May to Provide True Test to Economic Rebound
The author is an analyst of NH Investment & Securities. He can be reached at sw.kang@nhqv.com. -- Ed.
At the April FOMC, Powell suggested that ZLB would likely persist for a considerable period of time. We expect additional policy reinforcement for the labor market from the Fed in May. At the May MPC, in addition to a possible rate cut, the BOK is predicted to lower its growth forecasts by a large margin. KTB purchases will likely increase as well.
Fed succeeds in preventing financial crisis
Considering the steep contraction of the Libor-OIS spread and fourth consecutive week of fund inflow into prime MMFs, it appears that the Fed’s efforts to prevent a short-term financial market crunch have proved effective. Consequently, the Fed is now adjusting the speed of its safe asset purchases (US TBs/MBSs). However, given the ongoing recession of the real economy, the Fed is likely to strengthen its employment-related policies, such as the Paycheck Protection Program Liquidity Facility (PPPLF), in May with its remaining US$2tn in ammunition.
May to provide true test to economic rebound
From May, some US states are testing limited reopenings of their economies. Despite high expectations for a consumption recovery, given both the strong hysterisis effects haunting the US labor market and deteriorating household financial conditions, we are cautious towards a rapid rebound in consumption this month. As a further burden, we note Trump’s antagonism towards China ahead of the US presidential election. Believing that low interest rates will not stimulate growth just yet, we expect long-term US TB yields to remain stable.
BOK to take increasingly active role
Currently sized at about W3,600tn, Korea’s interest-bearing debt is likely to rise on the issuance of additional KTBs and special fund bonds—a factor that should ramp up the effects of any benchmark rate cut. At the May MPC, the BOK will likely cut the key interest rate further. In April, supply burden from large-scale issuance relating to supplementary budgets and special fund bonds pushed yields upwards—the prerequisite for active KTB purchasing Governor Lee mentioned at the April MPC. Accordingly, the May MPC should provide signals regarding aggressive KTB purchase by the BOK.