[Good Morning Stock Market] Mixed Trends Amid US Political Uncertainty... Korean Stock Market Also Expected to See Sectoral Movements

US Democratic Party Tax Increase Plan Dampens Investment Sentiment
But Only Leads to a Stable Trend... Somewhat Favorable Impact on Korean Stock Market

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Minwoo Lee] The U.S. stock market started higher on the back of a rebound buying following last week's decline but closed mixed as concerns over tax hikes surfaced. The domestic stock market is also expected to see buying interest mindful of the previous drop, but differentiation by sector and individual stocks is anticipated.

On the 13th (local time) at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed at 34,869.63, up 0.76% from the previous session. The S&P 500 index rose 0.23% to 4,468.73, while the Nasdaq index fell 0.07% to 15,105.58.

The Dow and S&P 500 rebounded after six trading days. The Nasdaq continued its four-day decline amid growing inflation concerns ahead of inflation data.

◆ Sangyoung Seo, Researcher at Mirae Asset Securities= Tax hike proposals emerging in the U.S. Congress weighed on the stock market. Some Democratic senators announced that taxes should be imposed on share buybacks. The Democratic House Ways and Means Committee proposed raising the corporate tax rate from 21% to 26.5% and the top individual income tax rate from 37% to 39.6%. The Democrats chose tax increases to fund the $3.5 trillion spending plan they are pushing. The problem is that Senator Joe Manchin, a Democrat, advocates a 25% corporate tax rate and opposes the $3.5 trillion spending plan. Regardless of the vote on the tax hike proposal, uncertainty over government fiscal policy could expand, potentially dampening investor sentiment.

Meanwhile, the New York Federal Reserve raised the median short-term (1-year) inflation expectation from 4.8% to 5.2% and the medium-term (3-year) inflation expectation from 3.7% to 4.0% in its August consumer expectations survey. These are the highest levels since the statistics began in 2013. The increase appears to be due to rising food, rent, medical, and gas prices. This figure came amid concerns expressed by Fed officials such as Michelle Bowman and Cleveland Fed President Loretta Mester that high inflation may last longer than expected, which is likely to dampen expectations for a gradual monetary policy by the Fed.

The U.S. stock market's resilience, showing mixed but steady performance despite tax hike proposals and high inflation, is positive for the domestic market. The rise in international oil prices above $70 per barrel for West Texas Intermediate (WTI), driven by expectations of improved demand and reduced supply, is also favorable. The slight decline and stabilization of U.S. Treasury yields ahead of the consumer price index release are also supportive. However, it is important to note the differentiation, with energy, financials, hotels, and leisure sectors showing strength, while pharmaceuticals and biotech sectors underperformed. The domestic market is expected to start with about a 0.5% rise, followed by sector differentiation, with more focus on individual stocks than the index.

◆ Hojeong Kim, Researcher at Yuanta Securities= In the Beige Book released on the 9th, the Fed assessed that the U.S. economy slowed at a moderate pace through August. This contrasts with the July assessment, which described the economy as growing robustly. The rapid change in outlook can be attributed to the Delta variant spread causing a contraction in consumption and service sectors. Additionally, manufacturing activity, which has passed its peak, and ongoing cost pressures in manufacturing are factors. The spread of the Delta variant and inflation burdens have lowered the evaluation of the U.S. economy.

The market consensus for U.S. growth forecasts is being rapidly revised downward. The growth consensus, which was 6.6% in the third week of July, dropped to 6.0% by the second week of this month. The Atlanta Fed's 'GDPNow,' which predicts growth based on current economic data, had forecast around 5% through August but has lowered it to 3.6% this month.

Meanwhile, the New York Fed announced a temporary suspension of the 'GDP Nowcast' due to current uncertainties. This reflects the difficulty in gauging future directions with current data, which is a highly symbolic development. Despite this atmosphere, it remains important to assess the risk factors that will influence the U.S. economy's trajectory in the second half of the year, with inflation considered the main burden.

In the August Beige Book, the Fed diagnosed that producer inflation pressures would be passed on to consumers. The U.S. producer price index for August, released on the 10th, rose 8.3% year-over-year, marking the highest increase since statistics began, reinforcing the Fed's diagnosis of producer inflation. Expanding producer inflation pressures burden companies, potentially causing production disruptions and slowdowns, and if these costs are passed on to consumers, consumption may decline.

The number of job openings in the U.S. in July reached a record high of 1,093,400, exceeding expectations. Hiring activity increased among companies with 1 to 249 employees, while it decreased among companies with over 1,000 employees. By sector, manufacturing was stagnant, while face-to-face service sectors such as hospitality and leisure saw significant increases. Considering that face-to-face service sectors generally have smaller workforce sizes than manufacturing, the current labor shortage appears to be occurring in small to medium-sized face-to-face service businesses. If this labor shortage persists, wage inflation pressures may rise.

Indeed, while manufacturing wage growth remains stagnant, wage growth in the service sector is rising sharply. For sectors where labor is critical, rising labor costs may be borne by companies as expenses, leading to higher consumer prices, which in turn can increase final goods and services inflation, becoming a burden for both companies and households.