[Good Morning Market] US Stock Market Rises on CPI Slowdown... Domestic Market Also Expected to Climb

Nasdaq Index Rises for 5 Consecutive Trading Days
Tightening Concerns Ease Also Drive Stock Price Uptrend

[Asia Economy Reporter Lee Jung-yoon] The U.S. stock market closed higher as the rise in the U.S. Consumer Price Index (CPI) for December slowed. Additionally, remarks by Patrick Harker, President of the Federal Reserve Bank of Philadelphia, suggesting there is no need for an excessive monetary policy response, also supported the upward trend.

On the 12th (local time), the Dow Jones Industrial Average rose 216.96 points (0.64%) from the previous close to 34,189.97, the large-cap-focused S&P 500 index ended at 3,983.17, up 13.56 points (0.34%), and the tech-heavy Nasdaq index closed at 11,001.11, up 69.43 points (0.64%). The Nasdaq recorded its first five consecutive days of gains since July last year.

[Image source=Yonhap News]

The U.S. December CPI rose 6.5% year-on-year, marking the fifth consecutive month of a reduced increase. It was also the smallest increase in 12 months since October 2021. On a month-to-month basis, the CPI fell by 0.1%. This was the first monthly decline since May 2020. The core CPI, which excludes volatile energy and food prices, rose 5.7% year-on-year and 0.3% month-on-month.

As inflation eased, concerns over aggressive Fed tightening diminished. There is speculation that the Federal Reserve may reduce the rate hike to 0.25 percentage points at the February Federal Open Market Committee (FOMC) meeting.

President Harker also stated at an event that he expects several more rate hikes this year but said, "Going forward, 0.25 percentage points will be appropriate." He explained that the December CPI data shows that inflation is coming down.

Sang-young Seo, Head of Media Content Division at Mirae Asset Securities: "Rise Supported by CPI Digestion and Fed Officials' Remarks"

The U.S. December CPI declined from 7.1% to 6.5% year-on-year, and the core CPI also slowed from 6.0% to 5.7%, indicating a continued drop in inflation. Particularly, the 0.1% month-on-month decline shows increased downward pressure on prices.

Looking at detailed items, energy prices fell 4.5% month-on-month, adjusting the year-on-year increase from 13.1% to 7.3%. Conversely, housing costs rose 0.8% month-on-month, increasing the year-on-year rate from 7.1% to 7.5%, maintaining upward pressure on prices. Transportation services saw a decline in airfares but increases in automobile maintenance and repair, while medical services shifted from a 0.7% month-on-month decline to a 0.1% increase, showing continued strength.

However, considering the ongoing decline in housing prices and rents, housing costs are likely to turn downward in the future, and the medical services sector is also slowing from 4.4% to 4.1% year-on-year, suggesting the inflation downtrend will continue.

James Bullard, President of the Federal Reserve Bank of St. Louis, argued that interest rates need to be maintained above 5% to control inflation. Regarding the CPI, he stated that the Fed's actions are moving in the right direction and mentioned that economic outlooks have improved compared to just a few weeks ago. He also noted that the labor market remains robust and that policies to support consumption should be implemented.

These remarks reflect an optimistic outlook on the possibility of avoiding a recession and acknowledge inflation stabilization, differing from hawkish comments. This has been a major factor driving the weaker dollar, lower Treasury yields, and rising stock indices.

President Harker also mentioned that the period of 0.75% rate hikes is definitely over and that a 0.25% increase will be appropriate going forward, reinforcing the trend of a weaker dollar and rising indices.

Although the U.S. stock market experienced volatility with profit-taking selling despite the CPI slowdown news, this suggests that a similar process of digesting selling pressure may occur in the domestic market on the 13th. However, after Bullard's hawkish remarks, the U.S. market turned upward and expanded gains, which is expected to have a positive impact.

Considering these factors, the domestic stock market is expected to start with a rise of around 0.5%. However, concerns over earnings deterioration due to economic slowdown suggest a market characterized by individual stock movements. Notably, Tesla's turnaround to gains and the semiconductor sector's strength, showing sensitivity to individual stock issues, are likely to drive these market changes.

Ji-young Han, Researcher at Kiwoom Securities: "It Is Appropriate to View Inflation as Forming a Downward Trend"

The positive impact of the recent U.S. CPI results on the U.S. stock market appears to have been limited. The fact that prices for service items, including housing costs, expanded their increase compared to the previous month made it difficult to dispel concerns about inflation becoming entrenched.

However, considering that rents peaked in the first and second quarters of last year and that there is about a one-year lag before rent changes are reflected in the CPI, it is reasonable to view the decline in housing costs as a matter of time. Ultimately, it is appropriate to see inflation in major items such as energy and services forming a downward trend.

The key to the future direction of the stock market will be how much the gap between the market and the Fed regarding rate cuts within this year narrows. It is necessary to watch other Fed officials' remarks, and since there is still time until the February FOMC, it is premature to assume a 0.25% rate hike as a done deal.

On this day, the domestic stock market is expected to show a favorable trend, supported by positive factors such as the U.S. December CPI decline and the sharp drop in the won-dollar exchange rate. However, considering that these are pre-anticipated factors similar to the U.S. market, the upside is expected to be limited. Also, since sensitivity to central bank policies is currently higher than to inflation, attention from both bond and stock market participants is expected to focus on the Bank of Korea's Monetary Policy Committee results and the central bank governor's remarks regarding domestic monetary policy direction.