Toward critical FOMC disclosures

US Treasuries posted gains Tuesday after November's CPI was announced below forecasts. While the indicator UST rallied 2Y and closed at 4.18% with interest rates falling, the much-watched UST 10Y fell to 3.49%. The Treasury's $18 billion 30-year bond auction saw weak demand at 2.25x (average of six previous auctions: 2.39x) and closed with interest at 3.513% (previous auction: 4.08%). Softening inflation data could allow the Fed to lift its foot off the accelerator a bit compared to previous aggressive rate-tightening moves. According to the OIS, Fed swap pricing currently shows a 51% probability of a rate hike of 50 basis points at the upcoming FOMC meeting, with the highest final rates at 4.82% in May 2023. Attention will be turned to the crucial FOMC policy rate.

The first issue at the Fed meeting will of course be a 50 basis point rate hike. However, the main issues we will deal with are how to move the anticipated ceiling interest rate and how long the interest rates will remain at the specified ceiling level. For this, it will be necessary to look at the concentration of economic forecasts on future inflation and employment. In order to dampen the inflation effect from wage increases, the employment market should stagnate and demand movements should decline accordingly. The Fed will create the inflation reduction equation by taking into account the economic cooling, and accordingly, it wants to determine the optimal interest rate levels.

After the softer-than-expected inflation data yesterday, markets think it is appropriate for the Fed to take a slower walk. Tonight we will see how much this reflects on the thinking of policy makers. In terms of terminal rate, the base scenario still points to around 5%. The positive inflation outlook has reduced the possibility of an upward deviation from expectations. A phenomenon that the easing inflation will support is the possibility of interest rate cuts before the end of 2023. Because policy makers will think more and more that cumulative tightening is working.

While a 50 basis point rate hike is expected from the ECB meeting, we will also follow the statements on QT. On the Asian side, JGB has once again hit the 0.25% ceiling and is pushing it. The possibility of a BOJ policy change at the beginning of 2023 is being considered, so attention should be paid to the breakout thresholds in the JGB market.

If we look at Turkish assets; As US inflation data and the Fed's decisions are weighed, the lira has traded sideways and is hovering in the narrow gap that has been going on for the past two months. One-month implied lira volatility fell to 7.8%, hitting the lowest level in almost three years on a closing basis. 5-year credit default swaps fell to 517 basis points, the lowest level since February.

The Treasury completed its monthly domestic borrowing with approximately 209% renewals. We estimate that the Treasury borrowed a total of TL 50.3 billion in December, slightly above the target of TL 45 billion. With a redemption of TL 24.1 billion, the total domestic debt rollover ratio of borrowings was 209%. As a result, we estimate the Treasury's total domestic debt rollover ratio to reach 133% for the full year 2022, in line with the recently revised target. As a reminder, the Treasury targets a domestic rollover ratio of 114% for the full year 2023.

Sasa Polyester has made a new convertible bond issue of 500 million Euros to the CMB. The convertible bond will have a maturity of 5 years and will be sold to qualified investors outside of Turkey. The company's previous 200mn Euro convertible bonds performed very well and around 110mn Euros of the bonds were converted into equities as the share price rose 5x in EUR terms.

Kaynak: Tera Yatırım-Enver Erkan
Hibya Haber Ajansı