Where do we go now?

Market watchers rather become used to government bond prices and equity prices moving in tandem, a legacy, it would seem, of the ‘everything rally’ as central banks flood the markets with liquidity. They are still doing that but, so far this year, equity prices are on the rise while bond prices have fallen. Does this mean that the future will be very different from the past? The relationship between stock and bond prices did not change with the advent of quantitative easing by the major central banks. Even before then the relationship had turned positive, possibly spurred by the sort of savings glut arguments used by former Fed Chair Ben Bernanke all those years ago. The positive relationship between stock and bond seemed to go into overdrive.

If we come back to today, exactly the same conditions seem to be in place. However, the lesson of these post-recession periods in the U.S. has been that inflation stayed muted and hence the rise in bond yields soon petered out.


Turkey’s Central Bank left its benchmark one-week repo rate unchanged at 17.00% at the MPC meeting and the hawkish tone in the statement, including a commitment to bring inflation back to the 5% target, supports our view that rate cuts are still some way off. This will help to support a further rally in the lira over the coming months. Policymakers will have also taken heart from the continued rally in the lira over the past month. The currency is now up by around 20% against the dollar from its low point in November as investors have become confident that the shift to orthodoxy will stick. Looking ahead, the bar for additional tightening is high. But the CBRT is clearly keen to rebuild its credibility and tackle inflation. For our part, we think that the one-week repo rate will be left unchanged throughout 2021. In contrast, the consensus is for 375bp of rate cuts by year-end. If we’re right, the lira’s rally probably has further to run. We expect it to end this year at 6.25 on the dollar.

-Jason Tuvey, economist, Capital Economics, Feb. 18


Declining inflation expectations, recovering economic confidence, emerging signs of reversal in dollarization by retail investors, indications of a willingness to compromise on geopolitical disputes, reserves depletion having already troughed and likely to be gradually replenished, hawkish forward guidance from the CBRT. Turkey’s fiscal position is still a source of strength, while the country will likely see a robust economic recovery this year. We anticipate no change in the CBRT’s policy rates through H1 2021 ( benchmark one-week repo kept at 17%), with 100bp of cuts materializing in Q3 2021 and an additional 100 basis points in Q4. In our updated forecast for USD -TRY, we anticipate this cross reaching 6.20 by end-2021. We are revising the target lower on the short USD -TRY position to 6.45, while revising the target on the short EUR-TRY position to 7.82.

Phoenix Kallen, strategist, Societe Generale, Feb. 17

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