[MarketING] Growing Concerns Over Interest Rate Hikes Ahead of FOMC

KOSPI Falls After Four Days
Rising Concerns Over Interest Rate Hikes... Increased Volatility

The KOSPI has been showing a downward trend for the first time in four days. This is interpreted as a result of increased concerns about interest rate hikes as the central banks of Australia and Canada consecutively raised interest rates ahead of the U.S. Federal Open Market Committee (FOMC) meeting in June next week. Although a rate freeze is still likely at the June FOMC, the possibility of a rate hike in July is increasing, so the uncertainty surrounding interest rate hikes until the July FOMC is expected to act as a factor increasing volatility in the stock market.

KOSPI Weakens for the First Time in Four Days... Falls Below 2610 Early in the Session

As of 10:20 a.m. on the 8th, the KOSPI was at 2,608.64, down 6.96 points (0.27%) from the previous day. The KOSDAQ fell 2.34 points (0.27%) to 878.38.

[Image source=Yonhap News]

This weakness is attributed to the mixed closing of the U.S. stock market the previous day amid concerns over interest rate hikes. On the 8th (local time) at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average rose 0.27% from the previous day, but the S&P 500 fell 0.38%, and the Nasdaq fell 1.29%. The Nasdaq's decline was larger as technology stocks showed weakness amid inflows of interest rate hike concerns.

Han Ji-young, a researcher at Kiwoom Securities, explained, "The U.S. stock market closed mixed due to downward pressure from concerns about economic slowdown caused by weak Chinese export-import data, the Bank of Canada's interest rate hike, and profit-taking sales of artificial intelligence (AI)-related stocks."

The Bank of Canada (BOC) had signaled the end of rate hikes by holding rates steady in March and April but unexpectedly raised rates by 25 basis points (1bp = 0.01 percentage points) this time. The BOC stated that it raised rates because core inflation remains high and there is a high possibility of inflation becoming entrenched.

Earlier, the Reserve Bank of Australia (RBA) also surprised the market by raising rates in June following rate freezes in March and April and a hike in May. Philip Lowe, Governor of the RBA, indicated the possibility of further rate hikes, citing that inflation remains high.

Han said, "The rapid rise in market interest rates and the strength of the dollar, which provided a rationale for profit-taking in technology stocks such as Nvidia and Alphabet the previous day, appear to have been influenced by the additional rate hikes by the RBA and then the BOC. Since the BOC was the first advanced economy central bank to signal a rate freeze in March this year, their move to 'resume rate hikes after a freeze' seems to have symbolic significance for the stock market and other central banks," he analyzed.

With the RBA followed by the BOC raising rates, concerns have entered the market that the U.S. Federal Reserve (Fed) might also surprise with a rate hike at the upcoming June FOMC. According to the Chicago Mercantile Exchange (CME) FedWatch, the probability of a rate freeze in June fell from 78% the previous day to 69%, while the probability of a rate hike in July rose from 64% to 68%, and the forecast that rates will be raised in both June and July increased from 12% to 16%.

Seo Sang-young, a researcher at Mirae Asset Securities, said, "Since service sector prices are expected to remain firm and the core consumer price index is expected to stay at a high level, the possibility of a rate hike in June cannot be ruled out. Especially if rates are held steady in June, an additional rate hike is expected in July, and some investment firms even see the possibility of rate hikes continuing until September," he said.

Accordingly, uncertainty due to interest rate hikes is expected to act as a factor increasing volatility in the stock market. Han said, "If the Fed raises rates or sends hawkish signals at the June FOMC next week and then raises rates in July after a freeze, the stock market will face additional price adjustment pressure. The uncertainty and noise surrounding whether there will be additional rate hikes until the July FOMC could frequently cause stock market volatility," he forecasted.

Attention on U.S. Inflation Data to Be Released Ahead of FOMC

With Australia and Canada raising rates due to inflation, attention is expected to focus on the U.S. May Consumer Price Index (CPI) to be released ahead of the June FOMC.

The U.S. May CPI, to be announced on the 13th, is expected to show a slight decline from the previous month, but the core CPI is expected to remain at a high level. Han explained, "Similar to the RBA's reasons for rate hikes, the BOC's additional hike was driven by their consumer prices rising again unexpectedly, heightening concerns about inflation becoming entrenched. Conversely, the U.S. CPI is forming a sequential downward path." The U.S. CPI fell from 5.0% in March to 4.9% in April, with a May forecast of 4.2%.

Strong employment could also influence the Fed's rate decisions. An Kyung-tae, a researcher at SK Securities, said, "The environment is such that rates may not fall easily in the short term," adding, "Recent data on initial jobless claims, private employment from Automatic Data Processing (ADP), and Labor Department employment statistics have all been stronger than expected." He continued, "The overall trend is toward a slowdown in individual economic indicators and the U.S. economy itself, but the view that rates will naturally fall could be wrong in the short term."