Korea's further rate cut likely in Q4

Korean exports fell 14.7% y/y in August, much worse than expected and closer to the first 20-day advance flash estimate. The fall was the steepest since the 21% drop in August 2009 and far exceeded the declines in July (-3.4%), June (-2.6%), May (-11%) and April (-8%). 

The underlying trend has weakened further, given that the August export performance came even as the July contraction was revised slightly deeper to -3.4% (from -3.3%), bringing the drop in the first eight months of the year to 6.1% (Jul-Aug: -9.1%; Q2: -7.2%; Q1: -2.9%). 

"High inventories in both supply chains are likely to weigh on IP in the months ahead, a point underscored by the weak sub-50 Nikkei PMI readings (August: 47.9; July: 47.6). All in, the very soft trade report and the large inventory overhang in electronics reduce the probability that the expected rebound in Q3 GDP growth will exceed official expectations of at least 1% q/q sa. The BoK is now expected to deliver a further 25bp rate cut in Q4, most likely in October", says Barclays. 

Moreover, with key indicators for the services economy showing a healthy post-MERS rebound, we believe the urgency to act immediately is still low. The existing focus on engineering a weaker KRW bias, possibly by stockpiling essential commodities such as fuel, will remain.

"There is an outside chance of an earlier move, at the 11 September meeting, but the BoK will prefer to move after the initial delivery of the fiscal supplementary spending and the US FOMC meeting on 17-18 September. Also, the first rate hike is expected in Korea in Q3 16, rather than in late Q1 16", forecasts Barclays.