So, the United States just missed consensus on retail sales yesterday. The most surprising thing in the bond market from last year to the second half of this year was why consumption didn't decline. However, the consumption that hadn't declined is finally starting to show cracks a bit as of yesterday. And if you look at the breakdown of consumer spending, you can see that food-related consumption and housing-related consumption rates have started to decline. When the core consumption sector starts to deteriorate, if consumption starts to decline, then employment will follow, and then the rest of the economic cycle will falter. If additional indicators start to deteriorate here, the most important things are employment and prices. Then, it could be attempted to level down once again. We have Research Fellow Kim Myung-sil with us. Welcome. Hello. Greetings. Well, let's talk about the United States.

We are doing a lot, so how does this affect us? This is also a quite important issue for us, right? Let me start by talking about this. As I mentioned, there was a briefing on the operation status of the inflation target. The governor had quite a few comments, and I will ask for a review. Yesterday, there was a press conference at the Bank of Korea. In fact, most of it was theoretical, and the basic premise was that inflation could fall below 2.5%, as most major banks believe. However, despite this, there were concerns that external factors such as geopolitical risks and oil price increases could lead to anxiety. Secondly, in terms of inflation, there were a few characteristics of Korean inflation mentioned. Especially related to the food we eat, some obvious points were raised.

The cost of living in other countries is higher compared to others, but now the prices related to public services and education are somewhat lower than in other countries. For example, food prices will be adjusted in the future, while prices for public services may increase slightly compared to the global average. These are some basic points that you are probably familiar with. However, in the explanation of the recent price stability target, what the market was curious about was how the Bank of Korea could operate monetary policy regarding prices. Since prices are expected to fall, how can they manage it? This was the point of curiosity. This arose from the statement made by the President in the Blue House over the weekend, mentioning that Korea's prices are expected to drop by around 2% based on the core consumer price index in the second half of the year, which may increase the need for it. In a way, it is politically economic.

The mention was made by the government side. The monetary policy area is a unique area of the Bank of Korea, but there was a statement from the government side, so the most important point this time was how Governor Lee Ju-yeol would respond to this. As you may know, the independence of the Bank of Korea was emphasized once again, and the government side mentioned that they would somewhat exclude their opinions and that they would operate monetary policy based on the Bank of Korea's judgment in the future. There were statements drawing a bit of a line like this. So, in this regard, the bond market was somewhat disappointed. Rather than echoing, they drew a line a bit, so these parts can be seen as somewhat disappointing. Most of the evaluations on inflation are fundamentally theoretical. If you look at these theoretical parts and the distinctive points that are being touched upon.

Due to the high level of consciousness, even though public utility prices are low and overall inflation is showing signs of moderation, it may not be very well perceived by the public. Recognizing this, there is a structural change happening, and it is somewhat challenging to control prices through monetary policy alone. Yesterday, there was a nuance of acknowledging this situation. How do you see it today? Right, in fact, regarding consciousness-related prices, it is a bit vague to cover this through monetary policy. Ultimately, there are many parts influenced by the supply of agricultural products due to external factors such as climate and environmental conditions. In the end, actions related to industry or government policies are needed to control prices related to consciousness. For example, real estate or fresh food items we consume.

The government is now seeking price stability through controlling the supply volume. Therefore, I also sympathize with the idea that the Bank of Korea may recognize some limitations in monetary policy. Secondly, just because prices are falling, it doesn't mean that the room for additional actions in monetary policy from the sky disappears. Ultimately, from a macro perspective, since the Bank of Korea's goal itself is to target the inflation rate, when it starts to converge towards the target of 2%, the Bank of Korea will have to change its justification for monetary policy operation. Therefore, in this regard, it is expected that the inflation path in the second half of this year will fall to around 2.5%, and from that perspective, the probability of Korea lowering its policy rate this year has increased.

Yes, is the main reason for the existence of the Bank of Korea its primary goal is price stability. However, it has been acknowledged that there are limitations to achieving price stability through monetary policy alone compared to the past. Currently, there seems to be an environment conducive to lowering interest rates when looking at inflation itself. What do you think? Well, that's right. In May, the CPI recorded 2.7%. Now, the key is the level of inflation in the second half of this year. So, as analysts, we speculate on how much inflation in the second half could decrease. In order to estimate this, we need to understand some characteristics of domestic inflation. South Korea's consumer prices have an interesting feature. Firstly, they rise in the first and third quarters and fall in the second quarter.

