[Good Morning Stock Market] 'High Inflation Shock' Prolonged Inflation... KOSPI Downtrend "No Participation in Panic Selling"

[Asia Economy Reporter Lee Seon-ae] On the 13th, the domestic stock market is expected to decline amid the 'high inflation shock.' This is due to the sharp drop in the New York Stock Exchange following a surge in U.S. consumer prices. Securities firms anticipate the KOSPI to start with a 1% plunge.

The New York Stock Exchange plunged after news that U.S. consumer prices surged at the fastest pace in over 40 years. Prolonged inflation beyond expectations has pressured financial markets with forecasts that the U.S. central bank, the Federal Reserve (Fed), will raise interest rates more steeply. On the 10th (local time), the Dow Jones Industrial Average closed at 31,392.79, down 880.00 points (2.73%) from the previous session. The Standard & Poor's (S&P) 500 index dropped 116.96 points (2.91%) to 3,900.86, and the tech-heavy Nasdaq index fell 414.20 points (3.52%) to 11,340.02.

It is the first time in over two years since March 22-23, 2020, during the early COVID-19 crisis, that the S&P 500 index has fallen more than 2% for two consecutive days. The announcement just before the market opened that the U.S. Consumer Price Index (CPI) for May soared 8.6% year-over-year?the largest increase since December 1981?sharply dampened investor sentiment. The CPI inflation rate had hit a 40-year high of 8.5% in March, right after Russia's invasion of Ukraine, then slightly eased to 8.3% in April, but reversed to a surprising rise exceeding market expectations. Market speculation is gradually emerging that the Federal Open Market Committee (FOMC) in June might implement a 'giant step' by raising the benchmark interest rate by 0.75 percentage points at once. The Fed has never conducted such a rapid rate hike since 1994.

Seo Sang-young, Head of Media Content, Mirae Asset Securities

The sharp drop in the U.S. stock market following the CPI announcement, which weakened expectations for inflation easing, is a burden on the Korean stock market. This is because the Fed's aggressive rate hike stance has intensified. Additionally, the possibility of a slowdown in U.S. consumption due to sustained high inflation has introduced the 'economic recession' issue, which could negatively affect foreign investor demand. However, the U.S. core CPI released last month was below expectations, keeping hopes for an 'inflation peak out' alive, and President Joe Biden's announcement to intensify the 'fight against inflation' is positive. Recently, Treasury Secretary Janet Yellen mentioned tariff reductions on China and allowing purchases of Russian crude oil, which, if implemented, could lead to a sharp drop in energy and food prices that are currently driving inflation. Considering this, the Korean stock market is expected to start down about 1.2% and show significant fluctuations while awaiting the FOMC.

Meanwhile, attention should also be paid to the French parliamentary elections on Sunday. If far-left and far-right parties secure a meaningful number of seats, political uncertainty could rise amid the ongoing Ukraine crisis and inflation issues. However, if Macron's Renaissance party secures a majority, expectations for reduced political uncertainty could strengthen, potentially boosting the euro and weakening the dollar.

Han Ji-young, Researcher, Kiwoom Securities

The Korean stock market is expected to continue a phase of increased volatility, influenced by the early-week pressure from the May U.S. consumer price surge, key economic indicators such as U.S. and Chinese retail sales and industrial production during the week, and the June FOMC event. (Weekly KOSPI expected range: 2500?2650).

As confirmed by the U.S. stock market plunge, the surprise in May's consumer prices has amplified inflation concerns. Although the surge was mainly driven by soaring energy prices, including fuel costs (106.7%) and energy (34.6%), the problem is that other items such as clothing (5.0%), new cars (12.6%), used cars (16.1%), and housing costs (5.4%) are also rising simultaneously. Following April's data, inflation is spreading broadly across the U.S. economy, indicating it will be difficult for the central bank to bring it under control soon.

China's producer prices (6.4%) fell due to lockdown impacts but the possibility of renewed inflationary pressure within China remains open due to expected demand recovery. Therefore, doubts about whether inflation has peaked may resurface before meaningful inflation level-down is achieved.

However, the May core CPI excluding energy and food (6.0%) declined from the previous month (6.2%), and President Biden's statement on the 10th about strengthening inflation measures such as reducing transportation costs and expanding crude oil drilling should be considered. Given this, the outlook for an inflation peak remains valid, and betting on further inflation spikes at this point is discouraged.

Meanwhile, after the May inflation announcement, the June FOMC (to be announced early morning on the 15th Korean time), where a 50bp rate hike was considered likely, is now also discussing the possibility of a 75bp hike. Although a 75bp hike has not yet become the dominant consensus, considering the Fed officials have entered a blackout period prohibiting public comments, market participants are expected to debate the 'giant step' or 'big step' until the June FOMC, increasing stock market volatility.

The key points to watch at the June FOMC will be not only whether a 50bp hike occurs but also changes in economic and inflation forecasts, and future rate projections on the dot plot. Furthermore, as the European Central Bank (ECB) recently did (even if it only raises rates by 50bp in June), whether forward guidance or Fed Chair Jerome Powell's press conference leaves open the possibility of more aggressive hikes like 75bp to curb inflation will determine the stock market direction after the June FOMC.

With the KOSPI falling below 2600 and threatening new yearly lows, temporary sell-offs may occur during the week due to caution around the June FOMC. However, considering the market valuation attractiveness and favorable earnings outlook, it is judged appropriate to respond with a wait-and-see approach rather than joining the sell-off.