Rapid Price Surge Is a Known Risk... "Stock Market Anxiety Will Also Pass Its Peak"

Price Outlook Uncertainty Already Largely Reflected in Stock Market
Focus on Upcoming US and China Real Economy Indicators... "Could Be a Springboard for Rebound"

[Image source=AFP Yonhap News]

[Asia Economy Reporter Minwoo Lee] The still steep inflation rate is increasing uncertainty about the U.S. Federal Reserve's (Fed) interest rate hikes, acting as a source of market instability. However, some analysts interpret that the more the market becomes unstable, the closer the inflection point is. Since this is already a known factor, the negative impact on the stock market is expected to gradually decrease.

On the 14th, KTB Investment & Securities interpreted the sharp rise in inflation this way. In fact, inflation outlook uncertainty has dominated market trends. China's Producer Price Index (PPI) for October rose 13.5% year-on-year, hitting the highest level in 26 years since 1996. The U.S. Consumer Price Index (CPI) for October also rose 6.2% year-on-year, setting a new 31-year high.

The reason why the sharp rise in inflation negatively affects the stock market is that it increases uncertainty about the Fed's interest rate hike schedule next year. Seokhyun Park, head of the investment strategy team at KTB Investment & Securities, said, "The expected number of rate hikes at the Federal Open Market Committee (FOMC) meetings in June, September, and December next year, as reflected in the Fed's implied policy rate, has been revised upward all at once, surpassing the previous upper limit recorded last month," adding, "This means that inflation outlook uncertainty has intensified, fueling concerns that the Fed may rush to raise rates immediately from June, right after the expected tapering (asset purchase reduction) ends in May next year."

However, it should be noted that the higher the inflation rate rises and the greater the market instability, the closer the inflection point may be. Park said, "As of the 10th, the Fed's implied policy rate for December 2022 has risen again this month, reflecting the possibility of up to three rate hikes, which means that consecutive rate hikes could occur at the FOMC meetings in June, September, and December next year," adding, "At the same time, since the realistically possible number of rate hikes by the end of next year has already been largely priced into the market, market anxiety may be approaching its peak."

Attention should also be paid to the PPI inflation rate, which shows a somewhat different trend from the CPI. Unlike the U.S. October CPI inflation rate, which hit a 31-year high, the October PPI inflation rate remained at 8.6% year-on-year, the same as the previous month. Park pointed out, "If the peak of the producer price inflation rate, which is sensitive to raw material prices, is confirmed to have passed, the peak of the CPI inflation rate may be confirmed with a time lag," adding, "Although China's October PPI inflation rate also hit a record high, the CRB metal index, which led the PPI inflation rate, has already reversed to a slowdown."

Ultimately, although the November inflation rate may rise further, maintaining uncertainty in the market, the possibility of passing the peak is gradually emerging. In addition, the upcoming release of real economic indicators for October from the U.S. and China this week could be a positive factor. In China's case, a slowdown signal is expected to continue, but the additional slowdown is not expected to be significant. In the U.S., consumption indicators are expected to improve, which could serve as a foothold for a stock market rebound attempt.

Park advised, "Since the rapid rise in domestic and international inflation rates is still considered temporary and limited to the fourth quarter of this year, and the inflation surge has already been significantly exposed, the negative impact on the stock market is expected to gradually decrease," adding, "Considering that the risk of further stock price corrections may be limited, a strategy of holding or approaching the bottom rather than selling is necessary."

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