[Good Morning Stock Market] Is the 'Inflation Peak-Out' Still Far Away?…KOSPI Bear Market Outlook

[Asia Economy Reporter Minji Lee] On the 14th (local time), the U.S. stock market closed lower as Treasury yields surged past 2.8% at one point. Comments from Federal Reserve (Fed) officials expressing uncertainty about whether inflation has peaked weighed negatively on risk asset investor sentiment. As the 'inflation peak-out' issue, which had been driving the domestic stock market, worsened, the KOSPI is expected to show weakness on the 15th.

The U.S. stock market saw an expanded decline as the inflation peak-out issue worsened, leading to a sharp rise in Treasury yields and resulting in selling pressure mainly on tech stocks. The volatility of large-cap stocks on options expiration day also dragged the market down. On that day, the Dow Jones Industrial Average fell 0.33%, while the Nasdaq and S&P 500 indices dropped 2.14% and 1.21%, respectively.

Notably, comments from ECB President Christine Lagarde and Federal Reserve officials John Williams and Loretta Mester triggered the surge in Treasury yields. President Lagarde noted at a monetary policy meeting that uncertainty in the Eurozone economy has increased due to the war between Ukraine and Russia. She mentioned that the risk of inflation remaining high in the short term has increased and cited the possibility of sustained high inflation as the reason for ending bond purchases in June. However, she maintained that it is premature to begin quantitative tightening. New York Fed President John Williams argued that a 50 basis point rate hike in May is a reasonable choice and should be implemented swiftly. His remarks about the uncertainty of whether inflation has peaked were also negative.

Considering these factors, the domestic stock market is expected to show a downward trend. Additionally, although the U.S. earnings season is in full swing, financial stocks have reported weak results due to provisions for loan losses related to the Ukraine war, reigniting concerns about a global economic slowdown, which is also negative.

Going forward, the financial market is expected to move based on corporate earnings, the IMF’s revised economic outlook, the U.S. Beige Book, and the authorities’ response to weak Chinese economic indicators. The IMF is expected to announce its revised economic outlook on the 19th. Earlier, IMF Managing Director Kristalina Georgieva stated that the outlook for 143 countries accounting for 86% of global GDP would be downgraded due to the war between Ukraine and Russia. Considering this, the revised economic outlook announcement is likely to lower expectations for the economy.

Attention should also be paid to China’s first-quarter GDP growth rate and key real economy indicators. The market is focused on whether the slowdown in major economic indicators seen in March will continue. Weak indicators inevitably lead to pressure on Chinese policymakers to stimulate the economy. If the Chinese government responds with accommodative measures such as interest rate cuts, the market shock from weak indicators is expected to be less severe.

In April, the Monetary Policy Committee raised the benchmark interest rate. The Bank of Korea (BOK) unanimously decided on the hike, citing 'higher-than-expected inflationary pressures' and 'solid domestic fundamentals.' Nevertheless, the bond market interpreted the BOK’s stance as dovish. This was because attention focused on comments made after the meeting such as 'if the meeting focused on price stability, going forward, downside risks to growth will also be considered in balance' and 'unlike the U.S., there is no need to raise rates above the neutral rate.'

However, caution regarding rate hikes should not be relaxed. With the possibility of three consecutive 'big steps' by the Fed emerging, it is considered a safer choice to implement compressed hikes when economic conditions allow. Considering this, the benchmark interest rate is expected to rise to 2% by the end of this year, with hikes likely in May and August.

For the BOK’s monetary policy stance to change, weak data related to growth such as the trade balance is necessary. Due to rising oil prices, the trade balance compiled by the Korea Customs Service is already in deficit. To slightly reduce downside risks to growth, the BOK is expected to shift its monetary policy stance under the pretext of boosting consumer sentiment.

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