[MarketING] Unresolved Inflation and Tightening Uncertainties

KOSPI Starts Higher Then Turns Lower
Inflation Uncertainty Grows Amid Higher-than-Expected US CPI

[Image source=Yonhap News]

[Asia Economy Reporter Song Hwajeong] The KOSPI has fallen again after just one day. This is because the US inflation data exceeded expectations, leaving uncertainties about inflation and tightening unresolved. As the pace of inflation decline slows, the possibility of a prolonged US tightening policy increases, leading the market to show a limited trend.

KOSPI Weakens After One Day Due to Inflation Data Exceeding Expectations

As of 10:20 a.m. on the 15th, the KOSPI was at 2,453.29, down 12.35 points (0.5%) from the previous day. The KOSDAQ fell 1.16 points (0.15%) to 778.42. Both the KOSPI and KOSDAQ started the day higher but turned downward due to selling pressure from foreigners and institutions.

This is interpreted as a reaction to the US January Consumer Price Index (CPI) released the previous day, which exceeded expectations. According to the US Department of Labor on the 14th (local time), the January CPI rose 6.4% year-on-year. Although it slightly decreased from the previous month's 6.5%, continuing a seven-month slowing trend, it surpassed Wall Street's market forecast of 6.2%. On a month-to-month basis, it rose 0.5%, also exceeding the market forecast of 0.4%. The core CPI, excluding volatile energy and food prices, increased 5.6% year-on-year and 0.4% month-on-month, both surpassing market expectations (5.4% year-on-year, 0.3% month-on-month).

While it is difficult to say that the overall inflation slowdown trend has been damaged by this inflation report, combined with a strong labor market, concerns about tightening are expected to rise. Choi Jemin, a researcher at Korea Investment & Securities, said, "Although January inflation came out higher than market expectations, it is hard to say that the disinflation trend this year has been damaged. The problem is that the recent strong labor market indicators and the slowed pace of inflation decline together increase the likelihood of a prolonged tightening cycle by the US Federal Reserve (Fed)." Reflecting this, Korea Investment & Securities revised its previous forecast that the Fed would finish rate hikes after one more 25bp (1bp=0.01 percentage point) increase in March, now expecting rate hikes to stop after 25bp increases in March and May, respectively.

The gap in perspectives between the market and the Fed has also narrowed following the employment report and CPI release. Kim Seokhwan, a researcher at Mirae Asset Securities, explained, "It is true that inflation has peaked and is slowing, but the market is paying attention to the recent deceleration in that pace and is recognizing that it may take a long time to return to the Fed's target level (2%). The market now expects the US benchmark interest rate to peak at 5.28% in July and fall to about 5% by the end of the year, which is different from just two weeks ago when two rate cuts were expected this year."

Limited Market Movement Expected for the Time Being

With inflation uncertainties unresolved, the market is expected to continue showing limited movement and stock-specific trends.

Han Jiyoung, a researcher at Kiwoom Securities, said, "Despite the burden of January CPI exceeding expectations, the market will show limited price movement as it digests mixed macro issues such as inflation slowdown and expectations for rate cuts within the year. As rotation among large-cap stocks continues, breaking through the long-term trend line of the 200-week moving average (2,510 points) will be difficult."

The market is expected to show a neutral trend until the US Federal Open Market Committee (FOMC) meeting in March. Han said, "Regardless of the timing of the rate hike pause and changes in the final rate level, the market's expectation for a 25bp rate cut by the end of the year has not retreated. Market participants find the January CPI results burdensome but have chosen not to fully revise their forecasts until the March FOMC. Ultimately, until the March FOMC, intermittent caution and waiting sentiment will enter the market, and the stock market will develop a neutral range-bound trend."

Kang Minseok, a researcher at Kyobo Securities, said, "The downward pressure on the domestic stock market index is limited, and it will be a stock-specific market. The supply and demand issues from foreigners will also be limited."