[Good Morning Stock Market] US Tapering Discussions Intensify... Soaring KOSPI Faces Harsh Freeze

[Asia Economy Reporter Ji Yeon-jin] The U.S. stock market slumped following news of the Federal Open Market Committee (FOMC) discussing tapering (asset purchase reduction). The Dow Jones Industrial Average closed at 34,033.67, down 265.66 points (0.77%) from the previous day. The Standard & Poor's (S&P) 500 index fell 22.89 points (0.54%) to 4,223.70, and the tech-heavy Nasdaq index ended the session at 14,039.68, down 33.17 points (0.24%) from the previous close. The announcement by Jerome Powell, Chair of the U.S. Federal Reserve (Fed), that interest rates would be raised twice next year dealt a direct blow to the indices. The market is weighing the timing of the tapering announcement, and it is forecasted that the domestic stock market, which has recently hit new highs day after day, will also turn to a downward trend.

◆ Sangyoung Seo, Researcher at Mirae Asset Securities = The U.S. stock market started flat ahead of the FOMC but turned to a decline as concerns over slowing earnings, especially in financial stocks, emerged and profit-taking occurred. The Fed significantly raised its inflation outlook through the FOMC and announced two rate hikes in 2023, which led to a sharp increase in profit-taking and widened the decline. However, when Fed Chair Powell cautioned against overinterpreting rate movements such as the dot plot, the decline narrowed. Notably, this was characterized by a process of preparing for an earnings-driven market after digesting the event.

The KOSPI is expected to start down by 0.5 to 1.0%. Although the Fed’s significant upward revision of inflation forecasts and adjustment of the timing of rate hikes are burdensome, these factors could negatively impact emerging market stocks. The clear strengthening of the U.S. dollar is also expected to weigh on foreign investor demand. The Korean stock market, after hitting record highs the previous day, is likely to see profit-taking, but the decline is expected to be limited mainly to sectors with high earnings improvement expectations.

◆ Gitae Ahn, Researcher at NH Investment & Securities = The U.S. FOMC revised upward its economic growth forecasts for 2021 and 2023. This implies that the economy will exceed its potential growth rate through 2023. Additionally, inflation forecasts for 2021?2023 were raised, with inflation expected to exceed 2% through 2023. The FOMC acknowledged tapering discussions, and the dot plot revealed the possibility of rate hikes in 2023.

Until now, Chair Powell had said inflation was a temporary phenomenon and that there was no need to discuss tapering, but this was actually a risk factor for financial markets. Instead of concluding that inflation is temporary, it was necessary to show what measures would be taken if inflation rises, but this was ignored until the June FOMC, which showed a changed stance. In fact, when tapering was mentioned in 2013, the inflation trend line was declining, but now it is rising. This means that while tapering was not ready in 2013, now there is a need to discuss it. During the 2015?2018 rate hike period, market futures were below the dot plot, but now they are above it. Financial markets recognize that starting tapering discussions and raising rates if necessary is a more realistic choice than blindly continuing accommodative policies.

The asset growth rate of the four major central banks (Fed, ECB, BOJ, BOE) peaked at 56% year-on-year in March this year and has been declining since. Considering tapering in 2022, the asset growth rate of the four major central banks will decrease to +12% by December this year and +7% by December next year. On the other hand, if the Fed’s outlook is correct, nominal growth rates this year and next will exceed 5%, and the tapering announcement is expected between August (Jackson Hole) and September (FOMC), with the start forecasted for January 2022.