Hantoo Securities "Market Expects Final Interest Rate Hike in July"

[Image source=Yonhap News]

Korea Investment & Securities expects the Federal Reserve's (Fed) final interest rate hike to occur in the third quarter (July). This is based on the judgment that there will be gradually less justification for additional hikes as the year-end approaches.

On the 20th, Sojung Yoon, a researcher at Korea Investment & Securities, stated, "If inflation and new employment indicators do not slow down more than expected before the July Federal Open Market Committee (FOMC) meeting, the Fed is expected to raise the benchmark interest rate once more to 5.5%."

Researcher Yoon forecasted, "However, starting from the decline in housing inflation, the perception that the July hike will be the last will expand after the rate hike decision."

Before this forecast, Researcher Yoon emphasized the need to understand the background behind the Fed's decision to hold rates steady in June. He said, "It was not an exceptional skip of a hike in June," and stressed, "The cycle for deciding rate hikes itself has been adjusted to once per quarter at each meeting." In other words, if the July rate hike is confirmed, the next hike turn will be in November, not September.

As evidence, he cited remarks from Fed Chair Jerome Powell. Chair Powell explained the reason for holding rates steady by saying, "Just as the size of hikes was reduced from 75 basis points to 50 basis points, then to 25 basis points, it is an obvious sense to slow the pace of hikes as we approach the terminal rate."

Researcher Yoon pointed out, "There is only one inflation and one new employment announcement left before the July FOMC," and added, "In the futures market, expectations for rate cuts have been partially reversed, and the level of the terminal benchmark rate itself has risen."

U.S. Treasury yields also increased. Last week (June 12?June 16), the 2-year and 10-year yields rose by 11.9 basis points and 2.2 basis points, respectively. The inversion of the 2-year?10-year spread widened to 95.3 basis points, the highest since the Silicon Valley Bank (SVB) incident.

Generally, the widening gap between short- and long-term yields is due to fluctuations in the price of the 10-year U.S. Treasury bond. There are two main reasons for the rise in the 10-year yield (price decline): institutions selling bonds and buying stocks in anticipation of economic improvement, and expectations of inflation.

Bonds lose value when inflation occurs because the principal repaid at maturity is fixed. Therefore, when the breakeven inflation (BEI) rises, demand for bonds decreases, leading to a drop in bond prices and a rise in yields.

However, the market expects that if a rate hike is implemented in the third quarter, there will be no further hikes. Researcher Yoon said, "While the futures market has reversed rate cut expectations, it has not reflected the forecast of one more hike in the fourth quarter," and added, "Although the July hike is not fully priced in yet, bond yields are unlikely to rise significantly above the current levels, which are the highest since the SVB incident."

This content was produced with the assistance of AI translation services.