The uncomfortable ergonomics of Erdonomics

Turkish lire takes a tumble

The Turkish lire suffered a massive fall in the twilight zone of early Monday morning after President Erdogan removed central bank head Naci Agbal from his post on Saturday. The lire (TRL) fell approximately 17.0% to 8.4900 this morning before USD/TRL stabilised around 8.1000, a 12.0% loss for the session so far.

The base premise of Erdonomics is that higher interest rates cause higher inflation, a theory that flies in the face of conventional economic theory everywhere. Mr Agbal was widely respected for his attempts to stabilise inflation with around 900 basis points of tightening over his short tenure. His demise appears to have been triggered by last week’s 2.0% rate hike, as Russia and Brazil also quietly lifted rates to rein in inflation.

Mr Agbal’s replacement, Sahap Kavcioglu, is a little-known business school professor who shares President Erdogan’s economics theories and is, unsurprisingly, associated with the ruling party. Turkey will be an interesting example of what EM can expect if inflation fears rise markedly. With markets nervous about inflation in developed countries and punishing asset classes accordingly.

Mr Kavioglu has since stated that no immediate change in policy is planned, which seems to have stopped the rot for now, but the new governor is in a tight spot. Cut rates and see foreign investors flee, inflation spike the currency crumple, hike rates and get fired. I would be doing nothing right now as well.

Meanwhile, we can expect some severe burning of foreign reserves to defend the lira. It is unlikely to stave off the inevitable, though, and I expect Turkish equities and foreign currency bonds to be thrashed this afternoon and for downside pressures to resume on the lira.

Bank of Japan Governor Kuroda is also in damage control mode this morning after the BOJ widened its JGB trading band and announced it would only buy TOPIX-linked ETF’s going forward at its policy meeting on Friday. The Nikkei 225 reacted negatively on Friday and continues doing so today, down nearly 2.0%. He stated that monetary easing would continue for a long time ahead (in BOJ-speak, that could be a very long time) and that the BOJ had no intention of selling any of its ETF holdings. Unfortunately, those words have counted for little. My Nikkei 225 chart shows the index breaking 6-month support and threatening a much larger downside correction.

China has left its one and five-year Loan Prime Rates unchanged this morning. The decision was as expected, and I expect the PBOC only to consider moving them higher in Q4, being content to tighten policy via the repo market quietly. That said, the PBOC attempted to calm tightening nerves over the weekend. PBOC Governor Yi Gang saying that China has room to pump liquidity into the economy. China markets are gently higher today, with Mr Yi’s remarks assuaging local investors’ nerves with the Financial Times reporting international bondholders are attempting to freeze overseas assets of Tsinghua Unigroup, China’s most prominent semiconductor company.

The data calendar is quiet in Asia this week, dominated by Thailand’s trade balance, Singapore CPI and Taiwan Industrial Output, along with rate decisions from Thailand and the Philippines, which should both remain unchanged.

Data in developed markets is weighted towards the end of the week. US Durable Goods and Q4 GDP Final will be secondary to the February Personal Income and PCE released on Friday. The data will likely be negatively affected by the big freeze and is pre-stimulus. Markets will dismiss it as a mere flesh wound.

Pan-Europe PMI and UK CPI data Wednesday will garner more attention. UK CPI is expected to rise, perhaps putting more pressure on gilt yields. European data will likely show manufacturing remains robust while services are muted as lockdowns past and present weigh on European economies. The euro and sterling are in danger of breaking lower this week, not just because of the strong US dollar but also a brewing vaccine conflict. The EU is threatening to withhold exports of European-made AstraZeneca Covid-19 vaccines to the UK to get its own vaccination programme back on schedule.

Given that the Nordic nations are ignoring EU directives that the vaccine is safe, and suspending its use anyway, the EU’s position is somewhat ironic, especially so as imports of alternative products are expected to ramp up massively in Q2. If the EU threats imperil the UK vaccination programme, as they shoot themselves in the foot on several fronts, neither the euro nor sterling are likely to benefit this week.

It’s taken me a while to get there, but vaccine nationalism, erratic EM national leaders, and economic data aside, markets will likely remain slaves to moves in US bond yields this week. Stock market rallies and US yield retreats seem to be getting shorter and shorter in duration. Inflation concerns are proving more obstinate than my kitten’s insistence on trying to sit on my laptop keyboard while I work today. Twinkle’s paws have revealed functions I did not know my laptop had, and that I cannot recreate. Moving the offending feline results in an attempted return in another direction. That sums up the inflation story now as well. Today may be a lull, but the inflation kitten is coming for your keyboard.

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