Chances Rising of Benchmark Rate Cut at May MPC
The author is an analyst of NH Investment & Securities. He can be reached at sw.kang@nhqv.com. -- Ed.
We believe that most of the temporary layoffs in the US are concentrated in the leisure, wholesale, and retail industries. A hotel room occupancy rate and retail business survey conducted in April indicates that many temporary layoffs will become permanent terminations in May. Meanwhile, deteriorating domestic export conditions are stoking the chances of an interest rate at the May MPC.
Be wary of excessive optimism towards labor market recovery
The April US jobs report showed that 78.3% of newly unemployed workers were temporary layoffs, forming expectations for a V-type employment recovery. Although official statistics do not report temporary layoffs by industry, we believe that most of them are concentrated in the leisure, wholesale, and retail industries.
The American Hotel & Lodging Association is estimating a 2020E room occupancy rate of 38%, down from 66% in 2019. Room occupancy rates for the first and third biggest (by market cap) US REITS market players have dived to 12% (vs previous average of 76%) and 2% (vs 79%), respectively. And, according to a retail business survey conducted in April, a hefty 22% portion of US retail players are considering closing underperforming stores during post-pandemic restructuring. Even after reopening, 22% of US retail players are expecting to reduce their number of store associates per store. Noting that business environments in leisure and domestic trade sectors have worsened since the numerous temporary layoffs were made in April, we expect many of these layoffs to become permanent in May.
There can be no rebound of consumption absent of one in employment first—if a V-shape jobs recovery proves difficult, consumption will be hard pressed to turn around. The newly unemployed from the leisure industry (which accounted for the biggest portion of new unemployment claims in April) are now earning an average of US$383/week more than their previous income due to a federal unemployment insurance subsidy of US$600. That said, April retail sales fell further from March’s drop, evidencing a rising consumer tendency towards savings. With the aftershocks of recession continuing, 10y US TBs are to fluctuate within a narrow range.
Chances rising of benchmark rate cut being made at May MPC
Given the export performance for the first 10 days of May, 2020 export growth is likely should a double-digit fall y-y. In light of a decline in global manufacturing PMI new export orders (a spearhead of global trade volume), the probability of an export rebound in 2Q20 is low. With contractions in domestic and foreign demand overlapping each other, downward pressure on the economy is mounting.
In May, the BOK is inevitably to make significant downward adjustments to its 2020 growth rate and inflation projections. Thus, the chances of a benchmark rate cut being made at the May MPC are on the rise.
We also expect the BOK to signal its intention to actively buy up KTBs. Its annual purchasing limit can be gauged based on the KTB balance against the amount of outstanding KTBs at the time of the 2008 financial crisis. If the third supplementary budget reaches W20tn, the BOK could purchase up to W16tn this year.