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Korea's headline inflation appears to have passed its peak but will likely stay above 5% for the rest of the year. The Bank of Korea will take some comfort from these latest inflation figures but will stay on a hiking path through to the year-end 5.7 CPI inflation %YoY Lower than expected Headline inflation eased more than expected but core inflation still rose in August Headline inflation eased to 5.7% YoY in August (vs 6.3% in July), which was lower than the market consensus of 6.1%. But core inflation (excluding food and energy) continued to accelerate to 4.0% in August (vs 3.9% in July), showing that underlying price pressures remained strong. The unadjusted monthly growth rate declined by -0.1%, the first decline since November 2020. Extended fuel-tax cuts and a drop in gasoline prices was the main reason for the decline but fresh food and eating-out services rose firmly.   We think inflation has now passed its peak but it will likely remain above 5% for the rest of the year. Firstly, there is a high possibility that the price of fresh food will rise due to bad weather as SuperTyphoon Hinnamnor is expected to pass through the southern part of the Korean peninsula, a major agricultural area. Secondly, some staple manufactured foods, like instant noodles and bread are scheduled to rise after the Choseok holiday. Thirdly, utility fees such as city gas and electricity will rise again in October. Lastly, some local governments are also planning to increase service fees too.  Headline CPI slowed in August Source: CEIC The Bank of Korea is expected to raise rates 25 bp in October The Bank of Korea (BoK) will continue to stay on a hiking path at least until the end of the year. Governor Rhee has made it clear that the BoK will continue to raise rates as long as inflation stays above 5% and growth conditions do not deteriorate meaningfully. We think these terms will remain in effect until the end of the year. However, as we get closer to the year-end, we will see clearer signs of a slowdown in growth, so the BoK could begin to give more weight to growth considerations in its policy decision. Today's weaker-than-expected inflation print supports our view that the BoK will end its hiking cycle at 3.0% in November.  Read this article on THINK TagsKorea economy CPI inflation Bank of Korea Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

Service and construction activity increased but couldn't stop the decline in the all-industry production index as manufacturing activity fell in August. Solid consumption and facility investment should lead the current quarter's growth, but we then expect a sharp deceleration. We expect only a 0.1%QoQ GDP gain in 3Q22 (vs 0.7% in 2Q22) Source: Shutterstock -1.8% Industrial Production %MoM, sa Lower than expected All industry production fell for a second month due to weak manufacturing activity Industrial production dropped by 1.8% MoM (sa) in August, which was a bigger fall than had been expected (-1.3% in July and -0.8% market consensus), recording its second monthly decline. By industry, automobile production continued to gain solidly (8.8%) with improving global supply conditions helping suppliers to fill gaps in existing orders. But other major export items such as semiconductors (-14.2%) and petrochemicals (-5.0%) fell, suggesting that overall global demand conditions worsened. Semiconductor production dropped for a second month and was also accompanied by a worrying accumulation of inventories. Usually, this leads to a downward cycle for semiconductors. We expect a weak semiconductor performance in the coming quarters. Meanwhile, economic reopening appears to have supported activity in services. Social/welfare services declined (-1.3%) as the Covid situation improved, but wholesale/retail sales (3.7%) and leisure services grew solidly. Manufacturing IP fell for a second month in August Source: CEIC Equipment investment and construction rebounded in August There was a positive message in the investment component of this data. Equipment investment rebounded 8.8% in August. In addition, the forward-looking machinery orders series also showed gains, mainly driven by the IT sector. It seems as if despite the downturn in the semiconductor cycle, manufacturers continue to expand their investment in advanced technologies. For construction investment, both engineering and residential construction rose for the first time in three months while construction orders fell sharply reflecting the sluggish real-estate market in Korea. Investment rebounded in August Source: CEIC The growth outlook and the Bank of Korea policy reaction Based on today’s weaker-than-expected industrial production data, we expect 0.1% QoQ growth in 3Q22 (vs 0.7% in 2Q) and have downgraded our annual GDP forecast for 2022 to 2.5%YoY. In addition, with downbeat forward-looking data, we believe the probability of recession is growing rapidly. Yesterday’s business survey outcomes were weak, with manufacturing sentiment deteriorating to its lowest level since October 2020. Also, we expect a sluggish housing market in the coming quarters as a result of tightened liquidity conditions backed by today’s weak construction order data. Thus, we think growth for the next two quarters will likely contract with both weak domestic and external demand. Despite the recent poor performances in activity data, we believe that the Bank of Korea (BoK) will still put its policy priority on price stabilization. And we expect a 50bp hike at the BoK's October meeting. But the weak growth conditions will eventually slow the BoK’s tightening actions. And growing concern about recession, together with slowing inflation, should stop the BoK's rate hike cycle by early next year. Read this article on THINK TagsSouth Korea Investments Industrial Production Business confidence Bank of Korea Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

