In what marked a somewhat inauspicious start to the new week, the Turkish lira plunged more than 3% out of the gate following President Erdogan’s wholly ill-advised (albeit not entirely surprising) decision to oust his central bank governor for the high crime of keeping rates on hold last month.
“We told him repeatedly to drop interest rates in meetings. ‘If rates fall, inflation would fall’ we told him”, Erdogan said Sunday, in a hilariously blunt attempt to “explain” the move. “He didn’t take the necessary step. We weren’t on the same track”.
No, not at all. In fact, nobody (with the possible exception of Berat Albayrak) is “on the same track” as Erdogan when it comes to asserting that rate cuts bring down inflation.
CBT’s credibility is now shot to pieces. The only silver lining may be that credibility isn’t something CBT had much of in the first place, so once the initial knee-jerk reaction has time to run its course, things could calm down, especially if state banks show up to support the currency (as they did during recent bouts of turmoil).
Still, the erosion of central bank independence is a worrisome trend, something we talked quite a bit about over the weekend.
Believe it or not, Trump made things worse vis-à-vis the Fed during remarks to reporters as he boarded Air Force One (or “Aircraft One“, as he called it last week) on Sunday.
“If the Fed knew what it was doing” it would cut rates, he said, adding that by not bowing to demands to immediately ease policy, Jerome Powell is handicapping the US in what Trump imagines is a battle with Europe and keeping a lid on stock market gains. Of course, stocks are up nearly 20% in 2019, a fact which underscores the notion that nothing would be good enough for Trump when it comes to Powell.
The Deutsche Bank news may weigh on sentiment. The headlines were flashy and the overhaul is quite dramatic, but according to two people we spoke with on Sunday, the radical step hardly comes as a surprise to anyone at the bank. Indeed, even the most casual of market observers knows the writing has been on the wall for years. The Lehman comparisons long ago became so cliché as to be unfunny.
As far as the market impact goes, Bloomberg’s Mark Cranfield notes that “this is one of the rare times since the global financial crisis when the events around a single firm could have wider implications for the trading of most asset classes”. The issue is obviously liquidity provision, although it’s not as if someone won’t step in to fill the void. The bank “has been a significant liquidity provider across derivative and cash markets at the institutional level, so any withdrawal of trading lines will hit liquidity”, Cranfield wrote.
On the data front, core machine orders in Japan fell 7.8% MoM in May, missing consensus (-3.6%) by a country mile. That doesn’t bode well for capex.
Meanwhile, markets aren’t particularly enamored with the prospect of a decades-old dispute between Japan and South Korea (over the Japanese occupation) spiraling into outright economic warfare. Abe has decided to impose export restrictions that threaten to curb access to products crucial for South Korea’s semiconductor industry, which is already laboring under the fallout from the US-China trade war. That the Trump administration hasn’t stepped in to mediate between America’s two closest regional allies isn’t helping. The Kospi fell more than 1% in early trading. Samsung and SK Hynix dove.
Again, none of this sets a particularly upbeat tone for the new week. Powell’s testimony on Capitol Hill will be in focus as will Iran, after the country took more steps towards abandoning the nuclear deal in light of recent tensions with Washington.