[Good Morning Stock Market] Shift of Focus from 'Interest Rates' to 'Economy'

Reflected in Economic Slowdown Concern Index
Limited Rise Due to Interest Rate Cut Expectations

[Image source=Yonhap News]

[Asia Economy Reporter Minji Lee] Investors' focus is shifting from interest rates to the economy. The U.S. stock market showed mixed results as economic indicators that triggered concerns about economic slowdown were reflected during the process of digesting selling pressure following a sharp rise the previous day. The Dow Jones Industrial Average fell 0.56%, and the S&P 500 index also declined by 0.09%. The Nasdaq index rose 0.13%, reflecting the effects of a weaker dollar and falling interest rates.

Sangyoung Seo, Researcher at Mirae Asset Securities: “U.S. Stock Market Sees Simultaneous Inflow of Inflation Stabilization Expectations and Economic Slowdown Concerns”

The U.S. stock market showed mixed results as it reflected economic indicators signaling both inflation stabilization and economic slowdown. As a sign of inflation stabilization, the October PCE inflation rate slowed from 6.3% year-on-year to 6%, and the core PCE inflation rate also eased from 5.2% to 5%. Although these figures had already been confirmed through Federal Reserve Chair Powell’s remarks, the actual numbers reinforced expectations for inflation stabilization.

However, investor sentiment weakened as indicators that triggered concerns about economic slowdown were released. The November ISM manufacturing index recorded 49, significantly below the previously announced 50.2. Among the detailed components, new orders, which indicate outlook, shrank sharply from 49.2 to 47.2, and the employment index also declined from 50.0 to 48.4. The number of mass layoffs surged by 127% compared to the previous month, with restructuring mainly occurring in the manufacturing sector.

Poor earnings reports from some retail sectors also negatively impacted the indices. Costco fell 6% due to a slowdown in November sales growth, and sales over the recent four weeks, including Black Friday, increased by only 5.7% year-on-year. Big Lots (-8%) also declined after news that, despite progress in inventory clearance, profits plunged nearly 10% year-on-year.

Considering the impact of the U.S. stock market, foreign investor flows are expected to be under pressure in the Korean stock market. However, given that recent global investment banks have mentioned the Korean stock market as a top rebound candidate for 2023, there is a possibility that foreign investor-driven flows will gather. Goldman Sachs cited low valuation, cheap dollar-converted value, and recovery in Chinese demand as reasons, while Morgan Stanley evaluated Korea, along with Taiwan, as an early winner of demand recovery. Expectations for easing China’s zero-COVID policy are also predicted to positively influence the domestic stock market.

Hyuncheol Jang, Researcher at Korea Investment & Securities: “Bear Market Rally is Limited... Attention Will Shift to the Economy”

Due to the inflation surprise, the focus of the December FOMC rate hike forecast shifted from 75 basis points (1bp = 0.01 percentage points) to 50 basis points. The forecast for the terminal rate in the rate hike cycle also decreased.

However, the financial market rebound due to improved financial conditions is likely to be short-lived. Only three months have passed since the Jackson Hole meeting, and the Fed’s stance is very unlikely to shift to a full easing policy. If a 25bp hike is implemented at the December FOMC or a combination of a 50bp hike and a Fed easing signal appears, the bear market rally could be extended, but it is difficult to extend the bear market rally based solely on expectations of a slowdown in tightening rather than a halt.

Going forward, investors are expected to focus more on the economy than on tightening. Although an economic slowdown is anticipated, it is unlikely to be as severe as expected. If investment, consumption, and government spending determine the economic direction, total demand (consumption) determines the depth of the recession, and consumption sentiment is expected to improve as inflation passes its peak. Although the real GDP growth forecast may be further downgraded, the projected economic growth rates of major countries at this point are very favorable compared to past severe recessions.

Considering this, stock returns are expected to outperform bonds in the short term. Long-term U.S. Treasury yields, which have priced in expectations of a rate cut cycle and recession concerns, are likely to stop falling and turn upward. For stocks, even if expectations for a slowdown in tightening are diluted, additional sharp declines are unlikely as the market has already priced in the recession. Among stocks, it is appropriate to increase interest in the U.S., which did not see a large rebound in November, and among bonds, to expand interest in short-duration high-yield bonds.