U.S. Government Spending to Rise after the Election
The author is an analyst of NH Investment & Securities. He can be reached at sw.kang@nhqv.com. -- Ed.
More important than the US presidential election are current economic conditions. Without additional economic stimulus policies, a consumption cliff looks unavoidable. Given such, we expect government spending to rise after the election. The BOK is likely to hike its 2020 GDP growth forecast at the upcoming November MPC meeting. Upward pressure on yields is to predominate.
Upward pressure on US TB yields to prevail regardless of election result
Statistically, US presidential election outcomes tend not to have a notable influence on US TB yields. Rather, the key influence is usually economic conditions around the time of an election. We expect the new government to increase spending after elections, noting that: 1) a spending cliff is likely to take place after November in the absence of additional stimulus policies; and 2) the Treasury has already accumulated US$1.65tn worth of cash. And, even with the additional recent uptick in US 10y TB yield, government interest burden is low. Thus, the need for Fed intervention is limited as of now. In November, the FOMC will likely keep its monetary policies the same and emphasize the need for fiscal expansion. US TB yield is to rise in November.
PEPP expansion signal; meaningful progress in FTA negotations
With the ECB predicted to expand the Pandemic Asset Purchase Programme (PEPP) amount in December, Europe’s HICP inflation rate should reverse into positive growth 1H21. The expansion of central bank asset purchases coupled with a rebound in inflation is to stimulate a yield uptrend. In addition, given France’s recent concession of fishing rights we expect meaningful progress to be made in UK-EU FTA negotiations before the November EU Parliament meetings. Upward pressure on EU sovereign yields is also to be dominant.
GDP growth forecast likely to be hiked at November MPC meeting
Given the 3Q20 GDP surprise, the BOK is likely to hike its 2020 GDP growth forecast at the upcoming November MPC meeting. Also, base effects upon CPI inflation will likely be maximized in early-2021 on a recent rent price uptrend. We expect there to be a chance to buy KTBs at higher yields in 1Q21. Thus, seeing no need to rush towards dip-buying, we continue to suggest buying up short-term KTBs.