US growth, ECB speculation, and more mistaken comparisons with King Canute....

 

ref :- "Week ahead. Market questions", The Financial Times, Companies and Markets

Once again on a Monday we turn to the FT's slot that identifies three of the salient issues for the coming week, the first two of which we can skip through fairly briefly. The third (actually the second in the FT's running order) focuses on the plight of the Turkish Lira, and is an ongoing potboiler of a story that goes far enough beyond normal market musings to merit a little more attention. In fact, we touched upon it only recently, but of course things have moved on....

1. US growth gains momentum despite sluggish quarter

By now we know all about the dilemma facing central banks when trying to decide on a monetary policy in the face of a sharp and possibly longer-term rise in inflation (which by rights would demand a tighter policy stance), and slowing growth (that would argue against it). US Q3 GDP figures  will be announced on Thursday, and are generally expected to show that growth in the July-September quarter ran at an annualised rate of 3.2%. That would be significantly lower than the Q2 level of 6.7%, and some economists are suggesting that consumer spending growth will have fallen to near zero. We've got to remember that all year-on-year comparisons have been skewed from what we used to know normal by the pandemic, but given the Delta resurgence and price rises in everything from groceries to fuel that doesn't seem too outlandish a call. 

Sounds a bit worrying.... except some data already released suggests that things may be on the turn as the US begins to get a grip on the Delta virus. September retail sales beat expectations, wages are rising and it's very possible that more will return to work as the expensive holiday season approaches. Yes, it's been tough.... but the FT quotes Gregory Deco of Oxford Economics: "We expect a slowly improving health situation, solid household finances, a rebuild of inventories, and additional fiscal stimulus will support solid growth momentum in 2022". 

Is the US emerging from the woods, even if the headline data looks bad? You pay your money, you take your choice.... but watch for the number on Thursday.

2.  How will the ECB respond to rate rise expectations ?

Also on Thursday is the ECB policy meeting, and it comes at a time when markets have priced in a 0.1% rise in rates by the end of 2022. Now, that seems an impossibly small number over a long time-frame by "normal" standards, but does go against everything the ECB has been saying. Indeed, ECB Chief Economist Philip Lane felt the need last week to say that the market move, small as it may be, does not square with the central bank's forward guidance.

Plainly, small is not the same as insignificant and we can expect ECB boss Christine Lagarde to "push back" on Thursday against market expectations of any early rate hike. She's likely to re-affirm that the ECB has no plans to raise rates before its bond-buying programmes have finished, and will probably not discuss the form of any replacement QE programmes once the emergency pandemic QE measures have run their course in March (though she may indicate that plans for transition options may be discussed at the December meeting). 

In short, she will seek to confirm an ECB approach that happens to be in stark contrast to that of the Bank of England, whose major players are making increasingly hawkish noises.... though of course, she is unlikely to be making that comparison herself.

3. How low can Turkey's Lira go ?

Apologies for another use of the King Canute reference, but we just can't resist it. Canute (a.k.a. Cnut the Great) was a wise and thoroughly decent fellow, and has been very poorly treated by history. King of Denmark, Norway and, most pertinently for this story England, he was portrayed in UK schools for many generations as the king who so believed in his divine powers that he sat in front of the incoming tide and ordered it to turn back, only to be saved by his entourage as the waves inevitably washed over him. In fact, the truth is very different. Canute was trying to prove to his fawning acolytes the exact opposite.... that he was indeed a mere mortal and possessed no superpowers whatsoever.

President Erdogan of Turkey always puts us in mind of of Canute.... or rather, the erroneous depiction of him. We don't know whether believes that he has any superpowers, but he is repeatedly trying to prove something that everyone else believes is wrong ....namely, that higher interest rates promote, rather than combat, higher inflation. 

Last week, Turkey's central bank CUT rates by a whopping 2% despite inflation running at a smidgeon under 20%, utter madness according to accepted wisdom. However "unconventional", some cut was expected after the President had sacked three employees (the latest in a long line) for refusing to lower rates, But 2% was at least double most expectations, and had a predictable effect on the Turkish currency. On Wednesday USD / TRY had traded at 9.21. By the end of Friday, it had slipped through 9.60 and this morning made a high of 9.81 (though it's taking a little breather as we write (last at 9.68). Numerous end-of-year predictions made after the rate cut were being filled almost before there was time to put them out, and most now seem to think that an end-2021 rate of over 10.00 is likely, though it's possible that too may be overcautious.

This is bad news for Turkey. Other nation are contemplating (or have already started) a hike in rates, and a tumbling exchange rate for a big net importer like Turkey can only stoke inflation even higher. As rates fall and inflation rises, REAL rates of return go further below zero. Capital flows outward not inward, and a balance of payments and currency crisis looks ever more on the cards.

Looking for areas of support for the Lira is not easy. Some hope that most foreign investment has already left the country so the capital outflows from now will be minimal, but what about Turkish investors? Do we see stricter capital controls, something that will hardly encourage capital inflows in the future? Or maybe there will be a change of heart, an emergency rate hike if the currency goes into freefall. It has happened before, but some believe the President will want to see his extraordinary rates/inflation experiment through to the end this time.

To cap it all, the news today that the ambassadors of 10 nations (inc. US, Canada, Germany, France) have been declared "personae non grata" for calling for the release of a businessman who opposes the president  --  presumably as a prelude to being officially expelled  --  only exacerbates the situation. Diplomatic exclusion is the last thing that Turkey needs at a time when it will require a few friends. But Mr Erdogan likes to be seen as a strong-man, and so the prospects for a U-turn on this front, as on so many others, are not particularly good.

Oh dear .... all in all, this could end pretty badly.