As expected Latvian June inflation dropped to 3.4% y/y, down from 4.7% y/y in May. This is further confirmation of the strong deflationary trends in Latvia. We expect inflation to turn negative later in the year. Obviously, this is just an internal devaluation, but the consequences will be the same as a nominal devaluation.
In Turkey industrial production dropped 17.4% y/y in May - worse than the consensus expectation, but still an improvement from -18.5% y/y in April. We are moderately optimistic on the recovery for Turkish industry, but it is clear that the recovery is fragile.
Preview
Czech inflation is likely to be unchanged at 1.3% y/y in June from May. Even though this is slightly above the consensus expectation of 1.2% y/y we do not expect the number to have any major market impact.
We expect Lithuanian inflation to have declined to 4.4% y/y in June from 5.2% y/y. This would be more or less in line with what we already have seen in June inflation numbers for Estonia and Latvia, which were published earlier this week.
Today we will get numbers for industrial production in Romania. Even though there are signs of a beginning of a recovery in Europe (for example the German industrial production numbers released yesterday) we don’t think there will be any pick up in Romanian industrial production in May as the contraction in domestic demand is likely to outweigh the stabilisation in European industry.
Trading update
Overall sentiment remained nervous yesterday and all currencies but the Polish zloty weakened over the session with the South African rand being hit hardest.
Oil prices remain under pressure – dropping more than 2% yesterday – and that pushed Russian markets lower. During the morning the interest rate markets were going in just one direction - payers were much more active and swap rates went much higher – up 80bp at one point. The move reversed somewhat during the day and IRS-rates were up roughly 20bp over the day. The rouble depreciated 0.8% against the currency basket and equities fell around 3%. We are beginning to see increased stress in Russian markets as market sentiment becomes less benign and oil continues lower. From a hedging perspective we still like the idea of hedging RUB exposure.
