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BLOCK, 2s/10s Ultra-Bond Steepener


Put Condor Update

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  • Morgan Stanley see today's 200bp cut as a strong message of lower rates going forward.
  • The CBT returned forward guidance to the statement. It now says that "till the end of the year, supply-side transitory factors leave limited room for the downward adjustment to the policy rate". They read this as the CBT not ruling out cuts, but that future cuts will likely be smaller than the 200bp delivered today, and than the 300bp of easing in total delivered over the last two meetings.
  • FX volatility and weakness pushes the inflation trajectory higher. Their end-2021 CPI forecast moves to 18.3%Y vs. 17.5% previously and MS see inflation remaining high, just below 20%Y until mid-2022. Overall, in 2022, they expect inflation to average 17.8%Y (2pp higher than before) and see it at 16.0%Y by year-end.
  • On rates, they see the key rate down to 14.50% by end-2021, and to 14.00% in 2022, although investors should keep a range of scenarios in mind. Today's 200bp cut sends an even stronger message of determination for lower rates. Another 150bp of cuts in total in November and December, to 14.50% at the end-2021, with inflation and FX pressures as well as financial stability risks on the rise.
  • More broadly, a decision today means more pronounced risks of volatility, which may trigger a sudden change in stance. In particular, there is a chance of more reliance on regulatory instruments to support the lira and control inflation.
  • On the strategy side, the outlook for TRY has not changed, in their opinion, with further depreciation likely ahead.