The Turkish Central bank made headlines – weekly update 17 September

A look back over macroeconomic and market events for the week ending 14 September 2018. The Turkish Central bank made headlines by defying the president and raising interest rates, whilst the Bank of England Governor gave a sharp warning on the perils of a no-deal Brexit to the UK Cabinet. US consumer data were a little soft in August, coming after a strong July. There are some mid-ranking data and political events to look forward to in the week ahead.

Central Banks (and bankers) were in focus last week

Central Banks (and bankers) were in focus last week the with Turkish Central Bank surprising markets by hiking interest rates by 6.25% to 24%, almost double the 3.25% hike that economists had forecast, and defying the president who has repeatedly called for lower borrowing costs. Foreign investors have been rushing for the exit as inflation has spiked to 17.9% year on year (yoy) and the currency has collapsed more than 40% year-to-date.

Confidence was further weakened with the president openly trying to interfere in monetary policy and bizarrely believing that higher interest rates were the cause of higher inflation. The Central Bank will be hoping that aggressive action will go some way to restoring investor confidence in the currency, economy and the Central Bank.

The European Central Bank and Bank of England meetings were uneventful

The European Central Bank (ECB) and Bank of England (BoE) meetings were uneventful, though Governor Carney weighed back in on the Brexit debate. The ECB confirmed that the quantitative easing (QE) programme would halve to €15 billion per month from October, with December still expected as the end date, however the committee kept its options open by reiterating that the end date remains data dependent. We think it would still take something quite major to alter the current course which is thoroughly baked into market expectations.

The BoE left policy entirely unchanged, as expected, but Mark Carney, who has agreed to stay on as BoE Governor until 2020, made headlines when he warned the UK government of potentially dire consequences of a “no-deal” Brexit. In his briefing, he told the Cabinet that property prices could fall by a third, that inflation and unemployment would rise and there was little the BoE would be able to do to prevent this. He also provided a boost to Prime Minister Theresa May’s Chequers plan, suggesting it would likely result in a better economic outcome than the Central Bank’s current assumptions.

US CPI inflation and retail sales both fell short of expectations

US CPI inflation and retail sales both fell short of expectations. Headline CPI slowed from 2.9% to 2.7% yoy, against a forecast of 2.8%, whilst the core measure slipped from 2.4% to 2.2%. Apparel was the main detractor, falling -1.4% yoy. While the headline figure for Retail Sales disappointed, it came with upward revisions to the already solid reading for July – by the numbers, August had just 0.1% month-on-month (mom) sales growth (0.4% was expected), the 0.5% growth in July was revised to 0.7%. While these data suggest a pause in consumerism, with some early signs of meaningful wage growth coming through, this is going to be a key area to watch.

Last week’s other events

• In China, CPI inflation rose from 2.1% to 2.3% yoy, against expectations for no change. Retail Sales growth picked up to 9.0% from 8.8% yoy (no change was expected), but Fixed Asset Investment growth slowed from 5.5% to 5.3% yoy (an acceleration to 5.6% was expected). Industrial Production picked up 0.1% to 6.1% yoy as expected
• UK Industrial Production slowed to 0.9% yoy (from 1.1%, with no change expected), however Construction Output picked up significantly, from 2.2% to 3.5% (2.6% was forecast)
• Eurozone Industrial Production contracted -0.1% yoy in July, down from 2.5% previously and notably worse than the 1.0% forecast. The ZEW Survey showed expectations picking up from -11.1 to -7.2

The markets

Equity markets rallied through the course of the week as core sovereign bonds dipped. While the UK stock market was the laggard, the gains in overseas markets were somewhat offset for sterling investors as the pound strengthened. Commodities peaked mid-week but gave up much of that strength on Thursday and Friday.

Equities

Equity markets regained some of their poise last week. Of the regions we focus on, the Japanese TOPIX had the strongest run, rising 2.6% on the week. Europe (excluding the UK) returned 1.3% with the US just behind at 1.2% (MSCI Europe ex-UK and S&P 500 indices respectively). The UK lagged, advancing just 0.5% for the week (using the MSCI index) and the MSCI Emerging Markets index returned 0.4%.

Bonds

Unsurprisingly, as equities gained, core sovereign bonds marginally softened. US 10-year Treasuries hit the 3% mark on Friday, rising 6 basis points (bps) during the week to finish at 3% (though fractionally below at 2.996% if you move to one more decimal place). UK 10-year gilt yields rose 7 bps to 1.53% while the equivalent German bund yields moved 6 bps higher to finish at 0.45%. 10-year Japanese Government Bond (JGB) yields were fractionally higher by the end of the week at 0.12%, and may be an area to watch as we look to the Bank of Japan meeting this week.

Commodities

Brent crude oil briefly hit US$80 per barrel mid-week, but subsequently fell back to finish only slightly stronger than it started at US$78.09 per barrel. It was a similar story for gold, which briefly made it back through the US$1,200 mark before softening back to US$1,195 per ounce and copper finished at US$2.63 per lb.

Currencies

Sterling had a strong week, rising 1.1% against the US dollar, and also making decent gains against the yen and euro. Sterling closed on Friday at US$1.31, €1.12 and ¥146.

The week ahead

The pace of releases slows down this week, but there is still a lot to look out for. Wednesday gives us UK CPI (a slowdown from 2.5% to 2.4% yoy is expected), with Retail Sales on Thursday (2.3% from 3.5% forecast). Friday will see the PMI numbers from the Eurozone and US (details below). On Wednesday, the Bank of Japan’s monetary policy meeting concludes, and while no formal policy change is expected, the market will be looking for any signals around the tolerance band for the target on 10-year JGB rates, which is currently +/- 20 bps.

There are also plenty of political events that could have an impact including an informal EU meeting, a leadership contest in Japan, Korean peninsula talks, US-Japan trade discussions and the continued expectation that the next raft for US sanctions on China, covering a fresh $200 billion, could be imposed any day. The daily breakdown is as follows:

Monday: It’s a quiet start to the week. A minute after midnight, UK House Prices from Rightmove are released whilst in the afternoon the only release of note is likely to be the Empire Manufacturing reading.

Tuesday: There is nothing of note in the schedule for Tuesday.

Wednesday: UK inflation numbers will be the main highlight for Wednesday, as well as the Bank of Japan meeting overnight into Thursday. As well as UK headline CPI (covered above), core CPI is forecast to fall 0.1% to 1.8% yoy. Also out in the morning will be Eurozone Construction Output and US Housing Starts and Building Permits in the afternoon.

Thursday: UK Retail Sales are released (covered above), as well as Eurozone Consumer Confidence and US jobless data.

Friday: The US and Eurozone PMI numbers are the main events of the day, and markets will be particularly interested in the latest US PMI numbers given last month’s divergence between the Markit and ISM measures. Forecasts are for US Manufacturing PMI to rise from 54.7 to 55.0, while Services PMI is expected to rise from 54.8 to 55.0. The Eurozone Manufacturing PMI is expected to slip from 54.6 to 54.5, while Services PMI is forecast to be unchanged at 54.4. Other data out on Friday will include Japanese CPI inflation early in the morning (1.1% from 0.9% expected), Japanese Manufacturing PMI and UK government borrowing.