Ample Tax Revenue Arriving This Year
The author is an analyst of NH Investment & Securities. He can be reached at sw.kang@nhqv.com. -- Ed.
For the first time since 2019, the Fed has lowered its longer-run FF rate (a proxy for the neutral FF rate). Considering the past downward revision of 2018, we estimate that the terminal rate of this hike cycle will be 2%. Accordingly, we believe that long-term US TB yields have already reached this year’s peak.
Lesson from 2018’s downward revision of longer-run FF rate
At last week’s March FOMC, the Fed hinted at 7 rate hikes this year (including the March hike) and 3.5 hikes in 2023. On the surface, the Fed’s stance looks quite hawkish, given the suggestion of 10 FF increases within two years. However, with markets reading the Fed’s underlying message, risky assets rallied and the dollar index fell after the March FOMC.
Last week, the Fed lowered its longer-run FF rate (a proxy for the neutral base rate) for the first time since 2019 (2.50% → 2.375%). In other words, it has been judged that the level of FF rate that the US economy can endure has fallen due to Covid-19. At the end of the last rate hike cycle in 2018, the Fed set the longer-run FF rate at 3%. But, when the Fed hiked the FF rate from 2.25% to 2.50% in 4Q18, asset markets were rocked. Taking this into consideration, we estimate that the US economy of the time could have withstood an FF rate of as high as 2.25%. Given last week’s downward revision, today’s appropriate FF rate level is now reduced. We project the terminal rate of this cycle at 2%.
Despite weakened economic momentum, the Fed is planning for more rapid hikes compared to the last cycle. Against this backdrop, the 10yr-5yr US TB spread dipped into the negative during trading for the first time since the 2008 global financial crisis, with the one year forward 10yr-2yr spread sliding further into negative territory. Although the Fed has implied that it will enact seven hikes this year, such a task is unlikely to be easy. We expect five rate hikes followed by a breather after September.
Ample tax revenue arriving this year
In January, national tax revenue totaled W49.7tn—a surprise given the past five year (2017~2021) January average of W36.6tn. The government attributes the surprise to one-off factors such as deferred 2021 tax revenue and base effects. Moving ahead, additional deferred tax revenue is expected. We also note that the combined 2021 OP of listed Kospi and Kosdaq firms climbed 67.2% y-y. Given that 2022 corporate tax is to be based on 2021 OP, this year’s corporate tax revenue will likely exceed forecasts.
Supply-demand burden, which has been the biggest negative for the KTB market, should gradually subside going forward. In addition, US TB yields are believed to have already reached this year’s peak. We maintain our prediction of a downward stabilization in KTB yields.