US Economy Posts Negative Growth for 2 Consecutive Quarters
The author is a fixed income strategist of Shinhan Investment Corp. He can be reached at jk.ahn@shinhan.com. -- Ed.
Market seen overly optimistic toward hints of a dovish tilt
The 10Y US treasury yield ended 31bp lower for the month of July at 2.67%. Despite another 75bp hike in the Fed funds rate, subtly dovish comments from Fed chair Jerome Powell and the FOMC statement for July caused the 10Y yield to fall to 2.6% levels for the first time since early April. Powell stated that the 75bp hike in July places the US Fed funds rate close to the neutral level of 2.5% suggested by the Fed in June. In addition, the July FOMC statement says “recent indicators of spending and production have softened.” In all, the stance of the Fed and its chair is seen somewhat moderating compared to June.
Meanwhile, the US economy posted negative growth for a second quarter in a row, with gross domestic product (GDP) falling at an annual rate of 1.6% in 1Q22 and 0.9% in 2Q22. With two consecutive quarters of negative growth signalling technical recession, financial market forecasts for the year-end Fed funds rate and the expected 3-month interest rate 18 months from now have dropped to 3.3% levels and 2.8% levels, respectively. This indicates market expectations for two rate cuts next year.
The 10Y US treasury yield recently posted a steeper decline on mounting fears over economic recession amid a tightening cycle. Despite Powell's comments pointing toward further rate hikes and another unusually large hike in September depending on future data, the decline in yields accelerated on expectations for smaller rate increases going forward and the end of the rate hike cycle by end-2022. At home, concerns continue to grow over the Korean economy with growth in exports and consumption likely to slow down. This week, we expect a yield band of 2.95-3.15% for 3Y KTBs and 3.00-3.25% for 10Y KTBs. The 3Y-10Y yield should move within 6-14bp.