The trade balance in September recorded a six-month deficit while the trade deficit narrowed to -USD3.7 billion (vs -USD9.4 billion in August) as import growth decelerated at a faster pace than exports. We expect the trade deficit to continue to narrow until the year end and possibly turn into a surplus early next year Source: shutterstock.com 2.8% Exports %YoY Lower than expected Exports rose 2.8% YoY in September, the slowest pace in about two years Weakening global demand appears to have put pressure on Korea's exports, which recorded a 2.8% year-on-year rise in September (vs 6.6% in August), missing the market consensus of 3.3%. By product, semiconductor exports dropped by -5.7% in September (vs -7.8% in August) and performances of other IT products such as wireless phone (-7.0%) and computers (-23.6%) were also weak. Steel products made a sudden drop of -21.1% mainly due to a typhoon-triggered shutdown, which will be normalised fully by the year end; thus the slowdown is expected to continue. Meanwhile, petroleum product exports were solid with a 52.7% gain, and automobiles (34.7%)/auto parts (8.7%) exports rose for three consecutive months. By country, exports to the US (16.0%), Japan (2.5%), and ASEAN (7.6%) were solid while exports to China (-6.5%), the EU (-0.7%), and Vietnam (-6.4%) dropped.   Meanwhile, imports rose 18.6% YoY in September (vs 28.2% in August), slowing down due to the drop in global commodity prices. We expect import growth to decelerate further during the winter time, mainly due to the high base last year.  Trade deficit narrowed in September Source: CEIC Exports Automobiles vs IT products Source: CEIC, ING estimates Trade outlook and the Bank of Korea policy reaction Most of Korea's exports are intermediate goods processing trade. Therefore, if global external demand weakens, imports of raw materials and components will decrease. In addition, imports tend to weaken more quickly when domestic demand is weak, which is our base case scenario over the coming quarters, which could eventually lead to a trade surplus. We think that the current trade deficit trend will continue until early next year, but after that, as both external and internal demand weakens, the trade balance is expected to turn to a surplus again.  As the inflation is expected to stay above 5% for a few months, the Bank of Korea will likely continue to stay on the hiking path and frontload a 50bp hike at its October meeting. However, recent data releases from hard activity data to soft survey data suggest a sharp contraction of the economy in near term and real-estate markets already show a quite rapid price correction and liquidity concerns on mortgages and Jeonsei (yearly rent contract) deposits. Thus, we expect the BoK to put a break eventually early next year.  Read this article on THINK TagsKorea trade GDP Exports Bank of Korea Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

Interesting day for Asia with Bank of Korea rate meeting plus Indian inflation ahead of FOMC minutes and US PPI inflation tonight Source: shutterstock Macro outlook Global Markets: The turmoil that threatened to spread across markets from the UK’s Gilts market looked marginally less ominous for a while yesterday. 2Y Gilt yields retreated to the tune of 14.9bp, though their 10Y counterparts fell only 3.4bp. 2Y German bond yields also fell 5.7bp and were down 4.1bp in the 10Y Bund. It remains to be seen whether this calm will hold, as Bank of England (BoE) Governor, Andrew Bailey, noted that the BoE Gilt buying programme would still end this Friday.  Many pension funds seem to think that this is not long enough to make the necessary adjustments to their funds and there is a lot of speculation that the Friday deadline will have to be extended. US Treasury yields did their own thing yesterday. 10Y US Treasury yields rose 6.6bp to 3.947%, bringing 4% back into play as a near-term target. 2Y US Treasury yields were little changed at 4.31%. The pound came under further selling pressure yesterday, dropping to 1.0975 as of writing. EURUSD has ended up virtually unchanged after a very choppy session in US trading. The AUD is now down to 0.6267 and the JPY is nosing up towards the 145.90 level at which the BoJ intervened in mid-September. It looks like this could be an interesting day. Most of the Asian FX pack lost ground to the USD yesterday, led by the KRW which has risen to 1435, and the THB, which is up to 38.12. The CNY made further small losses, rising to 7.1687. Stock markets don’t yet seem to have woken up to what is going on in bond markets, and there were only small losses in the S&P500 and NASDAQ yesterday.  Equity futures are pointing to a small gain at the open. G-7 Macro: Yesterday’s US September small firm business survey (NFIB) rose for a third consecutive month. Most notably, there were slightly lower plans to increase selling prices (51% down from 53% in August and the 65% peak in May). The UK’s labour market data released yesterday showed a faster slowdown than had been expected, which won’t make the fiscal arithmetic any easier for the UK government, trying to make their tax cut plans add up to something that won’t crash the pound or Gilts market. The monthly GDP figures for August in the UK due out today will likely also make for uncomfortable reading. US mortgage applications and PPI numbers ahead of the September CPI release tomorrow as well as the FOMC minutes from the last meeting, will help set the tone for the market for the next 24 hours.     China: China loan growth jumped by almost double from a month ago to CNY247bn. Government bond issuance also jumped. This indicates that government spending will support the GDP growth figure in 3Q22. But fiscal pressure is mounting. India: September CPI due out later tonight will show inflation pushing higher. The consensus is for a rise to 7.4% from 7.0%. We think there is some upside risk to these figures based on some higher food price data over the month. South Korea: The Bank of Korea (BoK)  holds a rate decision meeting today. Both we and the market expect the BoK to raise its base rate by 50bp, considering the faster-than-expected Fed rate hikes, sticky inflation exceeding 5%, and growing inflation risks from the weak won and rebounding global oil prices. Inflation eased down to 5.8%YoY in September and inflation expectations also came down slightly. But the BoK will be very careful in reading too much into the latest figures as inflation is expected to pick up again in October. The market has already started talking about the possibility of another 50bp hike by the BoK at the next MPC meeting in November. We have to listen carefully to Governor Rhee’s comments today, but we think that October CPI is the key for the BoK regarding the next decision. If inflation goes back up to 6%, then another 50bp hike is possible. If not, then they will likely normalize their hiking pace. Japan: The JPY passed 145.9 this morning and if the authorities step in again, it will be no big surprise. Machinery orders fell in August by -5.8% MoM sa (vs 5.3% in July and -2.8% market consensus). The weakness mainly came from foreign orders (-18.9%), pointing to the slowdown in the global economy. Domestic demand orders rose modestly (1.9%). We think that Japan’s economy will stay on a recovery path, boosted by reopening-induced domestic demand. What to look out for: Inflation reports and the FOMC minutes Japan machine orders (12 October) India PPI inflation (12 October) US PPI inflation (12 October) Bank of Korea decision (12 October) FOMC minutes (13 October) Japan PPI inflation (13 October) US CPI inflation and initial jobless claims (13 October) China trade balance, CPI and PPI inflation (14 October) Korea unemployment (14 October) US retail sales and University of Michigan sentiment (14 October) Read this article on THINK TagsEmerging Markets Asia Pacific Asia Markets Asia Economics Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

