[MarketING] Easing Inflation Pressure... Sensitive to Central Bank Tightening Policy

KOSPI Starts Lower but Turns Up on Foreign Buying
Sideways Trend Expected Ahead of Seollal Holiday

The KOSPI opened lower due to concerns over the somewhat hawkish December Federal Open Market Committee (FOMC) results. On the 15th, the KOSPI index opened at 2383.83, down 15.42 points (0.64%) from the previous trading day. The won-dollar exchange rate started at 1298.5 won, up 2.2 won from the previous day's 1296.3 won. The photo shows the dealing room of Hana Bank in Jung-gu, Seoul on the day. Photo by Kim Hyun-min kimhyun81@

[Asia Economy Reporter Song Hwajeong] Concerns over an economic recession are growing due to weak economic indicators in the United States, putting pressure on the stock market. The market is reacting more sensitively to recession fears and the direction of the U.S. tightening policy rather than inflation concerns, as inflationary pressures ease.

Fading Inflation Concerns, Deepening Shadow of Recession

As of 10:20 a.m. on the 19th, the KOSPI was at 2,374.70, up 6.38 points (0.27%) from the previous day. The KOSDAQ recorded 710.31, down 1.44 points (0.2%).

Both indices started weak due to a sharp decline in the U.S. stock market, but the KOSPI reversed to an upward trend and remained slightly positive. Foreign investors alone purchased 198.8 billion KRW, supporting the index.

The U.S. stock market fell sharply the previous day. The Dow Jones Industrial Average dropped 1.81%, the S&P 500 fell 1.56%, and the Nasdaq declined 1.24%. All three indices recorded losses of over 1% amid growing recession concerns due to weak retail sales and industrial production. U.S. retail sales for December, released the previous day, decreased by 1.1% compared to the previous month, marking a decline for two consecutive months. This was the largest drop in a year and fell short of market expectations (-0.9%). December industrial production also decreased by 0.7% month-on-month, showing a significantly weaker performance than the market forecast (-0.1%).

Seo Sangyoung, a researcher at Mirae Asset Securities, said, "The recent decline in the U.S. stock market due to profit-taking after a rise is a burden on the Korean stock market," adding, "Especially, the contraction in retail sales and industrial production has heightened concerns about the economy, which will be a burden on the Korean stock market that is highly dependent on exports." Seo added, "However, the announcement that U.S. Treasury Secretary Janet Yellen and Chinese Vice Premier Liu He will make efforts to ease U.S.-China tensions is positive," and "The Korean stock market will change depending on foreign investor flows after a weak start."

The market is now reacting more sensitively to recession concerns and tightening policy directions rather than inflation, as inflationary pressures ease. The U.S. Producer Price Index (PPI) for December was also released the previous day, showing a slowdown similar to the Consumer Price Index (CPI) released earlier, confirming that inflationary pressures are easing. The U.S. December PPI rose 6.2% year-on-year, below market expectations (6.8%). Month-on-month, it fell 0.5%, marking the largest decline since the pandemic. The market expected a 0.1% decline.

Han Jiyoung, a researcher at Kiwoom Securities, said, "Following the December CPI, the PPI slowed to 6.2% from 7.3% the previous month, reaffirming that inflation this year is expected to continue its downward trend unless seasonal variables intervene," adding, "Going forward, the impact of inflation on the stock market will decrease, while recession concerns and central bank tightening issues will share the reduction and expand their respective influences."

Market Cautious Ahead of Lunar New Year Holiday

With the Lunar New Year holiday and the February U.S. Federal Open Market Committee (FOMC) meeting approaching, the market is expected to remain cautious.

Han said, "Since the domestic stock market will enter a holiday closure period next week, the cautious sentiment ahead of the holiday will deepen during the remaining two trading days this week," adding, "This could reduce overall market trading and narrow bid-ask spreads for individual stocks, so it is appropriate to manage the volatility of held stocks during the remaining two trading days."

Additionally, there are mixed forecasts about the extent of the U.S. interest rate hike at the February FOMC, and the market is expected to remain cautious as investors wait for confirmation.

With the December CPI and PPI coming in lower than expected, easing inflationary pressures, the market anticipates a baby step (0.25 percentage point rate hike) at this FOMC. However, based on remarks from Fed officials, the possibility of a big step (0.5 percentage point hike) cannot be ruled out. James Bullard, President of the Federal Reserve Bank of St. Louis, said the previous day, "To reach a restrictive level, at least a 5% interest rate is needed," and "A 0.5 percentage point hike is appropriate at this meeting." Loretta Mester, President of the Cleveland Fed, also said, "Inflation has recently eased," but added, "Under-tightening could pose greater risks," supporting further tightening.

Han said, "The gap between the Fed and the market regarding rate cuts within this year remains wide, which is also a factor limiting the upside of the stock market," adding, "Despite Bullard's statement that a 0.5 percentage point hike is appropriate at the February FOMC, the Chicago Mercantile Exchange (CME) FedWatch tool shows the market is betting on a 0.25 percentage point hike (95% probability) in February."