Sometimes the Best Offense Is a Good Defence

The New Year kicked off with a distinct strengthening in global risk appetite, as the fiscal cliff was averted, albeit temporarily, thanks to a last-ditch tax revenue deal, along with a two-month reprieve to resolve the outstanding debt ceiling and spending cut issues. Not that the minutes of the December FOMC meeting left investors unfazed… While it was reiterated in the minutes that open-ended asset purchases would continue in the short term, the fact that some members cited the unfavourable consequences of QE, expressing their views that purchases could be pared back or even terminated mid-year, i.e. somewhat earlier than expected, provoked scepticism. The first reaction to this news unsurprisingly came from 10-year US treasuries, the yields on which jumped up to 20bp. Though the ensuing turmoil appears to have subsided in recent days, the fact that Governor Bernanke failed to clarify this matter in his first speech to follow the publication of the minutes meant the continuation of uncertainty, suggesting related developments should be closely monitored from the standpoint of market equilibria. As for the Turkish economy, we reiterate our view that the overarching theme of 2013 will be the preservation of gains. As such, we feel fine-tuning, rather than drastic changes in policy implementations, will suffice. The implication for the Central Bank is the establishment -- and even more crucially the safeguarding -- of an environment conducive to balanced growth. Besides, the Bank has signalled balanced growth for 2013 with its following statement: “We will let domestic demand contribute to growth to the extent that external demand recovers”. It will continue to communicate any progress to this end via the following three intermediate targets: inflation, loan growth and the real exchange rate. At this stage, given a lack of threats to medium term inflation outlook in terms of inflation expectations, the Bank appears more likely to focus on more imminent threats such as acceleration in loan growth and appreciation pressure on the TRL. Loan growth, which closed last year somewhat above targets and started the New Year with unabated strength, appears to be the key challenge for the Bank. To the extent that loan growth deviates from targets, the possibility of additional burdens on banks from the CBT and/or the BRSA will have increased. Nevertheless, we remain of the view that the Bank will not consider the loan growth target as a rigid boundary, rather that it will evaluate it with a flexible approach, taking into consideration its reflections on domestic economic activity. From a short term perspective, on the other hand, disclosures by the ECB suggesting the worst was left behind, and Spanish bond yields dipping below 5%, have contributed to an upbeat start to the year. While PMI indices, which we consider among the most crucial leading indicators, signify sustained recovery -- that is stronger in China and the US, and less so elsewhere -- the nearest hurdle that needs to be surmounted so that the recovery may gain traction appears to be the fiscal policy uncertainty in the US, which should be resolved until mid-February. As for Turkey, we observe some strengthening in growth as of the last quarter of 2012, though this still seems short of the potential growth rate. Initial growth rate forecasts for 2013 appear to average at around 4.2% levels. On the other hand, we reckon inflation may once again edge closer to 7% levels in January along with tax adjustments, though provided that the prevailing muted volatility in FX rates and commodity prices is sustained, we reckon any deterioration in inflation expectations seems unlikely. Initial survey findings point to 6.3% for YE13 average CPI expectations. As for markets, while the ISE benchmark index continues its venture “into uncharted waters”, we reckon we might have reached overbought territory and the odds of a shift henceforth to a sideways pattern appear to have increased. In terms of interest rates, on the other hand, the rebound we anticipated from historic lows has occurred and we now expect the upward trend to continue, and be more pronounced at the longer end of the yield curve. Regarding FX, in view of the CBT’s known stance and the framework it has drawn for real exchange rates, we do not expect the currency basket to slip below the 2.05 mark, rather to fluctuate within the 2.05 - 2.15 band through the course of the year.