Meritz "Fed 25bp Hike Has Limited Impact on Stock Market"

Attention to ECB and BOJ Monetary Policies

[Image source=Yonhap News]

Meritz Securities on the 27th described the U.S. Federal Reserve's (Fed) decision to raise the benchmark interest rate by 25 basis points (1bp = 0.01 percentage points) as a result that met market consensus.

Hwang Su-wook, a researcher at Meritz Securities, stated, "Fed Chair Jerome Powell's insistence during the post-Federal Open Market Committee (FOMC) press conference that although the dot plot leaves room for one more rate hike, decisions will be made based on data, was actually a positive sign."

Earlier, Chair Powell consistently responded to questions about additional rate hikes by saying that future decisions would be made by comprehensively reviewing indicators such as inflation and employment at each meeting. This stance was unchanged from the June FOMC. In other words, it means that there is no need to provide forward guidance to the market under all circumstances.

Researcher Hwang analyzed, "Chair Powell also expressed a desire to leave room for tightening if results do not come despite efforts, which can be interpreted as leaving the possibility of no further hikes if employment and inflation indicators remain stable."

Hwang predicted, "The FOMC, which met expectations, and optimism about the economy will likely continue to be reflected in the stock market's 'risk-on' (preference for risk assets) sentiment."

In fact, yields on the U.S. 10-year and 2-year Treasury notes fell by 2 basis points each compared to the previous day. The S&P 500 closed nearly flat (-0.02%) compared to the previous day, and the Nasdaq index declined by only 0.1%. On the contrary, the Dow and Russell 2000 indices rose by 0.23% and 0.62%, respectively, compared to the previous day. This suggests that risk asset preference is spreading to some cyclical stocks and small- and mid-cap stocks.

Researcher Hwang expected that additional monetary policy would not exert significant downward pressure on the stock market. He forecasted, "The spread of risk asset preference based on expectations of economic rebound will benefit sectors and stocks in the investment cycle. Although big tech faces valuation pressure, AI and semiconductors, as part of the investment cycle, will continue to play a leading role and participate in the upward trend."

He identified the dollar as a risk factor for the stock market outlook. He analyzed that if the dollar's weakness is delayed, the pace of market gains could slow. Hwang explained, "The July FOMC met expectations, and the dollar index fell by 0.3% compared to the previous day, but recent volatility in the foreign exchange market was driven by monetary policy expectations from the BOJ (Bank of Japan) and ECB (European Central Bank). As monetary policy expectations in these two regions shifted to a dovish stance, the recent dollar weakness was reversed."

He added, "Tonight's (27th) scheduled ECB meeting is attracting attention for remarks on additional hikes amid expectations that July will be the last rate increase, and tomorrow's (28th) BOJ meeting is important regarding the possibility of revising the YCC (Yield Curve Control). If there are no related remarks, the yen's weakness is expected to continue."

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