Turkey Markets Jump as Fed, Slowing Inflation Fuel Rate-Cut Bets

  • Yield on 10-year government bonds falls 43 bps in week
  • Core inflation slows third month to lowest since September

Turkey’s bonds surged with stocks and the lira gained as core inflation slowed to a nine-month low and speculation grew U.S. policy makers may put off an interest-rate increase, giving the central bank more room to continue an easing cycle that started in March.

The yield on the 10-year bond fell 25 basis points, extending a decline this week to 43 basis points by 6:00 p.m. in Istanbul. The benchmark stocks gauge advanced the most in more than a week and the lira headed for a one-month high. Core inflation, which strips out volatile prices like food and fuel, slowed to 8.77 percent, the lowest since September and beating analyst expectations. The annual headline rate was little changed in May from a three-year low the previous month.

The prospect of lower rates in Turkey is offsetting pressure on the country’s currency and bonds from a political crisis that saw the prime minister resign. Turkey’s central bank has already lowered its overnight lending rate by 125 basis points this year and decelerating inflation rates "keep the door open for further monetary easing," JPMorgan Chase & Co said in a research note. Weaker-than-expected U.S. jobs data added to a rally across developing countries, including Turkey, on Friday.

“Their easing bias is well supported now and hence the rally,” writes Evren Kirikoglu, a strategist at Akbank TAS in Istanbul, who expects yields on Turkey’s lira-denominated debt to fall to 8.5 percent this year and the currency to remain stable.

Turkey relies on capital inflows to finance a current account deficit that is set to widen to 4.6 percent of gross domestic product and is sensitive to U.S. monetary policy as higher Fed rates pull investment away from emerging markets.

The currency jumped as much as 1.3 percent to 2.9117 per dollar, set for the highest since May 3 on a closing basis. The Borsa Istanbul 100 Index climbed 2.7 percent led by the nation’s largest listed lenders Turkiye Garanti Bankasi AS and Akbank TAS.

Consumer price growth will climb back to 8 percent by the end of the year, 3 percentage points above the central bank’s target, according to the median forecast of 27 analysts surveyed by Bloomberg.

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