[Good Morning Stock Market] Concerns Over Semiconductor Stocks' Earnings Deterioration... Monitoring Morning Monetary Policy Committee Decision

NVIDIA Announces Disappointing Earnings Forecast
Domestic Semiconductor Stocks Expected to Show Increased Volatility

Fed Minutes Suggest Big Steps in June and July
Morning KFTC Rate Hike Expected by 25bp

[Asia Economy Reporter Minji Lee] On the 25th (local time), the U.S. stock market closed higher as concerns about an economic recession eased. However, following the market close, Nvidia's disappointing earnings forecast raised concerns about performance, leading to expectations that the stock price trend of the domestic semiconductor sector will determine the direction of the index. At 9 a.m. on the 26th, the Bank of Korea is expected to hold a Monetary Policy Committee meeting and raise the base interest rate, with the market closely watching Governor Lee Chang-yong's press conference.

Sangyoung Seo, Researcher at Mirae Asset Securities: “KOSPI will be influenced by the stock price trends of semiconductor companies”

On that day, all three major U.S. stock indices closed higher. The Dow Jones Industrial Average rose 0.6%, the Nasdaq Composite increased by 1.51%, and the S&P 500 went up 0.95%. The Federal Reserve's (Fed) release of meeting minutes expressing confidence in the economy was positively reflected. Despite negative growth in the first quarter, the labor market and industrial production showed sustained strength, leading to expectations that concerns would not be significant, which positively influenced the stock market. Given that the recent market focus was on a 'recession,' investor sentiment toward risk assets expanded.

Strong earnings reports from individual companies were also positive. Apparel company Express (6.72%) showed strength after raising its sales forecast following solid results. Another apparel company, Urban Outfitters (15.45%), reflected confidence in future earnings improvements, which was favorably received by the stock market.

NVIDIA's quad-core processor 'Tegra 3'

However, Nvidia's decline after hours due to a disappointing earnings forecast is a cause for concern. Although the company reported a 46.3% increase in revenue, it lowered its forecast considering approximately $500 million in sales losses due to lockdowns in Russia and China, leading to a drop in after-hours trading. The plunge in tech stocks is expected to lead to declines in after-hours futures markets, impacting investor sentiment toward risk assets. Accordingly, the domestic stock market is expected to be influenced by changes in the semiconductor sector following Nvidia's plunge.

Jaekyun Lim, Researcher at KB Securities: “Fed reconfirms 50bp rate hikes in June and July”

The May FOMC minutes reconfirmed rate hikes in June and July. In the May FOMC, Chairman Powell mentioned considering 50 basis point hikes in upcoming meetings, and the minutes showed that most members agreed with this. Consequently, the possibility of a 'giant step' (a 75bp rate hike at once), as mentioned by James Bullard, President of the Federal Reserve Bank of St. Louis, has diminished. The futures market for federal funds rates reflects a 93.3% chance of a 50bp hike in June and an 89.4% chance in July.

The reason for accelerating rate hikes is to maintain policy flexibility. While rapid tightening is necessary due to high inflation concerns, there are also heightened worries about economic slowdown as a reaction. Maintaining a strong employment environment while achieving price stability is challenging, so it is expected that accommodative policies will be quickly removed to verify policy effects by the end of the year.

Accordingly, the year-end U.S. base interest rate is projected to be 2.75%. While most of the Fed's rate hikes have been priced into the market, concerns about economic slowdown remain high, so the upward momentum of the 10-year U.S. Treasury yield is expected to slow.

However, if there is a surge in MBS (Mortgage-Backed Securities) sales, interest rate volatility is expected to increase. Since many members mentioned in the minutes that Treasury securities should be prioritized through MBS sales during the tightening transition, early MBS sales could become a reality. Furthermore, MBS sales could help moderate the rise in U.S. housing prices, thereby reducing inflationary pressure (housing costs account for 33%), which is an aspect that requires close monitoring.