[Good Morning Stock Market] US Economic Indicators Recover, Rising Interest Rate Concerns Highlighted... Impact on Domestic Stock Market?

[Asia Economy Reporter Ji Yeon-jin] The U.S. stock market closed mixed as concerns over rising long-term interest rates due to improved economic indicators clashed with buying pressure based on the belief that inflationary pressures are temporary. Attention is focused on whether concerns about rising long-term interest rates will affect the domestic stock market.

On the 17th (local time), the Dow Jones Industrial Average rose 90.27 points (0.29%) to 31,613.02, while the Nasdaq and S&P 500 fell 0.58% and 0.03% to 13,965.50 and 3,931.33, respectively.

◆ Sangyoung Seo, Kiwoom Securities Analyst = U.S. retail sales in January increased by 5.3% month-on-month, showing a much greater improvement than expected. Excluding automobiles and gasoline, the figure also rose 6.1% month-on-month, industrial production increased by 0.9%, and the factory operating rate was reported at a favorable 75.6%, higher than the expected 74.8%. The producer price index for January rose 1.3% month-on-month, and the core producer price index excluding food and energy also increased by 1.2% month-on-month.

These indicator results raised expectations for economic normalization but also potentially increased inflationary pressures. Recently, the market has experienced increased volatility due to concerns over rising long-term interest rates, and these economic indicators ultimately triggered selling pressure on growth stocks, causing the Nasdaq to fall as much as 1.7% at one point.

The U.S. 10-year Treasury yield, which surged the previous day, started lower, but after news of weakening bond demand, it reversed to rise. However, as time passed, the stock market narrowed losses or, in the case of the Dow Jones, succeeded in turning positive. If inflationary pressures spread, the possibility of a policy change by the U.S. Federal Reserve (Fed) would increase, burdening the stock market, but the low likelihood of this so far has been highlighted. In fact, the FOMC minutes released that day stated that uncertainty remains and economic conditions are "far" from the target. This implies that policy changes such as tapering bond purchases will take time, raising expectations for continued accommodative monetary policy. Concerns about fundamental weakening due to rising long-term interest rates persist, so it is necessary to continuously monitor interest rate trends going forward.

◆ Byunghyun Jo, Yuanta Securities Analyst = With U.S. Treasury yields showing a sharp rise, the burden felt by market participants regarding interest rates is increasing. Referring to the 2018 case when a rapid rise in interest rates led to a market correction, there tends to be market pressure when interest rates surpass previous highs. Although current rates are still distant from previous peaks, considering the downward adjustment in growth trajectory after COVID-19, caution is needed when rates approach pre-COVID levels.

Interest rates should be considered in connection with economic recovery expectations. If economic recovery expectations are low but interest rates remain on the rise, it can act as a burden. Considering the ISM manufacturing index as a gauge of economic expectations, there have been about three instances since the 2010s where interest rates and economic recovery expectations diverged. Since the ISM manufacturing index rapidly recovered in the second half of last year and entered an empirically high range, more attention should be paid to future trends.

If U.S. interest rates show relative strength, the possibility of dollar strength pressure arising from interest rate differentials should also be considered. Given the U.S. vaccine rollout, declining COVID-19 cases, and large government stimulus, the recovery potential of the U.S. service sector can also be considered. The relative recovery speed of the service sector may strengthen compared to the manufacturing sector.

◆ Okhee Park, IBK Investment & Securities Analyst = Recent rises in international oil prices are expected to increase inflation in various countries. Price increases will also affect financial markets. Considering that supply-side inflation centered on energy is likely to occur, the gap between headline and core inflation is expected to widen.

Looking at the past relationship between inflation and investment assets, when headline inflation rises, it appears advisable to increase investment in stocks rather than bonds.

Inflationary pressures are expected to rise in the order of the U.S., Korea, and China, but the impact on financial markets is expected to be positive for the U.S. and Korean stock markets and negative for the Chinese stock market. Currently, supply-side inflation is occurring due to rising oil prices, but demand-side inflation remains weak due to COVID-19. Based on this, the gap between headline and core CPI may temporarily widen, and the relationship between each country's stock market and the difference between headline and core CPI was examined.

Looking at the past relationship between the U.S. and Korean stock markets and CPI, when the growth rate of headline CPI began to exceed that of core CPI, the stock markets showed an upward trend, especially pronounced in the U.S. stock market. Conversely, the Chinese stock market tended to decline when the gap between headline and core CPI widened.