Pullback in Turkish PMI raises bets on rate cut

By bne IntelliNews August 2, 2012

bne -

Turkey's manufacturing sector pulled back surprisingly sharply in July, according to the latest data, casting doubt on the country's growth prospects in 2012. That in turn saw bond yields pull in to their lowest in 18 months, as bets on a forthcoming rate cut from the central bank continue to build.

The Turkish manufacturing purchasing manager's index dropped below the 50-point threshold in July to fall back into contraction territory for the first time since March at 49.4. Capital Economics calls the drop, from 51.4 in June, "concerning and suggests (as we had feared) that last month's steep fall in the new export orders component of the survey may have been a sign of problems to come."

"[The data] has left Turkey's PMI at its lowest level since August last year," the analysts continue. "Of course, we wouldn't read too much into one month's data, but at the very least this would seem to support our view that efforts to narrow Turkey's current account deficit will become more difficult from here on. Recall that while domestic demand contracted in the final quarter of 2011 and the first quarter of 2012, the strength of industrial exports prevented a sharper downturn in the real economy. Today's data could be an early sign that policymakers may now no longer be able to rely on this prop to growth."

That was certainly the message that the market took out of the figures, with yields on two-year benchmark debt sliding for a third day, to their lowest since January 2011 at 7.58% in morning trade in Istanbul, reports Bloomberg. In tandem with a fall in Turkish consumer confidence reported around the same time by CNBC-e television, expectation of a rate cut is growing. The Central Bank of Turkey resisted calls to lower the upper limit of its dual benchmark rate band earlier this month, despite easing inflation indicators. That earned it a rebuke from government officials who demanded a less cautious stance.

"Worries about growth are becoming more emphasized and there is a generally rate-friendly environment in the world," Sercan Kiliclar, a fixed-income trader at Akbank TAS (AKBNK) in Istanbul, said in emailed comments. "Today's data are supporting this." The Turkish government sees economic growth falling to 4% this year from 8.5% in 2011.

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