• We kick off today with the Turkish lira, in a separate bullet for the occasion. It’s as if the floor beneath it simply evaporated. TRY tanks about 7% against the US dollar and the euro to new record lows of USD/TRY 23.10 and EUR/TRY 24.92. This is however not part of an all-out Turkish asset crash. Stocks are easily rising 3% today. The Borsa Istanbul 100 since end May skyrocketed a stunning 25%. Turkey’s dollar bonds also extended their rally. And Turkish CDS (5-y), after surging to the highest since October 2022 in the wake of president Erdogan’s election victory, eased to the lowest level since end 2021. These moves follow the appointment of Mehmet Simsek as the new finance minister. Simsek pledged a return to “rational” economic policies. That prompted investor hopes of Turkey returning to more conventional policymaking. One of the key unorthodoxies were the massive FX interventions that have prevented the Turkish lira from declining uncontrollably. But Bloomberg today ran a story citing people familiar with the matter that Simsek had asked the central bank to ditch these operations, unshackling long-subdued strong TRY market forces that probably have additional room to run. Next on the agenda: higher (instead of lower) policy rates to finally address soaring inflation. President Erdogan for the past years twisted the central bank’s arm in lowering rates as he considered this the solution to the dramatic price surges. The policy rate currently is a mere 8.5% vs inflation of more than 40%. D-day is June 22.
• Moves on other markets are miniscule compared to the hefty repositioning in Turkish assets. US yields nonetheless rise between 3.2 to 5.3 bps. The front-end underperforms with the US Treasury’s announcement weighing additionally. It expects to rebuild its cash buffer to around $425bn at the end of June. That’s up from an extremely low $50bn, give or take, currently. Expectations for a flood of T-bills in coming months have raised concerns here and there as it is seen sucking up liquidity in a relatively short period of time. That said, there’s still a huge amount of excess liquidity being parked at the Fed’s reserve repo facility every day (> $2000bn) that in theory could easily be redirected towards T-bills. German yields trade choppy and are on track to finish the day 2.9 bps higher at the front but a few bps lower at the longest tenor (30-y: -1.8 bps). Currencies trade muted. EUR/USD hit an intraday low of 1.067, this week’s low, before rebounding back north of 1.07(2). The trade-weighted DXY and EUR/GBP both ease to just south of 104 and 0.86 respectively in uninspired trading. The Canadian loonie awaits the Bank of Canada’s policy decision later today. It deserves some extra attention following the Reserve Bank of Australia’s unexpected rate hike earlier this week. Markets are almost evenly split between a hike and the status quo at 4.50%.
News & Views
• The OECD updated its global economic outlook. It is improving, albeit from a weak recovery to a low growth recovery. The outlook projects a moderation of global GDP from 3.3% in 2022 to 2.7% this year, followed by 2.9% in 2024. Lower energy prices are easing the strain on household budgets, business and consumer sentiment are recovering, albeit from low levels, and the re-opening of China has provided a boost to global activity. On a country level, India is the growth engine with 6% and 7% respectively this year and next. OECD countries are projected to grow by 1.4% in 2023 and 2024. Headline inflation in the OECD is projected to decline from 9.4% in 2022 to 6.6% in 2023 and 4.3% in 2024. The decline in inflation is due to tighter monetary policy taking effect, lower energy and food prices and reduced supply bottlenecks. Monetary policy should remain restrictive until there are clear signs that underlying inflationary pressures are durably reduced. OECD Chief Economist called on fiscal policy to be scaled back, prioritizing productivity-enhancing public investments including those driving the green transition and boosting labour supply and skills.
• Czech retail sales decreased by 0.3% M/M in April with the Y/Y-figure pointing to a 7.7% decline (from -9.5% Y/Y in March). The decrease of sales in retail trade was broad-based with the exception of sales of automotive fuels. Hungarian industrial production declined by 2.5% M/M in April (-5.8% Y/Y). Output increased in only two sectors: the manufacture of transport equipment and of electrical equipment. YTD, production was 4.3% lower compared to Jan-Apr of 2022. CZK and HUF both trade on the softer side today, respectively at EUR/CZK 23.62 and EUR/HUF 369.