I’m going to go out on a limb here and say that just about the last thing Turkish assets needed right now was contagion from broad-based EM Fed jitters.
As you’re hopefully aware, Erdogan has decided to bring forward the “election” (scare quotes there for a reason) that will cement his Sultan status to June, nearly 18 months ahead of schedule.
Turkish assets initially sold off when Bahceli and MHP proposed the snap polls but rallied a day later when Erdogan made it official, presumably on the (probably mistaken) assumption that the sooner we get this farcical “vote” out of the way, the sooner he (Erdogan) can stop shrieking about interest rate conspiracies on the way to allowing the CBT to try an stabilize the flagging lira.
That decision came a week ahead of a critical central bank meeting that was seen by the market as a test of Erdogan’s willingness to let the CBT do what it needs to do to stop the FX bleeding. They delivered – sort of. The 75bp LLW hike was ahead of estimates but below what was probably necessary to pacify markets.
That brings us to Thursday and the latest inflation readings out of Turkey which were predictably terrible. And I mean just an across-the-board disaster. Have a look at this egregious shit here:
- Turkey Inflation Accelerates to 10.85% in April from 10.23% in March (est. 10.45%)
- CPI M/m acceleration 1.87%; worse than est. 1.5%
- Core CPI 12.24%; worse than est. 11.53%
- PPI M/m acceleration 2.6%; double the est. of 1.3%
- PPI Y/y acceleration 16.37%; worse than est. 14.9%
Yeah. Here’s Goldman:
Going forward, we expect inflation to continue to increase and we now think that inflation will peak above 12% in late summer as the Lira has continued to depreciate and oil prices have risen. Moreover inflation expectations remain elevated, inflation remains sticky and the elevated pace of economic activity continues to add to the inflationary pressures. Given the recent inflation numbers and the performance of the Lira, we raise our end-year inflation forecast to 11% from 10.5% and well above TCMB’s forecast of 8.4% and a median Bloomberg consensus forecast of 9.5%. Given today’s inflation print, the risks to our forecast of another 75bp of rate hikes by Q3 2018 are firmly skewed to the upside, and we maintain our conviction view of paying rates.
“My immediate concern is about the value of the lira,” SEB’s Per Hammarlund said, adding that “the loss of CBRT’s credibility and political pressure for looser monetary policy have weighed on the currency [and] the central bank is running out of options.”
Right. And again, the reason that’s the case is because of Erdogan and his deliberately unorthodox views on rates, FX and inflation.
So that pushed the lira to a new record low:
And here’s the annotated chart that shows you the election calls and the CBT late liquidity window hike:
And here’s Turkish stocks (five month low):
Now all we need is for Erdogan to not-so-patiently explain that the reason inflation is so high is because rates aren’t low enough.