KOSPI Faces Rising Caution Ahead of Monetary Policy Committee Meeting: "Is Recovery to 2500 Out of Reach?"

[Image source=Yonhap News]

[Asia Economy Reporter Lee Seon-ae] This week (21st~25th), the KOSPI is expected to show caution against interest rate hikes ahead of the Bank of Korea's Monetary Policy Committee meeting to decide the base interest rate. Uncertainty over U.S. monetary policy is also likely to weigh on the domestic stock market. As a tug-of-war between upward and downward forces is anticipated, the recovery of the KOSPI to 2500 is expected to be difficult.

On the 20th, the securities industry forecasted that the KOSPI index would show caution toward the monetary policies of both Korea and the U.S. First, uncertainty over U.S. monetary policy is intensifying. Recent remarks by Federal Reserve (Fed) officials reveal a mix of dovish (favoring monetary easing) and hawkish (favoring monetary tightening) opinions.

James Bullard, President of the St. Louis Fed and a representative hawkish figure, stated on the 17th (local time) that the base interest rate should be raised up to around 7%. In a speech held in Kentucky, Louisiana, he said, "Despite generous assumptions, the base rate has not yet reached a level that can be justified as sufficiently restrictive," adding, "According to monetary policy rules, the rate should rise to at least 5% annually, and applying the rules more strictly could push it beyond 7%." The current U.S. base interest rate is 3.75?4.00% per annum.

Neel Kashkari, President of the Minneapolis Fed, also said that rates should continue to rise until it is certain that inflation has stopped increasing. Amid ongoing debates between hawks and doves, remarks from key officials advocating tightening have been coming one after another, causing global investor sentiment to contract.

If the minutes of the Fed's November Federal Open Market Committee (FOMC) meeting, released midweek, become a market event, volatility could increase. The market is expected to seek hints about the rate hike magnitude at the December Fed meeting and the terminal rate in this rate hike cycle through the minutes. Additionally, Fed Chair Jerome Powell mentioned that the pace of rate hikes might slow at the December meeting but also said, "The terminal rate level will be higher than previously expected," leading many experts to revise their forecasts upward, expecting the terminal rate to exceed 5%. As a result, the possibility of maintaining restrictive rates higher and longer than expected has increased, intensifying recession concerns. Park Hee-chan, a researcher at Mirae Asset Securities, said, "Volatility may not be large until the December FOMC, but caution toward rate hikes could rise one notch."

However, Goldman Sachs predicted in last week's economic outlook report for next year that the U.S. will narrowly avoid a recession. Core Personal Consumption Expenditures (PCE) price inflation is expected to fall from the current 5% to 3% by the end of next year, and the Fed is expected to raise the base rate by an additional 1.25 percentage points to 5.00?5.25%, with no rate cuts next year.

This week marks the start of the shopping season following the U.S. Thanksgiving holiday, beginning with Black Friday and continuing through Christmas and year-end. Black Friday is typically accompanied by large-scale sales and accounts for about 20% of annual sales for U.S. retailers, which is considered positive for the stock market. However, the benefits are uncertain. Consumer sentiment for this year-end is not very strong. Given that the sharply raised base interest rates affect the economy with a time lag, voices expressing concerns about a recession have emerged this year.

The Bank of Korea's Monetary Policy Committee meeting to decide the base interest rate is scheduled for the 24th, and investor interest is expected to increase. Currently, the interest rate gap between the U.S. and Korea has widened to 1 percentage point, raising the possibility of additional rate hikes, with the key issue being the magnitude of the hike. Consequently, caution is expected to strengthen.

Kim Young-hwan, a researcher at NH Investment & Securities, said, "There are divergent interpretations regarding the future direction of monetary policy and economic outlook, and no clear material to determine the short-term stock price direction, so the tug-of-war between upward and downward forces will continue for a while," forecasting that the KOSPI will move between 2370 and 2490 this week.

The market will also pay attention to remarks by Lee Chang-yong, Governor of the Bank of Korea. It is necessary to gauge how the Monetary Policy Committee members evaluate U.S. monetary policy direction and to what level domestic interest rates will be raised next year, as this will help predict the direction of the domestic stock market.

Ahn Ye-ha, a researcher at Kiwoom Securities, said, "Although concerns about liquidity tightening have recently increased, since it is not yet confirmed whether domestic inflation has eased, the Bank of Korea is likely to argue for the necessity of additional tightening," adding, "While an additional big-step hike may be burdensome, the stance of further hikes will be maintained."

There is a need to consider the possibility of a short-term slowdown in foreign demand. Korea Investment & Securities pointed out that Luxembourg funds, which serve as a barometer of global fund flows, are not buying domestic stocks.

Jang Chi-young, a researcher at Hyundai Motor Securities, emphasized, "The cheers from favorable inflation have subsided, and there are divergent interpretations regarding future economic and monetary policy directions," adding, "Since there is no material to clarify direction in the short term, the tug-of-war between upward and downward forces is expected to continue for a while." Han Ji-young, a researcher at Kiwoom Securities, said, "Due to high uncertainty over the final rates in Korea and the U.S., conservative responses remain valid even after this Monetary Policy Committee meeting."

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