Recommend Profit-taking
The author is an analyst of KB Securities. He can be reached at jk.lim@kbfg.com. -- Ed.
Expectation of rate cuts factored into market rates, but cuts should come after a significant period of time
After the Monetary Policy Committee meeting in November, market consensus on the BoK base rate moved to 3.50% (previously divided btw. 3.50% and 3.75%), reflecting expectations of the Fed and BoK reducing the pace of rate hikes going forward. Recent declines in current market rates, which reflect expectations of rate cuts next year, seem somewhat excessive. We see the low-end of the 3y KTB yield at 3.60% and recommend profit-taking amid the rate downtrend. The slowdown in U.S. CPI is positive, but we have yet to confirm a slowdown in service prices. New York Fed President John Williams stated that interest rates could be lowered in 2024 to maintain real base rates; the real base rate could increase if inflation recedes while nominal interest rates remain unchanged. This is in line with our 2023 outlook: (1) rate decisions should take place when the real base rate turns positive, depending on the extent of increases in real base rate, and (2) even if the real base rate turns positive, base rates should continue to be kept unchanged for a significant period of time. Given current inflation expectations, rate cuts are highly likely to take place in 1H24, though they could come next year if the real base rate increases rapidly. However, the market should not view rate cuts as loose monetary policy but rather a slowdown in tightening. Interest rates should remain high, which should lead to an economic recession, and the yield curve inversion between 10y KTBs and 3y KTBs should continue.