[Good Morning Market] Focus on BOJ Policy Changes Amid Recession Concerns

New York State Manufacturing Index Falls Short of Market Expectations... Dow Drops Over 1%
BOJ Monetary Policy Meeting Results Announced Today... Increased Market Volatility Expected During Trading

[Asia Economy Reporter Minji Lee] Since the beginning of the year, the KOSPI has shown a strong upward trend, but it is necessary to keep in mind that the expectation of an interest rate cut has already been priced in amid growing concerns about corporate earnings. It is difficult for a sharp rise similar to the past to be reproduced in the short term. Experts advise that rather than increasing expectations for a rise, investors should check the results of the Bank of Japan (BOJ) monetary policy meeting to be announced today, as well as the February U.S. Federal Open Market Committee (FOMC) results, before buying stocks.

[Image source=Reuters Yonhap News]

Seosangyoung, Researcher at Mirae Asset Securities: “Focus on BOJ Monetary Policy Meeting Results Amid Concerns Over Economic Recession”

The New York State Manufacturing Index, the first released among the manufacturing indices published by regional Federal Reserve Banks in the U.S., was announced at -32.9, significantly lower than last month’s -11.2 and the expected -8.1, heightening concerns about an economic recession. This implies that the slowdown in the ISM Manufacturing Index, to be released on the first trading day of next month, could be even greater. Additionally, news that financial stocks have significantly increased their loan loss provisions due to economic uncertainty has weakened confidence in the economy.

Accordingly, the U.S. stock market showed a slight decline overnight. The Dow Jones Industrial Average fell by 1.14%, the S&P 500 index dropped by 0.2%, while the Nasdaq index rose by 0.14%.

The decline in the U.S. stock market is a burden on the domestic market. However, considering that China’s real economy indicators released the previous day were stronger than expected, the index decline is expected to be limited. Rather, it is predicted that related stocks will rise as expectations grow for the Chinese government’s expansion of consumption stimulus policies.

An event to watch closely during the trading session is the BOJ’s monetary policy meeting results. There is a high possibility of increased volatility in the foreign exchange market depending on the BOJ’s announcement. Following the meeting, fluctuations in the yen-dollar exchange rate could affect the won-dollar exchange rate, influencing foreign investor demand.

Lee Jaeseon, Researcher at Hyundai Motor Securities: “Strong KOSPI at the Beginning of the Year... There Are Areas to Confirm”

As market risk factors ease, the downside of the stock market is becoming more solid. First, following the U.S. December CPI announcement that met expectations, the University of Michigan’s one-year inflation expectations recorded 4%, limiting unexpected moves by the Federal Reserve (Fed).

[Image source=Yonhap News]

It is also positive that currencies opposing the dollar are strengthening while the dollar’s strong trend is limited. Unlike the U.S., other countries have been exposed to import price inflation pressures due to the strong dollar, which has led to concerns about corporate profit declines and economic hard landings due to rising commodity prices.

The beneficiaries of the weak dollar trend are emerging markets. Korea has recorded one of the top returns among emerging countries since the beginning of the year. Foreign investors have shown a net buying preference for large-cap stocks in the KOSPI, and the decline in the won CDS premium has been relatively steep, linked to the strengthening of currencies with high correlation coefficients such as the yuan and yen. Korea has seen a stronger inflow of foreign passive funds compared to other emerging markets for the first time since 2019.

However, there are still areas that need confirmation. It should be remembered that the stock market enjoyed a beginning-of-year effect by preemptively pricing in expectations of a Fed pivot. Despite the decline in the University of Michigan’s one-year short-term inflation expectations, the futures market’s expected rate hike in February (25bp) reflected 27bp, similar to immediately after the CPI announcement, showing little fluctuation.

There is also lingering caution regarding fourth-quarter earnings. When the KOSPI approaches the 2400 level, the 12-month forward price-to-earnings ratio (PER) nears about 12 times. From a valuation perspective, this is somewhat burdensome even among emerging markets. The KOSPI’s valuation of around 11.8 times, according to Hyundai, exceeds the 10-year average.