[MarketING] KOSPI Falls Below 2400 Amid US Inflation Shock

KOSPI Drops Over 1%
Tightening Concerns Grow, US Stock Market Decline Impact

[Image source=Yonhap News]

Concerns about inflation in the United States have resurfaced, causing the KOSPI to fall below the 2400 level. With the possibility of a 50bp (1bp=0.01 percentage point) rate hike at the March Federal Open Market Committee (FOMC) meeting no longer excluded, it is expected that the index's upside will be limited until the March economic indicators and FOMC are digested.

KOSPI Falls Below 2400 Amid US Inflation Concerns

As of 10:15 a.m. on the 27th, the KOSPI was at 2,389.93, down 33.68 points (1.39%) from the previous session. The KOSDAQ fell 3.66 points (0.47%) to 775.22.

This weakness was due to the US stock market decline after the January Personal Consumption Expenditures (PCE) price index, released on the 24th, exceeded market expectations. All three major indices fell more than 1%. On the 24th (local time) at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average dropped 1.02%, the S&P 500 fell 1.05%, and the Nasdaq Composite declined 1.69% compared to the previous session.

The US January PCE price index rose 0.6% month-on-month, surpassing the previously announced 0.2% and the expected 0.4%, marking the largest increase since June last year. Year-on-year, it rose 5.4%, exceeding the expected 4.9%. The core PCE price index also increased 0.6% month-on-month, showing the largest rise since August last year. Year-on-year, it rose 4.7%, surpassing last month's 4.6% and the expected 4.3%.

As inflation concerns grow, tightening worries are also expected to expand. Lee Kyung-min, a researcher at Daishin Securities, said, "A 25bp rate hike at the March FOMC is becoming a foregone conclusion, with the probability of a 50bp hike approaching 30%. Moreover, the probability of a rate freeze at the May FOMC has dropped to zero." He added, "The probability of a 50bp hike at the May FOMC is also close to 30%, and the probability of a 25bp hike in June has exceeded 50%."

Seo Sang-young, a researcher at Mirae Asset Securities, said, "The market is now expected to focus on the Consumer Price Index (CPI) released on the 14th while waiting for the FOMC on the 22nd of next month." He explained, "Since core inflation remains at a high level, if further downward stabilization does not occur, the peak interest rate at the March FOMC could be revised upward from the existing 5.1% to above 5.3%."

Tightening concerns inevitably burden the stock market. Seo said, "Typically, it takes 12 to 18 months for the full effects of monetary policy to manifest, so the period of high interest rates could be prolonged, raising concerns about a recession, which will weigh on the stock market going forward."

He added, "For the time being, the KOSPI will ease valuation pressures and absorb foreign profit-taking in the process. While the psychological fear is expected to calm down after the March FOMC meeting due to the rapid reflection of rate hike concerns, it is necessary to be cautious of aftershocks caused by differences in the speed and degree of monetary policy issues being reflected in the financial market."

Han Ji-young, a researcher at Kiwoom Securities, said, "After a series of inflation events (CPI, PCE) in February, market confidence in disinflation, as mentioned by Jerome Powell, Chairman of the US Federal Reserve, has weakened, and a 50bp hike in March is no longer ruled out." She added, "Ultimately, it is appropriate to prepare for the possibility that the stock market's upside will be limited until employment, inflation, and the FOMC are sequentially digested in March."

Heightened Attention on Economic Indicators

With economic indicators and conditions having a greater impact on the stock market, market attention is expected to focus on various economic indicators released at the end and beginning of the month this week.

This week, the US January durable goods orders on the 27th, the US February Conference Board Consumer Confidence Index on the 1st of next month, South Korea's February exports and imports, China's February National Bureau of Statistics Purchasing Managers' Index (PMI), and China's February Caixin Manufacturing PMI are scheduled to be released. On the 2nd, the US February Institute for Supply Management (ISM) manufacturing index, South Korea's January industrial production, and on the 4th, the US February ISM non-manufacturing index will be announced.

Seo said, "Although economic indicators are generally expected to be weak, it is important to note that the US ISM manufacturing index is expected to rebound despite weak real economy indicators." He explained, "If inflation and employment indicators rebound and the new orders index remains weak, the manufacturing sector downturn will continue." China's PMI is also a critical variable. Seo added, "It is crucial whether China's economic indicators, which are being compiled after about a month, meet expectations." He continued, "So far, the stock market has only reflected positive news, so it is necessary to observe how interpretations change depending on the economic indicator results."

Han said, "If South Korea's exports and the US-China PMI results perform better than expected, it could positively impact earnings forecasts for key export sectors such as semiconductors, automobiles, and secondary batteries, potentially bringing warmth to the currently chilly domestic stock market during the week."