Macro and Politics

* The Treasury will hold 5y fixed-coupon bond auction as well the direct sale of 1y TLREFK-indexed lease certificate today and finalize its June domestic borrowing program. The Treasury tapped the domestic markets to the tune of TL104.1bn, including non-competitive sales amounting to TL74.8bn, via yesterday’s 8m zero-coupon and 2y fixed-coupon bond auctions, while demand conditions remained strong. In the 8m zero-coupon auction, the bid-to-cover ratio came in at a solid 3.38x, while the average compounded yield stood at 42.33%. Similarly, the 2y fixed-coupon bond auction also pointed to robust investor demand, with the bid-to-cover ratio realized at 3.21x and the average compounded yield coming in at 41.93%. Following yesterday’s auctions, the Treasury’s total domestic borrowing since the beginning of the month has reached TL397.3bn.According to the Treasury and Finance Ministry’s three-month domestic borrowing strategy for the June–August 2026 period, domestic redemptions amounting to TL555bn in June are planned to be met with total domestic borrowing of TL543.8bn, implying a rollover ratio of 98%. Having already raised TL397.3bn since the beginning of the month, the Treasury could borrow approximately TL147bn through today’s auction and direct sale.

* The CBT will release the Residential Property Price Index (RPPI) for May @ 10:00 local time. The Residential Property Price Index (RPPI) increased by 1.8% m/m and 26.6% y/y in April, reaching 223.4, while declining by 4.3% y/y in real terms. Recall that the real annual change in the RPPI had turned positive at 0.2% in November for the first time since January 2024, before reverting back into negative territory as of December. In this respect, the April reading suggests that residential property prices continue to lose value against inflation.  Meanwhile, the New Tenant Rent Index (NTRI) rose by 1.7% m/m and 31.7% y/y to 309.4 in April, while posting a real annual decline of 0.5%. Accordingly, the NTRI contracted in real terms on an annual basis for the first time since January 2020. This configuration points to weak real returns in the housing market despite the ongoing increase in nominal prices. In particular, the continued tight monetary stance, ongoing constraints on credit access, and elevated financing costs continue to weigh on housing demand, while the still-high inflation environment keeps nominal prices on an upward trajectory. On the rental side, the NTRI posting a real annual contraction for the first time in an extended period suggests that the upward momentum in rent inflation has started to moderate on a relative basis.

* The central government budget posted a deficit of TL298.2bn in May, while the primary balance recorded a deficit of TL169.3bn. As a result, the cumulative budget deficit widened to TL1.1tn in the Jan – May period, while the 12-month rolling budget deficit increased from TL1.7tn to TL2.2tn. The elevated budget deficit in May was primarily driven by a sharp decline in income tax withholding revenues as well as the adverse base effect on corporate tax collections stemming from the reintroduction of the fourth provisional tax payment last year. Meanwhile, revenue losses related to the échelle mobile mechanism became more pronounced in April and May, although the recent correction in oil prices could allow for a partial recovery in these revenue losses going forward. Our previous calculations suggested that, under a scenario where the full tax adjustment capacity is utilized, the daily fiscal cost of the mechanism could reach nearly TL1.4bn, including the VAT effect. However, Brent crude prices have recently retreated toward levels seen in early March, indicating that a significant portion of the SCT reductions previously implemented under the échelle mobile mechanism could be reversed. In this context, we expect the pressure on fuel-related SCT revenues to begin easing from June onward, which could partially mitigate downside risks to the fiscal outlook. Our 2026 budget deficit forecast currently stands at TL2.8tn, corresponding to 3.4% of GDP.

* The sequential (seasonally and calendar-adjusted monthly figure) industrial production (IP) increased by 3.7% m/m in April, while calendar-adjusted annual IP rose by 6.0% y/y. The improvement was driven mainly by stronger manufacturing output, while mining and quarrying (up 0.8% m/m, down 2.8% y/y) and electricity, gas, steam and air conditioning supply (down 2.8% m/m, up 1.8% y/y) posted relatively weak performances. This suggests that April’s strong headline figure reflected sharp gains in selected sectors rather than a broad-based recovery across industrial activity. Across main industrial groupings, capital goods, which rose by 12.3% m/m and 19.3% y/y, was the main driver of the increase, while the 5.1% annual rise in intermediate goods production pointed to continued momentum across the production chain. Meanwhile, energy contracted by 3.1% m/m, with annual growth slowing to 1.0%. Manufacture of other transport equipment, which we monitor closely given its inclusion of defense industry products, surged by 83.8% m/m and 92.2% y/y in April, while high-technology, another volatile component, increased by 3.4% m/m and 36.8% y/y. Looking at leading indicators, the ISO Türkiye Manufacturing PMI rose from 45.7 to 49.8 in May, reaching its highest level since March 2024. However, the PMI report noted that part of the increase in purchasing activity reflected precautionary inventory accumulation against rising costs and supply disruptions linked to the conflict in the Middle East. We therefore believe that part of the improvement in PMI may have been driven by temporary stock-building, warranting caution regarding the sustainability of the recent recovery. We maintain our 2026 growth forecast at 3.2%.