In the first quarter, as you may know, there is the Lunar New Year, and now with the opening of the year, there are external issues such as government tax increases and public utility price hikes. Lastly, in March, there are increases in education-related expenses. Consequently, prices usually rise in the first quarter seasonally. Looking ahead to the third quarter, we have Chuseok (Korean Thanksgiving) and that's when the agricultural season begins. This leads to significant volatility in the prices of agricultural products depending on the supply and demand of agricultural products. Therefore, if we look at the monthly inflation rates from the first quarter to the fourth quarter, over a 10-year average, the inflation rate has always gone up in the first and third quarters, and conversely, it has dropped in the second and fourth quarters. That's why the inflation has slowed down in May and June, and it has been confirmed that inflation has slowed down in April and May. So, looking ahead, in June...

Prices are expected to drop somehow until the end of the year due to seasonal factors. So, from July to September, which is the third quarter, well, one worrisome thing is, let's say, prices dropped in the second quarter reflecting seasonal factors. If prices go up again in the third quarter, some may worry that it could be burdensome to raise prices a bit. Interestingly, international vacations surged in the third quarter of last year. Therefore, last year's third-quarter inflation rate of 0.7 to 0.8 or more is reflected as a base effect. These are the parts where inflation generally rises seasonally, which could offset this quarter. So, if we conservatively estimate, the inflation rate in the third quarter of this year is expected to be around 2.4% on average, and for the fourth quarter, it's anticipated to be around 2.3%. And a bit more extreme, considering the cycle, for example, in October, it could temporarily be at 2%.

There could be segments of tightening. From that perspective, although the cycle of inflation in the US and Korea is not significantly different, there is a high possibility of inflation rate cuts in the third quarter. So, looking at the latest Fed Watch data from last night, the US has the highest probability of a rate cut in September, currently around 60%. If we were to follow that path, how much can we anticipate? We are considering August and once in the fourth quarter, maybe in October or November. So, first or later, well, I will start first and then once in the fourth quarter. Therefore, we are thinking that there is a slightly higher chance of two rate cuts this year for Korea. If I say this, the most common question I receive is whether we can cut rates before the Fed. But if I

In the last session, what I mentioned was that the divergence in global monetary policy is starting. Canada and other major countries are also cutting interest rates. Although it is uncertain when the Fed will cut interest rates, the proposition of a cut this year remains unchanged. Moreover, if the Fed starts cutting rates this time, they will likely lower interest rates by at least 150 to 200 basis points. If this cycle continues, it can alleviate concerns about the exchange rate. From the perspective of domestic monetary policy, so for about a month or two, lowering interest rates first shouldn't be a significant burden for the Bank of Korea. Rather, it seems more important to be concerned about the side effects of maintaining the current tightening stance in line with the pace of domestic inflation decline. This is the time to think about it. Global monetary policy.

You mentioned the divergence, and yesterday the Reserve Bank of Australia kept the interest rates unchanged. They mentioned that they are not considering an interest rate cut at the moment, and inflation easing is slower than expected. They are also considering the possibility of a rate hike. ECB is also on the brink of a monetary policy decision, as you mentioned. Each country has its own circumstances, so how should we evaluate the current situation accordingly? There were some discussions about whether the expectations were accurate or not. Until recently, there were high expectations for a rate cut, but with the recent slightly higher inflation numbers, there might be a delay of a month or two. However, as you mentioned, Australia seems to be heading in a slightly different direction. It seems unlikely for them to raise rates, and the timing of the freeze may be delayed a bit more.

So, as you said, each country is doing quantitative easing now. Currently, they are at a neutral level. In the second half of the year, and towards the end of the year, the number of countries that will lower interest rates rather than freeze or raise them is expected to increase. Korea may also follow the trend a bit. As you mentioned, the ECB is expected to lower rates at least twice more this year. Canada is likely to do the same. Moreover, other Western European countries are also considering speeding up the rate cuts in the second half of the year. Anyway, this year and until next year, there are more countries in the world that have interest rate cuts within their reach, as you mentioned. So, I would like to know about the bond trends at this point. How are the interest rate trends? Well, let's start with the United States.

There will be a lot of interest, so the United States now missed the consensus in retail sales yesterday, causing U.S. 10-year Treasury yields to drop to the low 4.2% range. From last year until the second half of this year, the most puzzling thing in the bond market was why consumption was not increasing. However, the consumption that had not declined is finally starting to show cracks as of yesterday. You must have heard a lot about the reason why consumption did not decline, which was that the depletion of excess savings had not yet ended, so consumption did not decrease. Now, according to the Fed's standards, as of April this year, the scale of consumption excess savings has officially turned negative. Considering this cycle, the slowdown in consumption was practically a predicted sequence that started, and the expenditure on consumption.