Although inflation expectations and pipeline prices have eased in recent months, the Bank of Korea raised its policy rate by 50bp today, responding to faster-than-expected Fed rate hikes, sticky inflation and growing inflation risks from the weak won and rebounding global oil prices. Future guidance remained vague  3.00 BoK 7-Day Repo Rate   As expected The BoK decided to raise the policy rate to 3.00% but with two dissenting votes The market widely expected a 50bp hike, but two dissenting votes were a surprise. This is the first time that the policy rate decision has not been unanimous since August 2021. This clearly shows that the spectrum of dove-hawk tendencies is shifting slowly from curbing inflation to supporting growth. In addition, Governor Rhee mentioned that multiple members see the terminal rate around the 3.5% level, but that a couple of members believe it will be lower than this, so the Board’s opinions on future interest rate hikes are divided. Lastly, Governor Rhee gave a vague answer to the possibility of a 50bp rate hike in November and mentioned that the board members will opt to watch the Fed before deciding what to do then.  The BoK's rate decision outlook in November We believe that two conditions must be met for a 50bp hike in November. The first is the Fed’s rate hike decision in November. If the pace of Fed hiking is faster than the market expectation of 75bp then the BoK could consider a 50bp hike. The second is Korea’s consumer inflation in October and pipeline prices. If inflation goes back up to 6% and pipeline price pressures reaccelerate (driven either by rapid won weakness or a rebound in global oil prices), then another 50bp hike is possible.   Our ING house view is that the Fed will deliver a 75bp hike in November and that Korea’s October CPI inflation rate will rise to 5.9%YoY with a continued slowdown in pipeline prices. And as such, we think that the BoK will likely normalize its hiking pace back to 25bp in November. The BoK's rate decision outlook next year We believe that the BoK’s tightening cycle is coming close to an end. Governor Rhee repeated several times that rate hikes will be painful for highly leveraged debtors, but that action is necessary now to avoid an even bigger increase in interest rates. However, we think that tight monetary conditions will soon start hitting the real economy with further asset price adjustments and a rapid slowdown in private consumption and investment. Although upside risks on inflation are growing, Korea’s consumers are highly sensitive to interest rates, given the large exposure to variable rate loans. Thus we expect inflation to come down quite sharply from the end of next quarter. In turn, we believe that the BoK will stay on hold for a while next year before commencing its easing cycle towards the year-end. Read this article on THINK TagsInflation expectations CPI inflation Bank of Korea Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

GDP grew 0.3%QoQ (sa) gain in 3Q22. Consumer spending, which had been boosted following reopening, slowed. In contrast, investment was more resilient. Based on the grim outlook for consumption and exports from recently released data, we maintain our view that the economy will experience a moderate recession early next year Source: shutterstock.com 0.3% Real GDP growth in 3Q22 %QoQ sa As expected Growth supported by domestic demand while net export contribution contracted even further In 3Q22, GDP growth was led by domestic demand, as expected. Household consumption rose 1.9% - a slower pace than the previous quarter (2.9% in 2Q22) mainly due to the increased debt service burden and higher inflation. Investment components were particularly strong. Construction and facility investment rose by 0.4% and 5.0% respectively. Investment in the IT sector expanded despite the recent semiconductor downturn cycle, and transportation equipment investment also increased as mobility restrictions were relaxed around the world and supply bottlenecks in the auto industry eased. Exports rebounded 1.0% in 3Q22 (vs -3.1% in 2Q) on the back of gains in auto and service exports. But, imports rose even faster than exports, rising 5.8% (vs -1.0%) with high commodity prices and increases in capital goods imports. As a result, the net exports contribution to GDP was a drag of 1.8pp more even than the 1.0pp drag in 2Q22.  By industry, manufacturing fell for the second consecutive quarter, while construction and services gained strongly.  3QGDP was led by domestic demand Source: CEIC GDP outlook : 2.6% in 2022, 0.7% in 2023 The latest data show the reopening boost starting to fade, and we expect this trend to accelerate in the current quarter. We think consumer spending will decline in the near term due to debt deleveraging and the debt service burden. Regarding investment, we expect IT equipment investment to continue to rise but other components of investment to weaken. The recent credit market squeeze will likely negatively impact investment due to high funding costs and increased uncertainty, with the construction sector being the hardest hit. Exports are also likely to turn weak again, due to the economic slowdown in major trade partners such as the US, EU, and China and sluggish semiconductor exports. Thus, we maintain our view that the economy will experience a moderate recession early next year.  The Bank of Korea's policy outlook With consumer price inflation back above 5%, the BoK is expected to raise its policy rate by 25bp in November instead of a 50bp hike. By doing so, the BoK's commitment to price stability can continue to be communicated to the market, while the BoK also needs to calm down the market's anxiety about the recent credit market squeeze to some extent. Although there is still a risk of inflation, an aggressive 50bp hike will probably be avoided as prices are expected to stabilize after a temporary rise in October.  The BoK's MPC will meet today. This is a regular meeting and the BoK will discuss policy response to the recent credit market issue. We believe that the BoK will not inject liquidity directly into the market as this would work against their current tightening policy stance. But, the BoK will likely adjust its micro-policy tools. Thus, we expect that options like reactivating Special Purpose Vehicles (SVPS) to purchase corporate bonds and CP and unlimited RP are not going to be delivered at this time. Instead, it is possible that the BoK will expand its purchases of bonds from commercial banks.  Read this article on THINK TagsSouth Korea GDP growth Exports Consumption Bank of Korea Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

