[MarketING] Growing Uncertainty Over Indicators That Fell Short of Expectations

Strong US Employment Data Raises Tightening Concerns
Dollar Strength Puts Pressure on Foreign Investment Flows

[Image source=Yonhap News]

[Asia Economy Reporter Song Hwajeong] The KOSPI opened with a sharp decline. This is interpreted as due to increased uncertainty about the direction of U.S. monetary policy following the release of U.S. economic indicators over the past weekend that diverged from expectations. Given that the dollar's strength and rising interest rate trend may continue for some time, it is expected to weigh on foreign demand, which has driven the stock market's strength so far.

An Unwelcome Surprise

As of 10:10 a.m. on the 6th, the KOSPI was at 2,462.11, down 18.29 points (0.74%) from the previous day. The KOSDAQ fell 3.13 points (0.41%) to 763.66. On this day, the KOSPI started down more than 1% but the decline narrowed afterward.

The KOSPI is showing weakness because the U.S. economic indicators released over the weekend showed unexpectedly strong results.

On the 3rd (local time), U.S. nonfarm payrolls for January increased by 517,000. This is double the previous month's increase of 260,000 and nearly three times the market forecast of 185,000. The unemployment rate also hit a record low of 3.4%, the lowest since 1969. The Institute for Supply Management (ISM) January Services (non-manufacturing) Purchasing Managers' Index (PMI) recorded 55.2, surpassing the baseline of 50. This greatly exceeded the market forecast of 50.5 and the previous month's 49.2. Lee Seunghoon, a researcher at Meritz Securities, analyzed, "Following the surprise from these two indicators, U.S. bond yields surged, the dollar strengthened, and major stock indices fell. In particular, the 2-year yield rose more than the 10-year yield, spreading concerns about an extended rate hike by the Federal Reserve (Fed)."

Due to the economic data release, the Dow Jones Industrial Average fell 0.38%, the S&P 500 dropped 1.04%, and the Nasdaq declined 1.59% at the New York Stock Exchange (NYSE).

Lee Kyungmin, a researcher at Daishin Securities, said, "Last week, the stock market continued its rebound on relief from the February Federal Open Market Committee (FOMC) meeting, but the weekend showed a different movement. The global financial market reacted oppositely to the U.S. employment and services index surprises: stocks plunged while U.S. bond yields and the dollar sharply rebounded." He added, "This is because the balance between the previously maintained expectations for a soft landing and rate cuts was broken."

The improved indicators are likely to change market expectations regarding U.S. monetary policy. Han Jiyoung, a researcher at Kiwoom Securities, explained, "The January employment surprise could be a turning point for the market to adjust its outlook on the Fed's monetary policy within the year. After this employment data release, the probability of a 25 basis point (1bp=0.01 percentage point) hike at the May FOMC, as reflected in the Chicago Mercantile Exchange (CME) FedWatch tool, rose from the 33% range to 59%, increasing the likelihood that the terminal rate will be 5.25% rather than 5.0%."

Dollar Strength and Rising Interest Rates Pose Burden on Foreign Demand

As the dollar's strength and the rising interest rate trend are expected to continue for some time, this is likely to burden foreign demand, which has driven the stock market's strength so far.

Seo Sangyoung, a researcher at Mirae Asset Securities, said, "The U.S. stock market's profit-taking triggered by the dollar's strength and the sharp rise in interest rates will act as a burden on the Korean stock market. Confidence in the economy may increase due to improvements such as the U.S. ISM services index, but it is important to note that the dollar's strength and the rising interest rate trend may continue for some time, which could weigh on foreign demand."

On this day, the won-dollar exchange rate opened at 1,247.5 won, up 18.1 won from the previous trading day in the Seoul foreign exchange market. Foreigners turned to net selling in the stock market for the first time in four days, selling about 40 billion won.

Attention should be paid to remarks from Fed officials scheduled for this week. One researcher said, "It is necessary to check how key Fed officials, including Fed Chair Jerome Powell and the President of the New York Federal Reserve Bank, scheduled to speak this week, interpret the January employment results. Considering that events affecting the market, such as the University of Michigan's inflation expectations, are pending, the domestic stock market is expected to enter a caution mode this week, showing a volatility market with limited upside."