[Good Morning Stock Market] Biden-Driven Investment Optimism Narrows Stock Declines Amid Inflation Concerns

Dow Jones, S&P 500, and Nasdaq All Close Lower
Federal Reserve May Intervene Even if Inflation Is Temporary
Chinese Yuan Expected to Remain Strong in Second Half

[Image source=Yonhap News]

[Asia Economy Reporter Gong Byung-sun] Concerns over inflation are growing. Nevertheless, expectations that U.S. President Joe Biden's infrastructure investment plan could actually pass have also increased, reducing the stock market's decline.

The New York stock market closed lower on the 3rd (local time). On that day at the New York Stock Exchange, the Dow Jones Industrial Average closed at 34,577.04, down 0.07% (23.34 points) from the previous trading day. The S&P 500 index and the tech-heavy Nasdaq index closed at 4,192.85 and 13,614.51, down 0.36% (15.27 points) and 1.03% (141.82 points), respectively, compared to the previous trading day.

◆ Yumi Kim, Kiwoom Securities Researcher = The financial market is paying attention to the spread of global inflation concerns. In the U.S., the consumer price index for May is scheduled to be released. According to current market consensus, the consumer price inflation rate is expected to rise by 4.6% year-on-year, and the core inflation rate by 3.4%, indicating an expansion in the rate of increase. Along with last year's low base effect, the overall rise in service prices is expected to increase inflationary pressure. If the inflation rate exceeds market consensus, concerns about the Federal Reserve's tapering of asset purchases are likely to intensify again.

Considering the base effect, U.S. inflation is expected to peak last month and then slow down. However, given recent spending centered on the U.S. service sector and rising housing costs, the level of service prices may be higher than expected. This suggests that even if the core consumer price inflation rate slows down, it may remain in the high 2% range for some time. Even if this inflation trend is considered temporary, if the period of higher-than-expected core inflation is prolonged, the Fed may find it necessary to partially normalize monetary policy.

◆ Sang-young Seo, Mirae Asset Securities Researcher = After President Biden met with Republican senators on the 2nd, news emerged that he proposed reducing the existing $1.7 trillion (approximately 1,894.65 trillion KRW) infrastructure investment plan to $1 trillion. In particular, the proposal excludes the corporate tax policy change that aimed to raise the rate to 28%. Although the $928 billion infrastructure investment plan advocated by the Republicans includes existing payments, so the actual numerical difference is large, the news that progress between the two parties is beginning had a positive impact on the stock market.

One reason the market responded favorably is that the proposal to raise the corporate tax rate from the current 21% to 28% was excluded. This has increased the likelihood of agreement more than ever. Meanwhile, Republican Senator McConnell said, "I don't know if we will reach an agreement, but I hope to get results," indicating that the surrounding conditions are not unfavorable. After this news was released, the Nasdaq's decline significantly decreased, and the Dow Jones index even managed to turn positive.

However, the Biden administration's proposal to set a minimum corporate tax rate of 15%, which Treasury Secretary Janet Yellen has continuously mentioned instead of raising the corporate tax rate, is a burdensome factor. This raises the possibility of increased taxes for major tech companies, including Micron, which paid a 7.5% tax rate last quarter, and Qualcomm, which was subject to a 5.7% tax rate.

◆ Hyeyoon Lim, KTB Investment & Securities Researcher = The Chinese yuan is expected to maintain its strong trend in the second half of the year. The People's Bank of China announced that it will raise the foreign currency reserve requirement ratio from the existing 5% to 7% as the yuan exchange rate fell below 6.4 yuan. This will take effect from the 15th of this month. The increase in the foreign currency reserve requirement ratio is a factor that slows the increase in dollar liquidity in the market and can ease pressure for yuan appreciation. This can be seen as the authorities putting the brakes on the yuan's strength.

The yuan's value against the dollar has risen about 2.3% since the beginning of this year. Excluding currencies of countries with monetary policy normalization issues such as the Canadian dollar, British pound, and Brazilian real, the yuan's appreciation has been the largest. Considering that the foreign exchange authorities took action when the yuan exchange rate approached 6.4 yuan earlier this year, this response and rationale seem sufficient. However, it is difficult to interpret this as a signal of a full-scale yuan depreciation.