The author is an analyst of NH Investment & Securities. He can be reached at sw.kang@nhqv.com. — Ed.
While the Fed looks to be aiming for a soft landing with a hawkish slant, the TB market is pricing in a hard landing coupled with a dovish stance. Despite a likely upward revision in the Fed’s terminal rate, the TB market view is unlikely to converge with that of the Fed.
Fed and TB market holding disparate views
We divide the upcoming December FOMC into four scenarios: 1) hard landing with dovish Fed stance, 2) hard landing with hawkish stance, 3) soft landing with dovish stance, and 4) soft landing with hawkish stance. Considering Chair Powell’s recent press conference, the Fed looks to be aiming for scenario four, which is the most favorable in terms of achieving economic stability and controlled inflation. In contrast, the TB market has deemed scenario one as being the most likely since November, assuming that labor supply is unlikely to rebound quickly to pre-Covid levels, which should induce stronger demand destruction from the Fed. Against this backdrop, the market gauges that the Fed will have no choice but to make a dovish pivot due to recessionary forces.
This disparity between the Fed and the TB market is likely to persist even after the December FOMC. We expect the Fed to hike the FF rate by 50bp, with some members to opt for an FF rate above 5% in the 2023 dot plot. Chair Powell will likely remain hawkish throughout the press conference (scenario four). However, expected to focus on: 1) confirmation of a 2024 rate cut cycle in the dot plot; and 2) higher chances of a hard landing in the Fed’s forecast, the TB market is likely to continue pricing in scenario one.
Whether the market shifts to scenario two or three is to depend on November CPI. If CPI growth outpaces consensus, the TB market will likely move towards scenario two. On the other hand, if CPI growth undercuts consensus, a market shift towards scenario three is likely. Expecting CPI growth to match consensus, we believe that the pricing-in of scenario one will continue.
Both household and corporate debt an issue in terms of real estate
Mortgage loans (housing) account for the lion’s share of Korean household debt (53.8%). The same is true for corporate debt (commercial mortgages). Thus, the issue of private debt delinquency could be exacerbated by the current real estate sector downturn.
Already, based on actual transactions, housing price growth has come in negative for five consecutive months (as of September), and the number of undersubscribed units exceeded 47,000 in October. In the BOK’s 2H22 financial survey, market participants assigned a significant probability to systemic financial risk unfolding within one year. As such, financial stability concerns are to continue reigning in the BOK’s hawkish stance for the time being.
