[MarketING] The Unnarrowed Market and the Gap with the Fed

KOSPI Starts Lower After Two Days
Pressure from Hawkish Remarks by US Fed Officials

[Image source=Yonhap News]

[Asia Economy Reporter Song Hwajeong] The KOSPI started on a downward trend after two days. Hawkish remarks from Federal Reserve (Fed) officials appear to have weighed on the stock market. Since there remains a gap between the market and the Fed's views on the interest rate path, opinions suggest that volatility management is necessary during the process of narrowing this gap.

Interest Rate Cuts Within the Year VS Higher Interest Rates

As of 10:15 a.m. on the 9th, the KOSPI was at 2,478.34, down 5.30 points (0.21%) from the previous day. The KOSDAQ rose 0.37 points (0.05%) to 780.35. Both indices started weak, but the KOSPI's decline narrowed while the KOSDAQ turned positive.

The decline is interpreted as influenced by the previous day's drop in the New York stock market due to hawkish remarks from Fed officials. On the 8th (local time) at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average fell 0.61%, the S&P 500 dropped 1.11%, and the Nasdaq declined 1.68%. Following Fed Chair Jerome Powell's remarks the previous day, four officials spoke on this day: John Williams, President of the New York Federal Reserve Bank; Christopher Waller, Fed Board member; Lisa Cook, Fed Board member; and Neel Kashkari, President of the Minneapolis Federal Reserve Bank. President Williams said, "The labor market is very strong," adding, "A federal funds rate of 5?5.25% is a reasonable view, and there is a lot of uncertainty in inflation forecasts, which could persist for specific reasons." He also mentioned, "Service prices will especially continue to rise, which may require higher interest rates." Fed Board member Waller said, "Ongoing inflationary pressures partly stem from a very tight labor market," adding, "Recent wage increases have eased somewhat but are insufficient, and the fight against inflation is a long-term battle." He further stated, "The U.S. economy is adapting well to high interest rates, and there is a need to maintain them at a higher level for a longer period."

Kim Seokhwan, a researcher at Mirae Asset Securities, explained, "Considering that all FOMC members who spoke today except Board member Cook made hawkish remarks, it indicates that the gap between the market and the Fed still exists," adding, "Since Chair Powell and others have presented different conclusions, this will continue to influence the market direction going forward."

Han Jiyoung, a researcher at Kiwoom Securities, said, "The sharp drop in the U.S. stock market the previous day may partly reflect pre-position liquidation ahead of next week's Consumer Price Index (CPI) event, but it also seems to be due to accumulated concerns over the persistent gap between the Fed and the stock market regarding the interest rate path within the year," adding, "Recently, the foreign exchange and bond markets have priced in the Fed's hawkish stance, such as dollar strength and rising interest rates, but the stock market had been supporting expectations of liquidity injection through Fed rate cuts within the year. Currently, these expectations appear to be partially reversing."

Volatility Management Needed While Narrowing the Gap

It is expected that narrowing the gap between the market and the Fed will take time, and volatility is likely to increase during this process.

Researcher Han said, "Both the market and the Fed are representing their positions based on persuasive logic and data, so it will take at least two to three months to determine who holds the correct view," adding, "However, the gap is expected to narrow somewhat during the upcoming January CPI event."

Lee Kyungmin, a researcher at Daishin Securities, said, "Judgments about the economy based on economic indicators and changes in monetary policy outlook (consensus) will become important," adding, "Since the beginning of the year until early February, the global financial market rebounded reflecting both expectations for a soft landing and interest rate cuts, but now one of these must be set aside, and the overly optimistic expectations for rate cuts are likely to normalize quickly."

Researcher Han advised, "At this point, rather than betting on the direction of the index, it is appropriate to build a market-neutral position through low-volatility or volatility management products and prepare for the CPI event."