[Good Morning Stock Market] Powell Says "No Inflation Concerns" Yet... Shaken by Third Wave of COVID-19

US 3 Major Indexes Close Lower... Concerns Over 3rd Wave of COVID-19 in US, Germany, and Others

Traders are discussing business on the trading floor of the New York Stock Exchange in the United States on the 18th (local time).
[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] Despite Federal Reserve (Fed) Chair Jerome Powell's repeated emphasis that the likelihood of inflation occurring this year is low, concerns over a third wave of COVID-19 infections spreading in some regions such as the United States, Germany, and France have once again shaken global stock markets.

On the 23rd (local time) at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed at 32,413.15, down 0.94% from the previous day. The S&P 500 also fell 0.76%, closing at 3,910.52. The tech-heavy Nasdaq index closed down 1.12% at 13,227.70 compared to the previous day.

◆Soyeon Park, Researcher at Korea Investment & Securities= Value stocks showed notable weakness amid the resurgence of COVID-19 and conflicts between the Western bloc and China-Russia camp. The European Union (EU) and the United States imposed economic sanctions on China over the Xinjiang Uyghur human rights abuses, and concerns spread after the U.S. Food and Drug Administration (FDA) raised doubts about inappropriate data found in AstraZeneca's clinical trials. Lockdowns resumed as infections spread again in some regions including the U.S., Germany, and France. Against this backdrop, the 10-year U.S. Treasury yield fell more than 7 basis points (bp) to 1.62%. The probability of a rate hike at the December Federal Open Market Committee (FOMC) meeting plummeted from 12.3% the previous day to 2.2% in the Chicago Mercantile Exchange (CME) Fed Funds futures market.

Meanwhile, Chair Powell appeared before the House Financial Services Committee and emphasized, "The economic recovery is not yet complete, and the Fed will continue to provide necessary support." This echoed his remarks following the FOMC meeting on the 17th. Meanwhile, U.S. Treasury Secretary Janet Yellen indicated that "tax changes are being considered to fund infrastructure," suggesting that announcements regarding tax increases such as corporate tax or carbon tax are imminent.

Disappointment over the economic recovery led stocks related to economic reopening to fall the most. Boeing (-4.0%), Carnival (-7.8%), and United Airlines (-6.8%) showed weakness, along with infrastructure investment beneficiaries like Caterpillar (-3.4%). Copper mining stock Freeport-McMoRan (-8.0%) also plunged sharply. Bank stocks such as Bank of America (-2.0%) also weakened. Economic indicators showed mixed results. Although affected by heavy snow and cold waves last month, new home sales in February plunged 18.2% month-on-month. The Richmond manufacturing index rose from 14 to 17 in March, exceeding expectations but failing to influence the market. West Texas Intermediate (WTI) crude oil prices fell again by 6% to $57 amid disappointment.

◆Hyojin Kim, Economist at KB Securities= The U.S. is discussing an additional economic stimulus package of up to $3 trillion. The major themes include President Joe Biden's pledges to ▲reduce economic inequality ▲cut carbon emissions to address climate change ▲support U.S. manufacturing and technology industries, with a significant budget likely allocated to infrastructure investment.

Considering the low investment ratio and high employment multiplier, the likelihood of infrastructure-related stimulus passing is gaining weight. Comparing the ratio of gross fixed capital formation (construction, equipment, intellectual property products, inventory changes, etc.) to GDP by country, the U.S. stood at 20.3% in 2020, lower than Germany at 21.3%, Japan at 25%, France at 22.7%, and South Korea at 31.3%. Although investment ratios tend to decrease as per capita GDP rises, the U.S. investment ratio is lower than other advanced countries like Germany and France.

This proactive stimulus increases the possibility of returning to the previous growth trend. This recovery path differs from past experiences where the economy deviated from prior growth trends after recessions. While the economic growth effect will vary depending on the size and details of the additional stimulus, the likelihood of returning to the previous growth trend will increase if infrastructure-related stimulus passes.

◆Yumi Kim, Researcher at Kiwoom Securities= Recently, as U.S. long-term Treasury yields have risen, mortgage rates have also increased, exceeding 3% for 30-year fixed-rate loans, expanding the rise. Some have expressed concerns that continued mortgage rate increases could burden the real economy, especially the housing market.

The rise in U.S. mortgage rates may reduce demand related to home purchases or refinancing compared to before. However, considering that the average 30-year mortgage rate in 2019, when housing demand was active before COVID-19, was in the low 4% range, the current rate level seems unlikely to significantly damage demand. Housing inventory remains low, and the perceived market sentiment within the housing market remains above the baseline, maintaining optimism. Therefore, it is premature to discuss the real economic burden from rising mortgage rates at this point.

On the contrary, the recent rise in housing prices, which raised concerns about a housing bubble, may be alleviated by the mortgage rate increase, potentially leading to positive ripple effects and sustainability in the real economy through subsequent housing market improvements. In the fourth quarter of last year, U.S. household net worth reached $130.2 trillion, up 5.6% quarter-on-quarter and 10.1% year-on-year. Stock and real estate price increases were the main factors behind asset growth. Additionally, with cash payments from the Biden administration, disposable income has risen again, increasing households' consumption capacity. The savings rate also recorded 20.5% in January, significantly exceeding the pre-COVID-19 average of around 7%.

As economic activities normalize following vaccine distribution, there is potential for personal consumption to increase more than expected. Although uncertainties about future income remain and some funds may be used for debt relief, the increased consumption capacity could stimulate latent consumption demand. If the upward trend in real estate prices slows, a relatively larger shift from investment to consumption than expected may occur.

This content was produced with the assistance of AI translation services.