[MarketING] Relief on US Inflation Data... KOSPI Recovers to 2590 Level

KOSPI Rises for Third Consecutive Day
KOSDAQ Recovers to 890 Level

The KOSPI and KOSDAQ have continued their upward trend for the third consecutive day. Early in the session, the KOSPI reclaimed the 2590 level, and the KOSDAQ surpassed the 890 level. This is attributed to the increased risk appetite following the U.S. Consumer Price Index (CPI) falling short of expectations. There are forecasts that a favorable environment for the stock market will be established until the July U.S. Federal Open Market Committee (FOMC) meeting.

KOSPI Strengthens for Third Day... Surpasses 2590 Level

As of 10:20 a.m. on the 13th, the KOSPI was at 2593.27, up 18.55 points (0.72%) from the previous day. The KOSDAQ rose 11.66 points (1.33%) to 891.54.

[Image source=Yonhap News]

This strength is interpreted as a result of the U.S. stock market rising on easing inflation concerns the previous day. On the 12th (local time) at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average rose 0.25%, the S&P 500 increased 0.74%, and the Nasdaq climbed 1.15% compared to the previous day.

Seokhwan Kim, a researcher at Mirae Asset Securities, said, "The U.S. stock market cheered the June CPI, which fell short of market expectations, with major indices such as the S&P 500 and Nasdaq reaching their highest levels of the year and the highest since April 2022." He added, "Especially after the CPI announcement, concerns about further tightening by the U.S. Federal Reserve (Fed) eased, causing the U.S. 2-year Treasury yield to drop more than 13 basis points (1bp = 0.01 percentage points) from the previous day, and the dollar index also fell more than 1%, hitting a 14-month low. This strengthened the preference for risk assets and created an environment where capital inflows into the stock market could continue."

The U.S. Department of Labor announced that the June CPI rose 3.0% year-over-year. This was below Wall Street's forecast of 3.1%, marking the lowest figure since March 2021. The CPI increase rate fell below 4% for the first time since April 2021. On a month-over-month basis, it rose 0.2%, below the Wall Street forecast of 0.3%. The core CPI, which excludes volatile energy and food prices, rose 4.8% year-over-year, below the market expectation of 5.0%. It increased 0.2% month-over-month, marking the smallest month-over-month core CPI increase since August 2021.

With the weakening dollar and falling U.S. Treasury yields, risk asset preference is strengthening, which is expected to have a positive impact on foreign investor demand. Researcher Kim said, "Foreign investors, who had accumulated net purchases of about 13 trillion won (as of June 9) since the beginning of the year, increased their selling in mid-June, recording net sales of about 2.2 trillion won until the 11th, reducing the cumulative net purchases to 10.9 trillion won. However, in the past two days, they recorded net purchases of about 600 billion won, currently standing at 11.5 trillion won. The decline in U.S. Treasury yields and the dollar index is expected to improve accessibility to the domestic stock market."

A favorable environment for the stock market is expected until the July FOMC. Ji-young Han, a researcher at Kiwoom Securities, said, "With about two weeks left until the July FOMC, until then, the rise in the dollar and interest rates is expected to be limited, and the market can digest earnings events from Tesla and Netflix, creating a favorable stock market environment." She added, "However, Fed officials may take a stance to keep the possibility of additional hikes open to curb excessive market expectations. It is necessary to be cautious about this." She continued, "During this process, volatility in the summer months of July and August may frequently shake the market, but rather than adopting a conservative strategy to avoid volatility, it is appropriate to respond with a dollar-cost averaging strategy that aims to lower the average purchase price during volatile periods."

July Expected to Be the Last Rate Hike

With the June CPI falling short of expectations and showing inflation is slowing, there are forecasts that the rate hike at the July FOMC will be the last one.

Jemin Choi, a researcher at Korea Investment & Securities, said, "Despite the core CPI falling short of expectations, we expect the benchmark interest rate to be raised by 25 basis points at the July FOMC." He explained, "The basis for expecting a rate hike is that the upside risk to core Personal Consumption Expenditures (PCE) inflation remains high, and this figure is not sufficient to revert the core PCE inflation forecast in the June Summary of Economic Projections (SEP) back to the March SEP level."

Da-eun Lee, a researcher at Daishin Securities, also said, "This inflation indicator is unlikely to have a significant impact on the Fed's rate hike in July." She added, "The Bank of Canada raised rates by 25 basis points despite a broad slowdown in inflation because most of the downward pressure came from energy, and excluding base effects, the downward momentum is insufficient. The U.S. situation is not much different, and uncertainty about inflation remains."

The July rate hike is expected to be the last. Researcher Choi said, "The easing of core inflationary pressures shown in this CPI is likely to act to restrain further Fed rate hikes, so we maintain our existing forecast of a rate freeze for the rest of the year after the last hike in July."

Accordingly, future focus is expected to shift from whether there will be additional rate hikes to how long the high rates will be maintained. Researcher Lee said, "The possibility of additional rate hikes after July has significantly decreased due to this CPI announcement. Now, the market's attention will shift from 'how much more will rates be raised' to 'how long will high rates be maintained.'"