Macro and Politics

* TURKSTAT will release June foreign trade figures @ 10:00 local time. The preliminary June trade figures released by the Ministry of Trade point to a marked widening in the foreign trade deficit compared to the previous month. According to the preliminary data, exports rose by 21.9% y/y to USD24.9bn, while imports increased by 23.1% y/y to USD35.3bn. As a result, the monthly trade deficit widened to USD10.4bn in June from USD5.6bn in May, lifting the rolling 12-month deficit to USD95.7bn from USD93.5bn. Following the renewed deterioration in the trade balance in June, we expect the current account deficit to widen back above USD5bn after narrowing to USD1.5bn in May.

* The seasonally adjusted unemployment rate declined to 7.6% in June from 8.1% in the previous month. Meanwhile, the composite measure of labor underutilization – our preferred broad measure of labor market conditions, comprising time-related underemployment, the potential labor force and unemployment – declined to 28.8% from 30.8%. The underlying breakdown also pointed to an improvement, with the combined rate of time-related underemployment and unemployment declining to 18.5% from 20.1%, while the combined rate of unemployment and the potential labor force eased to 19.2% from 20.4%. Despite the decline in June, the underutilization rate remains elevated by historical standards, suggesting that the headline unemployment rate continues to understate the degree of slack in the labor market. In particular, the persistently high level of the potential labor force points to still-significant spare capacity in the labor market.

* The Economic Confidence Index rose to 99.8 in July from 98.9 in June, reaching its highest level since February. The three-month moving average also increased to 98.6 from 97.5. While readings above the 100-threshold signal optimism regarding the overall economic outlook, the index remained below this level, suggesting that the cautious view on economic activity remains intact. Looking at the July sub-indices, consumer confidence increased by 2.2% to 89.8, while confidence in the services and construction sectors rose by 1.4% and 0.6% to 112.0 and 83.5, respectively. In contrast, the real sector confidence index declined by 0.8% to 101.2, while retail trade confidence fell by 1.6% to 111.0. The divergence across the sub-indices suggests that the recovery has yet to broaden across sectors. Although high-frequency indicators point to a partial recovery in domestic demand compared to the first quarter, we believe the underlying weakness in economic activity has yet to dissipate. We continue to expect second-quarter growth to prove somewhat more resilient than in the first quarter. However, tight financial conditions continue to weigh on economic activity, leading us to expect no strong or broad-based acceleration in growth over the near term. Looking into the second half of the year, we expect economic activity to move onto a more balanced footing as financial conditions gradually ease. We maintain our 2026 GDP growth forecast at 3.2%.

* Foreign buying activity remained muted in the equity market during the July 17 – 24 period, with net purchases totaling only USD38.9mn, while the bond market recorded a strong USD805.5mn net foreign inflow excluding repo transactions. Moreover, foreign investors' share of the total bond stock increased from 6.8% to 7% during the July 17 – 24 period, reaching its highest level since the week of March 6. During the same period, residents' FX deposits, excluding gold and adjusted for the EUR/USD parity effect, increased by USD2.2bn, while their total FX deposits, including gold and adjusted for valuation effects, increased by USD2.4bn during the July 17 – 24 period. According to the CBT’s official reserve data, gross FX reserves fell by USD8.0bn to USD149.2bn during the June 19 – 26 week, while net FX reserves declined by USD6.6bn to USD45.3bn. We believe the decline in reserves was largely driven by the correction in gold prices observed over the same period. As of June 26, gold accounts for 63.6% of the CBT’s gross FX reserves. Over the same period, the swap stock decreased by USD2.7bn to USD16.7bn, while net reserves excluding swaps deteriorated by USD3.9bn, falling to USD30.7bn.