[Good Morning Stock Market] Investor Sentiment Weakens Ahead of FOMC... Kospi Expected to Start Lower

US Federal Reserve Expected to Raise Interest Rate by 0.25%
Regional Bank Stocks Hit Amid Rate Hike Concerns

On the 2nd (local time), the U.S. stock market closed lower ahead of the Federal Open Market Committee (FOMC) interest rate decision in May. The Dow Jones Industrial Average fell 367.17 points (1.08%) to close at 33,684.53, the large-cap S&P 500 index dropped 48.29 points (1.16%) to finish at 4,119.58, and the tech-heavy Nasdaq index declined 132.09 points (1.08%) to close at 12,080.51.

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The market expects the Federal Reserve (Fed) to raise the benchmark interest rate by 0.25 percentage points at this FOMC regular meeting. If the rate is increased by another 0.25 percentage points, the Fed's benchmark rate will rise to 5.00?5.25%, marking the highest level in 16 years.

Additionally, the market anticipates that even if rates are raised at this meeting, the Fed will maintain a pause for some time afterward. It is also expected that rates could be cut in the second half of the year due to recession risks. Attention is focused on whether the Fed will signal a pause after this rate hike or indicate that further measures are needed to curb inflation.

Concerns over additional rate hikes hit regional bank stocks. PacWest Bank, based in Los Angeles, saw its shares drop about 28%, while Western Alliance in Phoenix and Metropolitan Bank in New York fell approximately 15% and 20%, respectively. Large bank stocks such as Bank of America and Wells Fargo also declined by more than 3%. The possibility of customers moving deposits to other assets like government bonds or money market funds (MMFs) amid further rate hikes continues to fuel instability in the banking sector.

Investors are also closely watching the atmosphere surrounding the U.S. Congress's debt ceiling increase. Treasury Secretary Janet Yellen sent a letter warning congressional leaders, including House Speaker Kevin McCarthy, a Republican, about the possibility of default on June 1. Failure to reach an agreement on the debt ceiling raises concerns about inevitable financial market repercussions from a default.

In March, private job openings fell to their lowest level in about two years, indicating a cooling labor market. According to the March Job Openings and Labor Turnover Survey (JOLTs) released by the U.S. Department of Labor, private sector job openings in March totaled 9.59 million, the lowest since April 2021 and below the forecast of 9.7 million.

Corporate earnings have generally exceeded expectations. According to DataTrek Research, more than half of the S&P 500 companies have reported earnings, with 79% posting net profits above estimates. Pfizer reported net income and revenue exceeding expectations despite a significant decline in COVID-19 sales. Uber posted a smaller-than-expected quarterly loss and revenue that beat forecasts.

The domestic stock market is expected to open lower on the 3rd. The debt ceiling negotiation controversy and the sharp decline in U.S. regional bank stocks are likely to weigh on investor sentiment. Seosangyoung, head of the Media Content Division at Mirae Asset Securities, said, "The fact that the U.S. stock market narrowed losses late in the session due to market participants' expectations that the Fed might signal a pause after the rate hike is positive. However, concerns about persistently high inflation and a still-robust labor market mean that the Fed is unlikely to signal a pause, contrary to market expectations, so the possibility of increased volatility after the FOMC cannot be ruled out, which is a burden."

He added, "Regional bank risks could continue to have an impact if commercial real estate problems are not alleviated, and with only a month left before the debt ceiling deadline, U.S. political instability could contribute to increased financial market volatility. Considering this, the domestic stock market is expected to start down about 0.5% and then go through a process of digesting sell-offs."

Han Jiyoung, a researcher at Kiwoom Securities, said, "Market interest in the path the Fed's policy will take, which triggered the banking sector crisis, is expected to grow further. Since the Fed still prioritizes inflation control, a 0.25 percentage point rate hike at the May FOMC is considered highly likely."

She added, "On this day, renewed concerns about instability in the U.S. small and medium-sized banking sector and caution ahead of the May FOMC will provide incentives for market participants to liquidate short-term positions, exerting downward pressure. Also, despite AMD reporting strong first-quarter earnings after the U.S. market close, it issued negative guidance citing weak server demand, causing its stock to plunge about 6% in after-hours trading, which is expected to stimulate volatility in domestic semiconductor stocks."

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