[US Inflation Shock] New York Stock Market Plunges Worst Since Pandemic... Exchange Rate Nears 1400 Won

[Image source=Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Joeslgina, Reporters Seo Sojeong, Kwon Jaehee] The global financial market was bombarded by the shock of the U.S. Consumer Price Index (CPI) surpassing market expectations. The market’s hopes surrounding the so-called ‘inflation peak theory’ collapsed, rapidly shifting the focus toward the Federal Reserve’s (Fed) aggressive tightening. Some even speculate that the Fed might take the bold step of raising interest rates by 1 percentage point at once next week.

Following the worst plunge in over two years in the New York Stock Exchange, the Korean stock market also showed a decline in the mid-2% range. The won-dollar exchange rate quickly surpassed 1390 won, approaching the 1400 won level.

On the 13th (local time) at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed down 3.94% compared to the previous session. The S&P 500, centered on large-cap stocks, fell 4.32%, and the Nasdaq, focused on tech stocks, plummeted 5.16%. The August CPI, released just before the market opened, struck the market hard, causing all three major indices to record their largest single-day drop since June 2020, early in the COVID-19 pandemic.

The domestic stock market was not spared from the U.S. CPI shock. On the 14th, the KOSPI opened at 2390.47, down 2.41%. Most of the market capitalization stocks, including Samsung Electronics, remained weak. The KOSDAQ also dropped 3.26% shortly after opening, falling to the 770 level. On the same day, the Nikkei 225 in Japan and the S&P/ASX 200 in Australia both fell by over 2%, with Asian markets unable to avoid the plunge.

The rapidly spreading outlook for aggressive tightening also shook the bond and foreign exchange markets. In the Seoul foreign exchange market that day, the won-dollar exchange rate started at 1393.0 won, up 19.4 won, and surged to 1395.5 won around 9:37 a.m. shortly after the market opened. The exchange rate surpassing the 1390 won level is the first time in 13 years and 5 months since March 31, 2009 (the high was 1422.0 won) during the financial crisis. The two-year U.S. Treasury yield, sensitive to monetary policy, hit 3.79% intraday, marking the highest level since November 2007.

The U.S. Department of Labor revealed that the August CPI rose 8.3% year-over-year, far exceeding the market expectation of 8.0%. Despite gasoline prices, a major driver of inflation, plunging more than 10%, high inflation was still confirmed. Particularly, the core CPI excluding energy and food surged 6.3% year-over-year, spreading concerns about widespread high inflation.

Accordingly, there are even forecasts that the Fed might go beyond the three consecutive giant steps (0.75 percentage point rate hikes) and raise rates by 1 percentage point at the September Federal Open Market Committee (FOMC) meeting on the 20th-21st. On the same day, investment bank Nomura revised its forecast from a 0.75 percentage point hike to a 1 percentage point hike at the September FOMC. Harvard professor Larry Summers, who served as U.S. Treasury Secretary under the Bill Clinton administration, also expressed support for a 1.0 percentage point increase.

The market’s initial expectation that the Fed would slow the pace of tightening after September has also collapsed. There is even speculation about four consecutive giant steps through November following September. The federal funds rate is estimated to reach 4.00?4.25% by the end of this year.

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