[MarketING] Relief Amid Possibility of a Receded Big Step

KOSPI Ends Higher After Four Days, Recovers 2400 Level
Rises Amid Weakened Outlook for 50bp Increase at March FOMC
Fed Rate Hike Pause Expected This Month

[Image source=Yonhap News]

The KOSPI closed higher after four days, regaining the 2400 level. The market showed relief as the Silicon Valley Bank (SVB) crisis in the U.S. lowered the possibility of a big rate hike (0.5 percentage points) by the U.S. Federal Reserve (Fed).

KOSPI rises after four days... recovers 2400 level

On the 13th, the KOSPI closed at 2410.60, up 16.01 points (0.67%) from the previous session. The KOSDAQ ended the day at 788.89, up 0.29 points (0.04%). The KOSPI started the day higher, briefly turned lower, but then successfully reversed to rise again, reclaiming the 2400 level. The KOSDAQ fell more than 2% early in the session but narrowed losses and turned to an upward trend before the close, finishing in a slightly positive range.

The morning session showed weakness due to the SVB bankruptcy crisis, but the market turned bullish as the mood spread that the Fed would find it difficult to raise rates by 0.5 percentage points at the March 22 Federal Open Market Committee (FOMC) meeting due to the SVB situation.

Kim Seok-hwan, a researcher at Mirae Asset Securities, said, "The domestic market, which showed mixed trends early in the session, turned positive supported by the U.S.'s active intervention to mitigate SVB risks, the reduced possibility of a 50bp (1bp=0.01 percentage point) rate hike at the FOMC, and expectations for Chinese economic stimulus policies following the conclusion of the Two Sessions (National People's Congress and Chinese People's Political Consultative Conference)." He added, "Reflecting the outlook that rate hikes will slow due to the SVB crisis, the won-dollar exchange rate fell by more than 20 won." On the day, the won closed at 1301.8 against the dollar in the Seoul foreign exchange market, down 22.4 won from the previous trading day.

Due to the SVB crisis, there are expectations that the Fed will slow its tightening pace. Goldman Sachs forecasted that the Fed would hold rates steady at the March FOMC. In a report on the 12th (local time), Goldman Sachs cited the broad uncertainty the SVB crisis brings to the U.S. benchmark interest rate hike path. Goldman Sachs expects the Fed to raise rates by 0.25 percentage points each at the May, June, and July FOMC meetings, with the terminal rate reaching 5.25-5.5%. After the Goldman Sachs report was released, the Chicago Mercantile Exchange (CME) FedWatch tool showed the probability of a big step in March dropped to 0%, while the chance of a baby step (0.25 percentage point hike) rose above 95%. The probability of a rate hold was 4%.

Fed faces tough choice between 'big step vs. baby step'

As the March 22 FOMC approaches, the Fed's dilemma is expected to deepen.

Kim Yong-gu, a researcher at Samsung Securities, said, "This crisis increases the Fed's concerns and burdens about over-tightening, and the room and justification for additional tightening will narrow significantly. Additional Fed rate hikes could further deepen and entrench the inversion of the short- and long-term yield spread, potentially inflicting additional damage on the asset quality and profitability of small and regional commercial banks in the U.S. The liquidation of Silvergate Bank, SVB's bankruptcy, and Signature Bank's closure may not be the end."

Considering that the domestic stock market has been adjusting due to concerns over Fed tightening, the Fed's pace moderation is likely to have a positive impact on the market. Kim said, "We need to observe economic indicators and the progress of the crisis, but if the Fed's terminal rate ends up lower than the currently priced-in 5.75% in June or if the rate hike path after the March FOMC becomes more cautious and gradual considering the economy and financial environment, it could be a turning point for domestic and international asset markets."

Lee Nam-gang, a researcher at Korea Investment & Securities, said, "The February employment data showed that despite a slight increase in the unemployment rate, the labor market remains tight, indicating that the Fed's goals of resolving labor market imbalances and stabilizing inflation have not yet been met." He added, "However, SVB's bankruptcy is likely to worsen financial conditions again, and some degree of financial tightening aligns with the Fed's objective to curb labor demand and aggregate demand in the current U.S. economy with high demand pressure to achieve price stability." He continued, "If SVB's bankruptcy leads to a rise in liquidity premiums on short-term funds, the FOMC could achieve the equivalent effect of a 50bp hike with just a 25bp increase at the March meeting."

According to the U.S. employment report released on the 10th, nonfarm payrolls increased by 311,000 in February, significantly exceeding market expectations of 255,000. The unemployment rate was 3.6%, higher than the expected 3.4%. Average hourly earnings rose 0.2% month-on-month, below the expected 0.3%. Lee explained, "Looking at nonfarm employment alone, the increase remains solid, but the rise in unemployment due to an increase in the labor force and the slower-than-expected wage growth could be interpreted as signs of some easing in labor market overheating."

With the possibility of a baby step rising at the March FOMC, the spread of SVB-related risks and the U.S. inflation data for February, released on the 14th, will be important. Choi Yoo-jun, a researcher at Shinhan Investment Corp., said, "The February U.S. employment data showed nonfarm payrolls exceeding market expectations, but the unemployment rate and wage growth imply a potential slowdown in employment. It is necessary to further confirm the impact on vulnerable sectors to tightening, including startups, in the spread of the SVB crisis. Tonight's Fed discount rate adjustment and the February Consumer Price Index (CPI) released on the 14th are crucial." He added, "If inflation pressure is low, a 25bp rate hike in March could be solidified, but if inflation is high, the Fed's dilemma will deepen."