Seoul bond market participants are focusing on the July Federal Open Market Committee (FOMC) meeting during the week of July 27-31, according to Yonhap Infomax. The FOMC rate decision will be announced on July 30 (dawn Korean time), with market sensitivity heightened by recent oil price movements and ahead of July consumer price inflation data scheduled for early August. This follows a sharp rise in government bond yields last week, driven by a surprise second-quarter GDP growth rate of 0.6% quarter-on-quarter — significantly above the 0.37% consensus — and oil prices surpassing $100 per barrel amid US-Iran tensions. Analysts from Shinyoung Securities and Hanwha Investment Securities cited inflation concerns and potential back-to-back rate hikes in August as key drivers of market volatility. The geopolitical backdrop includes the US halting a two-week series of Iran strikes over the weekend, shifting attention to potential diplomatic resolutions around the Strait of Hormuz.
FOMC Announces Rate Decision on July 30 with Q2 GDP and PCE Data
The July FOMC meeting will conclude on July 30 (dawn Korean time), with markets expecting the Federal Reserve to hold rates steady. Federal Reserve Chair Kevin Warsh's press conference remarks are anticipated to drive market volatility, though uncertainty remains elevated given Warsh's limited engagement with market communication, according to Yonhap Infomax. On the same day, the US and other major economies will release second-quarter GDP growth rates, and the US June core Personal Consumption Expenditures (PCE) price index will be published. On July 31, the Bank of Japan (BOJ) will announce its rate decision, with markets expecting rates to remain unchanged.
Domestic focus centers on the August government bond issuance plan, scheduled for release on July 30. Market reaction may be influenced by the atmosphere at the Primary Dealer (PD) council meeting held prior to the announcement. At last week's Long-Term Investor Council meeting, the Ministry of Finance and Economy reiterated that August competitive auction issuance for ultra-long bonds will be at the lower end of the range. On July 31, the National Data Office will release June industrial activity trends. Semiconductor production fell 10% in May, marking two consecutive months of decline following April — June data will again hinge on semiconductor output. The Bank of Korea will publish the July consumer survey on July 28, and the July Business Survey Index and Economic Sentiment Index (ESI) on July 30.
Q2 GDP Growth Reaches 0.6% Quarter-on-Quarter, Exceeding Market Consensus
During the week of July 20-24, the 3-year government bond yield (based on average pricing) surged 10.1 basis points to 3.953%, while the 10-year yield jumped 14.5bp to 4.445%. The 10-year to 3-year spread widened from 44.8bp to 49.2bp, steepening the yield curve. Early in the week, escalating US-Iran conflict drove oil prices higher, amplifying inflation concerns. Hawkish reassessment of the July Monetary Policy Committee gained traction as major global investment banks raised the probability of back-to-back rate hikes in August through FOMC review reports. A Bank of Korea issue note released over the weekend, analyzing substantial spillover effects from improved terms of trade, reinforced this view.
The Bank of Korea announced that second-quarter real GDP growth reached 0.6% quarter-on-quarter, significantly exceeding the Yonhap Infomax consensus of 0.37%. Year-on-year growth stood at 3.7%. Real Gross Domestic Income (GDI) rose 3.6% quarter-on-quarter and 15.6% year-on-year in the second quarter. The central bank assessed that achieving 3% annual growth requires only an average of negative 0.1% growth in the third and fourth quarters. This data intensified speculation of consecutive rate hikes in August. Later in the week, oil prices breached $100 per barrel, further lifting yields. The 3-year benchmark government bond yield reached 3.975% intraday, approaching the psychological 4% threshold. Over the weekend, oil prices declined for the first time in six sessions, easing some concerns as market participants engaged in technical selling.
Foreign investors net purchased 16,366 contracts of 3-year government bond futures and net sold 16,225 contracts of 10-year futures. Among major sovereign yields, the US 10-year Treasury yield surged 12.9bp, Australia's 10-year yield rose 18.33bp, and Japan's 10-year yield climbed 10.39bp.
Analysts Forecast July CPI at 2.7% Year-on-Year, August Rebound to 3.3-3.4%
Market experts highlighted the possibility of a hawkish stance emerging from the FOMC, reflecting the recent surge in oil prices. Cho Yong-gu, researcher at Shinyoung Securities, stated: "In terms of the Fed's dual mandate of employment and inflation, the labor market is in balance, while inflation risks persist due to the recent escalation in Middle East tensions driving oil prices sharply higher." Cho added: "Particular attention is on the potential spread of hawkish views among some Fed Board members and regional Federal Reserve Bank presidents, and on Chair Warsh's assessment of the situation." He noted: "If the Fed shifts toward rate hikes, it is likely to proceed with two increases rather than a one-off move, given concerns about inflation spreading."
Following the FOMC stance confirmation, market direction will hinge on the July consumer price inflation data to be released in early August. Kim Sung-soo, researcher at Hanwha Investment Securities, stated: "While inflation diffusion pressure appears to have peaked and demand-side pressure is not as strong as expected, the July CPI reading itself could be higher than June given the rebound in oil prices during July." Kim added: "In that case, the 3-year government bond yield, having broken through the psychological resistance of 3.9%, may now attempt to enter the 4% range, and the 10-year yield could easily exceed 4.5%."
Cho Yong-gu forecasted July CPI at 2.7% year-on-year, citing the previous month's oil price decline and temporary summer electricity rate reductions as key factors. However, he cautioned: "Oil prices have rebounded more than 30% from their lows, and base effects including last year's telecom rate cuts will overlap in August, likely pushing CPI back up to 3.3-3.4%, making it difficult to assign significant meaning to July's CPI decline." He concluded: "With the probability of back-to-back hikes in August now elevated, if the terminal rate level needs to be raised rather than remaining unchanged, an additional shock of 10-15bp could occur beyond current levels."
FAQ
What did the Bank of Korea announce about Q2 GDP growth?
The Bank of Korea announced that second-quarter real GDP growth reached 0.6% quarter-on-quarter, significantly exceeding the Yonhap Infomax consensus of 0.37%. Year-on-year growth stood at 3.7%, and real Gross Domestic Income (GDI) rose 3.6% quarter-on-quarter and 15.6% year-on-year.
When will the July FOMC rate decision be announced?
The July FOMC rate decision will be announced on July 30 (dawn Korean time). Markets expect the Federal Reserve to hold rates steady, with attention focused on Federal Reserve Chair Kevin Warsh's press conference remarks.
