[Good Morning Stock Market] Powell: "No Rate Cut Within This Year"... KOSPI Expected to Start Flat

Concerns Resurface Over Regional Bank Risks
Volatility Expected to Increase Depending on Foreign Investor Trends

[Image source=Yonhap News]

On the 4th, the KOSPI is expected to start in a narrow range. This is due to the influence of the U.S. stock market decline after Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), indicated that there will be no interest rate cuts this year.

On the previous day (local time), the Dow Jones Industrial Average closed at 33,414.24, down 270.29 points (0.80%) from the previous session. The S&P 500, focused on large-cap stocks, ended at 4,090.75, down 28.83 points (0.7%), and the tech-heavy Nasdaq closed at 12,025.33, down 55.18 points (0.46%).

The U.S. Federal Open Market Committee (FOMC) implemented a baby step (a 0.25 percentage point increase in the benchmark interest rate). As a result, the U.S. benchmark interest rate rose from 4.75-5.00% to 5.00-5.25%, widening the interest rate gap with Korea to a maximum of 1.75 percentage points.

Powell's hawkish remarks and the decline in the U.S. stock market are expected to have a negative impact on the Korean stock market as well. During the press conference, Chairman Powell stated, "The decision regarding a (rate) pause was not made today," leaving the possibility of further hikes open.

Contrary to market hopes for a rate cut within the year, he continued with hawkish comments. Based on the outlook that inflation will not subside quickly, he firmly stated, "A rate cut would be inappropriate."

The strength of U.S. labor indicators also supports the hawkish stance. The U.S. nonfarm payrolls for April recorded 296,000 jobs, exceeding both the previous month (142,000) and expectations (143,000). Leisure and hospitality added the most jobs at 154,000, followed by construction with 53,000, mining with 52,000, and trade and transportation with 32,000. Manufacturing and finance decreased by 38,000 and 28,000 jobs, respectively.

Wages for job changers rose 13.2% year-over-year, slowing from 14.2% the previous month. Wages for existing employees also slowed, increasing 6.7% compared to 6.9% the previous month.

Powell’s focus during most of the press conference on credit conditions and banking risk issues is also a source of concern. The market interprets this as worries about the economy. As the possibility of demand slowdown grows, the decline in the U.S. stock market deepened.

Consequently, shares of U.S. regional banks also fell. PacWest Bancorp dropped 2.0%, and Western Alliance Bancorp fell 4.4%. PacWest Bancorp plunged 54% in after-hours trading following news that it is considering a sale.

Seosangyoung, head of Future Asset Securities, analyzed, "Powell’s expression of confidence in the economy and the FOMC statement indicating no change in the rate hike stance are positive, but the reemergence of regional bank risks is a burden." He added, "The decline in the U.S. stock market following Powell’s remarks weakening expectations for rate cuts will also negatively affect the Korean stock market," and "The Korean stock market is expected to experience increased volatility depending on foreign investors' movements."