Monetary Tightening Coinciding with Hard Data Downturn
The author is an analyst of NH Investment & Securities. He can be reached at sw.kang@nhqv.com. -- Ed.
Monetary tightening and a hard data slowdown are to coincide in July, stoking fears of recession induced by policy errors. As market attention shifts gradually from inflation to economic growth, TB yields should stabilize downwards.
Fed to continue its battle with inflation, even at cost of recession
Despite recession worries, Fed has already stated at the June FOMC meeting that its primary task at hand is to lower inflation. Given a gasoline price uptrend, June CPI (announced on Jun 13) is unlikely to mark the peak point for inflation. The Fed will likely boost the FF rate by 75bp at the July FOMC and by another 50bp in September, continuing its aggressive tightening.
Monetary tightening coinciding with hard data downturn
Up through June, confidence indicators have shown the first signs of deterioration, but actual hard data is likely to stagnate from July. Concerns over an employment slowdown are to emerge amid downward revisions to corporate earnings projections. And, June retail sales releases should evidence drops. Given such, the Fed’s monetary tightening efforts are unfolding simultaneously with an economic data downturn. Market attention should turn gradually from inflation to the cost of fighting inflation (ie, economic growth).
Korea must pay price of fighting against inflation
We expect the BOK to boost its benchmark rate by 50bp in July and another 25bp in August. As the BOK (like the Fed) is pursuing tightening even at the cost of a recession, inflation predictions will likely temper. Noting a sharp drop in the Philadelphia Semicon Index, we believe that domestic export growth will shrink rapidly in 2H22. As such, we expect the magnitude of downward revision in GDP growth to be larger than upward revision to the inflation forecast. KTB yields will likely also downtrend as economic growth comes into the spotlight.