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June early indicators in Russia to show fragility of recent manufacturing pick-up

This week, the key macro news in Russia is the preliminary estimate of 2Q14 BoP, the June CPI report and the set of early indicators (PMIs, rail cargo volumes, electricity output, etc.). From Turkey, the CPI release for June is due on Thursday. Also worth watching are the June Manufacturing PMIs across our CEEMEA universe and the Polish central bank's decision on 2 July.

The first week of July is likely to be rather intense in terms of economic data. Entering the summer, our CEEMEA region seems to have followed recent trends: a tepid recovery in CEE3 (the Eurozone flash PMI estimate for June indicated that the strongest growth momentum was outside France and Germany) and close-to-stagnant economic growth in Russia and Turkey.

In Poland, although the monetary policy decision is unlikely to produce any surprises, as the central bank explicitly signalled that rates would remain unchanged until the end of 3Q14, the policymakers might extend their forward guidance or/and show more tolerance towards a further rate cuts scenario (to recap, back in April governor Marek Belka called inflation a “deadly sin”, but since early June the central bank has notably eased the tone of its comments on inflation).

In Russia and Turkey, as opposed to the deflation scenarios in Europe, inflation has been running at multi-year highs recently and is set to slow in both countries. Thus, in Russia, we see inflation peaking in June on both food shocks and the FX pass-through impact, with an increase of 0.5% MoM and 7.7-7.8% YoY. Looking into 2H14, softer tariffs hikes, the base effect, a fading FX pass-through, and demand-pulled disinflation all support our view that there is to be solid disinflation. In Turkey, YoY inflation might have edged down starting from June, as June inflation last year was 0.8%, mostly due to the weakness in the lira vs. negative inflation under normal seasonality. For YE14, we expect inflation to decline to the 7.5-8.0% band.

Daria Isakova, Vladimir Kolychev
VTB Capital analyst

Russia, CPI

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