SOUTH KOREA: Could The Curve Steepen More From Here
May-26 02:57
- South Korean presidential candidate Lee Jae-myung saw his lead in the election campaign narrow sharply in the latest opinion poll released Friday as the conservative ruling party’s Kim Moon-soo made up ground after their first TV debate. The opposition Democratic Party nominee Lee had the backing of about 45% in a Gallup Korea poll conducted between May 20-22, a drop of 6 percentage points compared with the previous week. Support for the ruling People Power Party’s Kim rose by 7 percentage points to 36%.
- Candidate Lee Jae-myung vowed to immediately draw up 2nd extra budget to revive economy if he’s elected next month; Lee also pledged to set up a emergency task force to actively respond to sluggish economy.
- The BOK meets this week to decide on interest rates and economists are aligned in their expectations for a cut, despite the bond market only factoring in 10bps of cuts over the next three months.
In the period since the last BOK meeting (where policy was unexpectedly held) the KTB2YR yield has fallen 10bps, whilst the KTB10YR yield is higher by +10, resulting in a steeper curve.
- The Korean bond market has the highest correlation to the US bond market according to our analysis. The UST 10s2s steepend at the start of April and has remained static since and given KTB's correlation, a portion of its steepening could be attributed to that.
- However could the curve be pointing to a re-calibration of growth expectations for 2025? Current forecasts suggest a mere +0.9% GDP growth for 2025.
- South Korea's parliament approved a supplementary government budget on May 1 of 13.8 trillion won ($9.7 billion) to bolster an economy grappling with weak domestic demand and the potential impact of U.S. tariffs. A further supplementary budget could be positive for growth (given the mooted support to exporters).
- In 2020 the COVID impacted budget resulted in a deficit of -2.7% and GDP growth the following year of 4.6%. The deficit for 2024 was -3.4% with a skew towards the back end of the year. The 2025 budget forecast at this stage is -1.8% yet clearly with upside potential and would be two meaningful deficits in two years for the first time in some time.
- Looking back at 2020, the curve steepened to 0.83 at year end as the COVID economy required significant budget spend. This could suggest potential steepening to occur in the mid part of 2025 for KTBs should the BOK cut rates as expected and supplementary budgets positively impact growth.
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US TSYS: Extraordinary Measures And Cash Look Sufficient To Head Off X-Date
Apr-25 20:32
Treasury has about $164B in "extraordinary measures" available as of April 23 to avoid hitting the debt limit, per its regular report out Friday. That's out of a maximum total of $375B (they have used $211B).
- With Treasury cash looking healthy (around $600B), that's a fair amount of dry powder to get through the summer months to wait out the debt limit impasse. Tax receipts have looked strong with tariff revenues also starting to boost cash flows, further reducing the near-term urgency to adjust bond issuance.
- This has also helped push back analyst “x-date” expectations to later in the summer/September. We expect to hear from Treasury about its own x-date assumptions next week.
US TSYS: Treasury Market Trading Stayed Orderly In April: Fed Report
Apr-25 20:25
Liquidity across financial markets including the Treasury market deteriorated after President Trump's April 2 reciprocal tariffs announcement but market functioning was generally orderly, according to the Federal Reserve's semiannual report on financial stability, released Friday. (PDF link is here)
- Treasury market liquidity has been poor for years and yields were particularly volatile in early April, contributing to a deterioration in market liquidity, the Fed said.
- Nevertheless "trading remained orderly, and markets continued to function without serious disruption," according to the report, which looked at information available as of April 11.
FED: Ex-Gov Warsh: Fed Has Failed To Satisfy Price Stability Remit
Apr-25 20:22
From our Washington Policy Team - Some fairly sharp words today from ex-Fed Governor Warsh on the central bank (who for what it's worth is seen by betting markets as by far the frontrunner for the next Fed Chair):
- The best way for the Federal Reserve to safeguard its independence is for policymakers to avoid expanding the institution's role over time, including wading into policy areas that are outside its core mission, former Fed Governor Kevin Warsh, a leading contender to replace Jerome Powell as chair next year, said Friday.
- "I strongly believe in the operational independence of monetary policy as a wise political economy decision. And I believe that Fed independence is chiefly up to the Fed," Warsh said in a speech at a Group of Thirty event on the sidelines of the IMF meetings. "Institutional drift has coincided with the Fed’s failure to satisfy an essential part of its statutory remit, price stability. It has also contributed to an explosion of federal spending." His speech made no mention of Trump's tariffs or the appropriate monetary policy to deal with them.
- He said the ideas of data dependence and forward guidance widely adopted by Fed officials are not especially useful and might even be counterproductive.
"We should care little about two numbers to the right of the decimal point in the latest government release. Breathlessly awaiting trailing data from stale national accounts -- subject to significant, subsequent revision -- is evidence of false precision and analytic complacency," he said.
"Near-term forecasting is another distracting Fed preoccupation. Economists are not immune to the frailties of human nature. Once policymakers reveal their economic forecast, they can become prisoners of their own words. Fed leaders would be well-served to skip opportunities to share their latest musings."
