[MarketING] Strong Economic Indicators Turn into Stock Market Headwinds... "Tightening Easing is Reversing"

KOSPI Drops Over 1% Amid US Stock Market Plunge
Economic Indicators Improve, Reducing Rate Cut Expectations

[Image source=Yonhap News]

[Asia Economy Reporter Song Hwajeong] The KOSPI is showing a decline of over 1%. This is interpreted as a result of the U.S. stock market's sharp drop caused by concerns over tightening following favorable economic indicators. As the market reacts sensitively to U.S. monetary policy, the phenomenon of 'Good news is Bad news,' where positive news negatively impacts the market, has reappeared.

KOSPI Weakens Over 1% Amid U.S. Stock Market Plunge

As of 10:20 a.m. on the 22nd, the KOSPI was at 2,430.93, down 28.03 points (1.14%) from the previous day. The KOSDAQ fell 9.61 points (1.21%) to 783.81.

This weakness appears to be due to the sharp decline in the U.S. stock market the previous day. On the 21st (local time) at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average fell 2.06%, the S&P 500 dropped 2.0%, and the Nasdaq declined 2.50% compared to the previous close.

Favorable economic indicators led to concerns about tightening, causing a sharp rise in bond yields and a steep drop in stock prices. The S&P Global Manufacturing Purchasing Managers' Index (PMI) for February, released that day, rose significantly to 50.2 from 46.8 the previous month. This is the highest level in eight months, and a reading above the baseline of 50 indicates economic expansion.

Jo Yeonju, a researcher at NH Investment & Securities, explained, "The service sector PMI expanded significantly, driving the surprise," adding, "Concerns arose that inflation would slow down more slowly due to stronger-than-expected U.S. economic indicators." She continued, "Expectations that the U.S. Federal Reserve's (Fed) rate hikes will continue until July have increased, with the 10-year U.S. Treasury yield rising to 3.9% and the 2-year yield to 2.7%, marking the highest levels since November last year," and added, "The sharp rise in interest rates led to increased profit-taking, especially among U.S. big tech stocks."

It is analyzed that the U.S. stock market correction will also increase domestic market profit-taking desires. Kim Seokhwan, a researcher at Mirae Asset Securities, said, "There will be strong profit-taking demand centered on cyclical sectors such as secondary batteries, construction, petrochemicals, and steel, which have seen significant recent gains," adding, "One characteristic of recent foreign inflows is that they have been more focused on futures and programs rather than spot trading, so profit-taking sales centered on large-cap stocks that make up the KOSPI 200 are also expected." While most sectors are showing weakness today, chemicals are down 1.19%, steel and metals 1.24%, and construction 1.54%, respectively.

Changed Interest Rate Path Compared to January

The changed interest rate path is leading to stock market adjustments. While expectations of rate cuts in January led to a market rebound, this month, the reduction in expectations for rate cuts within the year is acting as a burden on the market.

Han Jiyoung, a researcher at Kiwoom Securities, said, "In the January market rally, the main driver was 'market interest rate decline due to expectations of Fed rate cuts within the year,' but now the opposite phenomenon of 'market interest rate rise due to reduced expectations of rate cuts within the year' is causing market adjustments," adding, "Fed rate cuts are premised on the economy being damaged and entering a recession, but strong U.S. economic indicators released after February are making the Fed less willing to ease tightening."

Strong economic indicators are causing changes in the Fed's interest rate path. The researcher explained, "Just one month ago, the probability of a 50 basis point (bp) increase at the March U.S. Federal Open Market Committee (FOMC) meeting was 0%, but as of the 21st, that probability rose to 24%, making it difficult to prematurely judge whether there will be a 25bp or 50bp hike at this meeting," adding, "Until last week, market participants who supported rate cuts within the year regardless of the final rate level are gradually retreating."

Due to changes in the interest rate path, the market is again reacting sensitively to Fed policy. The researcher said, "Considering the change in sentiment after the January surprises in employment and inflation data, the current market is becoming sensitive to Fed policy, re-entering a phase where bad news is interpreted as good news and good news as bad news."

Adjustment pressure is expected to continue until the March FOMC. Researcher Jo said, "The recent market has been fluctuating between expectations of a U.S. economic no-landing scenario and Fed-driven tightening," adding, "Until the March FOMC meeting, strong U.S. hard data will continue to exert adjustment pressure over the period."