[Good Morning Stock Market] "May CPI Surge 'Temporary'... Continued Preference for Risk Assets"

US May CPI Hits 13-Year High
Bond Yields Fall, Nasdaq Up, Financial Stocks Down

Next Week's FOMC Dot Plot and Growth Rate Changes Expected
However, Tapering Mention Unlikely... "Risk Asset Preference to Continue"

[Image source=Yonhap News]

[Asia Economy Reporter Minji Lee] Although the U.S. Consumer Price Index (CPI) showed a sharp rise again this month, the stock market exhibited a trend opposite to last month. After last month’s CPI announcement, the New York Stock Exchange plunged sharply, fully reflecting inflation concerns, but this time, with a decline in Treasury yields and gains in pharmaceutical, technology, and semiconductor sectors, the Nasdaq index rose by 0.78%.

◆ Sangyoung Seo, Researcher at Mirae Asset Securities = The U.S. CPI in May rose 5% year-on-year, marking the highest level since August 2008. This was due to rising raw material prices, wage increases, and supply constraints, significantly exceeding market expectations of 4.6%.

By sector, the pharmaceutical and biotech sectors showed notable gains, but financial stocks declined due to the drop in Treasury yields. Bristol Myers showed a strong gain of over 3% after announcing positive Phase 3 results related to lymphoma, and Eli Lilly (3%) and Biogen (1.9%) also rose. On the other hand, JP Morgan (-1.5%) and Bank of America (-1.5%) declined. Stocks known as “meme stocks” such as AMC Entertainment (-13%), GameStop (-27%), and Bed Bath & Beyond (-8%) plunged sharply. As the CPI variable was resolved, speculative trading sentiment toward meme stocks weakened, causing related stocks to fall sharply.

Considering the rise in the U.S. stock market, the market views the CPI surge as a temporary phenomenon. This is expected to have a positive impact on the domestic stock market as it reduces concerns about the upcoming Federal Open Market Committee (FOMC) meeting next week. Similar to the European Central Bank (ECB) monetary policy meeting, which showed a dovish stance despite upward revisions to growth forecasts, the FOMC is also expected to show similar changes. In the domestic stock market today, semiconductor, pharmaceutical, some essential consumer goods, and software sectors are expected to show an upward trend.

◆ Yumi Kim, Researcher at Kiwoom Securities = It is predicted that the FOMC next week will find it difficult to make direct mentions of tapering (asset purchase reduction). Although employment is improving, it is still below market expectations, and since inflation has been described as temporary, it is unlikely that tightening signals will be issued.

However, there may be some changes in inflation forecasts and the Fed officials’ dot plot. In March, the Fed projected U.S. economic growth at 6.5% for this year, and since private consumption and housing investment have been better than expected, it is possible to maintain the current level or slightly revise it upward. Considering the trend in international oil prices and inflationary pressures in the service sector, the likelihood of upward revisions to forecasts is high.

Changes in the dot plot are also expected to follow. With the CPI coming out favorably, some officials have mentioned the need to implement tapering and early tightening. While the majority will likely still advocate for holding policy rates steady through 2023, the number of officials calling for rate hikes next year may increase compared to March, as some officials advanced the timing of rate hikes in April.

◆ Daejun Kim, Researcher at Korea Investment & Securities = The Fed is expected to maintain patience once again at next week’s FOMC. Although CPI is rising, more time is needed for labor market recovery. Recently, the U.S. market’s fear index (VIX) and market risk indices have shown very stable trends. These indices are expected to remain largely unchanged even after the June FOMC concludes, suggesting that risk asset preference sentiment will continue.

Looking ahead, cyclical consumer goods sectors are worth watching as promising investment areas. South Korea’s vaccination rate is accelerating to exceed the global average, increasing the likelihood that sectors related to pent-up consumption will attract market attention. As economic activities resume, pent-up consumption may unfold, making automobiles, distribution, travel, leisure, and cosmetics potential investment targets.