BOK to Push up Key Rate 50bps
The author is an analyst of NH Investment & Securities. He can be reached at sw.kang@nhqv.com. -- Ed.
We view the sharp rise in bond market volatility in September as being the cost of losing trust in CBs. But, after the September FOMC, a massive sell-off of TIPS was verified at end month. This signals that trust is starting to restore. In October, long-term KTB and US TB yields should form high points.
CBs on path to rebuilding trust
The bond market volatility index in September soared to the level at the time of the Covid-19 crisis, showing the cost of lost trust in CBs. But, after the September FOMC, large-scale selling of inflation bonds was verified despite the presence of high inflation. We believe this signals the start of a rebuilding of trust in CBs.
A liquidity indicator check using the quantity theory of money shows that the extent of drop in the sum of the M2 growth rate and the velocity of circulation growth rate widened in August. The pace of liquidity recovery sped up in September alongside QT acceleration. The liquidity indicator is placing downward pressure on inflation.
A key variable in determining the unemployment rate is the labor force participation rate. Recently, with higher numbers of the inactive labor force turning to active status, the labor force participation rate is likely to rise, in turn boosting the unemployment rate. Against this backdrop, we expect to see: 1) a restoring of trust in the Fed; 2) liquidity recovery; and 3) confirmation of a job market correction, believing that long-term TB yields will form high points in October.
BOK to push up key rate 50bps, but US developments to be key
In October, we expect the MPC to make a 50bp base increase and to signal further hikes ahead, but we believe the market is already reflecting such. For now, we view the first condition for stabilizing the KTB market as being the easing of Fed monetary policy uncertainties. The credibility of the Fed’s dot plot is expected to strengthen in October, and we believe that fundamental indicators will support KTB market stabilization. Daily average export growth rate is on the verge of a (-) inversion, and even the won-converted import price growth rate is continuing to stabilize downwards. Thus, we expect long-term KTBs also to form a high point.