After the 3Q GDP result last week, we expected IP to be somewhat weak in September. But the details were much weaker than anticipated with forward-looking components pointing to a cloudy outlook. While the recent crowd tragedy will temporarily negatively impact private consumption, the Bank of Korea is unlikely to take action as a result Source: Pexels -1.8% Industrial production % MoM sa Lower than expected Industrial production, retail sales, and investment all slid in September All-industry industrial production dropped 0.6% month-on-month (seasonally adjusted) in September, the third consecutive month of decline. Manufacturing activity also declined for a third straight month while services, a growth engine after reopening, turned weaker. All-industry has declined for three months in a row Source: CEIC Manufacturing IP contracted 1.8% MoM in September Manufacturing production was worse than in August (-1.4% revised) and below the market consensus (-0.8%). The weakness in September was mainly driven by semiconductors (-4.5%) and basic metals (-15.7%). One temporary factor exaggerating the weakness was the decision by POSCO to shut down some facilities due to a typhoon in September. The steel company expects a gradual recovery within a few months. However, continued weakness in semiconductor production and stockpiling mean that the future production outlook is worrying. Meanwhile, service output declined 0.3% in September (vs 1.8% in August) with retail/wholesale and health/social welfare down 2.1% and 1.0%, respectively. Forward looking data is mixed, but biased towards the soft side Machinery orders declined -16.5% MoM (sa) in September (vs 30.4% in August) with private orders down quite sharply while construction orders rebounded solidly by 20.4% in September (vs -24.9% in August) mainly led by non-residential segments such as factories, warehouses, and civil engineering. We expect residential construction to turn weak due to a sharp increase in unsold housing units and adjustments in housing prices. Although the outlook for facility investment is expected to be better than that of construction in the short-term, facility investment is expected to shrink next year due to the recent tightening in the credit market. Near-term consumption outlook is gloomy Retail sales dropped 1.8% MoM (sa) in September (vs 4.4% in August). Automobile sales rose sharply by 9.4%, recording three monthly increases as production lines normalise globally, but overall sales dropped with weak consumer and semi-durable goods sales.  The Halloween disaster is expected to have some negative impact on private consumption. Early November is the peak shopping season in Korea, and several shopping- and entertainment-related events had been scheduled. However, as the government has declared a one-week national mourning period through 5 November to honour the victims, all festivals and entertainment events have been cancelled or postponed. However, the magnitude of the negative impact on the economy is expected to be small compared to the sinking of the Sewol Ferry in 2014. Thus, we don’t expect any macro policy changes due to this accident. Retail sales excluding automobiles are weak Source: CEIC Read this article on THINK TagsSouth Korea Investments Industrial Production Consumption Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

A series of recent credit events in Korea is a major concern for the economy. We don’t see a credit crisis as the base case scenario, but as market jitters continue, some losses are inevitable and project financing is the area of greatest concern Seoul, South Korea   Recently, the corporate bond market has experienced a crunch triggered by the default of a municipality-guaranteed asset-backed commercial paper (ABCP). As the global economy faces headwinds and liquidity conditions are expected to become tighter, difficulties in corporate bonds and credit markets are expected to increase. The key is how quickly the authorities and industries can calm the market’s unnecessary unrest. Credit spreads are expected to widen further and small losses in specific sectors are foreseeable, but it is unlikely this will lead to large-scale insolvency of the corporate bond market. Recent market development in the credit market The credit market has been struggling quite a bit over the past few weeks. The 5Y Credit Default Swap had remained low through the year but has almost doubled since mid-September (74.3 as of 4 November vs 31.4 as of 9 September). In addition, credit spreads between 3Y Korean treasury bonds (KTB) and AA-credit widened quite sharply from 96.9bp on 1 September to 147 on 4 November. Global monetary tightening has had a negative impact on the Korean credit market since the beginning of the year, but the recent volatility is due to specific domestic issues. The credit spread has widened quite sharply since October Source: Bank of Korea, CEIC, ING What's going on in Gangwon-do? The province of Gangwon-do (GWD) announced last month that it would withdraw payment guarantees for a project financing (PF) ABCP worth 205 billion won. Since then, there have been signs of a liquidity crunch across the bond market. So what happened in GWD? GWD established a real-estate developer called GJC in 2012 for the region's Legoland construction project. The GJC’s special purpose company (SPC) issued an ABCP for which the payment was ultimately guaranteed by the GWD municipality. But when the principal payment was not made as scheduled by the end of September, the municipality decided to file a rehabilitation application for the GJC with the court instead of making the payment. Why did it do this? The market has interpreted this move as the municipality acting according to the policy change following the change of local government, rather than because it was unable to make the payment.  