[Good Morning Stock Market] Attention Focuses More on US FOMC Than Omicron

FOMC Shows Steeper Tightening Schedule Than Market Expectations, Stock Market Volatility Inevitable
People's Bank of China Lowers Financial Institutions' Reserve Requirement Ratio...Real Estate Default Risk Decreases

[Image source=Yonhap News]

[Asia Economy Reporter Gong Byung-sun] Although the new COVID-19 variant virus 'Omicron' is spreading, global stock markets are focusing more on the U.S. Federal Open Market Committee (FOMC). If the FOMC reveals a more aggressive tightening schedule than market expectations, stock market volatility is expected to be inevitable.

On the 10th (local time), the New York stock market rebounded. On that day at the New York Stock Exchange, the Dow Jones Industrial Average closed at 35,970.99, up 0.60% (216.30 points) from the previous trading day. The S&P 500 index closed at 4,712.02, up 0.95% (44.57 points) from the previous session. The tech-heavy Nasdaq closed at 15,630.60, up 0.73% (113.23 points) from the previous trading day.

◆ Seo Jung-hoon, Samsung Securities Researcher = The Omicron variable seems to be subsiding. Naturally, market attention is inevitably focused on the Fed's tightening issue. Shortly after Jerome Powell's reappointment as Fed Chair was confirmed, he attended a Senate hearing and confessed a change in perception regarding inflation. His explanation that the rhetoric of 'transitory' is not appropriate to diagnose the current price situation is quite hawkish.

The FOMC scheduled for the 15th is likely to differ from last month. The key issue is whether it will reveal a tightening schedule steeper than market expectations. The number of rate hikes for next year already reflected in the interest rate futures market is around three, and the probability of a rate hike in March next year is also quite high.

However, it is necessary to note that one of the few consensus points between investors and the Fed is that managing deflation is more difficult than inflation. Inflation can be controlled by raising interest rates, but deflation is often resistant to any remedy. Japan's lost 30 years is a representative example.

(Provided by Cape Investment & Securities)

◆ Chae Hyun-ki, Cape Investment & Securities Researcher = The U.S. Department of Labor announced on the 10th that the Consumer Price Index (CPI) for November rose 6.8% year-on-year, exceeding the market expectation of 6.7% and the previous month's 6.2%. This reconfirmed that high inflationary pressure is persisting long-term.

However, one day before the November CPI announcement, U.S. President Joe Biden unusually issued a statement emphasizing that consumer prices are a lagging indicator and do not reflect the recent slowdown in price increases of major products. Also, since the November CPI increase rate did not significantly deviate from the expected range, it is judged that financial market volatility was limited.

The November CPI increase rate recorded the highest level since June 1982 (7.1%), with energy, food, used cars, and new car price increases contributing to inflationary pressure, similar to the previous month. This is interpreted as a result of supply chain bottlenecks and production disruptions caused by the spread of the COVID-19 Delta variant in the third quarter, combined with product demand entering the year-end consumption season. Since the inflation peak has not yet been confirmed, there is a high possibility that caution will continue toward the December FOMC meeting.

(Provided by Daishin Securities)

◆ Lee Da-eun, Daishin Securities Researcher = On the 6th, the People's Bank of China announced that it would lower the reserve requirement ratio for financial institutions by 50 basis points (1bp = 0.01 percentage point) starting from the 15th. With this measure, the average reserve requirement ratio for Chinese financial institutions will drop to 8.4%, supplying 1.2 trillion yuan (approximately 222.528 trillion KRW) of long-term funds to the financial market, and funding costs are expected to decrease by 15 billion yuan annually.

The background for the People's Bank of China supplying liquidity is that the Chinese economy has slowed more sharply than the government expected. Already in the third quarter of this year, the economic slowdown worsened due to strengthened quarantine measures, power shortages, and Evergrande risk. With regulatory tightening and the Evergrande bankruptcy crisis increasing pressure on the real estate market, concerns have been raised that the Chinese economy in the fourth quarter may deteriorate compared to the previous quarter.

The expansion of liquidity supply is expected to help mitigate shocks in the real estate and financial markets, which have become volatile due to Evergrande risk. With 950 billion yuan of Medium-term Lending Facility (MLF) support funds maturing on the 15th and Chinese real estate companies' bond maturities concentrated in the first and second quarters of next year, the risk of overall real estate insolvency due to liquidity crunch is expected to decrease.

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