[MarketING] Why the US Employment Data Brings Smiles

KOSPI Recovers to 2300, KOSDAQ to 700
Strong Start with Over 1% Gain in Early Trading

[Image source=Yonhap News]

[Asia Economy Reporter Song Hwajeong] The KOSPI continued its upward trend for the fourth consecutive day, reclaiming the 2300 level. The KOSDAQ also rose more than 1% for the second consecutive day, recovering the 700 level.

The Market Smiles More at Slowing Wage Growth than Strong US Employment Data

As of 10:05 a.m. on the 9th, the KOSPI was at 2,334.56, up 44.59 points (1.95%) from the previous day. The KOSDAQ rose 11.35 points (1.65%) to 700.29.

This strong performance is attributed to the sharp rise in the New York stock market last Friday. On the 6th (local time), the Dow Jones Industrial Average (2.13%), the S&P 500 Index (2.28%), and the tech-heavy Nasdaq Index (2.56%) all rose more than 2%.

Investors were reassured by the employment data released before the market opened that day, leading to the stock market rally.

US nonfarm payrolls increased by 223,000 in December last year, exceeding the market expectation of 200,000, and the December unemployment rate fell to 3.5% from the revised 3.6% in the previous month. The 3.5% rate matched the levels seen in July and September last year, which were the lowest since 1969.

Hourly wages rose 0.3% month-on-month, slowing from the previous month's 0.4% increase, and increased 4.6% year-on-year, down from 4.8% the previous month. The 4.6% figure is the lowest since August 2021 and is 1 percentage point lower than the March peak of 5.6%. This figure was also below market expectations of 0.4% month-on-month and 5.0% year-on-year.

Although employment was higher than expected, the market was relieved by the slowing wage growth. Ji-young Han, a researcher at Kiwoom Securities, analyzed, "While the robust labor market lends credibility to arguments denying the possibility of a US economic recession, the market has already shifted its focus from whether a recession will occur to its severity. The slowing wage inflation has eased the Federal Reserve's tightening concerns." Considering that Fed Chair Jerome Powell expressed concerns about persistent high inflation in service items excluding housing costs at the December Federal Open Market Committee (FOMC) meeting, which was mainly driven by wage inflation, the recent decline in average hourly wages could gradually alleviate the Fed's worries.

Sang-young Seo, a researcher at Mirae Asset Securities, said, "The sharp rise in the US stock market, driven by slowing wage growth and the possibility of a soft landing for the economy, will have a favorable impact on the Korean stock market. Along with this, the won is expected to strengthen further due to the weakening dollar, which should sustain foreign investors' net buying trend. Additionally, less hawkish remarks from Fed officials will also positively influence foreign investor demand."

Will Inflation Pressure Ease?

In this context, attention is focused on the upcoming US December Consumer Price Index (CPI) scheduled for release during the week. Investors will seek to confirm further easing of inflationary pressures through the CPI data.

The market estimates that the December CPI fell to the 6% range.

Young-jin Ahn, a researcher at SK Securities, said, "The December CPI inflation rate scheduled for the 12th is expected to have risen 6.5% year-on-year, according to consensus. This follows the previous month's 7.1% surprise and suggests a continuous slowdown throughout the first half of this year, making it possible for inflation to fall below 4% by June." He added, "Although reaching the Fed's 2% target is difficult, inflation will gradually reduce its negative impact on the economy and financial markets."

Nam-jung Moon, a researcher at Daishin Securities, forecasted, "The expected US December CPI is a 6.6% increase, entering the 6% inflation range due to declines in energy and housing costs. Considering that the global stock market began to decline significantly when the CPI entered the 7% range in December 2021, the market will interpret the CPI result entering the 6% range positively." Moon added, "If the January University of Michigan inflation expectations on the 14th confirm stabilization of inflation expectations, it will temporarily ease concerns about a hard landing in the US economy and reduce market burdens."