Consequently, credit rating agencies took immediate action. The ABCP’s rating of A1 was downgraded to D within five days. It literally went bankrupt. Creditors demanded GWD repay the loan through the issuance of municipal bonds. In the end, the governor of GWD announced that it would repay the loan of 205 trillion won through a special budget by next January, but as market jitters continued, it brought forward the payment plan to December. The case is almost resolved, but the effects are longer lasting To make a long story short, the municipality will ultimately make the payment as promised. However, this issue was strong enough to shake the entire credit market. Developers are experiencing difficulties due to a deterioration in profitability in the aftermath of the global interest rate hike and rising construction costs due to surging raw material prices. As the number of unsold residential units increases rapidly, overall investor sentiment has frozen. The bankruptcy of ABCP caused by a local government has expanded the possibility of a chain stoppage of the PF loan market and the possibility of a contraction in the financial market.  Recent debt increase was driven by electricity/gas and construction industries The average debt ratio of Korean companies has been continuously decreasing since 2015. The debt ratio of all-industry fell from 105.6% in the first quarter of 2015 to 91.2% in the second quarter of 2022. Yet, the debt of the electricity/gas industry increased sharply to 228.7% this year in response to their operating losses. Their bonds get AA-grade (Fitch rating) with government guarantees, so a sudden increase in debt itself is not considered risky but it is blamed for crowding out the entire credit market. We expect new issuance of those companies to decline next year thus the crowding out effect is expected to reduce. On the other hand, the debt ratio of the construction sector showed an upward trend in 2022 but fell sharply from 210.5% in 2015 to 135.6%. As such, even if we foresee some defaults in construction, the estimated damage should be smaller than in the past.   Electricity/gas industry debt rose sharply in 2022 Source: Bank of Korea Cloudy outlook for the construction industry The construction industry's debt level has been managed relatively well, but we have caught signs of insolvency coming to the surface. First, the number of defaulted construction companies has picked up this year. In the first half of the year, four local companies went bankrupt. This is a relatively small number, but we expect it to increase based on a strong forward-looking indicator – the number of unsold units outside of Seoul, which is rapidly rising. We are not concerned about large builders as they have a relatively strong financial structure and sufficient cash reserves. However, we believe small and medium-sized local builders will experience a capital crunch if market liquidity continues to shrink. Cloudy outlook in residential construction Source: CAK, KOSTAT, ING Project financing is still the concern Korea has already suffered from PF insolvency once between 2011 and 2013. Project financing has more than quadrupled compared to 2013 as investors have sought higher returns amid the continued low interest rate environment. Although the scale has grown, the composition of funding sources has changed. According to a report by the Bank of Korea, the PF loan balance stood at 112.2 trillion won as of 2Q22, which is higher than 76.5 trillion won in 2008 and 35.2 trillion won in 2013. Most notably, while PF exposures of banks declined in 2022 compared to 2008, the exposures of insurances, and capital/credit increased sharply. Banks have applied stricter conditions on PF, and most of the funds have been invested in large residential construction projects – considered high-quality assets. As the exposure of insurances has risen sharply, it is a worrying fact, but fortunately, their PF projects are also concentrated in high-quality assets. The biggest concern is that investments of capital/credit, savings banks, and securities are small-sized, non-residential, and risky assets. But the total size is relatively small, thus the expected damage should be contained.    Insurances have the largest exposure to project financing Source: Bank of Korea How have government authorities responded to this credit event? With market volatility growing fast and credit conditions tightening sharply, authorities have announced a series of policy measures including a special liquidity supply package of more than 50 trillion won. Measures include: The government will double the ceiling of its corporate bond-buying facility operated by special state-owned banks to 16 trillion won (vs 11 trillion). Commercial paper issued by securities firms will be included in the facility’s purchase list. The Korea Securities Finance Corp will supply an additional 3 trillion won of liquidity for securities firms experiencing liquidity shortages. In addition, the government reiterated that all municipalities would fulfil their payment guarantee obligations. GWD announced that it would complete its debt obligations by 15 December, earlier than the originally proposed date of January 2023. How did the Bank of Korea respond to this credit event? The Bank of Korea (BoK) has also eased some of its micro-policy measures: The central bank will temporarily (for three months starting on 1 November) accept bonds issued by banks and nine state-owned companies such as KEPCO and KOGAS, as eligible collateral for banks borrowing money from the bank. Currently, the BoK only takes KTBs, monetary stabilisation bonds (MSB), and government-guaranteed bonds as collaterals. The plan to raise the liquidity coverage ratio (LCR) from 70% to 80% will be postponed by three months to May 2023. The BoK will carry out a temporary repo (until the end of January 2023) with an estimated amount of 6 trillion won. As long as the current situation does not shake the entire credit market, we believe that the Bank of Korea will not inject liquidity directly into the market as it would go against the current tightening policy stance. Thus, options like reactivating special purpose vehicles (SPV) to purchase corporate bonds and commercial paper and unlimited repo are not going to be delivered any