As the employment indicators in the United States deteriorate, expectations for interest rate cuts by the Federal Reserve (Fed) are growing in the market. With the rapidly changing situation in the U.S., the possibility of a rate cut by the Bank of Korea in August is also increasing.
◇ U.S. July employment falls short of expectations… May and June figures adjusted down to 258,000
According to the financial sector on the 10th, the non-farm payroll data for July, announced on the 1st, recorded only 73,000 new jobs, significantly lower than market expectations. This is a figure that fell well below the expert projection of 100,000 compiled by Dow Jones.
Additionally, the figures for May and June were drastically revised down, shocking the market. The number of new jobs in May was reduced from the previous figure of 144,000 to 19,000, a decrease of 125,000. The employment figure for June was cut from 147,000 to 14,000, a decrease of 133,000.
In Wall Street, the deterioration of the employment indicators has led to expectations that the Fed will lower the key interest rate during the Federal Open Market Committee (FOMC) meeting on September 16-17. Although the key rate was kept unchanged at the FOMC meeting held last month, Federal Reserve Board members Christopher Waller and Michelle Bowman expressed minority opinions in favor of a cut, and with the resignation of hawkish Governor Christopher Kuigler, the likelihood that the Fed will shift toward a dovish stance (favoring currency easing) has increased.
The Chicago Mercantile Exchange (CME) Group's FedWatch, which indicates the monetary policy outlook of investors trading Federal Funds Rate (FF) futures as probabilities, shows that the probability of a rate cut in September is recorded at 85.4% as of the 6th. This is an increase of nearly 40 percentage points compared to the previous figure of 46.7% on the 30th of last month, before the employment indicators were released.
Reflecting expectations for a rate cut by the Fed, market interest rates are also declining. According to the U.S. Treasury, the yield on 3-year U.S. Treasury bonds, which are sensitive to changes in the benchmark interest rate, plummeted by 22 basis points (bp) on the 1st (1 bp = 0.01 percentage points), and fell further to 3.63% on the 5th. This is the lowest level since April 30 (4.58%). It appears that the market is reacting sensitively to the possibility of a rate cut.
Kang Seung-won, Head of Bond Strategy Team at NH Investment & Securities, noted, "Before the July FOMC, Christopher Waller and Michelle Bowman said that the employment market situation is not good, so the rate should be cut quickly," adding, "The Fed may send a strong message regarding the rate cut at the Jackson Hole Symposium held from the 21st to the 23rd of this month to avoid criticism of hesitation and could cut in September."
◇ Burden of Korea-U.S. interest rate differential may ease… "Possibility of rate cut by Monetary Policy Committee in August"
As the Fed's rate cut timeline accelerates, the possibility of a rate cut by the Bank of Korea in August is also increasing. The Bank of Korea has found it challenging to cut rates due to the historically large Korea-U.S. interest rate differential of 2.00 percentage points. However, as the Fed's possibility of a rate cut increases, the Bank of Korea's options have also widened.
The recent cooling of the rising real estate prices that had been blocking rate cuts is also a positive development. According to the 'Weekly Apartment Sale Price Trend' released by the Korea Real Estate Board (REB) on the 7th, the apartment prices in Seoul increased by 0.14% in the first week of this month (as of the 4th), continuing a 4-week streak with an increase rate around 0.1%. The rate of increase in apartment prices in Seoul peaked at 0.43% and 0.40% in the third and fourth weeks of June, just before the announcement of the June 27 measures, and has been gradually slowing.
Consumers' expectations for rising housing prices have also cooled. According to the results of the 'Consumer Trends Survey' announced by the Bank of Korea on the 23rd of last month, the housing price outlook index for July stood at 109, down 11 points from June. While still above the long-term average of 107, this marks the largest drop on a monthly basis since July 2022 (-16 points). This indicates that the proportion of consumers expecting housing prices to rise in one year has significantly decreased.
Kong Dong-rak, an economist at DAISHIN SECURITIES, stated, "This U.S. employment data confirms that employment has deteriorated significantly following the tariff measures," adding, "Although there are still indicators to check, such as inflation in September, I believe there is sufficient possibility for the Fed to cut rates." He further noted, "As it stands now, there are no factors that would hinder a rate cut by the Bank of Korea in August."
Kang Seung-won also stated, "As real estate prices in the metropolitan area stabilize, it will be difficult for the Bank of Korea to find justification to delay a rate cut further," adding, "While the volatility of exchange rates has increased recently due to factors such as U.S. reciprocal tariffs, the possibility of a rate cut by the Fed has increased, so it should not become an obstacle."