Possibility of January US Consumption Surprise Growing
The author is an analyst of NH Investment & Securities. He can be reached at sw.kang@nhqv.com. -- Ed.
The possibility of a January US consumption surprise is increasing due to the Blue Wave. Inflation expectations are to rise further spurring the uptrend in US 10yr TB yields. At the January MPC meeting, the BOK should unanimously freeze the benchmark rate and present a positive judgment on the economy.
Fed to continue to tolerate yield uptrend
The Democratic Party won the Georgia Senate runoffs and achieved a Blue Wave. President-elect Biden promised to raise economic impact payments (EIP) to US$2,000 if the Democratic Party won. Comparing to the amount allocated to EIP and unemployment benefits in the CARES Act and the new stimulus bill (including the upward revision of EIP), income support will increase 22% against Apr 2020. The possibility of a consumption surprise in January has grown and inflation expectations should rise further in line with the recent oil price climb.
The Fed’s has also positively revised its economic judgment. In November, 12 of the 17 Fed members were concerned about economic downside risks, but the number declined to 6 in December. Meanwhile, those viewing that the economic outlook is balanced increased from 4 to 10. In addition, upside risks are mentioned in the December FOMC minutes and a discussion of tapering took place. Internally, the Fed’s outlook on the economy is improving.
Amid expectations for overall economic improvement, 10yr US TB yields exceeded 1.0% last week for the first time since March. The rise in nominal yields led by an additional rise in inflation expectations is unlikely to restrain the economy as real yields should remain stable. Thus, the Fed continues to tolerate the yield uptrend. Upward pressure US TB yields is prevailing. We continue to underweight US TB.
January MPC: Improving headline indicators vs sluggish job market
In addition to the strong export economy thanks to improving global trade, government spending will likely soar q-q in 1Q21. A continuing improvement in headline indicators means that MPC members will likely positively adjust their economic outlooks (compared to last November). As such, we expect the MPC to freeze the benchmark rate unanimously at the upcoming January meeting. Considering the BOK president’s New Year address, he will likely take a cautious stance, emphasizing vigilance against the accumulation of financial imbalances.
However, noting employment indicators as of November, the number of people in unpaid family jobs increased for the first time since the IMF crisis. This suggests that the job market is in its most difficult situation in 20 years. The BOK said that it will not aim for full employment, but that employment levels will be an important criterion for economic judgment. Thus, it is too early to be worrying about monetary tightening. While domestic monetary policy is likely to remain neutral for the time being, the KTB market is expected to go through a period of high volatility from foreign yield uptrend. We continue to recommend short-term KTBs.