[Good Morning Stock Market] Nasdaq↓·Dow↑... Mixed Trends in US Markets, Limited Impact on Korean Stock Market

Rising US Treasury Yields Strengthen Dollar... Concerns Over Foreign Selling in Korean Stock Market Increase
Impact Limited as Economic Normalization Continues... "Sectoral Differentiation Expected"

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Minwoo Lee] The U.S. stock market showed mixed trends as buying momentum driven by stimulus measures and selling pressure caused by rising U.S. Treasury yields coincided. The Nasdaq, centered on tech stocks, widened its losses, while the Dow Jones Industrial Average showed strength, indicating sector differentiation. Similar effects, combined with strong demand, are raising concerns about foreign selling in the domestic market. However, as the economic normalization process continues, the impact is expected to be limited.

On the 8th (local time) at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed at 31,802.44, up 0.97% from the previous day. Meanwhile, the tech-heavy Nasdaq index closed at 12,609.16, down 2.41% from the previous day. The S&P 500 also closed down 0.54% at 3,821.35 during the same period. Sector differentiation became pronounced due to the rise in U.S. Treasury yields, resulting in mixed market trends. The 10-year U.S. Treasury yield rose to as high as 1.606% during the session.

◆Sangyoung Seo, Kiwoom Securities Researcher= This appears to be the aftermath of the $1.9 trillion (approximately 2,162 trillion KRW) additional stimulus package pushed by the U.S. government passing the Senate last weekend. A vote in the House of Representatives is scheduled for the 9th (local time), followed immediately by President Joe Biden's signature. Since this stimulus package is ultimately supported through bond issuance, it triggered the rise in U.S. Treasury yields. Meanwhile, U.S. Treasury Secretary Janet Yellen claimed that this stimulus will accelerate the pace of economic normalization in the U.S. and that full employment will be restored next year.

The improvement in the Employment Trends Index (ETI) from the Conference Board, a leading indicator of employment, from 99.69 to 101.01 is also a factor driving the yield increase. Although still lower than the pre-COVID-19 level of 109.27 in February last year, expectations for employment improvement have risen, highlighting the possibility of employment normalization. The February expected inflation rate announced by the New York Federal Reserve was 3.1%, and the household spending outlook for this year also improved, showing a 4.6% increase year-over-year compared to last month, which also contributed to the yield rise. Ultimately, as yields rose due to the additional stimulus and improved economic indicators, the U.S. stock market saw strength in financials, travel, leisure, and industrials, while large tech stocks, semiconductors, electric vehicles, and solar-related stocks underperformed, showing clear differentiation.

This pronounced differentiation is expected to impact the domestic stock market as well. From a supply-demand perspective, concerns about foreign selling are rising due to the increase in U.S. Treasury yields and the strengthening dollar. However, since the economic normalization process continues, the impact is expected to be limited. Attention should be paid more to sectors and individual stocks rather than the overall index. In particular, attention should be paid to remarks by Anthony Fauci, director of the U.S. National Institute of Allergy and Infectious Diseases (NIAID), who stated that COVID-19 vaccine supply in the U.S. will significantly increase, and the spreading possibility of economic normalization. This could raise expectations for profit improvements in sectors related to travel, leisure, industrials, and consumer goods, which were depressed by COVID-19. However, caution is needed as profit-taking desires may spread among stocks that have benefited from COVID-19.

◆Ilhyuk Kim, KB Securities Researcher= With the additional support package passing the Senate, economic outlooks are being revised upward. The average forecast for U.S. GDP growth this year by economists was sharply revised up from 4.95% last week to 5.5%. This is due to upward revisions in estimated contributions from consumer spending and government expenditure. The growth forecast for 2022 did not increase significantly. Inflation forecasts for the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) also rose, both exceeding 2%. However, the core PCE forecast remained unchanged at 1.8%. This suggests expectations of strong growth but not strong inflation.

Treasury Secretary Yellen claimed that the additional stimulus will bring the U.S. back to full employment next year. She emphasized that the additional support will not overheat the economy, and therefore inflation and interest rates will not rise excessively. Since there was no inflation even with a 3.5% unemployment rate, considering the current unemployment rate, there is no concern about inflationary pressure.

Expectations for an early interest rate hike have increased further. The market expects one hike in December next year and one each in June, September, and December 2023. On the other hand, based on the median of the dot plot announced by the Federal Reserve (FED) in December last year, the benchmark interest rate is expected to remain unchanged at the current level until the end of 2023. The dot plot for the FOMC is expected to be revised upward around 2023, reflecting the additional support package to be passed before next week's Federal Open Market Committee (FOMC) meeting.

◆Hojung Kim, Yuanta Securities Researcher= The acceleration of COVID-19 vaccine distribution and the Senate passage of the stimulus package are likely to give momentum to the recovery of employment indicators after March. Expectations for improved economic outlook have been reflected in long-term yields, with concerns about Fed tightening and additional upward pressure still in effect. However, considering qualitative indicators comprehensively despite strong employment, it is still premature for the Fed to consider tightening. The population working part-time less than 36 hours per week has steadily increased for economic reasons. In other words, considering the employment conditions of vulnerable groups that the Fed is carefully monitoring, the possibility of a change in the current monetary policy stance is quite low.

From the perspective of the Fed's goal of full employment, service sector jobs need to steadily increase more than twice the current level for a recovery to pre-COVID-19 levels within this year. Despite the vaccine effect and expectations for future stimulus packages, the optimistic scenario seems difficult to realize.

Ultimately, attention should be paid to the accompanying expansion of inflationary pressures during the recovery process. So far, goods prices have rapidly normalized due to inventory depletion and rising raw material prices. For service prices, as employment in the service sector recovers, constraints on service consumption activities will decrease, potentially causing a rapid rise in prices. In U.S. consumer prices, the weighting of service prices to goods prices is 6:4. In other words, if service inflation is stimulated, headline inflationary pressure could be greater than expected.