[MarketING] Stuck Again by Inflation... Sideways Market Expected for a While

KOSPI Turns Down in One Day
Inflation Anxiety → Tightening Concerns → Stock Price Decline Repeats
Box Range Market Expected Until March Inflation Data Confirmation

[Asia Economy Reporter Song Hwajeong] The domestic stock market turned bearish after just one day due to inflation concerns and tightening fears. It appears repeatedly hindered by inflation. It is expected that the market will remain range-bound until the confirmation of the March inflation indicators.

KOSPI Turns Bearish After One Day

As of 10:30 a.m. on the 17th, the KOSPI was at 2,469.92, down 5.56 points (0.22%) from the previous day. The KOSDAQ fell 4.65 points (0.59%) to 780.06. The KOSPI started the day down more than 1%, but the decline has gradually narrowed.

The stock market, which had risen sharply the previous day, turned bearish in just one day due to inflation and tightening concerns originating from the U.S. On the 16th (local time), the New York stock market fell sharply after the Producer Price Index (PPI) exceeded market expectations following the January Consumer Price Index (CPI), along with hawkish remarks from Federal Reserve (Fed) officials. On the New York Stock Exchange (NYSE), the Dow Jones Industrial Average fell 1.26%, the S&P 500 dropped 1.23%, and the Nasdaq declined 1.78% compared to the previous close.

According to the U.S. Department of Labor, the January PPI rose 6.0% year-on-year. Although this was lower than the 6.5% increase in December last year, continuing a seven-month slowdown, it exceeded market expectations of 5.4%. On a month-to-month basis, it rose 0.7%, marking the largest monthly increase in seven months and surpassing the market forecast of 0.4%.

Following the previously released CPI, the PPI also showed a rise beyond expectations, confirming that U.S. inflation is not falling as much as anticipated, which led to increased tightening concerns.

Hawkish remarks from Fed officials further fueled these concerns. Before the opening of the New York stock market the previous day, Loretta Mester, President of the Federal Reserve Bank of Cleveland, stated, "A 50 basis point (1bp=0.01 percentage point) rate hike should have been implemented at the February Federal Open Market Committee (FOMC) meeting," adding, "More aggressive policies are needed to control inflation." Later in the day, James Bullard, President of the St. Louis Fed, said, "The current policy rate range of 5.25?5.50% is appropriate," and "If necessary, a 50 basis point hike at the March meeting cannot be ruled out."

Kim Seokhwan, a researcher at Mirae Asset Securities, said, "The January PPI exceeding expectations has raised concerns that the Fed still has much work to do due to persistent inflationary pressures," adding, "The domestic stock market is likely to face significant profit-taking pressure following the sharp rise the previous day amid expanded concerns over Fed tightening."

It is expected that the market will remain range-bound until the confirmation of the March inflation indicators. Kim Jihyun, a researcher at Kiwoom Securities, explained, "The rise of the U.S. 10-year Treasury yield to near its yearly high is weighing on risk assets, including growth stocks," and added, "Since the Fed is likely to continue hawkish remarks to control market overheating in an environment where both interest rates and stock markets are rising, the market will likely remain range-bound until the March inflation data is confirmed."

Market Sensitive to Inflation

Recently, the stock market has shown limited movement as the pattern of higher-than-expected inflation indicators leading to increased tightening concerns repeats. Since entering the 2400 level at the end of January, the KOSPI has fluctuated around the 2400 level for more than three weeks.

Jo Junki, a researcher at SK Securities, explained, "As the middle of each month approaches when the U.S. CPI is announced, the market shows heightened caution and a wait-and-see stance," adding, "Depending on the inflation data results, market expectations for the Fed's monetary policy strength and duration change, and market participants quickly reflect these changes."

If the pace of inflation slowdown is slow, the market's sensitivity to inflation will inevitably be high. Researcher Jo said, "The question of when the market will become insensitive to inflation indicators requires that the absolute level of inflation be sufficiently low," and added, "Although the inflation rate will continue to slow numerically, whether the market's sensitivity will quickly decline depends on the magnitude and speed of the slowdown."

There is a low possibility of a dramatic shift in U.S. monetary policy. Jung Yongtaek, a researcher at IBK Investment & Securities, said, "Based on economic indicators released in January and February, the U.S. economic trend and monetary policy are unlikely to undergo dramatic developments or shifts this year," adding, "The economic trend is likely to form a mild slowdown without recession, and U.S. monetary policy is expected to remain at a neutral level after the end of rate hikes in the first half of the year until the first half of next year." He further added, "The financial market will not rise as much as previously expected, nor will prices fall as much as feared."