
06 Jul 18 (Fri)
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