Russia: a brief market watch

RUSSIA ECONOMICS - In Brief 23 Nov 2023 by Evgeny Gavrilenkov

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As the federal budget was in surplus for the last three months, it acted as a liquidity absorber from the money market, which pushed short-term interest rates above the key rate. Since mid-November RUONIA fluctuated within the 15.01-15.08% range, while earlier in November it was more than 50 bps lower. We suppose the budget will return to deficit at the end of the year and, most likely, remain so in 1Q24 2024, which will help to improve the situation on the money market. Investors started to price in another rate hike at the end of 2023 as weekly inflation remains high. The latter may push OFZ yields higher in the coming weeks. On top of that, the demand on the primary market may be subdued. Generally speaking, the CBR rhetoric (inspired by weekly CPI prints) is a key factor for investors' sentiment on the bond market. The bulk of them expect that the regulator will start a rate cut cycle in 2024 and are ready to bet on that. They also expect that average interest rates in Russia within the next 10 years will be single-digit. However, the momentum to increase holdings of government bonds may not be ideal now as borrowings will climb up in 2024. All in all, volatility on the bond market is likely to be high in the coming months. In the seven days ending on December 20, inflation w-o-w reached 0.2%. The MTD and YTD tallies climbed to 0.8% and 6.31%. Persistently elevated w-o-w inflation hints that in November, the m-o-m inflation will likely exceed 1.0% (in November 2022, it was 0.37% only). Therefore inflation y-o-y may exceed 7.5%, which will be an additional signal for the CBR to move the key rate further up. The CBR faces an uneasy task as it becomes clear by how muc...