[Weekly Market Outlook] US Fed Likely to Raise by 0.25%P... Market Cautious Amid SVB Aftershocks

As the aftermath of the Silicon Valley Bank (SVB) bankruptcy in the United States continues, the U.S. Federal Open Market Committee (FOMC) will be held on the 21st and 22nd (local time). In the domestic securities market, the prevailing forecast is that the U.S. Federal Reserve (Fed) will raise the benchmark interest rate by 0.25 percentage points. Although the possibility of a 'big step' (0.50 percentage point increase) has significantly decreased, investors are expected to maintain a cautious stance for the time being, as concerns about a banking crisis stemming from the SVB incident have not been completely resolved.

NH Investment & Securities projected the expected fluctuation range of the KOSPI index for this week (20th?24th) to be between 2300 and 2450 points. On the 17th, the KOSPI closed at 2395.69. Kim Young-hwan, a researcher at NH Investment & Securities, said, "Investors are highly focused on how the Fed will respond to the recent emergence of banking sector crisis risks," adding, "There is a possibility of increased volatility in the stock market following Chairman Jerome Powell's remarks." He continued, "If the Fed raises interest rates by 0.25 percentage points and proposes measures to mitigate financial risks, it will have a positive effect on the stock market," and predicted, "Investors will likely maintain a cautious stance in the short term."

Jerome Powell, Chairman of the U.S. Federal Reserve
[Photo by Yonhap News]

Following the SVB bankruptcy, expectations that the Fed would ease its tightening stance gained momentum, causing U.S. Treasury yields to drop sharply. Global investment bank Goldman Sachs predicted that the benchmark interest rate would be 'held steady' at the upcoming FOMC, while Nomura Securities even forecasted a 0.25 percentage point cut. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the probability of a 0.25 percentage point rate hike was the highest at 66%, with a 34% chance of a rate hold (as of March 16). There was no forecast for a 0.5 percentage point increase.

In the domestic securities market, the consensus is that the Fed will take a baby step (0.25 percentage point increase). Lee Jae-man, a researcher at Hana Securities, said, "If the Fed holds rates steady under the current circumstances, the market might interpret the 'bank liquidity crisis' as a 'systemic crisis leading to economic recession,' so it is highly likely that a compromise will be reached with a 0.25 percentage point increase." He added, "If this scenario unfolds, we can expect a change in the monetary policy path toward an early end to rate hikes (from September to May) or a gradual increase."

Lee emphasized, "Once the benchmark interest rate hikes conclude, market interest rates will eventually decline reflecting growth rates," and "This will lead to a conclusion that the stock price premium for companies with high growth rates will increase."

Moon Nam-jung, a researcher at Daishin Securities, also explained, "The SVB incident has introduced a previously unseen probability of a rate hold, and expectations for rate cuts within the year have returned," adding, "Since the bank run was triggered by funding shortages in tech companies due to the Fed's aggressive tightening, a rate hold would be justified by 'financial stability,' while a 0.25 percentage point hike would be justified by 'inflation control.'" He further predicted, "The Fed needs to clearly communicate to the market that it has separate policy tools to address inflation and financial stability, so the March FOMC is expected to result in a 0.25 percentage point rate hike."

Until early this month, the market had highly anticipated a 'big step' at the March FOMC. Following the SVB incident, a 0.25 percentage point increase is expected, and if Chairman Powell delivers dovish (accommodative monetary policy) remarks, market relief could grow even stronger. The FOMC results are scheduled to be announced in the early morning of the 23rd Korean time.

Meanwhile, given the inevitable short-term preference for safe assets immediately after the SVB incident, the decline in the won-dollar exchange rate is expected to be limited for the time being. However, as the energy import burden eases and exports to China improve from the second quarter onward, the exchange rate is expected to gradually stabilize.

Kwoun Ah-min, a researcher at NH Investment & Securities, said, "Looking at the correlation coefficient between regional export growth rates and the won's value since COVID-19, the linkage with exports to China is particularly strong," adding, "Although Korea's exports to China decreased by 24% in February, the recovery of China's economy is expected to support a rebound in Korean exports around April." He continued, "Considering the authorities' cautious stance on intervention at the current level and the technical limitations on the won-dollar exchange rate's upward trend, the outlook for a decline in the won-dollar exchange rate remains valid," and added, "The foreign exchange swap agreements between the National Pension Service and the Bank of Korea, as well as the supply of foreign exchange hedging volumes by the National Pension Service, could expand dollar supply in the foreign exchange market."

In response to the sharp depreciation of the won last October, the Bank of Korea and the National Pension Service signed foreign exchange swap agreements worth up to $10 billion by the end of the year. Recently, authorities have resumed these efforts and are reportedly considering measures such as providing new investment funds and extending maturities.