[Weekly Market Outlook] KOSPI Focuses on Monetary Policy Committee and US Personal Consumption

China LPR Decision·Korea Monetary Policy Committee·US PCE Scheduled
Market Bets on Monetary Policy Committee 'Hold'
However, February Monetary Policy Committee Is Last Chance for Rate Hike
KOSPI Expected to Move in a Box Range

[Asia Economy Reporter Hwang Yoon-joo] This week (29th~24th) is lined up with important events that will impact the market. The domestic stock market is expected to hinge on the direction of the U.S. January Personal Consumption Expenditures (PCE) data announced the day after the Bank of Korea's Monetary Policy Committee meeting scheduled for the 23rd, amid growing caution ahead of the meeting. It is anticipated that confirmation sentiment regarding the soft landing path will strongly influence through monetary policy and survey indicators. Additionally, with the exchange rate rapidly surpassing 1290 won, the possibility of the KOSPI shifting to a box range movement has increased.

Lee Chang-yong, Governor of the Bank of Korea, is presiding over the first Monetary Policy Committee meeting of 2023 held at the Bank of Korea in Jung-gu, Seoul on the 13th. Photo by Joint Press Corps

According to the Korea Exchange on the 19th, last week (13th~17th) the KOSPI and KOSDAQ showed changes of -0.2% and 0.0%, respectively. At the upper end of the index, caution over tightening slowed the inflow of foreign demand. While the influence of spot demand in the stock market decreased, the influence of futures demand grew during the week.

This week's monetary policy-related events include the People's Bank of China's Loan Prime Rate (LPR) decision on the 20th, the Bank of Korea's Monetary Policy Committee meeting on the 23rd, and the U.S. January PCE price index on the 24th.

Choi Yoo-jun, a researcher at Shinhan Investment Corp., stated, "Even if adjustment factors appear, there is a possibility of support around 2400." If the indicators to be announced this week support the possibility of a soft landing and the Monetary Policy Committee is favorable, a breakthrough above the previous high of the KOSPI can be expected. However, valuation burdens and strong dollar pressure are factors limiting upside potential.

The market is betting on a 'hold' for the February Monetary Policy Committee rate

[Image source=Yonhap News]

The market is focusing on the Monetary Policy Committee results on the 23rd and the January PCE price index on the 24th (local time). Regarding the Monetary Policy Committee, the market currently places weight on a 'hold' forecast, maintaining the base rate at 3.50%.

Kim Ji-man, a researcher at Samsung Securities, analyzed, "Monetary policy committee members will still consider various variables such as high domestic and international inflation, the U.S. base rate hike trend, exchange rates, and real estate market conditions. Considering that the economy and inflation are gradually declining, there is a growing need to assess the effects of the 300 basis points (1bp=0.01 percentage point) increase in the base rate over the past year and a half."

The Fed's commitment to restrictive monetary policy and persistent domestic inflation make the need for rate hikes considerable. However, Korea is suffering from downward pressure on the economy due to export contraction and real estate market downturns, increasing the justification for a hold. Researcher Kim expects that if there is a minority opinion for a 'rate hike,' it would be about one person. In the last Monetary Policy Committee meeting, there were two dissenting opinions (Joo Sang-young and Shin Sung-hwan) against a rate hike.

Regardless of whether the Monetary Policy Committee raises rates next week, securities researchers generally agree that the Bank of Korea will have to adjust policies to balance inflation and the economy going forward. This means finishing rate hikes earlier than the U.S. and possibly preemptively cutting rates depending on circumstances.

Recalling that the Bank of Korea tolerated a base rate inversion with the U.S. because it raised rates earlier than the Fed, it is necessary to watch the Bank of Korea's moves with the possibility that it will argue the first-in-first-out (先入先出) logic.

On the other hand, voices still exist that expect a rate hike in February. Shin So-jae, a researcher at Shinhan Bank, said, "February might be the last chance to raise rates, so we need to watch the Bank of Korea," and added, "I will raise my hand for a final 25bp hike in February."

Researcher So pointed out, "In this case, the Bank of Korea will add sufficient consideration for the economy, but if it chooses to hike, it will deviate from consensus and the market will express disappointment. Even if the Bank of Korea's 'insurance 25bp hike' occurs, it has limitations in being perceived as a factor for won strength."

The PCE price index is an indicator that covers more items than the Consumer Price Index (CPI) and is used by the Fed to monitor inflation. Around the 24th, which marks the first anniversary of the Ukraine war, Russia's actions could affect the overall market, including international oil prices and interest rates.

Will U.S. January PCE rebound again? ... Fed tightening outlook spreads

[Image source=Yonhap News]

According to the Cleveland Fed, the January PCE index is expected to have risen 4.91% year-on-year and 0.42% month-on-month. This is a slight decline compared to December (5.0%).

PCE is an inflation indicator that the Fed considers important. Especially, the 'core PCE,' which excludes volatile energy and food prices, is regarded as the most accurate indicator. The PCE index recorded a 40-year high of 6.8% in June last year and then steadily slowed down for six months until the end of last year.

Kim Young-hwan, a researcher at NH Investment & Securities, said, "The expectation for rate cuts is likely to continue to retreat next week." At the beginning of the year, the Eurodollar futures market expected a base rate of 4.8% in December 2023 and 3.6% in December 2024, but these have been adjusted to 5.3% and 3.9%, respectively.

Researcher Kim explained, "Expectations for rate cuts within this year in the bond futures market have rapidly retreated, and while 2024 reflects cuts, the magnitude of cuts is shrinking."

He evaluated, "For this trend to reverse, the PCE index announced on the 24th must fall short of expectations or the employment data released in early March must underperform expectations." Considering this, he forecasted the KOSPI expected band for this week to be '2410~2540P.'