[MarketING] Stock Market Disappointed by Powell and Yellen

KOSPI Turns Down in One Day
Expectations for Interest Rate Cuts and Bank Risk Resolution Fade

On the 23rd, the KOSPI index opened at 2398.27, down 18.69 points from the previous trading day, as dealers were busy moving in the Hana Bank dealing room in Jung-gu, Seoul. Photo by Dongju Yoon doso7@

The KOSPI opened lower. This is attributed to disappointment over remarks made by Jerome Powell, Chair of the U.S. Federal Reserve (Fed), and Janet Yellen, U.S. Treasury Secretary. Their statements dampened market expectations for interest rate cuts and easing of banking risks.

KOSPI Weakens as Interest Rate Cut Expectations Fade

As of 10:30 a.m. on the 23rd, the KOSPI stood at 2,411.57, down 5.39 points (0.22%) from the previous day. The KOSDAQ rose 0.74 points (0.09%) to 814.17. The KOSPI's decline narrowed somewhat, and the KOSDAQ turned positive, moving within a stable range.

This weakness is attributed to the impact of the sharp drop in the U.S. stock market following disappointing remarks by Chair Powell and Secretary Yellen. On the 22nd (local time) at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average fell 1.63%, the S&P 500 dropped 1.65%, and the Nasdaq declined 1.60% compared to the previous day.

At the U.S. Federal Open Market Committee (FOMC) meeting held the previous day, a baby step (a 0.25 percentage point increase in the benchmark interest rate) was implemented as expected by the market. The Fed raised the federal funds rate by 0.25 percentage points from the previous 4.5?4.75% range to 4.75?5%.

The dot plot released alongside showed a median year-end interest rate forecast of 5.1% for this year. This is the same level as that presented at the December FOMC last year, maintaining the final rate forecast at 5.25%. Additionally, the March FOMC statement replaced the phrase "ongoing rate hikes are appropriate" with "it may be appropriate to raise the benchmark rate a little more," raising expectations that the rate hike cycle is nearing its end.

The FOMC itself met market expectations. However, during the subsequent press conference, Chair Powell emphasized that there would be no rate cuts within the year, dousing market hopes for rate reductions. Sangyoung Seo, a researcher at Mirae Asset Securities, explained, "Initially, Powell made moderate remarks, even considering a pause in rate hikes, but given the banking system issues, he expressed concerns about economic tightening and repeatedly stated there would be no rate cuts. This led to increased selling pressure centered on regional banks in the U.S. stock market, expanding the decline." Seo added, "This is a burden for the domestic stock market, especially as the recent Silicon Valley Bank (SVB) incident has worsened credit conditions. Although the possibility of a soft landing remains high, the ongoing uncertainty is also a concern."

Adding to this, Secretary Yellen's remarks further fueled concerns about banking risks. At a Senate Appropriations Committee financial subcommittee hearing that day, Yellen stated, "We have not discussed or considered anything regarding comprehensive insurance that protects all bank deposits," adding, "That is not what we are pursuing." This contrasts with the previous day's suggestion of mitigating banking risks by expanding deposit protection. Ji-young Han, a researcher at Kiwoom Securities, said, "The March FOMC could have created a favorable atmosphere for stock market gains with the results and messages the market wanted to hear, but Yellen's sudden shift during the congressional hearing around the same time drastically changed the situation. Just two days ago, Yellen indicated she was considering expanding full deposit protection without congressional approval to prevent additional bank runs, but she sharply reversed her stance the day before, leading to sharp declines in small and mid-sized bank stocks such as First Republic (-15.5%), along with falling interest rates and a weaker dollar."

Volatility Expected to Expand for the Time Being; Better to Observe than Act

Although the March FOMC results came as the market expected, Powell's rejection of rate cuts and Yellen's dampening of banking risk resolution expectations suggest that increased stock market volatility is inevitable for the time being. In this situation, some experts recommend observing the market rather than taking aggressive action.

One researcher said, "Despite the March FOMC producing a neutral or better outcome, volatility is expected to increase due to uncertainties such as additional bank runs among small and mid-sized U.S. banks following Yellen's stance change. Typically, volatility arises as market participants adjust their stock and interest rate paths after the FOMC, so observation is also a valid response strategy."

There is also a warning that the market may enter a phase where good news is treated as bad news and vice versa. Kyungmin Lee, a researcher at Daishin Securities, cautioned, "We need to be wary of the possibility of entering a phase where both bad and good news are perceived negatively (Bad Is Bad, Good Is Bad). If economic indicators exceed expectations, hopes for rate cuts will fade, and if indicators are weak, concerns about the side effects and aftershocks of high-intensity tightening will rise."

While a strategy to increase holdings during market corrections remains valid, there is no need to rush. Lee said, "Expectations for fading rate cuts after the March FOMC are likely to stimulate volatility in global stock markets, including Korea. However, with China's economic recovery and the semiconductor industry's bottoming out anticipated, increasing holdings during corrections is a valid strategy. Still, there is no need to hurry. We maintain a strategy to increase holdings below the KOSPI 2,300 level."