[MarketING] Waiting for FOMC, Taking a Breather

KOSPI and KOSDAQ Start Up but Turn Down
Rising Concerns of Short-term Overheating and FOMC Caution Limit Gains

Ahead of the June Federal Open Market Committee (FOMC) meeting, the KOSPI is fluctuating around the flat line in early trading amid cautious sentiment. The inflation pressure eased as the U.S. May Consumer Price Index (CPI) released the previous day came in below expectations, strengthening the view that interest rates will be held steady at this FOMC.

KOSPI Fluctuates Around Flat Line in Early Trading

As of 10:25 a.m. on the 14th, the KOSPI stood at 2,637.52, down 0.43 points (0.02%) from the previous day. The KOSDAQ fell 3.53 points (0.39%) to 893.28.

[Image source=Yonhap News]

Both the KOSPI and KOSDAQ started higher but then turned lower and have been fluctuating around the flat line, showing no clear direction. This is interpreted as a result of increased cautious sentiment as investors await the FOMC outcome scheduled for early tomorrow. The U.S. stock market also opened higher on the back of favorable CPI data but saw gains narrow due to profit-taking. On the 13th (local time) at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average rose 0.43%, the S&P 500 increased 0.69%, and the Nasdaq climbed 0.83% compared to the previous day.

Sangyoung Seo, a researcher at Mirae Asset Securities, said, "The U.S. stock market opened higher on expectations of a rate hold as the May CPI increase slowed, but concerns over persistently high core inflation led to limited fluctuations. After digesting the inflation data, profit-taking emerged, narrowing the gains."

According to the U.S. Department of Labor, the May CPI rose 4.0% year-over-year. This figure is below both the previous month (4.9%) and market expectations (4.2%), marking the smallest increase in two years and two months since March 2021. The May CPI rose only 0.1% month-over-month. Core CPI, which excludes volatile energy and food prices, increased 5.3% year-over-year and 0.4% month-over-month.

With this CPI result confirming easing inflationary pressures, expectations are rising that the U.S. Federal Reserve (Fed) will hold interest rates steady. Jemin Choi, a researcher at Korea Investment & Securities, analyzed, "Headline inflation slowed significantly due to base effects such as falling energy prices, while core inflation remains firm due to factors like steady housing costs and rising used car prices, resulting in a slow deceleration. Although the slowdown in core inflation is gradual, the overall disinflation trend is confirmed, supporting the Fed’s pause in rate hikes."

Following the inflation data release, the Chicago Mercantile Exchange (CME) FedWatch tool showed a 91.9% probability of a rate hold in June, up from 79.1% the previous day.

Short-Term Overheating Concerns Should Also Be Noted

Concerns about short-term overheating amid FOMC caution may also act as a factor limiting stock market gains.

Jiyoung Han, a researcher at Kiwoom Securities, said, "CNN’s Fear & Greed Index, which measures investor sentiment in the U.S. stock market, reached 80 points, the highest since February 1 (82 points). Given the recent increased synchronization between the Korean and U.S. stock markets, such short-term overheating concerns combined with FOMC caution in June could limit the upward momentum of the domestic stock market."

With a rate hold likely at this FOMC, attention will turn to adjustments in the dot plot. Kyungmin Lee, a researcher at Daishin Securities, said, "The dot plot released at the March FOMC showed a peak rate of 5.1% for this year, and investors currently expect around 5%, with the peak close to 5.3%. The key at the June FOMC is whether the dot plot will be revised upward. If the dot plot is maintained or adjusted upward but does not exceed 5.3%, the impact on the stock market will be limited. However, if it rises beyond 5.3% to around 5.5%, market disappointment will grow, and concerns about financial system and economic instability due to further rate hikes will intensify." He added, "If the dot plot is revised downward, it could bring short-term surprise momentum."

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