In September data, monthly earnings and IP disappointed. September real wages data at 2.6% YoY surprised on the downside even as August data was revised downwards by a large 1.3pps. Real disposable income also surprised on the downside as it declined by 0.3% YoY in September. However, retail sales remained strong with a growth of 3.1% YoY (prev. 1.9%). Strong wage growth, improving consumer confidence, lower savings by households induced by declining real rates, improving household credit and declining inflation all are likely to contribute to the strong momentum in household demand in Q3. We have been highlighting that, even though corporate profits have probably reached a peak, past surge has meant that investment growth will likely improve in Q3 as well. In other activity data, the transportation sector data for September was very weak. However, strong retail trade and improving agricultural output along are expected to support growth. September industrial production data also disappointed, falling to 0.9% YoY from 1.5% YoY previously. Industry slowdown has been pronounced this quarter with the Q3 average at 1.1% YoY, 2.8pps lower than the average in Q2.    CPI decelerates further, in line with our forecast. A monthly decline in consumer prices along with a higher base, took the headline inflation down to an all-time low of 3.0% YoY. We expect the disinflationary trend to continue on the back of falling food inflation and base effects with annual inflation now likely to reach 2.8% YoY by year-end. However, still un-anchored inflation expectations and a faster-than-expected pass-through from domestic demand expansion pose upside risks. See EMEA Snap - Russia: Inflation deceleration spot on for more details.    The CBR decided to cut the key policy rate by 50bps in September. However the CBR remained cautiously hawkish in their tone, as they expressed concern about inflation expectations and medium-term risks on inflation. With below target inflation, we believe that room to ease further exists, despite CBR's hawkish tone. We continue to expect the CBR to ease the policy rate by 2x25bps at the remaining two meetings this year to take the policy rate to 8.00% by year-end. However, with the latest inflation print and our revised forecast of end-2017 inflation undershooting 3%, we think the risk of a 50bps cut at the October meeting has increased.    The CBR’s recapitalization of two major private banks - Otkritie Bank and B&N Bank - triggered some concerns last month. However, we do not expect these to have any effect on fiscal positions (MinFin not involved) or inflation. Also, we do not think the problem is systemic as the overall banking sector remains healthy with stabilized NPLs, low FX exposure, stable NIMs and healthy loan-deposit ratios.    Investor questions this month centered on bank recapitalization, possibility of lowering inflation target (unlikely according to the CBR), and fiscal policy rule (allowing for more sterilization as the new rule takes FX forecast out of the equation) at the recent IMF meetings. While we do not expect a new wave of significant inflows and, therefore, significant Ruble appreciation, we believe investors will continue to invest in Russia as their allocations to EM increase. Nearly 5% real rates, using OFZ as a benchmark, economic pick-up, sound fiscal policy and a healthy current account surplus all speak in favor of Russia. Risks remain related to the US sanctions report on SOEs and sovereign debt due in early February and sharp oil price movements.

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