Hyundai Motor Securities "Reflecting Possibility of 25bp Increase in Futures Market in July"

"High Possibility of BoK Keeping Base Rate Steady Within the Year"
"KOSPI Expected to Show Improved Returns in the Second Half"

[Image source=Yonhap News]

Hyundai Motor Securities stated on the 10th, "The futures market still highly reflects the possibility of an additional 25bp (1bp=0.01 percentage point) rate hike at the July Federal Open Market Committee (FOMC) meeting."

Researcher Jaeseon Lee of Hyundai Motor Securities explained, "The market concluded that June employment justified the rate hike," adding that the June wage growth rate rebounded slightly to 4.4% year-on-year, which was the same level as the previous year and slightly above the market expectation of 4.2%.

Although the June nonfarm payrolls reported by the Labor Department recorded 209,000, less than half of the previously announced ADP employment figure (500,000), the decline was not enough to limit the Fed's possibility of further hikes. Historically, the scale of employment contraction likely to lead to a sharp rise in unemployment is around 100,000.

Lee pointed out that the key to ending the market's period adjustment is ultimately 'interest rates.' He analyzed, "Since the increased possibility of a 25bp hike at the July FOMC meeting, the volatility indices of the stock and bond markets have rebounded for the first time since early May," adding, "The higher bond yields contribute to the decline in the yield gap (expected stock returns minus bond yields), which is referred to as the risk premium of risk assets."

Last week, the 10-year U.S. Treasury yield surpassed 4.0% intraday, causing the S&P 500 yield gap to fall to around 1.2%. The Nasdaq 100 index, which has a high proportion of big tech companies, showed a similar trend. As of the end of June, the expected return of the Nasdaq 100 fell to 3.9%, lower than the 10-year yield. Consequently, the Nasdaq 100 yield gap recorded -0.2%, the lowest level since 2000.

Lee forecasted, "The June CPI data to be released this week is unlikely to increase the possibility of a rate freeze at the July FOMC meeting, so the period adjustment is likely to continue further."

He predicted, "The headline CPI for June, to be announced on the 12th, is likely to fall to the low 3% range, but the expected core CPI for June is around 5.1% year-on-year, indicating limited clear downward momentum." The core CPI, a key data point closely watched by the Fed, is expected to show a similar pattern. Considering the rent contribution, which reflects with about a one-year lag, the absolute figure is expected to decline from the summer peak.

Lee evaluated, "The interest rate level, which already reflects the possibility of two additional hikes within the year, will rather increase sensitivity to negative factors," adding, "In the mid to long term, the merit of risk asset prices remains high."

He explained that attention should be paid to sectors and styles where the yield gap rebound is likely to develop relatively quickly. Currently, in the U.S., the earnings estimate rebound speed of Nasdaq 100 companies is faster compared to S&P 500 companies. Lee expects the relative defensive strength of Nasdaq big tech companies to remain high.

Lee Chang-yong, Governor of the Bank of Korea, is answering reporters' questions at the "2023 First Half Price Stability Target Operation Status Review Briefing" held on the afternoon of the 19th at the Bank of Korea Podium in Jung-gu, Seoul. Photo by Joint Press Corps

The yield gap burden remains in South Korea as well. Lee pointed out, "The KOSPI yield gap, like other countries, is recording 4.9% based on the 3-year government bond at the elevated interest rate level," adding, "The 10-year average is around 7.8%." The key issues are the Bank of Korea's possibility of a rate freeze in the second half and whether the KOSPI expected return rebound will continue.

Lee highly anticipated the Bank of Korea's base rate freeze within the year. South Korea's core CPI recorded 4.1% as of June. Although this is higher than the 10-year average (2.0%), a gradual decline compared to the previous year and month has continued since early January.

He analyzed, "The decline speed is relatively faster compared to the U.S. core CPI," adding, "Wages are also continuing a downward trend centered on manufacturing, and the burden of sticky inflation prices is lower compared to other countries."

He also expected the KOSPI expected return in the second half to improve compared to the first half. As of the end of May, the KOSPI expected return showed a better improvement speed than the S&P 500 expected return.

Lee added, "If the continuity of China's stimulus policies is observed in the future, Chinese economic data, which is likely to improve with a time lag around autumn, will support the rebound of the KOSPI expected return," adding, "If these factors align, the yield gap rebound speed of the KOSPI is likely to proceed relatively quickly."

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