This Week's KOSPI... Interest Rate and Earnings Sensitivity Intensifies Amid Fed Speech Blackout Ban

Jerome Powell, Fed Chair. [Photo by Yonhap News]

[Asia Economy Reporter Lee Seon-ae] This week (25th?29th), the domestic stock market is expected to be influenced by corporate first-quarter earnings, the Federal Reserve's (Fed) tightening, and China's economic stimulus measures. Since the release of the March Federal Open Market Committee (FOMC) minutes revealing the Fed's aggressive tightening schedule, the stock market has been highly sensitive to interest rate levels. With a series of corporate earnings announcements scheduled, stock differentiation by sector is expected to become more pronounced.

On the 24th, securities firms set the expected KOSPI band for this week at 2680?2800. Expectations for China's economic stimulus and the lifting of domestic social distancing measures are seen as positive factors for the stock market. On the other hand, tightening outlooks, uncertainties surrounding China's COVID-19 resurgence and lockdowns are expected to negatively impact the market. The rising possibility of a Russian default is also a negative factor.

Moreover, on the 22nd (local time), the New York stock market experienced its "worst day" in a year and a half. The three major indices fell between 2.55% and 2.82%. On the 22nd (local time), the Dow Jones Industrial Average closed at 33,811.40, down 981.36 points (2.82%) from the previous session. According to Dow Jones Market Data, this was the largest drop since October 28, 2020.

The Standard & Poor's (S&P) 500 index fell 121.88 points (2.77%) to 4,271.78, and the tech-heavy Nasdaq index dropped 335.36 points (2.55%) to 12,839.29. The market froze due to the shock from Fed Chair Jerome Powell's remarks and the weaker-than-expected first-quarter earnings of major companies.

Kim Young-hwan, a researcher at NH Investment & Securities, explained, "The biggest question in the current stock market is whether the Fed can successfully achieve a soft landing by raising interest rates while stabilizing inflation and the economy. Ultimately, this depends on how well the U.S. economy holds up."

He added, "As economic indicators and corporate earnings become more important, attention is expected to focus on U.S. employment data in the first week of May. Until then, the market is likely to lack a clear direction. At the individual stock level, a differentiated market based on first-quarter and annual earnings forecasts will continue."

The first-quarter operating profit forecast for the KOSPI has been declining for three consecutive weeks. The sectors leading the downward revision in earnings forecasts include trading companies & capital goods, utilities, consumer staples, shipbuilding, and banking. Conversely, sectors with upward earnings revisions include energy, insurance, transportation, and steel. Inflation remains a key factor affecting earnings forecasts.

Choi Yoo-jun, a researcher at Shinhan Financial Investment, also noted, "An individual stock market continues to unfold. While individual sectors and stocks respond sensitively to positive news, the duration of such positive effects is expected to shorten due to ongoing macroeconomic uncertainties."

Additionally, there is a forecast that volatility driven by earnings will be greater than that caused by interest rates. SK Securities stated, "Although Fed Chair Powell's hawkish remarks will remain a burden on the domestic stock market for the time being, this week marks the start of the Fed's 'blackout' period during which Fed officials are prohibited from speaking. With earnings announcements from major domestic and international large-cap stocks concentrated, corporate earnings issues are expected to have a greater impact on the stock market."

Meanwhile, according to the Korea Exchange, last week the KOSPI closed at 2,704.71, up 8.65 points (0.32%) from the previous week (2,696.06). Although the weekly gain was positive, market sentiment froze after Fed Chair Powell hinted at a 0.50 percentage point rate hike at the May FOMC on the 21st (local time). The market is already pricing in consecutive big rate hikes in May, June, and July, moving beyond to giant steps and an interest rate exceeding 3% within the year.

Key events scheduled for this week include South Korea's first-quarter GDP, U.S. January durable goods orders, and the U.S. April Conference Board Consumer Confidence Index on the 26th. On the 28th, the Eurozone's April European Commission Consumer Confidence Index and U.S. first-quarter GDP will be released. On the 29th, South Korea's March industrial production, Eurozone's April preliminary consumer price index, and the U.S. April University of Michigan Consumer Sentiment Index final reading will be announced. On the 30th, China's April National Bureau of Statistics PMI and April Caixin PMI will be published. Additionally, major U.S. big tech companies including Microsoft (MS), Alphabet, Meta, Twitter, Apple, and Amazon will release their earnings reports.

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