time soon. The Bank of Korea's monetary policy outlook In the short term, the BoK is expected to raise its policy rate by 25bp in November as inflation is still above 5% and upside risks remain. By doing so, the BoK’s commitment to price stability can continue to be communicated to the market, while the BoK also needs to calm the market’s anxiety about the recent credit market squeeze. That’s why we see a low probability of a 50bp hike in November. For next year, taking into account ING’s recent house view that the Federal Reserve’s hike will be extended to the first quarter of next year with an additional 50bp hike, we have changed our view about the Bank of Korea's next steps, and now believe it will make an additional 25bp hike in the first quarter of next year. We have also advanced our rate cut call from 4Q23 to 3Q23. Given the tight liquidity conditions with a minimum of 50bp more hikes, a meaningful negative impact for households and businesses is inevitable. Beyond the first quarter, inflation is expected to fall below 4%, then the BoK will shift its policy priority from inflation to growth and financial sustainability. With a bleak growth outlook for 1H23, we believe that the BoK will begin its easing cycle in the second half of next year. GDP outlook We have already forecasted that consumer spending will turn negative this quarter as the debt service burden weighs on private consumption and consumer sentiment deteriorates further. Now, we foresee investment contracting over the new few quarters. We don’t see a credit crisis as the base case scenario yet, but as market jitters will persist for a while, business sentiment and market conditions will certainly have a negative impact on the economy. Corporate bond yields and bank lending rates are good forward-looking indicators for investment, and the recent tight credit conditions will likely lead to a slowdown in future investment. The economic slowdowns in the US, EU, and China are also expected to be longer and more severe, and external conditions will be unfavourable for Korea’s exports during the first half of next year. As a result, we expect three consecutive quarters of contraction from the current quarter, and the anticipated rebound in 3Q23 will be smaller than we had expected. Thus, we are downgrading our 2023 GDP forecast to 0.6% year-on-year from 0.7%, already lower than the market consensus of 1.9%. Investment is expected to contract in the coming quarters Source: Bank of Korea, CEIC, ING We expect GDP growth to contract for the next three quarters Source: Bank of Korea, ING Expect a recession, not a crisis With authorities’ swift responses, expectations of a crisis in the market are expected to subside. Regarding the redemption issue of insurers, we believe that insurers can manage and mitigate risks. While insurance companies will pay high costs for funding, solvency and the ability to raise capital are not at risk. In addition, authorities have already begun consultations with insurance companies and, if necessary, are seeking policy help to alleviate the short-term money market tightness.  However, even after this, the soundness of companies is in question for the next couple of quarters. As always, a crisis always begins with a crack in the economy’s weakest point. Looking at corporate debt, it is judged that the overall debt level of Korean companies is still good, but the status of some selective parts, such as project financing and construction, is worrisome. Authorities have provided a series of relief measures and expect additional mitigation measures to be introduced. These efforts will likely allow time for businesses and authorities to manage the risks in the hope of more orderly restructuring and a soft landing. We don’t think the credit crunch will pose a systemic risk to the financial system because corporate’s debt condition has improved on average compared to 2015 and most of them are already in risk management mode. But, this will hurt near-term growth and drag the economy into recession next year. Read this article on THINK TagsSouth Korea Investment Credit crunch Corporate debt Bank of Korea Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

Equity markets are making steady gains in Europe and Asia on Thursday, while Wall Street is closed for the Thanksgiving bank holiday. The day got off to a decent start as investors on this side of the pond played catch-up following the late rally in the US. All considered it hasn’t been the most lively of weeks but the FOMC minutes did ensure investors went into the Thanksgiving break on a bit of a high. A dovish boost before Thanksgiving The most notable takeaway from the minutes – which were never going to be game-changing – were the discrete references to the difference in support for slowing the pace of tightening now and those raising their estimates of the terminal rate. Clearly, the latter has much less support which means a lower rate hike is on the cards in December – probably 50 basis points – while a higher terminal rate is only a possibility and will depend on the data. While not ideal for investors, the net effect is undoubtedly less hawkish and that’s at least partly what drove that late rally. Read next: G7 work on a Russian oil price cap, gold has gained as dovish Fed signals spread through the market| FXMAG.COM Destructive lockdowns again for China? Record Covid cases in China, more testing and restrictions, and even possible lockdowns went some way towards undermining that positivity coming from the US in Asia on Thursday. Stocks in China slipped while Hong Kong underperformed its regional peers as investors weighed up the prospect of more growth-destructive lockdowns and uncertainty for the world’s second-largest economy. This comes as authorities sought to slightly ease the burden of Covid restrictions and support the property market, both of which are difficult if record case numbers force people indoors. Another disappointing manufacturing survey The plunge in Japan’s manufacturing PMI to a two-year low below 50 – which separates growth from contraction – perfectly highlights how challenging the current environment is around the world. Higher input costs combined with lower domestic and external demand is hammering the manufacturing sector and is likely to continue until inflation abates and growth bounces back. Navigating blind The Bank of Korea has become the latest central bank to jump aboard the “slower for longer” train, raising rates by 25 basis points while leaving the door wide open to further