Headline inflation surprised on the downside in August with m/m realization of -0.29% against the market expectations for a flat reading. Annual inflation lowered to 8.05% from 8.79% a month ago. Meanwhile core inflation has also declined in August to 8.4% from 8.8% in July.
The downward moves in food and clothing prices led a boosted inflation outlook. Though food prices that has remained volatile through this year make it extremely hard to estimate the trajectory in months to come. Yet, one should expect a pick-up in prices due to resumption of food exports to Russia. The inflation rate will most probably remain above the target of 7% with positive contribution from food prices. Also note that oil prices and imminent rate hike by the US Federal Reserve are likely to be influential external factors that could have an impact on the performance for the remainder of the year.
Turkish central bank will continue to loosen policy with O/N lending rate cuts until average funding rate hit one-week repo rate at 7.5%. At some point, central bank’s efforts to boost the economic activity will be increasingly relied on loosening liquidity.
Given the lower local funding costs that generates plenty of room for carry trades, we believe that short term returns are warranted in Turkish government bonds despite the cloudy outlook in inflation.
Despite the ongoing still-decent GDP growth, the economic outlook of Turkey is not in brilliant shape. Following a robust start to 2015 for the economy, the current focus of consumers in view of economics developments in predominantly on general domestic conditions and clearly there are negative signs in these areas.
The mood of consumers in Turkey is more pessimistic according to the data released by Turkish central bank in September’s Survey of Consumer Confidence. The overall indicator providing the numerical information about the consumers’ expectations was down by 3.9 points to 58.5 which was the lowest figure recorded since January 2009. Moreover, Turkey posted a reading below 60 only three times in the past (between November 2008 and January 2009), in other words consumer confidence is not that far from hitting its all-time low.
The economic expectations index also hit an all-time low in September at 72.0. The index averagely fell by 8% in the past two months.
Given the higher political risks ahead of the elections, further potential lira weakness, and the restart of violence in the southeastern part of the country, one would not expect the mood of consumer to be boosted after all.
We find something very interesting in the chart above as it provides information about the relationship between propensity to save and Turkey benchmark bond (2-year) yield. Apparently, the index had worked out greatly as a pre-indicator for rates in the debt market until early this years, however the two series clearly have moved different way since then. Ultimately, average Turkish citizen is likely to face important challenges in a struggling economy before they return to non-crisis consumption patterns.