[MarketING] Growing Expectations for Interest Rate Freeze Amid Eased Inflation Pressure

KOSPI Turns Up in One Day
KOSDAQ Gains for 3 Consecutive Days... Recovers to 890 Level

The KOSPI, which had shown weakness due to a wait-and-see stance ahead of the U.S. inflation data release and the June Federal Open Market Committee (FOMC) meeting, reversed to an upward trend in just one day. This was because expectations for interest rate freezes increased as expected inflation declined. As a result, the market is expected to closely watch the U.S. May Consumer Price Index (CPI) scheduled for release that night.

KOSPI Turns Upward in One Day... KOSDAQ Rises Above 890

As of 10:15 a.m. on the 13th, the KOSPI was at 2,641.73, up 12.38 points (0.47%) from the previous day. The KOSDAQ rose 7.64 points (0.86%) to 893.40.

[Image source=Yonhap News]

This strength appears to have been influenced by the rise in U.S. stock markets following easing inflationary pressures in the U.S., which fueled expectations for an interest rate freeze. On the 12th (local time) at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average rose 0.56%, the S&P 500 increased 0.93%, and the Nasdaq rose 1.53% compared to the previous day.

Seosangyoung, a researcher at Mirae Asset Securities, explained, "The U.S. stock market rose thanks to the New York Federal Reserve Bank's announcement lowering the 1-year expected inflation rate from 4.4% to 4.1%. This is presumed to have increased the possibility of the Federal Reserve (Fed) maintaining interest rates at the FOMC meeting."

The expected inflation rate, which reflects how much U.S. consumers anticipate prices to rise over the next year, fell to its lowest level in two years. According to the May consumer outlook survey released by the New York Fed, the 1-year expected inflation rate was 4.1%. This is 0.3 percentage points lower than the previous month and the lowest since May 2021. However, the 3-year expected inflation rose from 2.9% to 3.0%, and the 5-year expected inflation increased from 2.6% to 2.7%. Researcher Seo analyzed, "In the short term, inflation is expected to slow down mainly in housing and medical costs, but high inflation may persist in the long term. However, the market showed strength centered on tech stocks, boosting expectations for the FOMC due to the decline in 1-year expected inflation."

Eyes on U.S. May CPI

With the decline in expected inflation increasing hopes for an interest rate freeze, market attention is focused on the U.S. May CPI scheduled for release that night at 9:30 p.m. Korea Standard Time.

The market consensus for May CPI is between 4.1% and 4.2%, with core CPI expected to be between 5.2% and 5.3%.

Jojun-gi, a researcher at SK Securities, said, "The Inflation Nowcasting system, an inflation forecasting system compiled by the Cleveland Fed, also predicts 4.13%, which is close to the consensus. Last week, the central banks of Canada and Australia raised their benchmark interest rates again, contrary to market expectations, due to high inflation, raising some concerns. However, the U.S. inflation slowdown trend is expected to be relatively favorable."

JP Morgan sees a 40% probability that May CPI will be around the consensus level of 4.0% to 4.2%. In this case, the likelihood of an interest rate freeze at the June FOMC increases, and the S&P 500 index is expected to rise by 0.75% to 1.25%. However, if CPI rises to 4.5% to 4.8%, hawkish measures by the Fed will be inevitable, and the S&P 500 index is expected to fall by 1% to 1.5%. The probability of this scenario is 15%. JP Morgan considers the probability of CPI exceeding the previous month's 4.9% to be the lowest, but if it happens, the S&P 500 index is expected to plunge by 2.5% to 3%.

Han Ji-young, a researcher at Kiwoom Securities, said, "It is unlikely that the CPI result will significantly exceed expectations or surpass April's figure, and the possibility of it falling far below expectations is also limited. Ultimately, it is likely to meet or slightly underperform expectations."

Even if the CPI comes out as expected, the stock market is not expected to rise sharply. Researcher Han said, "It is necessary to consider that the recent stock price rise partly reflects anticipation of the May CPI slowdown. Therefore, even if a decent result of 4.0% to 4.2% is announced, the stock market's upward momentum is unlikely to be strong, and market participants will likely enter a wait-and-see mode in preparation for the June FOMC results to be released two days later."