Quote for the day: "Discussions with the lenders are difficult and the conditions which the IMF proposes are also quite tough", Latvian Prime Minister Dombroskis. The negotiations between the Latvian government and IMF are continuing in Riga, but are planned to be wrapped up on Friday. It increasingly looks like the IMF could say “no” to Latvia on paying out the next tranche on Latvia’s IMF loan. Worries over the situation in the Baltics have also increased after a numbers of Nordic bankers voiced concerns over possible bank losses in the region.
Russia’s June industrial activity fell 12.1% y/y, but was up m/m. The number suggests that the industrial sector is gradually is beginning to stabilise. However, the recovery is expected only to materialise gradually. (see comment). The Russian central bank said yesterday that Russian banks’ non-performing loans, excluding Sberbank, are at 4.8% in June.
South African retail sales dropped by 4.2% y/y in May. This is slightly better than the consensus of -4.5% y/y. However, April was revised down from -6.7% y/y to -6.9% y/y, so overall this is very close to the consensus expectation and does not change our outlook for the South African economy, where consumers continue to suffer.
Preview
Tonight we expect the Turkish central bank (TCMB) to cut its key policy rate by 50bp to 8.25% in line with the consensus expectation. That said, we think that we are getting closer to the end of the easing cycle in Turkey as real interest rates are now at historically low levels and carry-to-risk on lira positions is quite low.
Labour market conditions continue to worsen in Poland. Today’s employment and wage data for June are likely to confirm this picture as we expect Polish wage growth to have eased to 2.6% y/y in June – down from 3.8% y/y in May. Further, we expect employment to have dropped 1.9% y/y in June. All in all, we think that the development in the Polish labour will be extremely important for how private consumption develops in the coming quarters, and we see some downside risks – both on private consumption and GDP growth – from the deterioration in the Polish labour market.
Trading update
CEE rates have been trending down recently and we think that today’s Polish labour market data could push rates even lower as the markets start pricing in more rate cuts across the region.
We expect today’s Turkish rate decision today to have a relatively limited impact on the Turkish markets.