If you look at the detailed breakdown, the consumption related to groceries and housing has started to decline. When the core consumption sector starts to deteriorate, the next thing to be affected will be employment, followed by the rest of the economic cycle. Taking these factors into account, it seems like the US Fed's interest rates are reflecting these aspects to some extent. Additionally, as you mentioned, in June, the FOMC dot plot was revised upwards, with the month of deletion changed to August. Despite this, the market still has high hopes for September. Although this is the Fed's assessment, it can change at any time. Moreover, if inflation, consumption, or employment indicators start to deteriorate, the Fed may advance the rate hike at any time. This narrative itself has not changed.

Considering that, I believe that downward pressure on U.S. Treasury bonds will continue. As I mentioned before, in the short term, after the FOMC meeting, I mentioned that the range of U.S. 10-year Treasury bond yields could be between 4.20 and 4.0. Now, it has come down to the lower end. If the indicators deteriorate further from here, the most important factors are employment and inflation. Therefore, I believe there could be another attempt to level down. However, if weak inflation or employment indicators start to emerge after this point, I think it could stay around the 4.20 level for a while. The FOMC meeting was last week, though it feels like quite a long time ago. Looking at recent developments, even though the Fed's tone in the dot plot was quite hawkish, when you consider the reaction to the CPI released just before that, and the comments of the Fed officials, it seems like...

I think there are some trends where individuals analyze the indicators and seem to trust more than the Fed. If you see it that way, do you also view the rate cut timing as September, Mr. Member? How do you see it? It's interesting. Yes, it seems strong. However, the Fed is not looking at September, but the market is overly emphasizing September, and the key to that seems to be the case. In the dot plot, there were seven members forecasting one rate cut, eight members with two, and nine members with no change. So, if we calculate arithmetically, among the Fed members expecting one rate cut, only two need to shift to two for an additional dot on the plot. Secondly, the final policy rate level for 2026 was agreed at 3.125, similar to the previous one. So, there may be noise in between, but in any case, the Fed is...

In the market, there seems to be a reflection that the market has priced in the possibility of the interest rate being lowered by up to 200 basis points. From that perspective, the market does not seem to place great emphasis on an upward adjustment on the dot plot itself. Instead, if the key indicators change as mentioned earlier, this can change significantly. Therefore, it is thought that the U.S. and international gold markets may not react strongly. Last week, there was an auction for the 20-year bonds, and demand has been quite good since last week. Recently, I find it interesting that it seems to be cycling a bit. As the indicators start to deteriorate, the consensus on interest rates at the Fed in the market changes quickly, and secondly, in terms of demand, the auctions are consistently performing well. So, some parts of the bond market that have been cooling down for a while are starting to revive a bit.

It feels like the cycle is starting to unfold, and unless there are other variables in the near future, it seems a bit difficult for the atmosphere itself to change. So, right now, should we buy bonds directly or sell them? Looking at the current trading trends, when interest rates spike, there is a continuous influx of funds into that area. Therefore, it seems like the market sentiment is to keep buying if it lags behind. Looking at it from a perspective of about 6 months to a year, it seems that the current interest rate level may be at its peak. From that aspect, I think the timing to buy bonds is not bad. Despite the fact that the buying timing has already seen some price increases, it still seems like a decent time to buy. One more thing to ask, recently, the Bank of Japan has been observing the weakness of the yen movement.

Because of that, yesterday, there was a mention of a possible interest rate hike in July, and after the statement by the Fed about starting tapering, it was actually the first statement, so the market paid attention to this. How do you see the flow of the yen? In fact, just before that, the BOJ had disappointed. They did start tapering, but in reality, what the market expected was more than just the tapering. However, since that didn't happen, and there was no clear insight given on that, the yen immediately weakened. However, statements like the possibility of a rate hike next month could theoretically be factors for yen strength. But personally, I think it's difficult for the Bank of Japan to change its stance quickly. In the end, although the fundamentals are there, inflation is gradually rising, I think we should focus on more insightful aspects rather than this. Last year and this year.

Private consumption indicators in Japan are falling apart. The parts where prices are rising are not reflected in wages. In that situation, if interest rates are raised, private consumption in Japan can only further shrink. Therefore, when considering these aspects, Japan will also have a lot of concerns. The first reason Japan's prices went up was due to wage increases. However, as you know, companies decide each year how much they will raise wages, so there may be a moment when they won't raise wages. Considering these aspects, the number of times wages will be raised this year may be more subdued than the market consensus. If this cycle continues, I think it will be difficult for the direction to quickly turn strong. Despite the somewhat tough remarks of the governor yesterday, and despite his remarks about excessive weakness, concerns about excessive weakness persist, and there are concerns about the economy itself.

There is also a part that was not there. I will refer to that part as well. I will stop here. I was joined by Kim Myung-sil, a research fellow at High Investment Research Center. Thank you very much. Thank you.

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