Will Interest Rate Uncertainty Prolong?... Market Eyes on US CPI

Headline: Slight Increase in CPI Expected
US Job Growth in December
Early Interest Rate Cut Becoming Less Likely

The market is closely watching the release of the U.S. December Consumer Price Index (CPI), a key indicator for assessing the possibility of future benchmark interest rate cuts. If the headline CPI index rebounds as per market consensus, it will be difficult to completely lower concerns about inflation, making it even harder to gauge the timing of rate cuts. As uncertainty about the timing of rate cuts increases and investment sentiment weakens, the domestic stock market is expected to enter a consolidation phase for the time being.

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On the 8th, the KOSPI index closed at 2,567.82, down 10.26 points (0.40%) from the previous session. The KOSDAQ index ended the day at 879.34, up 1.01 points (0.11%) from the previous session. Unlike 2022, when the KOSPI closed sharply lower at 2,655.28 on the last day of the year, it ended higher after one year. Until last month, expectations for an early rate cut by the U.S. Federal Reserve (Fed) had spread in the market, driving a rally, but the market cooled off after the release of the Federal Open Market Committee (FOMC) minutes. Although Fed officials expressed that it would be appropriate to cut rates this year, they did not discuss the specific timing of the rate cut, lowering expectations for an early rate cut.

Now, the market's attention is focused on the U.S. December CPI scheduled for release on the 11th. The CPI is an index that reflects price changes of goods and services purchased by consumers and is used in the Fed's rate decisions. The market expects the headline CPI for December last year to record 3.2% year-on-year, with a slight increase in the rate of rise compared to the previous month. However, the core consumer price inflation rate is expected to slow to 3.8% year-on-year compared to the previous month.

If the inflation slowdown trend is not clearly confirmed in the price indicators, the justification for lowering interest rates weakens. This means that the direction of monetary policy is unlikely to change until there is confidence that the inflation trend is falling to the Fed's target.

Ilhyuk Kim, a researcher at KB Securities, said, "The market's expectation for a large cut in the benchmark interest rate is likely to change," adding, "The market is forecasting a rate cut not because the economy is weak but because inflation is decreasing. If there is no sign of demand weakening due to an economic downturn, the Fed will find it difficult to conclude that all upside risks to inflation have disappeared."

The U.S. labor market is also a factor increasing uncertainty about the future path. According to last week's U.S. employment report, nonfarm payrolls for December by the Department of Labor exceeded 200,000 at 216,000, and wage growth rebounded to 4.1%. Employment indicators, another benchmark for deciding rate cuts, remain solid. Since a hot labor market stimulates consumption and drives up prices, the better the employment indicators perform, the lower the expectations for an early rate cut.

Due to these mixed indicators, there are forecasts that uncertainty over the Fed's rate cut decision could be prolonged. Yumi Kim, head of investment strategy at Kiwoom Securities, said, "The first quarter of this year could be a period when uncertainty about the timing of the Fed's rate cuts increases due to mixed indicators," adding, "Since the market is in an exploratory phase rather than reaching a consensus on the timing of the Fed's rate cut, a buying strategy based on earnings rather than chasing prices is necessary."

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