[MarketING] Growing Expectations for Inflation Easing

Ahead of US CPI Release, Optimism vs. Caution
KOSPI Continues 7-Day Rise with Slight Uptrend

[Image source=Yonhap News]

[Asia Economy Reporter Song Hwajeong] Market attention is focused on the release of the U.S. December Consumer Price Index (CPI). The market expects the consumer price inflation rate to fall to the 6% range, easing inflationary pressures and potentially leading to changes in the U.S. tightening policy.

Expectations vs. Caution Ahead of U.S. CPI Release

As of 10:30 a.m. on the 12th, the KOSPI was up 6.00 points (0.25%) from the previous day, standing at 2365.53. The KOSDAQ rose 1.32 points (0.19%) to 711.09.

Both indices started the day rising, but ahead of the U.S. December CPI release, mixed sentiments of expectation and caution emerged, causing the KOSPI's gains to narrow while the KOSDAQ experienced fluctuations.

The New York stock market closed higher across the board on optimism about the CPI. On the 11th (local time) at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed at 33,973.01, up 268.91 points (0.8%) from the previous close. The large-cap S&P 500 index rose 50.36 points (1.28%) to 3,969.61, and the Nasdaq index closed at 13,931.67, up 189.04 points (1.76%).

This strength in the U.S. stock market is due to expectations that the December CPI's slower rise will ease inflationary pressures. Ji-young Han, a researcher at Kiwoom Securities, said, "The U.S. stock market showed strength reflecting expectations of further declines in inflation. Additionally, the Boston Federal Reserve Bank President's remarks supporting a 0.25 percentage point increase at the upcoming Federal Open Market Committee (FOMC) meeting, along with limited volatility in non-stock assets such as the dollar and U.S. Treasury yields, contributed to improved risk appetite."

The market consensus for the December CPI is currently set at 6.5% for the consumer price index and 5.7% for the core CPI. Researcher Han explained, "The basis for expecting the CPI to meet or fall below consensus includes declines in the Institute for Supply Management (ISM) manufacturing and services price indices, a sharp drop in the U.S. used car price index since July last year, a slowdown in real wage growth confirmed in last week's employment report, and a year-on-year decrease in China's producer price index, which is highly leading for U.S. consumer prices. Of course, strong employment conditions may still exert upward pressure on service prices, but the overall downward trend is expected to continue."

With ongoing expectations of easing inflation, there are also forecasts that the Federal Reserve (Fed) will slow its pace again at the FOMC meeting scheduled for January 31 to February 1. Susan Collins, President of the Boston Fed, said in an interview, "A 0.25 or 0.5 percentage point increase is reasonable," adding, "I am leaning toward a 0.25 percentage point increase, but it depends on the data." Earlier, Raphael Bostic, President of the Atlanta Fed, and Mary Daly, President of the San Francisco Fed, also left open the possibility of a baby step (a 0.25 percentage point rate hike), depending on CPI and other economic data.

Possibility of Slowing Pace After Recent Rapid Rise

While expectations for easing inflation are gaining weight, there is also a possibility of the market slowing down due to fatigue from the recent sharp rise. On the previous day, the KOSPI closed with a reduced gain due to fatigue from the recent continuous rise. The KOSPI has risen for six consecutive trading days and continues to show strength with a slight increase on this day as well. Since rising more than 2% on the 9th, the gains have gradually narrowed, showing a modest upward trend.

Yujun Choi, a researcher at Shinhan Investment Corp., said, "The slowdown in wage growth confirmed in the U.S. December employment data and services PMI, along with expectations of easing service price pressures, generally create a positive atmosphere for the stock market, but the speed of the rise is a burden. The December U.S. inflation data and the Bank of Korea's Monetary Policy Committee's waiting sentiment also influence the index, which may focus on slowing down the pace."