rates hikes. The decision to join the RBA and BoC, with the Fed likely not far behind, comes as the economic headwinds mount. The problem many now face is a result of acting late and aggressively. As rate moves come with a lag, policymakers are being forced to make decisions without full visibility of the impact recent moves have had. They must therefore decide when to slow the pace of tightening in order to avoid unnecessary economic hardship and deflation while inflation is still very high. It may work out in the end but there’s a big risk on both sides that it won’t. CBRT brings an end to its easing cycle I’m not sure that particular analogy works when describing the Turkish central bank. In this case, it’s more like driving a car in reverse while looking forwards in the hope you somehow make it home ok. The CBRT cut interest rates by another 150 basis points today, taking it back to 9% while declaring the end of its easing cycle. That comes as official inflation sits at 85.5% in October, despite various efforts to control the currency movements. A dead cat bounce? Bitcoin is in the green for a third day, albeit only just, as it continues to try and stabilize in the aftermath of the FTX collapse. The event was unsurprisingly a huge setback for the whole industry, both from a contagion perspective but also a reputational one. Traders are correctly now asking themselves who else is exposed, how big will the ripple effects be, and where else this kind of activity is taking place. In such an unregulated world, these fears are very real and could undermine faith in the crypto space for some time, further weighing on prices in the process. For a look at all of today’s economic events, check out our economic calendar: www.marketpulse.com/economic-events/ This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds. A "dovish" boost - MarketPulseMarketPulse

OANDA Senior Market Analyst Craig Erlam reviews the latest market news with Jonny Hart. They discussed the Fed minutes, BoK rate hike, Chinese lockdowns, and oil as the G7 finalise the Russian price cap. http://www.subscribeonandroid.com/audioboom.com/channels/4947364.rss This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds. Market Insights Podcast (Episode 402) - MarketPulseMarketPulse

Although utility and public service fees are scheduled to rise next year, inflation expectations have fallen to the 3% level for the first time in six months In South Korea, inflation expectations have fallen to the 3% level for the first time in six months 3.8% Inflation expectations   Consumer sentiment index improved in December The consumer sentiment composite index rose slightly to 89.9 in December (vs 86.5 in November), but has remained in contraction territory for seven straight months. Despite the continued price adjustment of the housing market and high interest rate environment, expectations for consumers' living standards and economic conditions have improved. We believe that this unexpected improvement is based on better views regarding employment and the interet rate environment. The interest rate expectation sub-index fell by 18 points while the employment expectation rose by 4 points.  Inflation expectations returned to the 3% level Source: CEIC Bank of Korea Watch The most important reading in today's consumer sentiment survey was inflation expectations, which dropped to 3.8% in December (vs 4.2% in November) as the Bank of Korea keeps a close eye on consumer inflation expectations in terms of its monetary policy decisions. We expect consumer inflation to slow to 4.9% year-on-year in December, mainly due to the base effect and falling gasoline and fresh food prices. The slowdown in both actual inflation and inflation expectations underpin our view that the Bank of Korea may take a break in January and resume rate hikes in February. Read next: USA: The weakest year since 1990 - IPO market acquired "only" $7bn| FXMAG.COM The government plans to raise utility bills (details will be announced on 30 December) and public service fees quite meaningfully next year and reduce the amount of gasoline tax cuts (from 37% to 25%) from 1 January. However, this will mostly be offset by falling global oil prices and a stronger KRW, in our view. Also, the recent sharp drop in housing and rent (jeonse) prices is expected to be reflected more prominently in next year's CPI. Thus, we believe that CPI inflation should come down to the 3% level by early 2Q23. Then, the Bank of Korea will likely take a pause for a while to monitor how inflation moves and how monetary policies of other major central banks change.  Read this article on THINK TagsInflation expectations CPI inflation Bank of Korea Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

In November, all industry IP rebounded slightly for the first time in five months as manufacturing and public administration activities rose. Yet, service and retail sales continued to fall for the third consecutive month Auto manufacturing facility in South Korea 0.4% Industrial Production % MoM, sa Higher than expected Industrial production rose slightly in November Manufacturing output rebounded 0.4% month-on-month seasonally adjusted mainly due to strong gains in auto production (9.0%) and general machinery (6.4%) while semiconductor output plunged (-11.0%). The global supply conditions for the auto industry improved while unmet pre-ordered vehicle shipments increased. However, IT-related output – semiconductor and other electrical equiment – continued to decline with weakening global and China demand. Even though production rebounded, shipments dropped -2.3% for the second month, resulting in inventory rising 1.4%. Semiconductors, basic metals, and chemical inventory remain at an elevated level, meaning that the inventory cycle is likely to work unfavourably for near-term production activity. IP rebounded, but shipments fell even more, thus inventory accumulation continued Source: CEIC Services and retail sales declined for three months in a row, but a temporary rebound is expected in December Service activity reduced in November with hotels/restaurants and information/communications down the most. After the tragic accident in late October, the national mourning period in early November appeared to have a negative impact on hospitality/leisure-related service activities. In the latter case, overall IT activities such as software development, programming, and system maintenance slowed, reflecting a slowdown in global IT demand and suggesting employment cuts in the IT sector. We think that Black Friday shopping promotions have probably boosted consumption from late November to early December, thus services and retail sales are likely to rebound temporarily, at least in December.  