[Good Morning Stock Market] "US Expected Inflation Rise and Strong Dollar Pressure... Domestic Stock Market Expected to Decline"

[Image source=AP Yonhap News]

[Asia Economy Reporter Lee Jung-yoon] On the 17th, the domestic stock market is expected to show weakness due to a combination of factors including the rise in expected inflation in the U.S. and recession concerns stemming from a slowdown in retail sales. Additionally, the decline in the Philadelphia Semiconductor Index in the U.S. has weighed on the electric vehicle and secondary battery sectors, which could also be a burden.

According to the University of Michigan, the median expected inflation for the next year rose to 5.1% from 4.7% the previous month. The 5-year expected inflation also increased from 2.7% to 2.9%. This spread inflation fears and raised concerns about tightening by the Federal Reserve (Fed). Furthermore, U.S. retail sales in September were sluggish at $684 billion, the same as the previous month, falling short of expectations. Among 13 sectors, retail sales in seven sectors including automobiles, furniture, and electronics decreased compared to the previous month, indicating the impact of soaring inflation and aggressive interest rate hikes.

On the previous trading day, the 14th (local time), the Philadelphia Semiconductor Index closed down 4.46% (100.92 points) at 2,162.32. The Dow Jones Industrial Average fell 403.89 points (1.34%) to 29,634.83, the large-cap-focused S&P 500 dropped 86.84 points (2.37%) to 3,583.07, and the tech-heavy Nasdaq Composite declined 327.76 points (3.08%) to 13,210.39.

◆ Seo Sang-young, Head of Media Content Division at Mirae Asset Securities = As U.S. economic indicators showed an expanding economic slowdown alongside rising expected inflation, the U.S. dollar strengthened and government bond yields rose.

Disappointment over UK Prime Minister Liz Truss’s press conference also led to a weaker pound and stronger dollar. Prime Minister Truss stated, "It is clear that some parts of the budget progressed faster than the market expected, so those parts will be canceled." The core parts of the tax cut plan, including corporate and income taxes, were canceled. This failed to restore market confidence, and the previously strong pound turned weak.

With the University of Michigan’s one-year expected inflation rising sharply, the dollar’s strength widened and U.S. Treasury yields increased further. The recession concerns from the contraction in September retail sales also negatively affected investor sentiment.

The decline in the U.S. stock market on the previous trading day, caused by a combination of lack of confidence in the UK government, rising U.S. expected inflation, and recession concerns from slowing retail sales, is a burden on the domestic stock market. The stronger dollar could further weaken the Korean won, which may also dampen investor sentiment.

However, it is worth noting that UK Chancellor Jeremy Hunt criticized the government’s tax cut plan as a mistake, increasing the likelihood of new policies. Depending on the outcome, the pound could strengthen, potentially reducing the decline in the domestic stock market. Also, attention is on the economic policy content of President Xi Jinping at the 20th National Congress of the Communist Party of China, which opened the previous day. Expectations for improved investor sentiment due to expanded economic stimulus measures could rise. Considering this, the domestic stock market is expected to start the day down about 1.5% and then fluctuate depending on the direction of the dollar.

◆ Han Ji-young, Researcher at Kiwoom Securities = The domestic stock market is expected to continue a volatile trend influenced by external factors such as the aftershocks of the U.S. inflation shock, major corporate earnings, China’s retail sales and industrial production data, the results of the Party Congress, and statements from Fed officials ahead of the blackout period.

Following the dismissal of former Chancellor Kwasi Kwarteng and the appointment of former Foreign Secretary Jeremy Hunt as the new Chancellor, expectations arose that the tax cut plan would be completely revised. However, the market’s dominant view is that concrete plans were insufficient, and the policy uncertainty from the UK until the timeline Hunt set for the 31st could be a burden on global financial markets.

The University of Michigan’s expected inflation also seems unable to improve the uneasy investor sentiment. Ultimately, as the problem of inflation entrenchment remains unresolved, market participants are judged to be facing the reality of preparing for a 75 basis point hike at the Federal Open Market Committee (FOMC) meetings in November and December.

Although the high macroeconomic uncertainty makes market response difficult, attention should be paid to the fact that the earnings season is officially beginning. Considering that earnings are the fundamental factor determining stock prices, short-term sentiment reversal opportunities are expected to be created depending on the third-quarter earnings and subsequent guidance changes of companies.