[Good Morning Stock Market] Tapering May Be Far, But Inflation Remains a Burden

Mixed Trends in New York Stock Market
EU Officially Adopts Climate Law and Carbon Tax... Increasing Pressure on China

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Gong Byung-sun] Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), mentioned that it is not yet time to begin tapering asset purchases, but acknowledged inflationary pressures. The resurgence of COVID-19 also poses a burden on the stock market.

On the 15th (local time), the New York stock market showed mixed results. On the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed at 34,987.02, up 0.15% (53.79 points) from the previous trading day. Meanwhile, the S&P 500 and the tech-heavy Nasdaq indices closed down 0.33% (14.27 points) and 0.70% (101.82 points) at 4,360.03 and 14,543.13, respectively.

◆ Seo Sang-young, Researcher at Mirae Asset Securities = Chairman Powell appeared at a congressional hearing and indicated a moderate monetary policy stance, stating that the criteria for tapering are still far off. Nevertheless, he emphasized the need to assess the persistence of high inflation and remains watchful of inflationary pressures. During his remarks, he expressed discomfort with the current high level of inflation.

The White House also expressed concern over the current high inflation levels. Although the White House, like Chairman Powell, mentioned that all signs point to inflation being temporary, both the Fed and the White House stating discomfort with high inflation marks a change from the past. This is one of the factors behind the decline in tech stocks.

The increase in new COVID-19 cases centered in Asia, Europe, and the U.S. is also a concern. Some cities in Australia announced extensions of social distancing regulations, and Dr. Anthony Fauci, Director of the U.S. National Institute of Allergy and Infectious Diseases (NIAID), expressed concern about the resurgence of COVID-19. As a result, sectors related to travel, leisure, consumption, and energy showed weakness, and international oil prices also fell.

◆ Kim Yumi, Researcher at Kiwoom Securities = At this month’s European Central Bank (ECB) monetary policy meeting, it is expected that there will be no major changes, with interest rates held steady and current accommodative measures reaffirmed. Additionally, the ECB is likely to emphasize its accommodative monetary policy stance again by specifying the monetary policy strategy announced on the 8th.

On the 8th, the ECB announced the results of its strategy review, which included changes to the inflation target and climate change response plans, and stated that these would be applied starting from the meeting on the 22nd. The inflation target was changed from slightly below (below, but close to 2%) to a symmetric 2% (at 2%), which is interpreted as allowing temporary overshooting of inflation. The ECB is also expected to emphasize that accommodative monetary policy may continue for an extended period. However, despite the announcement on the 8th, the perception that the ECB is less accommodative compared to the Fed’s average inflation targeting led to euro strength, and similarly, the ECB monetary policy meeting is not expected to have a significant impact on the euro.

(Provided by Korea Investment & Securities)

◆ Park So-yeon, Researcher at Korea Investment & Securities = Last week, China’s Producer Price Index (PPI) for June rose 8.8% year-on-year, slightly lower than May’s 9.0%, which eased market concerns. This was due to a stabilization in raw material prices. However, the spread between the PPI and Consumer Price Index (CPI) has widened to a record high, which is worrisome. In the short term, prices may appear stable due to falling raw material costs, but there is a possibility that this will affect final goods prices with a time lag.

There are also inflationary factors from policy and regulatory perspectives. Although it is widely understood that Environmental, Social, and Governance (ESG) initiatives are effectively a ‘China crackdown,’ pressure is becoming more overt. Following the official adoption of the European Union (EU) climate law by 26 countries last week, detailed plans for the Carbon Border Adjustment Mechanism (CBAM) and carbon reduction were unveiled the day before. This is very challenging for China. Along with regulations on renewable energy use such as RE100, it requires a comprehensive review of the entire production process and efforts toward a just transition. Restructuring pressures will also intensify.

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