[MarketING] Price Stability Brings Relief, Stock Market Takes a Breather

KOSPI Rises After 3 Days, Recovers 2500 Level in One Day
US April CPI Below Expectations Brings Relief

The KOSPI is showing an upward trend for the first time in three days. This is interpreted as relief following the U.S. April inflation data, which was one of the market's concerns, coming in below market expectations. The stock market is expected to remain range-bound for the time being as it focuses on another source of uncertainty, the U.S. debt ceiling negotiations.

KOSPI Rises for the First Time in Three Days... Recovers 2500 Level in One Day

As of 10:15 a.m. on the 11th, the KOSPI was at 2511.00, up 14.49 points (0.58%) from the previous day. The KOSDAQ rose 7.53 points (0.91%) to 837.27.

This strength is attributed to the U.S. April Consumer Price Index (CPI) coming in below market expectations, indicating a slowdown in inflationary pressures. Although the U.S. stock market closed mixed the previous day, the CPI results led to a decline in Treasury yields and the dollar, fueling risk appetite, with the Nasdaq rising more than 1%. On the 10th (local time) at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average fell 0.09% from the previous day, while the S&P 500 rose 0.45% and the Nasdaq increased 1.04%.

According to the U.S. Department of Labor, the April CPI rose 4.9% year-over-year. This is the smallest increase since April 2021 and below the market forecast of 5.0%. It also declined from the March increase of 5.0%, continuing a slowdown for ten consecutive months. On a month-over-month basis, it rose 0.4%, meeting expectations. The core CPI, which excludes volatile energy and food prices, rose 5.5% year-over-year and 0.4% month-over-month, both in line with forecasts.

Han Ji-young, a researcher at Kiwoom Securities, explained, "The April CPI came in below both the previous month and expectations, serving as a relief factor that eased the market's pre-announcement anxiety that inflation might exceed 5.0%." She added, "The possibility of a rate freeze at the June Federal Open Market Committee (FOMC) meeting has become more likely." According to the Chicago Mercantile Exchange (CME) FedWatch, the probability of a rate freeze in June rose from 78% to 93% after the CPI announcement.

Han said, "From the U.S. Federal Reserve's perspective, it seems they have secured a justification to ease concerns about further tightening." She noted, "It is true that the core CPI remains higher than the overall CPI, which is a burden, but since housing costs, which began to decline from the second quarter of last year, have started to be reflected in the CPI, the inverse relationship between core CPI and CPI is unlikely to last long."

Although inflationary pressures are easing, there are opinions that excessive expectations for rate cuts need adjustment. Lee Da-eun, a researcher at Daishin Securities, said, "This CPI figure gives the Fed some room to pause rate hikes in June." However, she explained, "Given that core inflation remains stagnant, there is insufficient basis to bet on rate cuts within this year, considering the Fed's inflation control capabilities." She added, "Adjusting expectations for rate cuts in the second half of the year is inevitable."

Han said, "Currently, the market is reflecting expectations of rate cuts starting in July, but since the CME model's probabilities change frequently depending on financial market sentiment, it is not appropriate to assume July rate cuts as the base scenario yet." She continued, "Considering the likelihood of securing a CPI below 3% toward the end of the year due to cumulative demand-side inflation pressures easing amid economic slowdown, it is necessary to establish stock market strategies assuming rate cuts by year-end."

Remaining Uncertainties, Range-Bound Market Expected for Now

Although the April CPI results have alleviated some market concerns, uncertainties remain. The market is now expected to focus on the U.S. debt ceiling negotiations.

President Joe Biden and congressional leaders discussed raising the debt ceiling the previous day but failed to reach an agreement and are scheduled to meet again on the 12th.

Choi Yoo-jun, a researcher at Shinhan Investment Corp., said, "Concerns about tightening and recession have eased compared to the beginning of the year, but valuations have risen, approaching the short-term bottom test range formed in late April, such as KOSPI 2470 points and KOSDAQ 820 points." He added, "Debt ceiling negotiations are scheduled to resume on the 12th, with plans to continue talks over the next two weeks, which is a time-consuming issue."

Until the debt ceiling issue is resolved, the stock market is expected to move within a range. Han said, "With the earnings season entering its final phase and major May events concluding, the U.S. debt ceiling negotiation deadlock will be at the center of the stock market from a short-term perspective." He added, "Since the market needs to recover from fatigue following the rally from January to April, political uncertainty surrounding the debt ceiling increase will create noise and short-term profit-taking opportunities, resulting in a range-bound market with limited upper and lower bounds (KOSPI 2400?2600) until the end of the month."