[MarketING] Stock Market More Sensitive to Recession Than Inflation

KOSPI Declines After 5 Trading Days
KOSDAQ Weakness Continues for Second Day

The KOSPI has been showing a downward trend for the first time in five days. This is attributed to the mixed impact on the stock market from the release of the U.S. March Consumer Price Index (CPI) and the Federal Open Market Committee (FOMC) minutes, which led to a decline in the U.S. stock market. Going forward, the market is expected to react more sensitively to an economic recession than to inflation.

KOSPI Declines for the First Time in Five Days

As of 10:15 a.m. on the 13th, the KOSPI was down 1.37 points (0.05%) from the previous day, standing at 2549.27. The KOSDAQ fell 2.04 points (0.23%) to 888.58. Both indices started lower but the extent of the decline somewhat narrowed.

This weakness in the domestic stock market is due to the decline in the U.S. stock market the previous day. On the 12th (local time) at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average fell 0.11%, the S&P 500 dropped 0.41%, and the Nasdaq declined 0.85%. Sangyoung Seo, a researcher at Mirae Asset Securities, explained, "The U.S. stock market initially rose as the CPI increased by only 5% year-on-year, but then turned downward as the core CPI remained robust, some profit-taking intensified, and concerns about the economy surfaced."

The U.S. Department of Labor announced that the March CPI rose 5% year-on-year. This is a significant slowdown from the 6% increase in the previous month and slightly below market expectations (5.1%). It is the first time since September 2021 (5.4%) that the monthly U.S. CPI has recorded a 5% level. It is also the lowest level since May 2021 (5.0%). The core CPI, which excludes volatile energy and food prices, rose 5.6% year-on-year, in line with expectations. The year-on-year increase in core CPI exceeded the headline CPI increase for the first time in about two years.

The market was relieved by the easing inflationary pressure but gave up all gains following the release of the FOMC minutes. According to the minutes of the March FOMC regular meeting released by the U.S. Federal Reserve (Fed) that day, participants noted that "considering the potential economic impact on the banking sector, a mild recession may occur from the end of this year" and that "recovery would take about two years." Ji-young Han, a researcher at Kiwoom Securities, said, "Above all, the official forecast that a shallow recession could occur in the second half of the year, considering the aftermath of the recent banking crisis, seems to have triggered market anxiety. Although the March FOMC had projected a growth rate of 0.4% for this year, which might have partially anticipated economic slowdown or recession, the mention of recession in the minutes appears to have been problematic."

There is an opinion that the stock market reacted more sensitively to the economic recession than to the dollar or interest rates. Youngjin Ahn, a researcher at SK Securities, explained, "During these two events, the movements of the dollar, interest rates, and stock prices were distinctive. The dollar showed consistent weakness, interest rates fell but the decline narrowed, while stock prices started higher but widened their decline after the minutes were released. The Fed’s wording focused on 'mild' and 'gradual' for the dollar and interest rates, but the stock market focused on 'recession.'"

Future Markets to Focus More on Recession than Inflation

It is expected that the stock market will be more sensitive to economic recession than inflation going forward.

One researcher said, "Going forward, the stock market’s sensitivity to inflation will decrease while sensitivity to economic slowdown will increase. The judgment that the downside rigidity of the index has not been impaired remains valid, but it is appropriate to prepare for the possibility that uncertainty surrounding the severity of the recession, depending on real economic data results, could dampen the market’s upward momentum."

As sensitivity to recession increases, if economic indicators are poor, the market is expected to enter a phase where it interprets this as negative news. Until now, poor economic data was seen as positive for the stock market due to expectations that the Fed might ease its tightening policy. The researcher added, "While the stock market has already reflected recession to some extent, it is important to note that there is still no consensus on the severity of the recession. Last year, during the 'inflation rise + early to mid Fed tightening cycle,' poor data acted as a positive for the market. Now, entering the 'inflation decline + late Fed tightening cycle,' it is necessary to assume a base scenario where poor data acts as a negative for the market and respond accordingly."

Volatility is expected as the market digests the results of these two events. The researcher said, "The market will show intraday volatility as it processes external events such as inflation relief from the CPI results and the burden of the FOMC minutes anticipating recession, as well as internal events like changes in foreign investors’ spot and futures supply and demand due to option expiration."