[Asia Economy Reporter Lee Seon-ae] The stock market is expected to find its direction following the speech by Jerome Powell, Chair of the Federal Reserve (Fed). As Powell is anticipated to comment on the Fed's views regarding the U.S. economy, inflation, tightening pace, and interest rate outlook, if a strong hawkish (preference for monetary tightening) stance emerges, volatility in the KOSPI is likely to increase.
Powell's speech on the 30th at the Brookings Institution, themed "U.S. Economic Outlook and Labor Market Challenges," is expected to be a turning point for the stock market. With growing market confusion over the Fed's rate hike path and pace, the recent market rise has been driven by expectations of a slowdown. Therefore, Powell's remarks, which may provide hints ahead of the December Federal Open Market Committee (FOMC) meeting (13-14), will inevitably provoke a sensitive market reaction. There is a possibility that Powell's comments could dampen the market's hopes for a monetary policy pivot, leaving the current market in a holding pattern. If the hawkish tone intensifies, a year-end rally cannot be expected.
The market anticipates Powell's remarks to lean hawkish. After the November FOMC meeting on the 2nd, Powell stated at a press conference, "The time to slow the pace of rate hikes could be as soon as the next FOMC meeting or the one after," but also said, "The terminal rate will be higher than the previous estimate (4.6%)." John Potter, Chief Investment Officer (CIO) at Newton Investment Management, commented, "Inflation remains at abnormal levels," adding, "The Fed is expected to maintain high rates even after several more hikes, and Powell still believes some demand slowdown is inevitable to curb inflation."
Experts view that the U.S. tightening will continue into next year. Gong Dong-rak, a researcher at Daishin Securities, noted, "High inflation may persist until the first quarter, and the Fed's rate hikes are likely to continue until that time."
Accordingly, South Korea's base interest rate is also expected to rise further, which could have a significant impact on the stock market. Researcher Gong said, "We expect two 25 basis point rate hikes at the Monetary Policy Committee meetings in the first quarter of 2023, with 3.75% being the final level of this rate hike cycle."
Researcher Kim Ji-na of Eugene Investment & Securities explained, "If hawkish remarks from the December FOMC cause exchange rate volatility to rise again and assumptions change, the base rate cannot be considered safe at 3.5%, so it should be left open up to 3.75%." Min Ji-hee, a researcher at Mirae Asset Securities, also pointed out, "Since the Fed's tightening stance is expected to continue until mid-next year, if the base rate rises to 3.5% at the January Monetary Policy Committee meeting, it will significantly exceed the neutral rate level estimated by the Bank of Korea."
As the domestic market is on high alert for Powell's remarks, the KOSPI is expected to show a sluggish trend until the December FOMC. Kim Young-hwan, a researcher at NH Investment & Securities, said, "Until the December FOMC, the market is expected to remain cautious, trying to glean clues about Fed policy from economic indicators such as employment and inflation."
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