[Good Morning Stock Market] US Economic Concerns, Hawkish Remarks... KOSPI Expected to Start Lower

[Asia Economy Reporter Hwang Yoon-joo] On the 19th, the Korean stock market is expected to start lower. Concerns over a global economic recession are likely to impact the U.S. stock market's decline. Additionally, hawkish remarks from James Bullard, President of the St. Louis Federal Reserve, are expected to weaken investor sentiment.

On the previous day (local time), all three major indices of the New York Stock Exchange fell. The Dow Jones Industrial Average closed at 33,296.96, down 613.89 points (-1.81%) from the previous day. The Standard & Poor's (S&P) 500 index also closed at 3,928.86, down 62.11 points (-1.56%), and the Nasdaq index recorded 10,957.01, down 138.10 points (-1.24%).

Suh Sang-young, Head of Mirae Asset Securities: "KOSPI expected to start down about 0.7%"

Suh Sang-young, Head of Mirae Asset Securities, expects the KOSPI to start down about 0.7%. The decline in the U.S. stock market due to selling pressure is expected to weigh on the Korean stock market. Although the possibility of price stability has increased, concerns about the economy are growing as real economic indicators are contracting, which is a burden for Korea, highly dependent on exports.

According to the U.S. Department of Labor on the previous day, the Producer Price Index (PPI) for December fell 0.5% compared to the previous month. This is a larger decline than the expected 0.1%. Retail sales in December also decreased by 1.1% compared to the previous month, falling more than the expected 1.0%. Retail sales are an indicator showing domestic demand capacity and account for two-thirds of the U.S. economy. This marks a decline for two consecutive months following November.

James Bullard, President of the St. Louis Federal Reserve.

In particular, the Federal Reserve's Beige Book expressing concerns about the economy is also a burden. The recent economy is stable, but it is expected to grow little over the next few months. Regarding consumption, it mentioned that the purchasing power of middle- and low-income consumers is continuously decreasing due to high inflation. As for the labor market, it is increasing at a moderate pace, but some regions are experiencing declines.

Han Ji-young, Kiwoom Securities Researcher: "Korean stock market expected to show weak trend"

Han Ji-young, a researcher at Kiwoom Securities, expects the Korean stock market to show a weak trend on the 19th. It is expected to be affected by negative factors from the U.S., such as poor real economic indicators including U.S. consumption closely related to Korean export performance, and hawkish remarks from President Bullard.

The gap between the Federal Reserve and the market regarding interest rate cuts within the year still has not narrowed, which seems to be blocking the upside of the stock market. President Bullard said, "Interest rates should be maintained at least above 5%, and the Fed should maintain a tighter stance."

He stated that the upper limit of the benchmark interest rate should be around 5.5% (currently 4.5%) by the end of 2023, and that a 50 basis point hike at the February Federal Open Market Committee (FOMC) meeting would be appropriate. Nevertheless, the market on the Chicago Mercantile Exchange (CME) FedWatch is betting on a 25 basis point hike in February with a 95% probability.

Most Fed officials, including President Bullard, expect the year-end interest rate upper limit to remain in the 5% range. However, the market currently maintains a bet that after a total 50 basis point rate hike by the March FOMC, there will be a total 50 basis point rate cut through the November and December FOMC meetings, bringing the upper limit to 4.5%.

Therefore, at least until before the February FOMC, real economic indicators such as consumption, production, and exports, excluding inflation and employment data, are expected to act as uncertainties. It is explained that it is necessary to establish a stock market response strategy based on the premise that economic indicators will have the character of 'bad news is bad news.'