[Good Morning Stock Market] "KOSPI Expected to Start Lower... Caution Ahead of US CPI Announcement"

US September PPI Up 0.4% MoM... Down YoY
FOMC Minutes Mention Tightening Pace
CPI Scheduled for Release Tonight
"KOSPI Expected to Fall Around 0.3%"

[Image source=Yonhap News]

[Asia Economy Reporter Hwang Yoon-joo] On the 13th, the Korean stock market is expected to start slightly lower. Ahead of the Consumer Price Index (CPI) announcement, the shift to a stronger dollar is expected to influence the U.S. stock market, which closed slightly down.

On the 12th (local time), the S&P 500 index, centered on large-cap stocks, fell for six consecutive trading days, hitting its lowest level since November 2020. On that day at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed at 29,210.85, down 28.34 points (0.10%) from the previous session. The S&P 500 index closed at 3,577.03, down 11.81 points (0.33%), and the tech-heavy Nasdaq index ended at 10,417.10, down 9.09 points (0.09%). Both the S&P and Nasdaq indices have been declining for six consecutive trading days.

U.S. September PPI Generally Stabilizes Downward... FOMC Minutes Mention Pace of Tightening

The U.S. Producer Price Index (PPI) for September rose 0.4% month-over-month, exceeding last month's figure (-0.2%) and the expected value (+0.2%). However, year-over-year, it increased by 8.5%, down from 8.7% last month. The PPI excluding food and energy rose 0.3% month-over-month, surpassing last month's (+0.2%), while year-over-year it decreased from 8.1% to 7.2%.

Although inflationary pressures have eased, costs for services such as travel, food, and medical expenses have risen again, raising concerns that inflation is becoming entrenched. Producer prices excluding food, energy, and trade services rose 0.4% month-over-month and 5.6% year-over-year. Gasoline prices fell 2.0%, but heating oil prices surged 10.7%, contributing to inflationary pressures.

The minutes of the September Federal Open Market Committee (FOMC) were released, after which the dollar weakened, interest rates fell, and stock prices rebounded, showing some changes. According to the FOMC minutes, U.S. financial conditions have tightened. This is attributed to investors revising upward their expectations for the policy rate path. In other words, as the Fed's rate hikes progressed, interest rates rose and stock indices underperformed.

Meanwhile, inflation was described as unacceptably high and declining more slowly than expected. Particularly, household spending shifting from goods to services was identified as driving this trend.

Many members argued that it would be appropriate to maintain the policy rate at a sufficient level for some time, but some members noted that in the current highly uncertain global economic and financial environment, it would be important to adjust the pace of further tightening to mitigate the risk of severe adverse effects on the economic outlook.

The FOMC minutes notably show that Fed members have begun discussing adjusting the pace of rate hikes and announced maintaining the policy rate for a period after increases.

Following this, the dollar weakened, Treasury yields fell, and stock indices rose. However, the impact was limited as some of this was already known through Fed members' remarks. Moreover, with the CPI announcement approaching, some retracement occurred, and the dollar strengthened again, so no significant changes were observed.

Seo Sang-young, Head of Mirae Asset Securities: "KOSPI Expected to Start Down Around 0.3%"

[Image source=Yonhap News]

On this day, the KOSPI is expected to start down around 0.3%, followed by a process of absorbing selling pressure ahead of the U.S. CPI announcement.

The strong performance of the U.S. stock market after the FOMC minutes release ahead of the CPI announcement is expected to have a positive impact on the Korean stock market. The British pound strengthened by about 1% against the dollar, and the UK gilt bonds turned lower in the late session, easing concerns originating from the UK, which is also favorable.

Of course, since the stocks leading the U.S. market rise were driven by individual factors such as improved earnings outlooks, the impact is expected to be limited. However, the Fed's policy stance is expected to conclude by early next year, which is also positive.

However, it is noteworthy that lithium-related stocks have been weak, and eco-friendly stocks such as solar and wind power have also shown weakness. This is due to valuation pressures on some stocks, which have dampened overall investor sentiment across related sectors. This could lead to underperformance in Korean stock market-related stocks and increase volatility.

Meanwhile, the MSCI Korea Index ETF rose 1.03%, the MSCI Emerging Markets Index ETF increased 0.12%, and the 1-month NDF KRW/USD exchange rate was at 1,425.52 won, indicating a stable start for the exchange rate. Eurex KOSPI200 futures fell 0.49%.

Han Ji-young, Kiwoom Securities Researcher: "Domestic Stock Market Volatility to Expand Within a Limited Range"

On the 13th, the Korean stock market is expected to attempt a price recovery due to perceptions that the adjustment was excessive. However, due to caution surrounding the U.S. CPI results announced overnight after market close, volatility is expected to expand within a limited range.

From an industry perspective, with ShillaJen resuming trading after 2 years and 5 months, a temporary supply-demand concentration may occur. Therefore, changes in the overall bio sector's stock prices and supply-demand will be a key point to watch in today's market.

Although the U.S. September PPI showed a slowdown in the rate of increase, it exceeded the consensus (8.4%), failing to meet market expectations for a downgrade in inflation levels. A current concern is that items which had recorded month-over-month declines for some time, such as food and beverages (August -0.1% → September +1.2%) and energy (-5.6% → +0.7%), have turned positive.

Of course, the inflation indicator the Fed reflects in monetary policy decisions is the CPI, not the PPI. However, amid renewed geopolitical tensions related to the Russia-Ukraine conflict, this PPI result appears to have partially reversed the market's earlier expectations for a rapid decline in energy-driven inflation.

The September FOMC minutes were quite hawkish but are considered to reaffirm the hawkish stance of Fed members following the September FOMC meeting. The majority opinion within the Fed seems to be that full efforts are needed to control the persistently high inflation, and that insufficient tightening could lead to greater costs. At the same time, although a minority opinion, some members emphasized the need to adjust the pace of rate hikes considering potential adverse effects in the uncertain global economy and financial markets.

This suggests that, like the Bank of England (BOE), which is simultaneously tightening and easing to stabilize the bond market, or the Bank of Korea (BOK), which decided on a 50bp hike in October despite two dissenting opinions for a 25bp hike, the Fed also finds it difficult to overlook financial market stability as a central bank. Furthermore, since the Fed's basic approach is data-dependent, it is appropriate for market participants to keep open the possibility that the currently high tightening intensity and pessimistic market sentiment could change depending on the September CPI and subsequent data results.

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