[Weekly Market Outlook] Focus on US Inflation and Benchmark Interest Rate... Continued Concerns over Economic Slowdown

This week’s (12th-16th) stock market is expected to experience increased volatility as attention focuses on the U.S. May Consumer Price Index (CPI) and the benchmark interest rate announcement. The market is optimistic about the end of the sharp tightening cycle and the high possibility of an interest rate freeze, which is expected to have a positive effect on the stock market.

According to the securities industry on the 11th, the expected weekly KOSPI band is 2540 to 2660 points. The factors driving the rise include expectations that U.S. inflation will stabilize and that the Federal Open Market Committee (FOMC) meeting scheduled for the 13th-14th (local time) will likely result in an interest rate freeze. However, concerns about a slowdown in the U.S. real economy and an increase in government bond issuance are considered downward factors.

Jerome Powell, Chairman of the U.S. Federal Reserve (Fed)
[Photo by Yonhap News]

The U.S. May CPI is scheduled to be released on the 13th. The market consensus is 4.2% (year-on-year), which is expected to show a slower increase compared to the previous month (4.9%). Although there remain concerns due to the slow decline in core inflation excluding volatile food and energy prices, the core inflation forecast has also been lowered to 5.2%, down 0.3 percentage points from the previous month (5.5%), suggesting it will fall below the upper bound of the benchmark interest rate (5.25%).

Furthermore, the U.S. benchmark interest rate is expected to be decided in the early hours of the 15th Korean time. The market is highly confident in an interest rate freeze. Kim Young-hwan, a researcher at NH Investment & Securities, analyzed, “The Federal Reserve is likely to maintain the nuance that it could resume rate hikes in the future while freezing the benchmark interest rate. This is because the Fed needs to curb excessive expectations and expected inflation in the financial markets.” He added, “Since U.S. consumer prices are expected to decline rapidly and core consumer prices are also projected to fall below the upper bound of the benchmark interest rate, the realistic possibility of the Fed resuming rate hikes in the second half of the year is low.”

Such U.S. price stability and interest rate freeze are expected to positively impact the stock market. However, the possibility of the Fed cutting rates within the year is very low, so uncertainties in the real economy and financial markets remain.

Additionally, the resolution of the U.S. debt ceiling negotiations last month raises concerns about an increase in government bond issuance. An increase in U.S. government bond issuance could reduce demand for other financial assets.

Researcher Kim said, “The CPI release and FOMC results are expected to be positive for the stock market,” but added, “Uncertainties surrounding the economy and liquidity still persist.” He continued, “The stock index is expected to show an upward trend accompanied by somewhat high volatility. For stock selection, it is recommended to focus on growth themes that are less affected by economic conditions.”