"US July Rate Cut Expected... 100bp Cut Within the Year"

[Image source=Yonhap News]

Meritz Securities expects the U.S. Federal Reserve (Fed) to cut interest rates in July, forecasting a total reduction of 100 basis points (1bp = 0.01 percentage points) within the year.

Yoon Yeo-sam, a researcher at Meritz Securities, stated on the 8th, "As we move into the second half of the year, we see the possibility of a financial environment contraction due to high interest rate fatigue and potential cracks in the currently strong but narrowly based U.S. economy," adding, "We maintain our forecast of a 100bp rate cut following the July reduction."

In March, U.S. nonfarm payrolls increased by 303,000 compared to the previous month, significantly exceeding both the 200,000 expert forecast compiled by Dow Jones and the 12-month monthly average increase of 213,000. Yoon noted that there are implications in the fact that full-time jobs decreased by about 6,000 while part-time jobs increased by 69,000.

Yoon analyzed, "Although the pace of U.S. job growth remains around 200,000 on average, if most of this increase is in part-time jobs based on immigrants, the risk of a wage spiral driving inflation may not be a serious concern."

He further explained, "The actual U.S. wage growth rate in March rose by 0.35% month-over-month, higher than February's 0.17%, but this can be seen as a result of seasonal factors due to the harsh winter," adding, "On average since 2021, this is a moderate pace compared to the monthly wage growth rate." While confirmation of stabilization in the 3% range is still needed, this suggests that the current stimulus is not stronger than previously feared.

Meanwhile, Yoon expects the Bank of Korea to implement rate cuts in the third quarter. He explained, "Although expectations for two rate cuts within the year have retreated in price reflection, many agree that there is no reason for our interest rates to rise compared to the U.S."

He added, "While the perception that rising oil prices and a weak Korean won are obstacles to rate cuts is relatively high, sensitivity of the exchange rate to interest rates has decreased," and "Given that this is largely based on the weakness of surrounding currencies such as the yen and yuan, it is not easy to assert that lowering our interest rates will intensify the depreciation of the won."