Powell Reveals His 'Hawkish Claws'... Drops the Phrase "Inflation is Temporary"

Attendance at Parliament to Declare Strong Stance on Inflation
Tapering Expected to End in March Next Year
Interest Rate Hike Possible Anytime Thereafter

[Asia Economy New York=Correspondents Baek Jong-min and Lee Min-woo] Jerome Powell, Chairman of the Federal Reserve (Fed), has turned 'hawkish.' Powell, who was previously regarded as a 'dove,' announced the retirement of the term "transitory" regarding inflation and signaled an early completion of tapering (asset purchase reduction), which can be interpreted as a sign of the Fed's rapid transformation.

◇ "72% Chance of US Rate Hike in June" = On the 30th of last month (local time), Powell's remarks at Congress were unreserved. He responded to lawmakers' questions on inflation with prepared, tough statements.

After mentioning in a written response a day earlier that the Omicron COVID-19 variant could be a variable for inflation, the market speculated that Omicron might delay the Fed's monetary policy normalization. However, Powell's judgment was completely different.

The Wall Street Journal reported that after Powell's reappointment, he shifted focus from employment expansion to inflation control. Powell's statement that "price stability is necessary to return to past full employment levels" also reflects this recognition. He expects employment recovery within this year and anticipates that discussions on rate hikes could begin within a few months.

The Fed's preferred core Personal Consumption Expenditures (PCE) price index surged 5% year-over-year through October. The Fed can no longer tolerate inflation exceeding its 2% target by more than double. If the Fed expands the current $15 billion tapering scale to $30 billion, tapering could end in March instead of the initially expected June next year. After that, rate hikes could occur anytime depending on the situation.

The Chicago Mercantile Exchange FedWatch tool calculated the probability of a federal funds rate hike in March next year at 28.5%. The day before, the chance was only 18.1%. The probability of a rate hike by May rose from 30% to 40.3% in one day. The prevailing consensus for the first rate hike remains June. FedWatch estimates a 72.8% chance of a rate hike in June.

Of course, there are variables. The Omicron variant is one. With limited information on Omicron, financial market volatility is expected to continue for some time. Health experts estimate it will take about two weeks to confirm detailed information on Omicron. At the Federal Open Market Committee (FOMC) meeting scheduled for the 14th-15th, the Fed is expected to clarify its stance. Michael Feroli, an economist at JP Morgan Chase, forecasted, "If Omicron does not cause serious health issues, the Fed will accelerate tapering."

◇ "Volatility Phase... Korean Fundamentals Remain Strong" = Unlike the US stock market, the KOSPI showed vigor, rising more than 1% in early trading. News of record-high exports and semiconductor bottoming theories sparked bargain buying. Meanwhile, the KOSDAQ, which is relatively vulnerable in supply and demand, showed weakness, with profit-taking mainly in growth stocks sensitive to interest rates, mirroring the US market.

On the 1st, most of the top 10 market cap stocks in the KOSPI were rising. As of 10:35 AM, LG Chem showed the largest gain at 2.45%. Conversely, most of the top 10 market cap stocks in the KOSDAQ fell.

Shinhan Investment Corp. stated that the stock market is passing through a volatility phase due to the emergence of the new COVID-19 variant 'Omicron,' and expects IT sectors and growth stocks such as media and gaming to perform well. Researcher Choi Yoo-jun of Shinhan Investment explained, "Due to the recent spread of the variant, there is talk of adjusting the pace of monetary policy normalization. As the market passes through a volatility phase, growth stocks may perform well amid monetary policy pace adjustments."

Park Kwang-nam, head of the Digital Research Team at Mirae Asset Securities, explained, "From a fundamental perspective, November exports surpassed $60 billion (about 71 trillion KRW) for the first time ever, and memory semiconductor DRAM prices have confirmed a bottom, which seems to have raised expectations that operating profits for Samsung Electronics, SK Hynix, and the KOSPI next year could be revised upward."

◇ Money Lost in Direction... "Apple is the Safe Asset" = On the day, the 2-year US Treasury yield surged sharply while the 10-year yield fell, causing the spread?the difference between long- and short-term rates?to narrow to the smallest since January. Concerns that a faster pace of rate hikes could slow the US economy in the medium to long term caused the US dollar to plunge.

Investors are confused, unable to find suitable investment destinations. Amid continued preference for safe assets, Apple shares surged 3%. Experts said that Apple was perceived as a safe asset, attracting investment.