US Stock Market Rollercoaster on Powell's Single Remark

"Employment Inflation Below Target"
Stop in Rising Government Bond Yields
Nasdaq Recovers After 4% Plunge
Inflation-Driven Bond Yield Anxiety Persists

[Image source=EPA Yonhap News]

[Asia Economy New York=Correspondents Baek Jong-min and Lee Seon-ae] As expected, the problem solver was Jerome Powell, Chairman of the U.S. Federal Reserve (Fed). At Powell's word, the plunging stock market reversed direction, and concerns about inflation temporarily eased. However, it is difficult to say that worries about rising inflation and the resulting sharp increase in U.S. Treasury yields have completely disappeared.

On the 23rd (local time), right after the opening of the New York stock market, the Nasdaq index fell nearly 4%, heightening fears of a market correction. The Nasdaq, which is tech-stock centered, has been directly affected by the rise in U.S. Treasury yields and has continued its recent weakness. Technology stocks, classified as growth stocks, tend to decline in price when market interest rates rise.

◇ Plunging New York Stock Market Reverses on Powell’s Word = The situation changed from 10 a.m., when Powell’s prepared remarks for the Senate Banking Committee hearing were released. Powell continued speaking in a strong tone, seemingly to dispel market concerns.

His remarks differed from recent market expectations that the economic recovery would accelerate. He said, "The economic recovery is uneven and remains far from complete," and assessed that "the path ahead is very uncertain."

Powell emphasized that both employment and inflation, the Fed’s criteria for operating the benchmark interest rate, remain below target. At the same time, he did not forget to offer a hopeful note that thanks to the decline in COVID-19 cases and vaccinations, normalcy would return by the end of this year.

AP News evaluated Powell’s remarks as contrasting with the optimism of many analysts who expect the economy to grow rapidly by the end of this year. The day before, Bank of America had raised its forecast for U.S. economic growth this year from 6% to 6.5%.

Powell’s remarks curbed the relentless rise in U.S. Treasury yields. The 10-year Treasury yield had recorded 1.39% the day before but fell to 1.343% after Powell’s comments. A decline in bond yields means a rise in bond prices. With Treasury yields stabilizing, the Nasdaq index closed down 0.5%, while the Dow Jones Industrial Average and the S&P 500 turned to slight gains.

◇ Inflation-Driven Treasury Yield Rise Risk Remains = On this day, Powell did not mention the possibility of expanding asset purchases, which the market had expected as a way to manage the rise in Treasury yields due to inflation concerns. He also made no direct comments on Treasury yields. This leaves room for the possibility of further increases in Treasury yields amid ongoing inflationary pressures.

Anders Persson, Chief Investment Officer of Bonds at Nubin Securities, pointed out, "The speed of the rise is more problematic than the level of interest rates," warning that "a sharp rise in Treasury yields of 0.5% to 0.75% could scare investors." He explained that the possibility of a market correction due to a sharp rise in Treasury yields remains.

Korean stock markets react more sensitively to U.S. Treasury yields than to domestic government bond yields, as foreign investor flows are intertwined. Although rising yields exert downward pressure on the stock market, the recovery trend in the economy remains intact, so the upward curve is unlikely to be damaged, according to the general view in the securities industry.

Lee Jae-sun, a researcher at Hana Financial Investment, said, "The rise in long-term yields reflects the global economic recovery cycle and is nothing to fear," adding, "Considering that during the tightening shocks in June 2013 and December 2015, the KOSPI operating profit estimates and foreign buying recovered within about four months, there is a high possibility of supply-demand improvement centered on foreign investors going forward."