The great divergence
Politics and the economy are moving in opposite directions, with the former improving visibly, as economic challenges seem to deepen.
On the politics front, we expect the US to grant Turkey waivers from sundry Iran sanctions and hush up the Halkbank investigation, as Erdogan and Trump get ready to meet in Paris by mid-November. This is not a reconciliation, but a cease-fire which may or may not erect the environment to discuss more serious disputes amidst good-will and patience.
There are two tail-risks, the first of which is Erdogan aiming for the jugular of prince Mohammad bin Salman (MBS), exploiting Khashoggi murder. We doubt that this is his intention, which is likely to be a ransom of kingly proportions. Erdogan could also unwisely order a military campaign against Kurdish townships in North-Eastern Syria, which would cost him the Kurdish vote and any modicum of American gratitude earned this far. While we see a lot of jingoism in Ankara, the Second and Third Army Corps are yet to receive marching orders in preparation of a military incursion.
At home, AKP is in trouble, as its loyal ally MHP has ditched it in municipal elections and economic distress visibly translates into voter protest. We expect a flurry of non-traditional populist measures, likely to spook the markets and back-fire in short order. By the time polls close, AKP should have suffered a significant drop in its national vote and ready to consider an IMF program to bail out the economy.
Trade deficit contracted extremely sharply in September and according to preliminary release, in October as well. Combined with other growth indicators from last week (e.g., manufacturing PMI, sectoral confidence indices, pace of credit growth), we think these numbers confirm our view that the economy is going through something more troubling and challenging this time, than a garden-variety “rebalancing” dynamic.
Last week’s consumption tax cuts are understandable, but it is bad policy in our view from signaling as well as cost-benefit perspectives.
The Treasury announced its borrowing program for 2019 according to which it targets a rollover ratio markedly lower than the past two years, which by definition is predicated on two things: generating a solid primary surplus and tapping international capital markets relatively generously.
We are old enough to admit that we do not know what to think of October inflation print due this Monday except to say that consensus forecast has CPI inflation around 2%, which is in line with historical averages as well as what we also come up with when we play with the numbers.
Cosmic sees the late Indian summer in TL assets probably extending a while longer.
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