[MarketING] US Inflation Concerns Trigger Broad Stock Decline... Exchange Rate Surpasses 1300 Won Again

KOSPI Starts Higher but Closes Lower
Market Cautious Amid US Inflation Data
Investor Sentiment Weakens as Inflation Decline Slows

[Image source=Yonhap News]

The KOSPI, which started higher, failed to maintain its upward momentum and closed lower as cautious sentiment deepened ahead of the U.S. inflation data release. If the inflation data released that day exceeds market expectations, uncertainty regarding the interest rate path is expected to be highlighted again.

KOSPI Closes Lower Amid Cautious Sentiment Ahead of 'Inflation Data Confirmation'

On the 24th, the KOSPI closed at 2,423.61, down 15.48 points (0.63%) from the previous day. The KOSDAQ ended the session at 778.88, down 4.4 points (0.56%).

The cautious sentiment ahead of the U.S. January Personal Consumption Expenditures (PCE) price index release that night is interpreted as leading to the stock price weakness. Foreigners and institutions' selling pressure pulled down stock prices. In the KOSPI market, foreigners and institutions sold a net 302.3 billion KRW and 96 billion KRW, respectively. In the KOSDAQ market, they sold 78.8 billion KRW and 66.8 billion KRW, respectively. Individual investors were the sole net buyers with 363.3 billion KRW and 161.6 billion KRW.

Kim Seok-hwan, a researcher at Mirae Asset Securities, said, "Following the previous day's rise in the U.S. stock market, the market started higher mainly led by large-cap semiconductor stocks, but due to caution over the PCE inflation data, both spot and futures markets saw increased foreign selling in the afternoon," adding, "The rise in the won-dollar exchange rate intensified downward pressure on the index."

Recently, investors have been sensitive to inflation as the pace of price declines slows, leading to expectations that the U.S. Federal Reserve's tightening policy will be prolonged. The Consumer Price Index (CPI) released over the past three months showed year-on-year declines of 7.1%, 6.5%, and 6.4%, respectively, indicating a slowdown in the rate of decline, while month-on-month it rose by 0.5%, fueling inflation concerns. The GDP deflator and PCE price index for Q4 of last year, released the previous day, were both revised upward from preliminary estimates, further heightening inflation worries. The GDP deflator was revised from 3.5% to 3.9%, and the PCE price index from 3.2% to 3.7%.

The January PCE inflation data released that day is also expected to show a slowdown in the rate of decline. The market expects the January PCE price index to rise 0.4% month-on-month. Researcher Kim said, "This is quite a high level compared to the 0.1% recorded in November and December," explaining, "Especially since the PCE price index is the inflation gauge the Fed watches, if the increase exceeds market expectations, concerns about a hawkish Fed could grow."

Han Ji-young, a researcher at Kiwoom Securities, said, "According to the Chicago Mercantile Exchange (CME) FedWatch, the probability of a 50 basis point (1bp = 0.01 percentage point) rate hike at the March Federal Open Market Committee (FOMC) meeting has risen to the 27% range," adding, "If the PCE price index exceeds expectations, uncertainty about the interest rate hike path will be highlighted again, putting upward pressure on interest rates and the dollar."

Dollar Strength Seen as a Short-Term Adjustment Factor

With inflation and tightening uncertainties from the U.S. continuing to pressure the dollar's strength, attention is focused on the direction of the won-dollar exchange rate. Due to concerns over U.S. tightening, the won-dollar exchange rate recently surpassed 1,300 KRW for the first time in two months.

In the Seoul foreign exchange market that day, the won-dollar exchange rate closed at 1,304.8 KRW, up 7.7 KRW from the previous day. After crossing the 1,300 KRW mark on the 22nd, it dipped below 1,300 KRW the previous day but rose above 1,300 KRW again that day.

Kim Chan-hee, a researcher at Shinhan Investment Corp., said, "The release of the minutes from the February FOMC meeting confirmed that two members favored a 50bp rate hike, heightening concerns over further Fed tightening, which extended the dollar's strength this week," adding, "Next week, manufacturing-related indicators scheduled for release are expected to show sluggish performance, lacking additional momentum for dollar strength. The interest rate hike path implied by the futures market closely matches that suggested by Fed members, so caution over tightening is expected to pause, with the dollar index fluctuating within a range." He added, "The won-dollar exchange rate will continue to fluctuate around the 1,300 KRW level, reflecting mixed indicators and the effects of China's reopening."

There are opinions that the dollar's strength could act as a short-term adjustment factor for the stock market. Kim Young-hwan, a researcher at NH Investment & Securities, said, "Following U.S. January CPI and Producer Price Index (PPI) exceeding expectations, and this week's U.S. Purchasing Managers' Index (PMI) showing rebounds in both manufacturing and services sectors, the dollar index surpassed 104 points and the won-dollar exchange rate rose above 1,300 KRW, leading to a weekly net selling shift by foreigners," adding, "In the short term, dollar strength could act as a short-term adjustment factor for the stock market."