People have to work to consume

The author is an analyst of NH Investment & Securities. He can be reached at sw.kang@nhqv.com -- Ed.

The U.S. economy is returning to its normal structure where people have to work to consume. Artificial demand based on excess savings should eventually ease. We expect the Fed to freeze the FF rate after a final hike in May. Similarly, the BOK is expected to freeze Korea’s base rate in April.

People have to work to consume

There has been a sharp increase in the economically active population since the beginning of the year. This is in line with our prediction that excess savings for the bottom 50% of earners will be depleted in 1Q23, and people will have to return to the job market, accelerating job market normalization. Both the job market participation rate and the economically active population increased significantly in March. While labor supply is expanding, labor demand is weakening. In the US, the number of job seekers in February fell below 10mn for the first time since Jul 2021. The job openings-to-job seekers ratio has also fallen to the lowest level since Nov 2021. While it is premature to discuss a recession based on employment indicators, it is important that the US economy is returning to a normal structure where people have to work to consume.

Eventually, labor-less consumption—ie, artificial demand driven by excess savings—should moderate. The demand driven inflation figure provided by the San Francisco Fed peaked out in Feb 2023 for the first time since Mar 2021. Weekly card spending also fell further in March, suggesting that retail sales figures for the month will be weak. Signs of slowing demand are being seen.

Bank deposits rebounded slightly in the last week of March, weakening event risk. However, in our view, the banking crisis is less about event risk and more about the competition for funds with MMFs, which will inevitably lead to faster deposit rate hikes and less lending to the real market (rate hike substitution effect). This logic still holds true and small bank lending continues to plunge. The March FOMC minutes released this week will be important to confirm the Fed’s view of credit events. Expectations remain for a rate freeze after a final hike in May.

Expect April MPC rate freeze

We forecast a unanimous rate freeze decision at the BOK’s April MPC meeting. Due to the US credit event in March, the dot plot remains at the Dec 2022 level (5.25%). Given that the Fed’s terminal rate, which was priced in at 5.6% following the February MPC meeting, has now fallen to 5.25%, the base rate gap between Korea and the US should be maintained or narrow. Under such circumstances, we expect the BOK to focus on the domestic economy and inflation conditions.

While the inflation rate announced after the MPC meeting in February fell short of market expectations, 2Q is a time when base effect for energy prices and monthly rent can coincide. Currently, the justification for an additional rate hike is weak. We expect the BOK to freeze the base rate and take time to assess future economic and inflationary conditions.