[Good Morning Stock Market] Optimism Grows Amid US Interest Rate Hike Slowdown... Eyes on Korean Monetary Policy Committee

[Image source=Yonhap News]

[Asia Economy Reporter Lee Seon-ae] The domestic stock market is expected to start higher, supported by expectations of a slowdown in the pace of U.S. interest rate hikes. However, since the sustainability of the positive impact of the slowdown on the stock market may not be long-lasting, a conservative investment strategy is recommended. During the session, the market is likely to be influenced by the Bank of Korea’s Monetary Policy Committee’s base rate decision. With a 25bp hike highly anticipated, the KOSPI is expected to explore directional changes based on future economic outlooks and monetary policy directions.

FOMC Slowdown Boosts 'New York Stock Market'

On the 23rd (local time), major U.S. stock indices in New York closed higher as the Federal Reserve (Fed) hinted at slowing the pace of interest rate hikes. On the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed at 34,194.06, up 95.96 points (0.28%) from the previous session. The Standard & Poor’s (S&P) 500 index ended at 4,027.26, rising 23.68 points (0.59%). The tech-heavy Nasdaq index closed at 11,285.32, up 110.91 points (0.99%).

The market focused on the minutes of the Fed’s Federal Open Market Committee (FOMC) meeting held on the 1st and 2nd, released that day. Some members stated, "If the Fed continues to raise rates aggressively at the current pace, there could be risks to the financial system, and slowing the pace of hikes could reduce the risk of financial instability." The minutes indicated that a significant number of participants judged that slowing the pace of rate hikes would soon be appropriate. According to the minutes, most attendees believed that monetary policy was approaching a sufficiently restrictive level to achieve the Fed’s inflation target of around 2%, making a slowdown in the pace of hikes appropriate going forward. This suggested the possibility of slowing rate hikes from the end of this year through next year. As a result, expectations for a reduction in the magnitude of rate hikes in the coming months emerged, fueling investment.

Seo Sang-young, Researcher at Mirae Asset Securities

Although some U.S. stocks gave back gains during the session due to specific issues, the overall rise supported by a weaker dollar and falling Treasury yields is expected to positively impact the Korean stock market. In particular, the Philadelphia Semiconductor Index’s 1.07% increase, following the previous day’s gains, is also expected to positively influence investment sentiment among related companies.

Additionally, the release of the FOMC minutes, which showed many Fed members advocating for an imminent slowdown in rate hikes, is positive news. Furthermore, market participants’ expectations of a 5% terminal rate for the Fed, as reflected in interest rate futures, are also expected to have a favorable effect. Along with this, the won-dollar exchange rate is expected to start about 16 won lower due to the weaker dollar, increasing the likelihood of won appreciation and positively affecting foreign investor demand.

Of course, the Bank of Korea’s Monetary Policy Committee is likely to raise rates by 25bp, which may narrow the won’s appreciation, but this impact is expected to be limited. Considering this, the Korean stock market is expected to start about 0.7% higher and maintain a solid performance.

Han Ji-young, Researcher at Kiwoom Securities

Following the release of the November FOMC minutes, the U.S. stock market experienced temporary volatility but then stabilized, suggesting that the content did not deviate significantly from what Fed Chair Jerome Powell had mentioned. The November minutes confirmed that most members agreed on slowing the pace of rate hikes and were considering the lag effect of monetary policy on the economy and inflation. Although they wanted evidence that inflation was declining, the October Consumer Price Index (CPI) surprise after the November FOMC likely caused a shift in the Fed’s inflation outlook. This is expected to be confirmed at the December FOMC.

At the same time, by mentioning the risks of financial system instability caused by excessive tightening, the Fed appears to be considering financial stability alongside price stability and full employment, similar to other central banks recently. The fact that the Fed’s tightening stance has softened compared to before is welcome news for market participants, but since much of this has already been priced in since October, the sustainability of the positive impact of the slowdown on the stock market may be limited.

What the market should focus on going forward is the fact mentioned in the minutes that the terminal rate needed to achieve the Fed’s goals may be higher than previously thought (the median terminal rate in the September FOMC dot plot was 4.7% for 2023). The existing view that the terminal rate level and its duration, rather than the pace of hikes, will influence the stock market’s direction remains valid. Considering that the dot plot to be presented at the December FOMC will give the market an intuitive gauge of the terminal rate, it is appropriate to prepare for a period of unclear market direction until that meeting.

Today, the domestic stock market is expected to start higher, supported by reduced uncertainty surrounding the November FOMC minutes and a sharp drop in the won-dollar exchange rate. From a sector perspective, considering the strong performance of big tech and retail stocks such as Tesla (+7.8%), Alphabet (+1.5%), and Target (+3.5%) in the U.S. market, domestic stocks related to secondary batteries, IT, or growth sectors are expected to show favorable price trends. During the session, the market will likely be influenced by the Bank of Korea’s Monetary Policy Committee decision. With a 25bp hike highly anticipated, the focus will be on changes in the economic outlook and monetary policy direction. The decline in the exchange rate (won appreciation) is expected to create a favorable environment for foreign investor demand in today’s stock market, but the intensity of their trading may vary depending on exchange rate changes after the Monetary Policy Committee meeting. Therefore, this meeting is expected to be a factor influencing not only the bond market but also the stock market.

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