Retails sales excluding automobile were sluggish Source: CEIC Investment is likely to weaken in the future Construction orders rebounded quite smartly in November, but considering high monthly volatility, three-month sequential growth deepened its contraction to -27.0% 3Mo3M sa in November (vs -19.3% in October). Also, looking at the previous construction ordered data, construction completion is likely to decelerate quite sharply in the near future. Meanwhile, semiconductor investment has been on the rise despite the recent industry slowdown, but only because it takes three to four quarters for equipment that is ordered to be installed. Yet, machinery orders, a better indicator of the current business cycle, declined in November.   We think that investment components should remain positive in fourth quarter GDP but the outlook for next year is quite bleak.  Construction is likely to decline in coming months Source: CEIC GDP outlook In sequential terms, all industry IP tumbled to -1.6% 3Mo3M sa in November from 0.4% in September, meaning GDP growth for manufacturing and services is likely to contract this quarter. On top of that, as exports have declined over the past three months, the external demand component is also expected to fall. Currently we forecast fourth quarter GDP to contract by -0.1% quarter-on-quarter sa and annual growth of 2.5% YoY, yet the downside risks are growing.  Considering that forward-looking indicators such as business survey, construction orders, and machinery orders are still sluggish, the first quarter growth is unlikely to improve. The continuous price correction in the real estate market and high debt service burden is likely to weigh on private consumption as well. The weak start of the year lowers the base for the annual growth rate, thus we maintain our lower-than-consensus annual growth forecast of 0.6% YoY for 2023. China's reopening is expected to have positive impacts on second half 2023 growth, but in the near term, a surge in Covid cases, the risk of new variants, and health and safety-related problems are likely to add a negative impact on first quarter 2023 GDP.  Read this article on THINK TagsSouth Korea Retail sales Investment Industrial Production GDP Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

As widely expected, the Bank of Korea (BoK) left its policy rate unchanged at 3.5% for the second consecutive meeting. The BoK has pushed back against expectations of a rate cut later this year, but we continue to argue that the central bank has ended its rate-hike cycle and will eventually shift to easing by the end of the year The Bank of Korea in Seoul 3.50% 7-Day Repo Rate   As expected The Bank of Korea strengthens hawkish stance despite unanimous decision to hold It is not surprising that the BoK maintained its hawkish stance today, emphasising more inflation uncertainties. The path for global oil prices is quite uncertain at this point and the accumulated upward pressures from utility prices remain substantial, so the BoK has reason to be cautious.  Governor Chang-yong Rhee repeated several times during the press conference that board members see the market's expectation for a rate cut as too excessive, suggesting that the current market view is quite different from the board members' view. Five board members would still like to keep the door open for another rate hike if necessary while one member sees 3.50% as the terminal rate.  The BoK is quite confident that the slowdown in inflation in the first half of the year is mostly in line with its forecasts, but the inflation path may be different in the second half of 2023. That is probably why the majority of board members kept their hawkish stance, however we think the BoK will likely leave the policy rate unchanged at least during the second quarter. The BoK will likely reverse its policy stance as inflation pressures ease faster We still expect the BoK to reverse its policy stance because inflation will fall slightly faster than the BoK forecast of 3.5% (INGf 3.3%) and economic growth will miss the BoK’s current forecast of 1.6% by far (INGf 0.7%). Read next: FX Daily: Conditions continue to settle ahead of US data| FXMAG.COM It is true that uncertainty surrounding global oil prices remains high. But, we expect inflation to continue to ease throughout the year, driven by weakening supply and demand pressures. In the second quarter, the base effect will be a major contributor to the slowdown in inflation, despite recent gains in global oil prices. We also think the demand-side pressure will likely turn soft as the restrictive policy environment weighs on consumption and the real economy, meanwhile external demand conditions will improve only gradually in the second half.  Last week, Samsung Electronics announced plans to cut back on chips, so inventory adjustments are expected to proceed faster than expected. Its implication on the real economy is adding more downside pressure to growth and inflation. Industrial production is likely to be hit by production cuts while prices in memory chips are likely to bottom out with a time lag of around two quarters.  If we are right about slowing inflation in the second half of the year, we don't see a reason for the BoK to keep its policy rate in restrictive territory. Moreover, the possibility of a US recession increases and this is likely to add further downward pressure to global inflation.    BoK likely to cut as inflation heads towards 2% Source: CEIC, ING estimates The BoK welcomes two new board members in May Two of the BoK's directors will be replaced at the next meeting in May. The market considers one of the newly-appointed members dovish, and the other neutral, which could push the BOK's policy stance towards being more dovish. We do not necessarily agree with the market view because the most dovish member will retire while the newly joined dove may not be as dovish as the outgoing member. The four members keeping the possibility of another 25bp rise will remain. Therefore, we do not believe that changes in the board of directors will have a significant impact on the Bank's policy decisions. We will monitor how new board members express their policy positions over the next few months. Read this article on THINK TagsCPI inflation Bank of Korea Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more