[MarketING] Now the Market's Eyes Turn to the FOMC

US Inflation Data Eases Concerns, Boosts Markets
Focus on February FOMC Rate Hike Size

[Asia Economy Reporter Song Hwajeong] The U.S. December Consumer Price Index (CPI) met expectations, leading to a strong start in the stock market. Investors, having confirmed the easing inflationary pressures, are now focusing on the February U.S. Federal Open Market Committee (FOMC) meeting.

Relief from U.S. CPI, KOSPI Rises for 8 Consecutive Days

As of 10:20 a.m. on the 13th, the KOSPI stood at 2,396.03, up 30.93 points (1.31%) from the previous day. The KOSDAQ rose 2.84 points (0.40%) to 713.66.

The strong performance is attributed to the December U.S. CPI results aligning with market expectations. The New York stock market also closed higher on relief after confirming inflation data. The Dow Jones Industrial Average rose 0.64%, the S&P 500 increased 0.34%, and the Nasdaq Composite gained 0.64%.

The U.S. December CPI rose 6.5% year-on-year, matching market forecasts. The CPI inflation rate, which had surged to 9.1% in June last year, slowed to 7.7% in October and further dropped to the 6% range. Notably, the December CPI fell 0.1% month-on-month. This marks the first monthly decline in CPI since May 2020, shortly after the COVID-19 outbreak. The core CPI, excluding volatile energy and food prices, decreased 5.7% year-on-year, also in line with expectations.

Energy prices fell 4.5% month-on-month, and used car prices dropped 2.5%, driving the December CPI decline. Conversely, housing costs rose 0.8% month-on-month, continuing to exert upward pressure on inflation, and the medical services sector showed resilience, shifting from a 0.7% month-on-month decline to a 0.1% increase. Sangyoung Seo, a researcher at Mirae Asset Securities, commented, "With the CPI falling 0.1% month-on-month for the first time since May 2020, downward pressure on prices has increased. Considering the ongoing decline in housing prices and rents, housing costs are likely to turn downward soon. The medical services sector's inflation rate is also slowing from 4.4% to 4.1% year-on-year, suggesting the downward trend will continue."

Expected Rate Hike at February FOMC

With the December CPI confirming some easing of inflationary pressures, market attention is turning to the FOMC regular meeting on February 1, where the rate hike magnitude will be decided.

There is growing speculation that the Federal Reserve (Fed) may reduce the rate hike to 25 basis points (bp) (1bp = 0.01 percentage points) at the February FOMC meeting. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the probability of a 25bp hike was in the 76% range before the CPI release but rose to 93% afterward. The chance that the year-end upper bound of the benchmark rate will be 4.5% also slightly increased from the low 31% range to the mid-33% range. Patrick Harker, President of the Federal Reserve Bank of Philadelphia, emphasized that a 25bp hike would be appropriate going forward.

Sanghyun Park, a researcher at Hi Investment & Securities, said, "Given the visible trend of easing inflation, the Fed's rate hike stance is expected to shift from a big step (50bp) to a baby step (25bp). Along with this shift, regarding the timing of the end of rate hikes, we maintain our previous forecast that the rate hike cycle will conclude with the March FOMC meeting."

However, since there is still time before the February FOMC, some expect the pace of the new year rally, which has been unfolding since the beginning of the year, to slow down. Jiyoung Han, a researcher at Kiwoom Securities, stated, "With more than two weeks remaining until the February FOMC, it is premature to assume a 25bp hike as a done deal. Considering the high uncertainty surrounding economic and earnings downturns in the short term, it is appropriate to prepare for a possible slowdown in the new year rally as upcoming events such as retail sales, industrial production, and the earnings season unfold."