Macro and Politics

* The Treasury will hold a 2-year fixed coupon bond auction today. According to three-month (Fed – Apr 25) domestic borrowing strategy, the Treasury has a total domestic redemption of TL117.8bn in February, while in return plans to borrow TL180.1bn throughout the month, via five auctions and one direct sale. After today’s single auctions, the Treasury will hold a 5-month G-bond auction and a direct sale of 2-year lease certificate tomorrow.

* TURKSTAT will release December Industrial Production (IP) figures today @ 10:00 local time. The sequential IP (the seasonal and calendar adjusted monthly figure) increased by 2.9% m/m in November 2024, while the calendar adjusted IP rose by 1.5% y/y. Recall that IP had declined both on a monthly and annual basis in October. Leading indicators for December suggest that the recovery in industrial production may continue in this month as well. Preliminary data for the last quarter of 2024 suggest signs of modest improvement in economic activity compared to the previous quarter, while the manufacturing PMI, which continues to remain below the 50 threshold, signals a more limited contraction in the final months of the year. It is important to emphasize that the manufacturing sector continues to exhibit a contractionary trend in overall industrial activity. We project GDP growth to conclude 2024 at around 2.9%, with a further slowdown to 2.6% by the end of 2025.

* December Employment figures will be released @ 10:00 local time. The adjusted unemployment rate edged down to 8.6% from 8.7% in November, yet the broad-based unemployment calculations deteriorated as the rate of composite measure of labor underutilization – including time related underemployment, potential labor force and unemployment—increased to 28.2% from 27.6%.The combined rate of time-related underemployment and unemployment remained unchanged at 18.5%, while the combined rate of unemployment and potential labor force rose to 19.4% from 19%.  We expect growth dynamics to gain some momentum starting in the second quarter of 2025, although we forecast GDP growth for 2025 to be lower than in 2024, at 2.6%. As a result, we anticipate that the unemployment rate could rise above 10% in 2025.

*The inflation forecasts were revised upwards during the 1^st Quarterly Inflation Report of the year, delivered today by the CBT Governor Karahan.  Accordingly, inflation is projected to be between 19% and 29% (with a midpoint of 24%) at end of 2025, up from the previous report’s range of 16% and 26% (with a midpoint of 21%). The 2026 inflation forecast was maintained in the range of 6% to 18%, with a midpoint of 12%. Governor Karahan emphasized that the CBT is not in an autopilot regarding rate cuts and will continue to make decisions on a meeting-by-meeting basis. We anticipate that the CBT will proceed with an interest rate cut of 250bps in March. Yet, it is important to underline that the February inflation data will be critical. A February inflation outcome that deviates above the CBT’s forecast path could pose a risk to our interest rate cut expectations. In line with our forecast that the pace of disinflation will be rather slower in the second half of this year compared to the first half, we believe the magnitude of rate cuts may start to decelerate from the June meeting onwards. Our year-end 2025 policy rate expectation stands at 30%, with an inflation forecast of 28%.