[Good Morning Stock Market] "Interest Rate Hike Outlook vs Earnings Announcement Expectations... Box Range to Continue"

[Asia Economy Reporter Kwon Jaehee] On the 25th, the domestic stock market is expected to start slightly lower. The U.S. stock market fell due to concerns over aggressive interest rate hikes by the Federal Reserve (Fed) amid issues of global economic contraction caused by consumption slowdown due to high inflation, which is expected to weigh on the Korean stock market as well. However, it is anticipated that large-cap tech stocks such as Microsoft (MS), Apple, Alphabet, and major Korean companies like Hyundai Motor and SK Hynix will seek a rebound driven by earnings announcement expectations.

Last Thursday, the U.S. stock market initially rose nearly 2% in the Nasdaq based on solid earnings, but then declined after remarks suggested that the market's expected 'inflation peak out' was unlikely. On that day, the President of the San Francisco Fed stated, "This is not the inflation peak," which triggered selling. Additionally, after the President of the St. Louis Fed, Bullard, mentioned the possibility of a 75 basis point rate hike, the market turned downward. Later in the session, Fed Chair Powell hinted at a 50 basis point rate hike in May and asserted, "This is not the inflation peak in March," which widened the losses.

On Friday, the U.S. stock market plunged further due to concerns over economic slowdown. This was triggered by the apparel company Gap, a representative consumer goods firm, lowering its sales guidance from a single-digit decline to a mid-teens percentage drop ahead of its earnings announcement. Moreover, the U.S. April Services PMI released that day dropped sharply from 58 to 54.7, expanding the decline. This is interpreted as investor sentiment being dampened by weak individual corporate earnings and the Fed's aggressive rate hike stance. However, since these negative factors have been partially priced in, the possibility of continued weakness is expected to be limited.

Sangyoung Seo, Researcher at Mirae Asset Securities: "Korean Stock Market Expected to Start Down Around 0.7%"

Last Friday, the Korean stock market turned downward as Fed Chair Powell and other Fed officials emphasized that the 'inflation peak' has not yet been reached, raising concerns about further inflationary pressures. Particularly, the mention of a 75 basis point rate hike by Bullard, President of the St. Louis Fed, increased the likelihood of a more aggressive rate hike stance, adding to the burden. Furthermore, foreigners sold over 12,000 futures contracts, negatively impacting institutional demand and leading to the decline. However, it is noteworthy that the market trimmed losses somewhat in the late session ahead of the full-scale earnings season.

Meanwhile, the U.S. stock market's weakness on Thursday due to lingering negative factors also burdens the Korean market. Additionally, the global economic contraction issue highlighted by consumption slowdown is expected to further dampen investor sentiment. However, the fact that the Fed's aggressive stance has been partially priced in since last Friday, the declining probability of a 75 basis point hike in June after the weekend, and Treasury Secretary Yellen's call for tariff reductions on Chinese goods?which is reportedly under discussion at the White House?are positive factors.

Earnings announcements from large tech companies such as MS, Apple, and Alphabet, as well as major Korean companies like Hyundai Motor and SK Hynix, are expected to have a favorable impact on the Korean stock market. Considering this, the Korean stock market is expected to start down around 0.7% but seek a rebound driven by anticipation of the earnings season.

Donggil Noh, Researcher at Shinhan Financial Investment: "The Essence is Monetary Policy... Korean Market to Remain in a Box Range"

Amid ongoing stock market instability, the essence lies in monetary policy. There are two main factors for the stock market. First, how much of the steepening interest rate hike expectations have been priced in. This affects short-term stock market price forecasts. Second, how to sustain economic improvement within a monetary policy environment focused on inflation control.

Uncertainty related to monetary policy in the stock market is likely to continue until the June FOMC. This is the first opportunity to confirm the Fed's medium- to long-term outlook after economic data releases amid the prolonged Russia-Ukraine war. Until the June FOMC, interest rate forecasts may change depending on Fed members' remarks.

The current rate hike phase is comparable to the 1994 cycle. In 1994, the Fed pursued monetary policy aimed at stabilizing inflation, raising the benchmark interest rate by 300 basis points from 3% to 6% within one year. Notably, stock returns during this period were the lowest among rate hike cycles.

It is also important to note that although the 1994 rate hikes slowed stock returns, they did not lead to a recession. The employment market continued to expand, and economic growth remained solid. Although growth and leading economic indicators weakened in the latter part of the rate hike cycle, they recovered after the cycle ended.

Jiyoung Han, Researcher at Kiwoom Securities: "Korean Stock Market to Continue Volatility Expansion Phase"

The Korean stock market is expected to continue its volatility expansion phase influenced by the Fed's tightening concerns, earnings from major U.S. big tech companies such as Apple, Amazon, and MS, and earnings from key domestic companies like Hyundai Motor and SK Hynix. The weekly KOSPI forecast range is observed between 2630 and 2750.

After the March FOMC and minutes release, much of the anticipated negative news from the Fed had been exposed, and the market was digesting this while stabilizing the index floor. However, in the latter part of last week, Fed Chair Powell's hawkish remarks about inflation peak uncertainty and preference for a 50 basis point rate hike intensified Fed tightening, causing a sharp drop in the U.S. stock market on the 22nd (local time).

Consequently, the expected tightening intensity at the June FOMC, initially thought to be around 50 basis points, is now leaning toward 75 basis points. Unless the April U.S. inflation data, scheduled for release in May after the May FOMC, confirms a peak out, market participants are likely to continue bearing the Fed's tightening uncertainty until the June FOMC. Although the aftereffects of the tightening shock are expected to spread domestically this week, the current KOSPI valuation and technical indicators suggest a low incentive for liquidation, so the existing view of phased buying below the 2700 level remains valid. Additionally, attention should be paid to upcoming earnings announcements from major companies such as Apple, Amazon, MS in the U.S., and Hyundai Motor and SK Hynix in Korea. However, as inferred from last week's earnings reports from Netflix and Tesla, a differentiated market is expected to emerge among sectors and individual stocks depending on the degree to which earnings expectations are met.

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