Fixed Income Weekly
The author is an analyst for NH Investment & Securities. He can be reached at sw.kang@nhqv.com -- Ed.
Ahead of the announcement of 2H23 economic policy direction, the media has reported that policy focus will shift from prices to the economy. The government's demand for lower instant noodle prices and an electricity price freeze are a prelude to this. The pace of decline in core inflation should accelerate in 2H23. Without further policy rate hikes, we recommend a buy stance at current levels.
US’s uniqueness: Second-wave effects and end of free money
June’s four big central bank meetings resulted in the US and Japan pausing, Europe continuing to hike (25bp), and the UK deciding to reaccelerate (50bp). Policy differentiation among central banks is underway, with the intensity of each country's tightening inversely proportional to the pace of inflation stabilization. In the US, core inflation has slowed to the Sep 2022 level and core services inflation excluding housing has fallen for eight consecutive months. Japan is free of any significant inflationary pressure. In Europe, core inflation has just slowed for the second consecutive month following the Mar 2023 high. In contrast, the UK returned to big steps, with core inflation beating market expectations for the second consecutive month since April.
The divergence in inflation paths across major economies stems from the pace of rate hikes in 2022 and, in particular, the second-wave effects of differential import price spikes. The energy price spike caused by the Russia-Ukraine War in 2022 was a problem for everyone. However, the US is least dependent on energy imports and experienced a stronger dollar last year. As a result, import price inflation in the US was only 13%, compared to over 30% in other major economies. The US’s unique situation explains why the reacceleration of inflation in some countries is difficult to apply to the US.
In addition, short-term funding surplus liquidity reversed last week, giving back all of the increase seen after the debt ceiling deal, as reserves shrank faster than the RRP. The disappearance of US government free spending is also unique to the US. We believe fears of a reacceleration in US inflation are overblown.
Government course correction: 2H23 stimulus
Ahead of the announcement of 2H23 economic policy direction, the media has reported that policy focus will shift from prices to the economy. Shortly after the reports were released, the government officially called for a reduction in the price of instant noodles and decided to freeze electricity prices for the third quarter. It also suggested that a freeze was possible in 4Q23. This is seen as a prelude to economic stimulation in 2H23.
Utility price hikes are seen as upside risk to the BOK's 2H23 inflation outlook. With that risk removed and food prices set to fall, the decline in core inflation should accelerate, and the inflation trajectory should come in below that predicted in May. In particular, the rate of increase in housing costs in the CPI basket should decline from 3Q23. Fears of further rate hikes are likely to fade. We recommend a buy stance at current yield levels.