Piecing the puzzle together

The author is an analyst for Shinhan Securities. He can be reached at jk.ahn@shinhan.com — Ed. [US] Solid fundamentals We believe there is a possibility that the current Fed funds rate cycle may proceed differently from the ones seen in the past, due to the following reasons: 1) the US economy is now less sensitive to rate changes as a result of deleveraging efforts carried out in the wake of the 2008 global financial crisis; 2) the country seems sufficiently prepared to handle financial unrest; and 3) technological innovation and reshoring trends continue to add growth momentum despite high interest rates. Given the US economy’s solid fundamentals and growth drivers, a protracted high interest rate environment appears highly possible at this point. Nevertheless, the US Fed is unlikely to continue on a tightening path as in the previous year. The US now has the highest real interest rate among major developed economies. Macroeconomic indicators are still holding solid, but effects of fiscal tightening are seen in the US economy’s weakest links. Further tightening will only add to the difficulties of vulnerable populations. All in all, we expect the US Fed’s hiking cycle to come to an end in July and US Treasury yields to show a bear-flattening trend going forward. [Korea] Lower chances of a BOK rate cut within 2023 We previously forecast a policy shift to rate cuts from mid-3Q23, upon confirmation of stabilizing prices and weakening economic growth. However, the Bank of Korea (BOK) is now more likely to continue dismissing a rate cut within the year, with external uncertainties to persist until the September FOMC meeting, more efforts needed to stabilize prices given the slow decline in core CPI, and household debt back on an uptrend following the growing consensus that the real estate market has hit bottom. Expecting a 25bp rate cut in 4Q23 instead of 3Q23, we raise our yearend base rate projection from 3.25% to 3.50%. Our yield band projections are also revised upward from 2.90-3.50% to 3.25-3.70% for 3Y KTBs and from 2.90-3.55% to 3.20-3.75% for 10Y KTBs. We expect bond yields to face growing downward pressure from 4Q23, with a further rate hike seen less likely and a prolonged rate freeze environment to weigh heavily on the economic outlook. As price stabilization and economic slowdown should become more pronounced after 4Q23, an increasingly steeper drop in long-term yields will likely result in a flattening yield curve.

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