BOK to Remain Conservative on KTB Purchases
The author is an analyst of NH Investment & Securities. He can be reached at sw.kang@nhqv.com. -- Ed.
The effects of fiscal spending deployed in January are to be seen in February, continuing the uptrend of inflation expectations. Long-term US TB yields should rise gradually. Domestically, the MPC will likely maintain a conservative stance towards KTB purchases. We continue to recommend short-term KTBs.
February to showcase power of fiscal spending
January household consumption will likely exceed expectations on US federal unemployment benefits and economic impact payments. The contribution of government spending to 1Q21 real GDP growth is estimated to be 7.37%. Given that the contribution was -3.03% in 4Q20, GDP growth could record a surprise in 1Q21. The effects of fiscal spending should be seen during February, further spurring expectations towards inflation. The short-term inflation expectation (BEI 2y) has already expanded to 2.4%. US TB yields are to rise gradually, accompanied by expanding inflation expectations.
Fed’s message is clear: No tightening without overheating
Noting the pace of PCE growth in December, we see PCE growth of 2.3~2.4% over March~April. But, we caution that this is to be a ‘temporary’ inflation spike stemming from base effect. We view the prerequisite conditions for a shift in the Fed’s stance as being: 1) full employment; and 2) sustained inflationary pressure. Accordingly, the Fed will likely continue to adhere to a monetary easing stance throughout the year.
At February MPC, BOK to remain conservative on KTB purchases
High frequency data shows that global trade volume has been soaring since last November. The quality aspect of the export economy is also to improve in 1Q21. Along with the surge in government spending, headline indicators should continue to strengthen. The BOK’s role is becoming more important, as supplementary budget discussions are taking place. But, considering the size of its KTB holdings during the 2008 financial crisis, it is unlikely that the BOK will transition to an active role in KTB buying for now. With supply burden to persist, we continue to suggest short-term KTB investment.