BOK Needs Caution in Raising Rates Further
The author is a fixed income strategist of Shinhan Investment Corp. He can be reached at jk.ahn@shinhan.com. -- Ed.
Strong US jobs report for July lends support to Fed's tightening stance
The US job market data for July came in far above expectations. Nonfarm payrolls increased by 528,000, marking the largest gain since February (+714,000 jobs), and the unemployment rate dropped to 3.5% from 3.6% in June. Average hourly earnings of all employees rose by 0.5% in July, exceeding the 0.4% increase reported for June. We find that US job market conditions are now back to pre-pandemic levels, with nonfarm payrolls exceeding 1.53mn, similar to February 2020, and the long-term unemployment rate at 18.9%, vs. 19.1% right before the pandemic. US Treasury yields climbed across the board on confirmation of labor market recovery from COVID-19 impact.
We note a rift in views between the financial market and the US Fed since the July FOMC meeting. Given rising recession fears, market participants had increasingly expected the Fed to complete its tightening cycle within the remainder of this year and start cutting rates from the following year. The Fed, while closely monitoring the market's response, is nevertheless continuing on a tightening path. The decline in July ISM Manufacturing Index raised the possibility for a change in the central bank's monetary stance, but the strong July jobs report now adds further support to the Fed’s tightening stance.
In our view, the tug of war between the Fed and the market has just begun. With the July jobs report soon to be followed by the July consumer price index (CPI) release, US Treasury yields could continue upward in the near term. Market expectations are declining for a shift in US monetary policy stance, while rising for the Fed funds rate at the year-end and the terminal rate. Short-term upward pressure on US Treasury yields led by long-term rates will likely have negative impact on investor sentiment in the domestic bond market. This week, we expect a yield band of 3.05-3.25% for 3Y KTBs and 3.10-3.30% for 10Y KTBs. The 3Y-10Y yield spread should move within 2-9bp.