Government Starts to Execute 3rd Supplementary Budget
The author is an analyst of NH Investment & Securities. He can be reached at sw.kang@nhqv.com. -- Ed.
While the June jobs report showed another surprise, we believe that personal income fell paradoxically. The scale of fiscal stimulus measures announced in the second half of July will be important. In Korea, a third supplementary budget passed Congress, highlighting the BOK’s important role. We expect the BOK to announce additional KTB purchases around the July MPC meeting.
US personal income for June likely decreased significantly
In the US June jobs report, the percentage of temporary job losers showed a sudden 13.5%p drop, continuing the steep downtrend from May. This should support risky assets, but as we pointed out in our July monthly report, the markets are focused more on fiscal stimulus than economic indicators. Of note, when the unemployment rate skyrocketed in April (+10.3%p), US personal income rose US$2tn due to transfer receipts. However, when unemployment fell in May (-1.4%p), personal income slid US$874.2bn. We attribute this phenomenon to the fact that unemployment benefits were higher than normal wages for some people. In the leisure sector, which generated most jobs in May, unemployment benefits were US$383/week higher than average weekly wages. Noting this, we believe that personal income for June decreased by more than US$1tn compared to May.
The reason for the rapid recovery of asset prices despite the economic shock in 2Q20 is aggressive fiscal spending, including large unemployment benefits. As such, asset markets will likely focus on the size of additional fiscal stimulus to be announced in the second half of July, rather than economic indicators.
The US Congress has entered a two-week recess and policy momentum is on hold. While House Democrats passed the US$3.4tn HEROES Act, it was not discussed in the Senate before the recess. The Republicans, which control the Senate, said on Jun 27 that additional stimulus will not amount to US$3tn, and the White House officially proposed a stimulus of US$2tn. Of note, Donald Trump also mentioned on Jul 2 that it is problematic that unemployment benefits are higher than normal wages. Thus, additional stimulus is likely to be smaller than the CARES Act (US$2.2tn). As subsidies hold more weight than economic indicators, US TB yields will likely remain range bound despite the rebound in the economy.
Third supplementary budget finalized and BOK’s role highlighted
The National Assembly passed a third supplementary budget plan of W35.1tn, a level that is W200bn lower than the initially proposed amount. Out of the total budget, W23.8tn is to be funded via treasury bond issuance. Last week the standing committee increased the budget by W3.1tn, but ultimately it was reduced at the plenary meeting, easing the supply burden.
The government announced that 75% of the budget will be executed by end-3Q20. Amid such aggressive spending, the BOK’s role in reviving the economy is to be highlighted. Of note, Deputy Prime Minister Hong Nam-ki expressed concerns about potential crowding-out effects from an increase in KTB issuance. This sentiment concurs with a statement he made on Jun 3, the day the third budget was announced, when he said, “I look forward to seeing the BOK’s role.” We expect the BOK to announce additional KTB purchases around the July MPC meeting for policy coordination purposes.